Cotwo Advisors Physical European Carbon Allowance Trust S-1/A, filed Jan 16, 2024
Cotwo Advisors Physical European Carbon Allowance Trust (CTWO)
As filed with the Securities and Exchange Commission on January 16, 2024.
Registration No. 333-271910
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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COtwo Advisors Physical European Carbon Allowance Trust
(Exact name of registrant as specified in its charter)
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Delaware |
6221 |
92-6338429 |
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(State or other jurisdiction of |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer |
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COtwo Advisors LLC
140 Elm Street, Suite 6,
New Canaan, CT 06840
(203) 594-9988
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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Copies to
Eric D. Simanek, Esq.
Eversheds Sutherland (US) LLP
700 Sixth Street, N.W.
Washington, D.C. 2001
(202) 220-8412
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Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 16, 2024
COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST
The COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”) will issue COtwo Advisors Physical European Carbon Allowance Shares (the “Shares”), which represent units of fractional undivided beneficial interest in and ownership of the Trust. The investment objective of the Trust is for the Shares to reflect the performance of the price of EU Carbon Emission Allowances for stationary installations (“EUAs”), less the expenses of the Trust’s operations. The Trust is not actively managed.
The Trust’s assets will consist of EUAs, which are issued via the European Union Emission Trading System (“ETS”) and permit the holder to emit one ton of carbon dioxide equivalent or other greenhouse gas. The Trust will occasionally hold cash for short periods to pay Trust expenses. All EUAs will be held at the European Union Registry (the “Union Registry”).
COtwo Advisors LLC is the sponsor of the Trust (“Sponsor”). Wilmington Trust, National Association is the trustee (“Trustee”). State Street Bank and Trust Company is the administrator (“Administrator”), transfer agent (“Transfer Agent”) and the custodian, with respect to cash (“Cash Custodian”), of the Trust. Foreside Fund Services, LLC is the order examiner (“Marketing Agent”) in connection with the creation and redemption of Baskets of Shares. The Trust is obligated to pay the Sponsor a management fee (the “Sponsor’s Management Fee”), calculated daily and paid monthly, equal to 0.79% of the Trust’s average daily net assets. From the Sponsor’s Management Fee, the Sponsor has contractually agreed to pay all of the routine operational, administrative and other ordinary expenses of the Trust, excluding interest expenses and certain litigation expenses and other non-recurring or extraordinary fees and expenses. The Sponsor has paid all of the expenses related to the organization and offering of the Shares in this prospectus, which are estimated to be approximately $145,000.
The Shares are issued by the Trust only in one or more blocks of 50,000 Shares, called a “Basket,” in exchange for EUAs. The Trust will issue and redeem Shares in Baskets to certain registered broker-dealers who have entered into a contract with the Sponsor and Transfer Agent (“Authorized Participants”) on an ongoing basis as described in “Creation and Redemption of Shares.” Goldman Sachs & Co. LLC is expected to be the initial authorized participant (“Initial Purchaser”) and is a statutory underwriter under Section 2(a)(11) of the Securities Act of 1933, as amended (the “Securities Act”). Baskets will be issued and redeemed on an ongoing basis at net asset value (“NAV”) per Share on the day that an order to create a Basket is accepted by the Transfer Agent and approved by the Marketing Agent.
Prior to this offering, there has been no public market for the Shares. The Shares of the Trust are expected to be listed for trading, subject to notice of issuance, on the NYSE Arca, Inc. (“Arca” or the “Exchange”), under the symbol “CTWO”. The market price of the Shares may be different from the NAV per Share for a number of reasons, including the supply and demand for Shares, the value of the Trust’s assets, and market conditions at the time of a transaction.
Except when aggregated in Baskets, Shares are not redeemable securities. Baskets are only redeemable by Authorized Participants.
Investors who buy or sell shares during the day from their broker may do so at a premium or discount relative to the NAV of the Trust’s total net assets due to supply and demand forces at work in the secondary trading market for shares that are closely related to, but not identical to, the same forces influencing the prices of the EUAs in which the Trust invests. Investing in the Trust involves significant risks. See “Risk Factors” beginning on page 9.
Shareholders will take no part in the management or control of the Trust and will have no voting rights with respect to the Trust, except as expressly provided for in the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (“Trust Agreement”).
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of the securities offered in this prospectus (“Prospectus”), or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The Trust qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). “Emerging growth company” does not mean the Trust is a “growth” type of investment vehicle or that it will utilize a “growth” investment strategy. However, the Trust will not take advantage of any exemptions or other relief provided to emerging growth companies under the JOBS Act. See “Emerging Growth Company Status.”
The Shares are neither interests in nor obligations of the Sponsor, the Trustee, the Administrator, the Transfer Agent, the Union Registry, the Cash Custodian, the Marketing Agent or any of their respective affiliates. The Shares are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. The Trust is not an investment company registered under the Investment Company Act of 1940, as amended. The Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended, and the Sponsor is not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor.
The initial amount of EUAs required for deposit with the Trust to create Shares will be 10,000 per Basket. The Initial Purchaser, acting as a statutory underwriter in connection with the initial purchase of Shares, will deposit EUAs for the purchase of an initial Basket of 50,000 Shares, as described in “Plan of Distribution.” The initial Basket will be created at a per basket price of 10,000 EUAs and a per share price equal to 1/5 of the value of a single EUA on the purchase date. The Trust will receive all proceeds from the offering of the initial Baskets in EUAs in an amount equal to the full price for the initial Baskets. The Initial Purchaser may receive commissions/fees from shareholders who purchase Shares from the initial Basket through their commission/fee-based brokerage accounts. The price per Basket that will be paid in the future by the Authorized Participants may be different than the initial Basket price.
The date of this Prospectus is [ ], 2023.
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F-1 |
This Prospectus contains information you should consider when making an investment decision about the Shares. You may rely on the information contained in this Prospectus. The Trust and the Sponsor have not authorized any person to provide you with different information and, if anyone provides you with different or inconsistent information, you should not rely on it. This Prospectus is not an offer to sell the Shares in any jurisdiction where the offer or sale of the Shares is not permitted.
The Shares are not registered for public sale in any jurisdiction other than the United States.
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes statements which relate to future events or future performance. In some cases, you can identify such forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or the negative of these terms or other comparable terminology. All statements (other than statements of historical fact) included in this Prospectus that address activities, events or developments that may occur in the future, including such matters as changes in asset prices and market conditions (for EUAs and the Shares), the Trust’s operations, the Sponsor’s plans and references to the Trust’s future success and other similar matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially. These statements are based upon certain assumptions and analyses made by the Sponsor on the basis of its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Whether or not actual results and developments will conform to the Sponsor’s expectations and predictions, however, is subject to a number of risks and uncertainties, including the special considerations discussed in this Prospectus, general economic, market and business conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies, and other world economic and political developments. See “Risk Factors.” Consequently, all the forward-looking statements made in this Prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments the Sponsor anticipates will be realized or, even if substantially realized, that they will result in the expected consequences to, or have the expected effects on, the Trust’s operations or the value of the Shares. Moreover, neither the Sponsor, nor any other person assumes responsibility for the accuracy or completeness of the forward-looking statements. Neither the Trust nor the Sponsor undertakes an obligation to publicly update or conform to actual results any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
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The following is only a summary of this Prospectus and, while it contains material information about the Trust, it does not contain or summarize all of the information about the Trust and the Shares contained in this Prospectus that is material and that may be important to you. You should read this entire Prospectus, including “Risk Factors” beginning on page 9, and the material incorporated by reference herein before making an investment decision about the Shares.
European Union Carbon Emission Allowances (“EUAs”)
The European Union Emissions Trading System (“EU ETS”) is a “cap and trade” system that caps the total volume of greenhouse gas (“GHG”) emissions from installations and aircraft operators responsible for around 40% of European Union (“EU”) GHG emissions. The EU ETS is administered by the EU Commission, which issues a predefined amount of EUAs through auctions or free allocation. EUAs entitle the holder to emit one ton of carbon dioxide equivalent or other GHG. Entities covered by the EU ETS are required to surrender each year sufficient EUAs to cover all their emissions for the previous year.
In 2012, EU ETS operations were centralized into a single EU registry operated by the EU Commission (the “Union Registry”), which covers all countries participating in the EU ETS. The Union Registry is an online database that holds accounts for all entities covered by the EU ETS as well as for participants (such as the Trust) not covered under the EU ETS. An account must be opened in the Union Registry in order to transact in EUAs and the Union Registry is at all times responsible for holding the EUAs. The EU ETS is the largest cap and trade system in the world and covers more than 11,000 power stations and industrial plants in 31 countries, and flights between airports of participating countries.
The Trust
COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”) was formed as a Delaware statutory trust on January 12, 2023. The Trust is governed by the Amended and Restated Declaration of Trust and Trust Agreement (“Trust Agreement”) dated November 27, 2023 between COtwo Advisors LLC (the “Sponsor”) and Wilmington Trust, National Association (the “Trustee”). The Trust will issue common units of beneficial interest, or “Shares,” which represent units of fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will consist of EUAs, the unit of account within the EU ETS as described in the preceding paragraphs. The Trust will occasionally hold cash for short periods to pay the Sponsor’s Management Fee and any other Trust expenses and liabilities not assumed by the Sponsor (see “Description of the Trust”, below). The Trust will not hold any assets other than EUAs or cash.
The investment objective of the Trust is for the Shares to reflect the performance of the price of EUAs, less the expenses of the Trust’s operations. The EUAs will be held at the Union Registry. The value of EUAs will be reported on the Trust’s website daily, measured as described below in “Calculating NAV”.
Shares are issued by the Trust only in blocks of 50,000 Shares called “Baskets” in exchange for EUAs from certain registered broker-dealers (“Authorized Participants”). See “Creation and Redemption of Shares” for requirements to qualify as an Authorized Participant. Baskets will be redeemed by the Trust in exchange for the amount of EUAs corresponding to their redemption value. The Trust issues and redeems Baskets on an ongoing basis at net asset value (“NAV”) per Share to Authorized Participants who have entered into a contract with the Sponsor and the Transfer Agent.
The amount of EUAs represented by each Share will decrease over the life of the Trust because of the sale of EUAs necessary to pay the Sponsor’s Management Fee and any other Trust expenses and the disregarding of fractions of an EUA smaller than one EUA for purposes of computing the Basket Deposit (as defined below). Without increases in the price of EUAs sufficient to compensate for the above decreases, the price of the Shares will also decline and you will lose money on your investment in the Shares. For example, assuming that the Trust has $100 million in total assets represented by EUAs and Trust fees and expenses are 1% of the Trust’s total assets, if the price of EUAs decreases by 0.8% then the Trust’s total assets after paying Trust fees and expenses would be $98.2 million, $99 million if the price of EUAs remains flat and $101 million if the price of EUAs increased by 2%. Assuming that the Trust had 100,000 Shares outstanding in the above scenario, the NAV per Share would decrease from $990 per Share to $982 per Share if the price of EUAs decreased by $0.8%, remain at $990 per Share if the price of EUAs remained flat, and increase to $101 per share if the price of EUAs increased by 2%.
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Individual Shares will not be redeemed by the Trust, but are expected to be listed for trading, subject to notice at issuance, on the Exchange under the symbol “CTWO.” The material terms of the Trust and the Shares are discussed in greater detail under the sections “Description of the Trust” and “Description of the Shares.” Shareholders will take no part in the management or control of the Trust and will have no voting rights with respect to the Trust, except as expressly provided for in the Trust Agreement. The Trust is not a registered investment company under the Investment Company Act of 1940, as amended (“1940 Act”), and is not required to register with the Securities and Exchange Commission thereunder. The Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended, and the Trust and the Sponsor are not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor.
Secondary market purchases and sales of Shares are subject to customary brokerage commissions and charges.
The market price of the Shares may not be identical to the NAV per Share. The intra-day indicative value per Share is based on the prior day’s final NAV per Share, adjusted every 15 seconds throughout the day to reflect the continuous price changes of the Trust’s EUAs holdings, to provide a continuously updated indicative intra-day value per Share during the EUAs’ trading day. The intra-day indicative value per Share is calculated by using the prior day’s closing NAV per share of the Trust as a base and updating that value throughout the trading day to reflect changes in the most recently reported EUA End of Day Index (as defined below) value. All major exchanges that trade EUAs or Daily EUA Futures (as defined below) provide real time pricing information to the general public through data vendors such as Bloomberg. The trading prices for EUAs and the daily EUA End of Day Index value and historical EUA End of Day Index values will also be disseminated by on-line subscription services or by one or more major market data vendors during the NYSE Arca Core Trading Session of 9:30 a.m. to 4:00 p.m. E.T. In addition, there is a gap in time at the end of each day during which the Trust’s shares are traded on the NYSE Arca, but real-time trading prices for EUAs are not available. During such gaps in time the intra-day indicative value per Share will be calculated based on the end of day price of EUAs immediately preceding the trading session. The Trust is not involved in or responsible for the calculation or dissemination of the indicative intra-day value per Share and makes no warranty as to the accuracy of the indicative intra-day value per Share.
The Trust’s Service Providers
The Sponsor
The Sponsor is a Delaware limited liability company. The Shares are neither interests in nor obligations of, and are not guaranteed by, the Sponsor, its member(s), or any of its affiliates.
The Sponsor arranged for the creation of the Trust and is responsible for the ongoing registration of the Shares for their public offering in the United States and the listing of Shares on the Exchange. The Sponsor will develop a marketing plan for the Trust, will prepare marketing materials regarding the Shares of the Trust, and will exercise the marketing plan of the Trust on an ongoing basis. The Sponsor has agreed to pay all operating expenses (except for interest expenses and certain litigation expenses and other non-recurring or extraordinary fees and expenses) out of the Sponsor’s unified management fee.
The Sponsor’s officers, directors and employees, do not devote their time exclusively to the Trust. These persons are, or may in the future be, directors, officers or employees of other entities, which may compete with the Trust for their services. They could have a conflict between their responsibilities to the Trust and to those other entities. The Sponsor believes that it has sufficient personnel, time, and working capital to discharge its responsibilities in a fair manner and that these persons’ conflicts should not impair their ability to provide services to the Trust. In addition, the Sponsor and Trustee may agree to amend the Trust Agreement, including to increase the Sponsor’s Management Fee, without shareholder consent.
The Trustee
The Trustee, a national banking association, acts as the trustee of the Trust as required to create a Delaware statutory trust in accordance with the Trust Agreement and the Delaware Statutory Trust Act (“DSTA”). See “The Trustee.”
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The Administrator
The Administrator is State Street Bank and Trust Company. The Administrator is generally responsible for the day-to-day administration and operation of the Trust, including: (1) valuing the Trust’s EUAs and calculating the net asset value and net asset value per share of the Trust; (2) supplying pricing information to the Sponsor for the Trust’s website; and (3) receiving and reviewing reports on the custody of and transactions in cash and EUAs from the Cash Custodian and the Union Registry, respectively, and taking such other actions in connection with the custody of cash as the Sponsor instructs. The general role and responsibilities of the Administrator are discussed in greater detail under the section “The Administrator.”
The Transfer Agent
The Transfer Agent is State Street Bank and Trust Company. Pursuant to the Transfer Agency and Service Agreement between the Trust and the Transfer Agent, the Transfer Agent serves as the Trust’s transfer agent and agent in connection with certain other activities as provided under the Transfer Agency and Service Agreement. The Transfer Agent’s responsibilities include: (1) receiving and processing orders from Authorized Participants for the creation and redemption of Baskets; and (2) coordinating the processing of orders from Authorized Participants with the Marketing Agent, the Trust, the Cash Custodian and The Depository Trust Company (“DTC”). See “The Transfer Agent.”
The Marketing Agent
Foreside Fund Services, LLC is the Marketing Agent. The Marketing Agent’s responsibilities include: (1) working with the Transfer Agent to review and accept or reject orders placed by Authorized Participants with the Transfer Agent; (2) reviewing and approving all sales and marketing materials for compliance with applicable laws, and filing such materials with FINRA as required by the Securities Act of 1933, as amended (the “Securities Act”), and the rules promulgated thereunder, and (3) facilitating arrangements between the Sponsor, the Transfer Agent and broker-dealers for the purchase and redemption of Baskets. All such sales and marketing materials must be approved, in writing, by the Marketing Agent prior to use.
Custodial Arrangements
State Street Bank and Trust Company is the custodian (the “Cash Custodian”) of the cash held by the Trust and has entered into the Cash Custody Agreement in connection therewith. All EUAs held by the Trust will be held and maintained in the Union Registry. See “The Cash Custodian” and “EUAs and the Carbon Credit Industry-Registry Accounts.”
Trust Objective
The investment objective of the Trust is for the Shares to reflect the performance of the price of EUAs, less the expenses of the Trust’s operations. The Trust intends to achieve this objective by investing substantially all of its assets in EUAs. The Trust will invest in EUAs on a non-discretionary basis (i.e., without regard to whether the value of EUAs is rising or falling over any particular period).
Barring the forced liquidation of the Trust, the Trust will not purchase or sell EUAs directly, although the Sponsor may sell EUAs to pay certain expenses. Instead, when it sells or redeems its Shares, it will do so in “in-kind” transactions. Authorized Participants will deliver EUAs to the Trust in exchange for Shares when they purchase Shares, and the Trust will deliver EUAs to such Authorized Participants when they redeem Shares from the Trust. All EUAs will be held in the Union Registry. The Transfer Agent will facilitate the processing of purchase and sale orders in Baskets from the Trust.
Summary Risk Factors
An investment in the Shares is speculative and involves a high degree of risk. There is no assurance the Trust will achieve its investment objective or avoid substantial losses. A potential shareholder should not invest in the Shares unless he or she can afford to lose the entire investment. Before investing in the Shares, a potential shareholder should be aware of the various risks of investing in the Trust, including those described below. Additional risks and uncertainties not presently known by the Trust or not presently deemed material by the Trust may also impair the Trust’s operations and performance. The summary risk factors set forth below are intended to highlight certain risks of investing in the Trust. A more extensive discussion of these risks appears beginning on page 9 in “Risk Factors.”
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The Trust relies on the existence of cap and trade regimes and related markets to give EUAs value. Cap and trade regimes are new and based on scientific principles that are subject to debate. Cap and trade regimes have arisen primarily due to relative international consensus with respect to scientific evidence indicating a correlative relationship between the rise in global temperatures and extreme weather events, on the one hand, and the rise in GHG emissions in the atmosphere, on the other hand. If this consensus were to break down, cap and trade regimes and the value of the Trust may be negatively affected.
Scientists are still debating whether the rise in atmospheric GHGs is caused by human activity such as GHG emissions generated through the burning of fossil fuels, as well as the acceptable level of GHG concentrations in the atmosphere. If the science supporting the relationship or the acceptable level of GHG concentrations is discredited or proved to be incorrect or inaccurate, it may negatively affect cap and trade regimes and the value of the Trust.
There is no assurance that cap and trade regimes will continue to exist. cap and trade may not prove to be an effective method of reduction in GHG emissions. As a result or due to other factors, cap and trade regimes may be terminated or may not be renewed upon their expiration. The EU ETS is organized into a number of phases, each which a predetermined duration. Currently, the EU ETS is in Phase IV. There can be no assurance that the EU ETS will enter into a new phase as scheduled.
New technologies may arise that may diminish or eliminate the need for cap and trade markets. Ultimately, the cost of emissions credits is determined by the cost of actually reducing emissions levels. If the price of credits becomes too high, it will be more economical for companies to develop or invest in green technologies, thereby suppressing the demand for credits and adversely affecting the price of the Trust.
Cap and trade regimes set emission limits (i.e., the right to emit a certain quantity of GHG emissions), which can be allocated or auctioned to the parties in the mechanism up to the total emissions cap. This allocation may be larger or smaller than is needed for a stable price of credits and can lead to large price volatility, which could affect the value of the Trust. Depending upon the industries of end users of EUAs, unpredictable demand for their products and services can affect the value of GHG emissions credits. For example, very mild winters or very cool summers can decrease demand for electric utilities and therefore require fewer carbon credits to offset reduced production and GHG emissions.
The ability of the GHG emitting companies to pass on the cost of emissions credits to consumers can affect the price of the EUAs. If the price of emissions can be passed on to the end customer with little impact upon consumer demand, it is likely that industries may continue emitting and purchase any shortfall in the market at the prevailing price. If, however, the producer is unable to pass on the cost, it may be incentivized to reduce production in order to decrease its need for offsetting emissions credits, which could adversely affect the price of EUAs and the Trust.
Regulatory risk related to changes in regulation and enforcement of cap and trade regimes could also adversely affect market behavior. If fines or other penalties for non-compliance are not enforced, incentives to purchase GHG credits will deteriorate, which could result in a decline in the price of emissions credits and a drop in the value of the Trust. In addition, as cap and trade markets develop, new regulation with respect to these markets may arise, which could have a negative effect on the value and liquidity of the cap and trade markets and the Trust.
If the Sponsor and the Trust are unable to raise sufficient funds so that revenues generated from the Sponsor’s Management Fee can cover Trust expenses, the Trust may be forced to terminate and investors may lose all or part of their investment. Assuming the Trust’s ordinary operating expenses amount to $100,000 in a year, the Trust would have to raise approximately $13,000,000 in assets for the Sponsor’s Management Fee to cover trust expenses. Likewise, if the annual ordinary operating expenses of the Trust amount to $200,000 or $300,000, the Trust would have to raise approximately $25,000,000 and $38,000,000, respectively, in assets in order for the Sponsor’s Management Fee to cover Trust expenses. While the Sponsor is not able to cover Trust expenses indefinitely, there is no minimum amount of Trust assets below which the Sponsor would automatically terminate the Trust.
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Principal Offices
The offices of the Trust and the Sponsor are located at 140 Elm Street, Suite 6, New Canaan, CT 06840 and the Trust’s telephone number is (203) 594-9988. The office of the Trustee is located at 1100 North Market Street, Wilmington, Delaware 19890. The offices of the Administrator, Transfer Agent and Cash Custodian are located at One Lincoln Street, Boston, Massachusetts 02110. The offices of the Marketing Agent are located at Three Canal Plaza, Suite 100, Portland, Maine 04101. The offices of the Dutch Emissions Authority, which administers the Dutch section of the Union Registry are located at PO Box 91503, 2509 EC The Hague, The Netherlands.
Emerging Growth Company Status
The Trust is an “emerging growth company,” as defined in the JOBS Act, and is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations that are not otherwise applicable to the Trust. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Trust is choosing to “opt out” of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
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Offering |
The Shares represent units of fractional undivided beneficial interest in the net assets of the Trust. |
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Use of proceeds |
Proceeds received by the Trust in the form of deposits from the issuance of Baskets consist of EUAs. Such deposits are at all times maintained in the Union Registry. Such deposits are held by the Trust until (i) delivered to Authorized Participants in connection with redemptions of Baskets or (ii) EUAs are sold for cash or transferred to the Sponsor in-kind to pay the Sponsor’s Management Fee or other Trust expenses and liabilities not assumed by the Sponsor, is any. |
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CTWO |
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222067 100 |
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Creation and Redemption |
The Trust issues “Baskets,” each equal to 50,000 Shares, to Authorized Participants in exchange for EUAs. Conversely, the Trust delivers EUAs in exchange for Baskets surrendered to it for redemption by Authorized Participants. The Trust issues and redeems Baskets on a continuous basis only to Authorized Participants. Baskets are only issued or redeemed in exchange for the amount of EUAs determined by the Administrator on each day that the Exchange is open for regular trading based on the combined net asset value of the Shares included in the Baskets being created or redeemed. No Shares are issued unless the Trust confirms that it has been allocated the corresponding amount of EUAs. |
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The initial amount of EUAs required for deposit with the Trust to create Shares will be 10,000 per Basket. |
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Fees are assessed in connection with the creation and redemption of Baskets by Authorized Participants. See “Creation and Redemption of Shares” for more details. |
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Net Asset Value |
Net asset value means the total assets of the Trust including, but not limited to, all EUAs and cash (if any) less total liabilities of the Trust, each determined on the basis of generally accepted accounting principles. |
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The Administrator determines the NAV of the Trust on each day that the Exchange is open for regular trading, as promptly as practical after 4:00 PM E.T. The net asset value of the Trust is the aggregate value of the Trust’s assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the Trust’s net asset value, the Administrator values the EUAs held by the Trust based on the EUA End of Day Index value as established by the European Energy Exchange AG (“EEX”). The value of the EUA End of Day Index is published daily on the EEX website. The Administrator converts the value of Euro denominated assets into the U.S. dollar equivalent using published foreign currency exchange prices by an independent pricing vendor. The Administrator also determines the NAV per Share. |
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Trust Fees and Expenses |
The Trust’s only ordinary recurring expenses are expected to be the Sponsor’s Management Fee, paid monthly in arrears, in an amount equal to 0.79% per annum of the daily NAV of the Trust. In exchange for the Management Fee, the Sponsor has agreed to assume all routine operational, administrative and other ordinary expenses of the Trust, including, but not limited to, each of the Trustee’s, Administrator’s, Cash Custodian’s, Transfer Agent’s and Marketing Agent’s monthly fee and out-of-pocket expenses and expenses reimbursable in connection with such service provider’s respective agreement; the marketing support fees and expenses; exchange listing fees; SEC registration fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and routine legal expenses. The Sponsor also paid the costs of the Trust’s organization and the initial sale of the Shares. The Trust will be responsible for reimbursing the Sponsor or its affiliates for paying all the extraordinary fees and expenses, if any, of the Trust. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount. The Trust will either (i) cause the Sponsor to receive EUAs from the Trust in such quantity as may be necessary to pay the Management Fee or (ii) sell EUAs in such quantity as may be necessary to permit payment in cash of the Management Fee and other Trust expenses and liabilities not assumed by the Sponsor, if any. |
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Organization and Offering Expenses |
The Sponsor will be responsible for paying all of the expenses incurred in connection with organizing the Trust as well as the expenses incurred in connection with the offering of the Trust’s Shares. |
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Extraordinary Fees and Expenses |
The Trust will be responsible for paying, or for reimbursing the Sponsor or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Trust. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Trust. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount. |
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Tax Considerations |
A shareholder will be treated, for U.S. federal tax purposes, as if it directly owns a pro rata share of the Trust’s assets and directly receives that share of any Trust income and incurs that share of the Trust’s expenses. Shareholders of the Trust will be subject to U.S. federal income tax on their allocable share of the Trust’s taxable income, whether or not they receive cash distributions. Each delivery, transfer or sale of EUAs by the Trust to pay the Sponsor’s Management Fee or other expenses could be a taxable event to shareholders. See “Federal Income Tax Consequences — Taxation of U.S. Shareholders” and “Purchases by Employee Benefit Plans.” |
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Suspension of Issuance, |
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Termination Events |
The Trust will terminate and liquidate if certain events occur. See “Description of the Trust — Termination of the Trust.” |
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Authorized Participants |
Authorized Participants may create and redeem Baskets. |
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Each Authorized Participant must: (1) be a registered broker-dealer and a member in good standing with the Financial Industry Regulatory Authority (“FINRA”); (2) be a participant in DTC; and (3) have entered into an agreement with the Sponsor and the Transfer Agent (the “Authorized Participant Agreement”). The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets. A list of the current Authorized Participants can be obtained from the Administrator or the Sponsor. |
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Clearance and Settlement |
The Shares will be evidenced by one or more global certificates that the Trust will issue to DTC. The Shares are issued only in book-entry form. Shareholders may hold their Shares through DTC, if they are participants in DTC, or indirectly through entities that are participants in DTC. |
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Before making an investment decision, you should consider carefully the risks described below, as well as the other information included in this prospectus.
Risks Related to the Trust’s Investments
Because the Shares are created to reflect the price of the EUAs held by the Trust, the market price of the Shares may be as unpredictable as the price of EUAs has historically been. This creates the potential for losses, regardless of whether you hold Shares for the short-, mid- or long-term.
Shares are created to reflect, at any given time, the market price of EUAs owned by the Trust at that time, less the Trust’s expenses and liabilities. Because the value of Shares depends on the price of EUAs, it is subject to fluctuations similar to those affecting EUA prices. Although the price of EUAs has increased steadily since 2018, the price has also fluctuated widely (between €15 and €96 per EUA) in response to certain events including the COVID-19 pandemic and the Ukraine War. If EU ETS continues to be characterized by the wide fluctuations that it has shown in the past several years, the price of the Shares may change widely and in an unpredictable manner. This exposes shareholders to potential losses if they need to sell their Shares at a time when the price of an EUA is lower than it was when the shareholder made its investment in Shares. Even if a shareholder is able to hold Shares for the mid- or long-term the shareholder may never realize a profit, because EU ETS has historically experienced extended periods of flat prices, and has only recently (since 2018) seen consistent prices above €20 per Carbon Credit.
The price of EUAs is affected by numerous factors beyond the Trust’s control, including the following:
(a) Global or regional political, economic, environmental or financial events and situations (including pandemics, such as COVID-19) that depress economic activity may weaken demand for EUAs, and thus cause their price to fall. Very mild winters or very cool summers can decrease demand for electricity and therefore cause utilities to purchase fewer EUAs thus causing their price to fall.
(b) Investors’ expectations with respect to the future rates of inflation and movements in world equity, financial, environmental, commodity and property markets, and returns available in other investment markets may impact the extent to which investors allocate capital to investments in EUAs.
(c) The activities and emissions of energy-intensive sectors (including manufacturing facilities, oil refineries, power stations and, aviation) may impact the demand for EUAs; specifically, weaker activity in such sectors may reduce the demand for EUAs and cause their price to fall.
(d) The relevant rules of cap and trade programs outside the EU (including how allowances are made available to operators or market participants, such as free allocations or auctions) and links put in place between mandatory cap and trade programs and voluntary schemes (enabling carbon allowances of one mandatory program or voluntary scheme to be used for the purposes of another mandatory program or voluntary scheme) may impact the supply of EUAs; for example, if entities are able to purchase carbon allowances from other programs or voluntarily schemes, this could increase the supply of EUAs, and thus reduce their price.
(e) The rate of progress in the innovation, introduction and expansion of technologies and techniques in the reduction of emissions of greenhouse gases (or the capture and storage thereof). Advances in technologies for the reduction of greenhouse gases may result in companies being able to reduce their greenhouse gas emissions more quickly and cheaply, thus needing to purchase fewer EUAs which may cause the price of EUAs to fall.
(f) The use by governments of different policies to encourage or require the reduction of emissions of greenhouse gases (or the capture and storage thereof) or for other environmental goals may reduce the incentive for companies to purchase EUAs (as against taking other actions), thus causing the price of EUAs to fall.
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(g) Lobbyist, political or governmental goals or policies with respect to climate change and the imposition of environmental plans or climate goals such as achieving carbon neutrality may impact the demand for EUAs. If government environmental or climate goals or policies are perceived to be weaker or less credible this may reduce the demand for EUAs and may cause their price to fall.
(h) The cost and implications of non-compliance with the EU ETS (including both monetary and non-monetary penalties on operators subject to EU ETS for failure to surrender sufficient EUAs) may impact an operator’s willingness to pay for EUAs if the penalties associated with non-compliance are less costly than purchasing EUAs. These penalties (and any costs associated with them) may impose an implicit price ceiling on EUAs. Lower penalties and costs may result in lower Carbon Credit prices.
(i) Investment and trading activities of hedge funds, commodity funds and other speculators may impact the demand for EUAs. For example, lower demand for EUAs from speculators may cause the demand for EUAs to be lower than otherwise and thus may cause their price to fall.
(j) Interest rates and currency exchange rates, particularly the strength of and confidence in the Euro may impact the demand for EUAs. A reduction in the strength of, or confidence in, the Euro may reduce demand for assets denominated in that currency and thus may cause the price of those assets, including EUAs, to fall.
(k) The ability of the GHG emitting companies to pass on the cost of emissions credits to consumers can affect the price of the EUAs. If the producer is unable to pass on the cost, it may be incentivized to reduce production in order to decrease its need for offsetting emissions credits, which could adversely affect the price of EUAs and the Trust.
Conversely, several factors may trigger a temporary increase in the price of EUAs prior to your investment in the Shares. If that is the case, you may be buying Shares at prices affected by the temporarily high prices of EUAs, and you may incur losses when the causes for the temporary increase disappear.
Legal or Regulatory Risks Relating to Changes to a Cap and Trade Program
Regulatory risk related to changes in regulation and enforcement of cap and trade regimes could also adversely affect market behavior. If fines or other penalties for non-compliance are not enforced, incentives to purchase GHG credits may deteriorate, which could result in a decline in the price of emissions credits and a drop in the value of the Trust. In addition, as cap and trade markets develop, new regulation with respect to these markets may arise, which could have a negative effect on the value and liquidity of the cap and trade markets and the Trust.
EUAs can only be traded in accordance with the EU ETS, which was established pursuant to the EU ETS Directive and Registries Regulation. Changes in these and other laws and regulations (or prospective changes to any of them) may affect the market value and liquidity of EUAs, the market value and liquidity of the Trust’s Shares, and the ability of the Trust to continue to offer its Shares.
The laws and regulations governing the operation of and access to the EU ETS may be amended and this may affect, without limitation:
(a) the ability of the Trust to buy, sell, transfer or hold EUAs;
(b) the cap or allocation of the number of EUAs available, for example, a higher cap or allocation of EUAs would increase their supply, and may also reduce demand for EUAs and thereby cause the price of EUAs and the value of the Trust’s Shares to fall; and
(c) the operational aspects of the effective transfer of EUAs, and therefore the operations relating to the redemption of the Trust’s Shares, for example, changes to operations could slow settlement of redemptions of the Trust’s Shares, exposing redeeming Authorized Participants, and shareholders, to possible falls in price for an extended period of time.
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Abandonment, termination or non-renewal of an EUA trading scheme may cause the price of EUAs to fall (potentially to zero).
EUAs have no use outside of the cap and trade program under which they can be allocated and traded. There is no assurance that any particular cap and trade program, including the EU ETS, will continue to exist. Cap and trade programs may not prove to be an effective method of reduction in greenhouse gas emissions. As a result or due to other factors, a cap and trade program may be terminated or may not be renewed upon its expiration.
If it was announced that the EU ETS would terminate or not be renewed then this could result in reduced demand for EUAs and the liquidation or termination of the Trust. The announcement and other steps taken in relation to the termination or non-renewal could also reduce the demand for EUAs, thereby causing the price of EUAs and the value of the Trust’s Shares to fall (potentially to zero). The termination of a cap and trade program outside of the EU ETS could impact the longevity and stability of other cap and trade programs across the globe, and influence other governments to support similar terminations. One or all of these events, in turn, could cause investors in the Trust to suffer a loss of some or all of their investment.
Cap and trade regimes and related markets are new and based on scientific principles that are subject to debate. Cap and trade regimes have arisen primarily due to relative international consensus with respect to scientific evidence indicating a correlative relationship between the rise in global temperatures and extreme weather events, on the one hand, and the rise in Greenhouse Gas (“GHG”) emissions in the atmosphere, on the other hand. If this consensus were to break down, cap and trade regimes and the value of the Trust may be negatively affected.
Scientists are still debating whether the rise in atmospheric GHGs is caused by human activity such as GHG emissions generated through the burning of fossil fuels, as well as the acceptable level of GHG concentrations in the atmosphere. If the science supporting the relationship or the acceptable level of GHG concentrations is discredited or proved to be incorrect or inaccurate, it may negatively affect cap and trade regimes and the value of the Trust.
There is no assurance that cap and trade regimes will continue to exist. Cap and trade may not prove to be an effective method of reduction in GHG emissions. As a result or due to other factors, cap and trade regimes may be terminated or may not be renewed upon their expiration. The EU ETS is organized into a number of phases, each which a predetermined duration. Currently, the EU ETS is in Phase IV. There can be no assurance that the EU ETS will enter into a new phase as scheduled.
New technologies may arise that may diminish or eliminate the need for cap and trade markets. Ultimately, the cost of emissions credits is determined by the cost of actually reducing emissions levels. If the price of credits becomes too high, it will be more economical for companies to develop or invest in green technologies, thereby suppressing the demand for credits and adversely affecting the price of the Trust.
Future governmental decisions may have significant impact on the price of EUAs, which may result in a significant decrease or increase in the net asset value of the Trust.
Generally, EUA prices reflect the supply and demand of available EUAs. The availability of EUAs is determined by the EU parliament together with the EU member nation representatives. As such, decisions by the EU and its member nations have a significant impact on the supply and demand of EUAs. The EU ETS is organized into a number of phases with pre-determined durations, but extenuating circumstances can result in changes to the phase plans. For example, the global economic crisis of 2008 occurred at the beginning of Phase II, which lasted from 2008 to 2012. Even though the cap on EUAs had been reduced for Phase II, the economic downturn of 2008 resulted in an unexpected reduction in emissions, which in turn resulted in a surplus of EUAs (and low Carbon Credit prices) throughout Phase II. In response to this surplus, the EU held back the auction of approximately 900 million EUAs, and implemented the Market Stability Reserve (“MSR”). The MSR is a system under which EUAs are added to, or removed from, the market based on certain thresholds in order to avoid extreme surpluses or shortages. After the implementation of the MSR, the price of EUAs has steadily increased. More recently, in December 2022, the European parliament and EU country representatives provisionally agreed on a Carbon Border Adjustment Mechanism (“CBAM”) that would require certain importers to the EU to essentially pay a tax that equates to the price of EUAs they would have needed to buy under the EU ETS if their product was produced in the EU. It is unclear what, if any, impacts CBAM may have on the price of EUAs. Future governmental decisions may have an impact on the supply and demand and price of EUAs, which may result in a significant decrease or increase in the net asset value of the Trust.
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Because the Trust is not a diversified investment, it may be more volatile than other investments.
An investment in the Trust is not intended as a complete investment plan. Because the Trust only holds EUAs or cash, an investment in the Trust may be more volatile than an investment in a more broadly diversified portfolio. Accordingly, the NAV may be more volatile than another investment vehicle with a more broadly diversified portfolio and may fluctuate substantially over time. An investment in the Trust may be deemed speculative, therefore investors should review closely the objective and strategy, the investment and operating restrictions and the redemption provisions of the Trust as outlined herein and familiarize themselves with the risks associated with an investment in the Trust.
War and other geopolitical events, including but not limited to the war between Russia and Ukraine, outbreaks or public health emergencies (as declared by the World Health Organization), the continuation or expansion of war or other hostilities, or a prolonged government shutdown may cause volatility in the price of EUAs. These events are unpredictable and may lead to extended periods of price volatility.
The operations of the Trust, the exchanges, brokers and counterparties with which the Trust interacts, and the markets in which the Trust does business could be severely disrupted in the event of a major terrorist attack, cyber-attack, data breach, outbreak or public health emergency as declared by the World Health Organization (such as the spread of the novel coronavirus known as COVID-19), or the continuation or expansion of war or other hostilities.
In late February 2022, Russia launched an invasion of Ukraine, significantly amplifying already existing geopolitical tensions among Russia and other countries in the region and in the west. The responses of countries and political bodies to Russia’s actions, the larger overarching tensions, and Ukraine’s military response and the potential for wider conflict may increase financial market volatility generally, have severe adverse effects on regional and global economic markets, and cause volatility in the price of EUAs and the share price of the Trust. The conflict in Ukraine, along with global political fallout and implications including sanctions, shipping disruptions, collateral war damage, and a potential expansion of the conflict beyond Ukraine’s borders, has and could continue to disturb the EUAs market. Russia has historically been the primary supplier of natural gas to Europe. After the invasion of Ukraine, Russia cut off much of the gas it was supplying to Europe and several supply pipelines were damaged. This shortage of gas caused European countries to seek other natural gas suppliers, and to seek alternative energy sources such as coal, which may increase emissions in the short term and require the purchase of EUAs. This disruption in the energy supply caused volatility in the Carbon Credit market. The duration and extent of the Carbon Credit market volatility is unknown and impossible to predict. Future acts of war or geopolitical events in Europe, or countries economically tied to Europe may cause volatility in the Carbon Credit markets. These events are unpredictable and may lead to extended periods of price volatility.
Global terrorist attacks, anti-terrorism initiatives, and political unrest, as well as the adverse impact the COVID-19 pandemic has had on the global markets and economy, continue to fuel concerns. For example, the COVID-19 pandemic may continue to adversely impact the level of services currently provided by the EU and its member nations, could weaken the European economy, and interfere with Carbon Credit markets that rely upon data published by EU governmental agencies. The types of events discussed above, including the COVID-19 pandemic, are highly disruptive to economies and markets and have recently led, and may continue to lead, to increased market volatility and significant market losses.
More generally, a climate of uncertainty and panic, including the contagion of the COVID-19 virus and other infectious viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability of potential investment opportunities, and increases the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy of financial projections. Under these circumstances, the Trust may have difficulty achieving its investment objective which may adversely impact performance. Further, such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual companies (including, but not limited to, the Sponsor and third party service providers), sectors, industries, markets, securities and commodity exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Trust’s assets. These factors could cause substantial market volatility, exchange trading suspensions and closures that could impact the ability of the Trust to complete redemptions and otherwise affect Trust performance and Trust trading in the secondary market. A widespread crisis may also affect the global economy in ways that cannot necessarily be foreseen at the current time. How long such events will last and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact on the Trust’s performance, resulting in losses for shareholders of the Trust. The current and future global economic impact may cause the underlying assumptions and expectations of the Trust to become outdated quickly or inaccurate, resulting in significant losses.
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Trading on exchanges outside the United States is generally not subject to U.S. regulation and may result in different or diminished investor protections.
To the extent that the Trust places trades on exchanges outside the United States, trading on such exchanges is generally not regulated by any U.S. governmental agency and may involve certain risks not applicable to trading on U.S. exchanges, including different or diminished investor protections. Investors could incur substantial losses from trading on foreign exchanges which such investors would not have otherwise been subject had the Trust’s trading been limited to U.S. markets.
The Trust will face currency exchange rate risk.
The Trust will invest in EUAs which are denominated in Euros. Changes in currency exchange rates and the relative value of the Euro will affect the value of the Trust’s investments and the value of your Shares. Because the Trust’s NAV is determined in U.S. dollars, the Trust’s NAV could decline if the Euro depreciates against the U.S. dollar, even if the value of the EUAs held by the Trust, denominated in Euros, increases. Currency exchange rates can be extremely volatile and can change quickly and unpredictably. As a result, the value of the Trust’s investments may change quickly and without warning and the Trust may lose money.
As the above chart shows, throughout the past approximately 50 years the relationship between the U.S. dollar and the Euro has shifted dramatically. The relationship between the two currencies generally tracks the relative performance of the two economies and may react as one country’s (or currency zone’s) economy is outperforming the other. These periods of outperformance can cause dramatic swings in the relative value of the currencies. There have been periods during which the U.S. dollar depreciated by almost 50% against the Euro (2002 – 2009) as well as periods during which the U.S. dollar appreciated by similar proportions (1980 – 1984). These movements have tended to revert towards the historical average exchange rate of 1.194 Euro/U.S. dollar. As the Trust’s NAV is calculated in U.S. dollars, the Trust’s NAV may change, even if the Euro denominated value of the Trust’s assets do not, based upon currency exchange rate fluctuations. There will be periods when exchange rate fluctuations benefit the Trust, such as when the Euro is appreciating relative to the U.S. dollar, and periods when exchange rate fluctuations negatively impact the Trust, such as when the U.S. dollar appreciates relative to the Euro. Currency exchange rate fluctuations are beyond the control of the Trust and the Trust will not hedge against their impact. As of May 10, 2023, the exchange rate was 1.0982 Euro/U.S. dollar.
There are no position limits or accountability levels on EUAs, which, despite the large trading volume of EUAs, could theoretically allow a single investor or a group of investors to exert significant influence on the price of EUAs.
Unlike with certain commodity interests traded on designated contract markets, there are no position limits on the maximum net long or net short EUA futures contracts that any single investor or group of investors under common trading control may hold, own or control. Additionally, there are no accountability levels over which the exchanges
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on which EUA futures contracts are traded may exercise greater scrutiny and control over an investor’s or group of investors’ positions. While this theoretically could allow a single investor or group of investors to exert significant influence over the price of EUAs, and in the extreme case, “corner the market,” this is mitigated and made unlikely by the large daily trading volume of EUAs, which on January 31, 2023 for example, amounted to approximately 5.8 million EUAs, between the spot and futures markets, combined. Should there be any serious supply issues with regard to EUAs and the price of EUAs rises above a certain level, the MSR would likely increase the auction supply of EUAs in order to moderate the price of EUAs.
The fragmented nature of data regarding the EU carbon market and the lack of a centralized market monitoring of the EU carbon market may make it more difficult to identify potential market manipulation and abusive practices.
Due to the existing legal framework, data regarding the EU carbon market is fragmented, with each available dataset having a specific scope regarding the counterparties and types of instruments covered. Additionally, while all EU ETS operations have been centralized in the Union Registry since 2012, there is no centralized market monitoring of the EU Carbon Market and is instead largely conducted by individual EU member states, namely Germany, Netherlands and Norway. As a result of this lack of centralized market monitoring of the EU carbon market at the EU level, tools to detect and deter fraudulent or manipulative trading activities (such as market manipulation, front-running of trades, and “wash-trading”) may not be available to or employed by EUA markets or may not exist at all.
As a result of reduced oversight, these schemes may be more prevalent in EUA markets than in the general market for financial products. The potential consequences of the EUA market’s failure or failure to prevent market manipulation could adversely affect the value of the Shares. Any market abuse, and a loss of investor confidence in EUAs, may adversely impact pricing trends in EUA markets broadly, as well as an investment in Shares of the Trust.
Risks Related to the Trust’s Structure
The amount of EUAs represented by each Share will decrease over the life of the Trust due to the sale of EUAs necessary to pay the Sponsor’s Management Fee and Trust expenses. Without increases in the price of EUAs sufficient to compensate for that decrease, the price of the Shares will also decline and you will lose money on your investment in Shares.
Because the Trust does not have any income, it needs to sell EUAs to cover its expenses. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Trust, the Trust will still need to sell EUAs to pay the Sponsor’s Management Fee. The result of these sales is a decrease in the amount of EUAs represented by each Share. New EUAs, received in exchange for new Shares issued by the Trust, do not reverse this trend.
A decrease in the amount of EUAs represented by each Share results in a decrease in its price even if the price of EUAs has not changed. To retain the Share’s original price, the price of EUAs has to increase. Without that increase, the lesser amount of EUAs represented by the Share will have a correspondingly lower price. If these increases do not occur, or are not sufficient to counter the lesser amount of EUAs represented by each Share, you will sustain losses on your investment in Shares.
An increase in the Trust expenses not assumed by the Sponsor, or the existence of unexpected liabilities affecting the Trust, will force the Trust to sell larger amounts of EUAs, and will result in a more rapid decrease of the amount of EUAs represented by each Share and a corresponding decrease in its value.
The amount of EUAs represented by each Share will decrease over the life of the Trust due to the disregarding of fractions of an EUA smaller than one EUA for purposes of computing the Basket Deposit (as defined below). Without increases in the price of EUAs sufficient to compensate for that decrease, the price of the Shares will also decline and you will lose money on your investment in Shares.
Due to changes in the Trust’s NAV attributable to sales of EUAs to pay fund expenses, the Basket Deposit, calculated as described in “Determination of Required Deposits,” below, may include fractional EUAs. The Trust’s policy is to disregard such fractional amounts because they are deemed to represent de minimis amounts relative to the value of a Basket. Because the Trust will not receive EUAs equal to the full value of a Basket, the interest on each of the existing shareholders of the Trust will be slightly diluted with the issuance of new Baskets. The dilution will be equal
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to the value of the disregarded fractional EUA, divided equally over all of the existing Shares prior to the creation. The dilution of a Share’s value will never amount to the value of one EUA, divided by the total number of Shares. To retain the Share’s original price, the price of EUAs has to increase. Without that increase, the lesser amount of EUAs represented by the Share will have a correspondingly lower price. If these increases do not occur, or are not sufficient to counter the lesser amount of EUAs represented by each Share, you will sustain losses on your investment in Shares.
The Trust is a passive investment vehicle. This means that the value of your Shares may be adversely affected by Trust losses that, if the Trust had been actively managed, it might have been possible to avoid.
The Trust will seek to hold EUAs during periods in which daily changes in the price of EUAs are flat or declining as well as when they are rising, and will not actively manage the Trust based on any other discretionary criteria. For example, if the Trust’s EUAs are declining in value, the Trust will not close out such positions, except during rebalancing periods or for creation and redemption orders in accordance with its investment objective. Any decrease in value of the Trust’s EUA positions will result in a decrease in the NAV and likely will result in a decrease in the market price of the Shares.
The Trust will not take defensive positions to protect against declining Carbon Credit prices, which could cause a decline to the value of the Trust’s Shares.
The Trust’s sole assets will be EUAs, regardless of the Sponsor’s views on expected EUA price movements. The Trust will not take a defensive position if EUA prices decline or if the Sponsor expects prices to decline. The Trust’s performance will be highly sensitive to Carbon Credit prices changes and the value of the Trust’s Shares will decrease as Carbon Credit prices fall.
An investment in the Trust may be adversely affected by competition from other methods of investing in EUAs.
The Trust competes with other financial vehicles, including exchange traded products registered outside of the U.S. and investment companies registered under the Investment Company Act of 1940, as amended (the “1940 Act”), such as mutual funds, exchange traded funds (“ETFs”), and closed-end funds that gain exposure to EUAs through investments in futures contracts or other derivatives. Market and financial conditions, and other conditions beyond the Sponsor’s control, may make it more attractive to invest in other financial vehicles, which could affect the market capitalization of the Trust and reduce the NAV. To the extent existing ETFs or other exchange traded vehicles tracking Carbon Credit markets represent a significant proportion of demand for EUAs, large redemptions of the securities of these ETFs or other exchange traded vehicles could negatively affect Carbon Credit prices and the price and NAV.
The Trust may be forced to sell EUAs earlier than anticipated if expenses are higher than expected.
The Trust may be forced to sell EUAs earlier than anticipated if the Trust’s expenses are higher than estimated. Such accelerated sales may result in a reduction of the NAV and the value of the Shares.
The Trust could terminate at any time and cause the liquidation and potential loss of an investor’s investment and could upset the overall maturity and timing of an investor’s investment portfolio.
The Trust may terminate at any time, regardless of whether the Trust has incurred losses, subject to the terms of the Trust Agreement. However, no level of losses will require the Sponsor to terminate the Trust. The Trust’s termination would cause the liquidation and potential loss of an investor’s investment. Termination could also negatively affect the overall maturity and timing of an investor’s investment portfolio.
Upon termination of the Trust, the Trust will sell EUAs in the amount necessary to cover all expenses of liquidation, and to pay any outstanding liabilities of the Trust. The remaining EUAs will be distributed among Authorized Participants surrendering Shares. Any EUAs remaining in the Trust after may be sold by the Trust and the proceeds of the sale will be held by the Trust until claimed by any remaining holders of Shares. Sales of EUAs in connection with the liquidation of the Trust at a time of low prices will likely result in losses, or adversely affect your gains, on your investment in Shares.
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The Sponsor may choose to terminate the Trust.
The Sponsor has the power to terminate the Trust at any time for any reason. If this power is so exercised, investors who wished to continue to invest in EUAs through the vehicle of the Trust will have to find another vehicle, and may not be able to find another vehicle that offers the same features as the Trust.
If this offering of Shares does not raise sufficient funds to make the Trust’s future operations viable, the Trust may be forced to terminate and investors may lose all or part of their investment.
All of the expenses relating to the Trust incurred prior to the date of this prospectus have been or will be paid by the Sponsor. These payments by the Sponsor were designed to allow the Trust the ability to commence the public offering of its Shares. If the Sponsor and the Trust are unable to raise sufficient funds so that revenues generated from the Sponsor’s Management Fee can cover Trust expenses, the Trust may be forced to terminate and investors may lose all or part of their investment. Any expenses related to the operation of the Trust would need to be paid by the Sponsor at the time of termination.
The Sponsor has contractually agreed to cover all routine, operational, administrative and other ordinary Trust expenses out of amounts paid under the unitary Sponsor’s Management Fee. To the extent Trust expenses exceed the Sponsor’s Management Fee, the Sponsor will cover that shortfall. Assuming the Trust’s ordinary operating expenses amount to $100,000 in a year, the Trust would have to raise approximately $13,000,000 in assets for the Sponsor’s Management Fee to cover trust expenses. Likewise, if the annual ordinary operating expenses of the Trust amount to $200,000 or $300,000, the Trust would have to raise approximately $25,000,000 and $38,000,000, respectively, in assets in order for the Sponsor’s Management Fee to cover Trust expenses. While the Sponsor is not able to cover Trust expenses indefinitely, there is no minimum amount of Trust assets below which the Sponsor would automatically terminate the Trust. Likewise, no level of losses will require the Sponsor to terminate the Trust.
The Trust’s termination would result in the liquidation of its investments and the distribution of its remaining assets to the shareholders on a pro rata basis in accordance with their Shares, and the Trust could incur losses in liquidating its investments in connection with a termination.
There may be situations where an Authorized Participant is unable to redeem a Basket of Shares. To the extent the value of EUAs decreases, these delays may result in a decrease in the value of the EUAs the Authorized Participant will receive when the redemption occurs, as well as a reduction in liquidity for all Shareholders in the secondary market.
Although Shares surrendered by Authorized Participants in Basket-size aggregations are redeemable in exchange for the underlying amount of EUAs, redemptions may be suspended during any period while regular trading on the Exchange is suspended or restricted, or in which an emergency exists that makes it reasonably impracticable to deliver, dispose of, or evaluate EUAs. If any of these events occurs at a time when an Authorized Participant intends to redeem Shares, and the price of EUAs decreases before such Authorized Participant is able again to surrender Shares for redemption, such Authorized Participant will sustain a loss with respect to the amount that it would have been able to obtain in exchange for the EUAs received from the Trust upon the redemption of its Shares, had the redemption taken place when such Authorized Participant originally intended it to occur. As a consequence, Authorized Participants may reduce their trading in Shares during periods of suspension, decreasing the number of potential buyers of Shares in the secondary market and, therefore, decreasing the price a shareholder may receive upon sale.
The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants.
In the event that one or more Authorized Participants that have substantial interests in Shares withdraw from participation, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in your incurring a loss on your investment.
The lack of an active trading market for the Trust’s Shares may result in losses on an investor’s investment in the Trust at the time the investor sells the Shares.
Although the Trust’s Shares are listed and traded on the Exchange, there can be no guarantee that an active trading market for the Shares will be maintained. If an investor needs to sell Shares at a time when no active trading market for them exists, the price the investor receives upon sale of the Shares, assuming they were able to be sold, likely would be lower than if an active market existed.
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If the process of creation and redemption of Baskets encounters any unanticipated difficulties, the possibility for arbitrage transactions intended to keep the price of the Shares closely linked to the price of EUAs may not exist and, as a result, the price of the Shares may fall or otherwise diverge from NAV.
If the processes of creation and redemption of Shares (which depend on timely transfers of EUAs to and by the Union Registry) encounter any unanticipated difficulties, potential market participants, such as the Authorized Participants and their customers, who would otherwise be willing to purchase or redeem Baskets to take advantage of any arbitrage opportunity arising from discrepancies between the price of the Shares and the price of the underlying EUAs may not take the risk that, as a result of those difficulties, they may not be able to realize the profit they expect. If this is the case, the liquidity of the Shares may decline and the price of the Shares may fluctuate independently of the price of EUAs and may fall or otherwise diverge from NAV.
As an owner of Shares, you will not have the rights normally associated with ownership of other types of Shares.
Shares are not entitled to the same rights as Shares issued by a corporation. By acquiring Shares, you are not acquiring the right to elect directors, to receive dividends, to vote on certain matters regarding the issuer of your Shares or to take other actions normally associated with the ownership of Shares of a corporation. You will only have the limited rights described under “Description of the Shares — Description of Limited Rights.”
As an owner of Shares, you will not have the protections normally associated with ownership of Shares in an investment company registered under the 1940 Act, or the protections afforded by the Commodity Exchange Act (“CEA”).
The Trust is not registered as an investment company for purposes of United States federal securities laws, and is not subject to regulation by the SEC as an investment company. Consequently, the owners of Shares do not have the regulatory protections provided to investors in registered investment companies. For example, the provisions of the Investment Company Act that limit transactions with affiliates, prohibit the suspension of redemptions (except under certain limited circumstances) or limit sales loads, among others, do not apply to the Trust.
The Trust does not hold or trade in commodity futures contracts, “commodity interests”, or any other instruments regulated by the CEA, as administered by the CFTC and the National Futures Association (the “NFA”). Furthermore, the Trust is not a commodity pool for purposes of the Commodity Exchange Act and the Shares are not “commodity interests”. Consequently, the Sponsor is not subject to registration as a commodity pool operator or commodity trading advisor with respect to the Trust or the Shares. The owners of Shares do not receive the Commodity Exchange Act disclosure document and certified annual report required to be delivered by a registered commodity pool operator or a commodity trading advisor with respect to the Trust, and the owners of Shares do not have the regulatory protections provided to investors in commodity pools operated by registered commodity pool operators or advised by commodity trading advisors.
The Trust and its services providers, including the Union Registry may be the victims of a cyber-attack, which could adversely affect the price of EUAs and the prices of the Trust’s Shares.
The Trust and its service providers, including the Union Registry, may be prone to operational and information security risks resulting from cyber-attacks. Cyber-attacks include, but are not limited to, stealing or corrupting data maintained online or digitally, denial of service attacks on websites, the unauthorized release of confidential information or various other forms of cyber security breaches. Cyber-attacks could result in market disruption or adversely affect the price of EUAs or ability to access EUAs (including if they are stolen or lost).
Security vulnerabilities have previously been exploited in the EU ETS. For example, in January 2011, EUAs were allegedly stolen or “phished” from the national registries of several European countries and from the carbon trading accounts of market participants, which caused severe market disruption in the European carbon trading market with delivery of EUAs suspended. Such cyber security breaches could result in, amongst other things, the theft of EUAs. If some or all of the EUAs were to be stolen, this would have a material adverse effect on the Trust, which may, in turn, result in a shareholder losing some or all of the value of its investment in the Trust.
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Although the relationship between the Union Registry and the Trust concerning the Trust’s allocated EUAs is expressly governed by Dutch law, a court hearing any legal dispute concerning that arrangement may disregard that choice of law and apply U.S. law, in which case the ability of the Trust to seek legal redress against the Union Registry may be frustrated.
The obligations of the Union Registry are governed by Dutch law. The Trust is a Delaware statutory trust. Any United States, Delaware or other court situated in the United States may have difficulty interpreting Dutch law. It may be difficult or impossible for the Trust to sue the Union Registry in a United States, Delaware or other court situated in the United States. In addition, it may be difficult, time consuming and/or expensive for the Trust to enforce in a foreign court a judgment rendered by a United States, Delaware or other court situated in the United States.
Shareholders and Authorized Participants lack the right under the Union Registry Agreements to assert claims directly against the Union Registry, which significantly limits their options for recourse.
Neither the shareholders nor any Authorized Participant will have a right under the Union Registry Agreements to assert a claim of the Trust against the Union Registry. Claims under the Union Registry Agreements may only be asserted by the Trust.
The value of the Shares will be adversely affected if any services provided to the Trust by the Sponsor, the Union Registry or other Trust service providers are suddenly or unexpectedly terminated.
Upon the sudden or unexpected termination, resignation or removal of any service provider to the Trust, it is possible that a comparable replacement service provider will be unavailable or unable to be appointed without material delay. Any such unavailability or delay could cause the Trust to expend resources in finding a replacement service provider, which may impact the NAV of the Trust.
The service providers engaged by the Trust may not carry adequate insurance to cover claims against them by the Trust, which could adversely affect the value of net assets of the Trust.
The Trust and other service providers engaged by the Trust maintain such insurance as they deem adequate with respect to their respective businesses. Investors cannot be assured that any of the aforementioned parties will maintain any insurance with respect to the Trust’s assets held or the services that such parties provide to the Trust and, if they maintain insurance, that such insurance is sufficient to satisfy any losses incurred by them in respect of their relationship with the Trust. Accordingly, the Trust will have to rely on the efforts of the service provider to recover from their insurer compensation for any losses incurred by the Trust in connection with such arrangements.
The Trust may amend the Trust Agreement without the consent of the Shareholders.
The Trust may agree to amend the Trust Agreement, including to increase the Sponsor’s Management Fee, without shareholder consent. Any amendment will become effective on a date to be determined by the Sponsor in its sole discretion. Shareholders may not receive specific notice of a fee increase or other amendment, other than through a supplement to the prospectus. Moreover, at the time an amendment becomes effective, by continuing to hold Shares, shareholders are deemed to agree to the amendment and to be bound by the Trust Agreement as amended without specific agreement to such amendment.
The market price at which investors buy or sell Shares may be significantly more or less than NAV.
The market price at which investors buy or sell Shares may be significantly less or more than NAV. The Trust’s per share NAV will change throughout the day as fluctuations occur in the market value of the Trust’s portfolio assets. The public trading price at which an investor buys or sells Shares during the day from their broker may be different from the NAV of the Shares. Price differences may relate primarily to supply and demand forces at work in the secondary trading market for the Trust’s Shares that are closely related to, but not identical to, the same forces influencing the prices of EUAs, cash and cash equivalents that constitute the Trust’s assets. During periods of unusual volatility or market disruptions, market prices of Trust Shares may deviate significantly from the market value of the Trust’s securities holdings or the NAV of Trust Shares.
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The NAV of the Trust’s Shares may also be influenced by non-concurrent trading hours between the Exchange and the EUA markets. While the Trust’s Shares trade on the Exchange from 9:30 a.m. to 4:00 p.m. E.T., the trading hours for EUA markets do not coincide during all of this time. As a result, 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 NAV of the Shares.
The Trust may incur higher fees and expenses upon renewing existing or entering into new contractual relationships.
If the Trust enters into new contractual relationships or renews existing relationships with its service providers, it may incur higher fees and expenses and need to change its accruals or introduce new fees and expenses. Any such change could make investors; investment less profitable.
The Exchange may halt trading in the Trust’s Shares, which would adversely impact an investor’s ability to sell Shares.
The Trust expects to list its Shares for trading on the Exchange under the market symbol CTWO. Trading in Shares may be halted due to market conditions or, in light of Exchange rules and procedures, for reasons that, in the view of the Exchange, 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. Additionally, there can be no assurance that the requirements necessary to maintain the listing of the Trust’s Shares will continue to be met or will remain unchanged. The Exchange’s listing rules require a minimum of 50,000 Shares to be outstanding for continued listing and will be the Trust’s minimum.
The Trust does not expect to make cash distributions.
Unlike mutual funds, commodity pools or other investment pools that actively manage their investments in an attempt to realize income and gains from their investing activities and distribute such income and gains to their investors, the Trust generally does not expect to distribute cash to security holders. An investor should not invest in the Trust if the investor will need cash distributions from the Trust to pay taxes on its share of income and gains of the Trust, if any, or for any other reason.
Although the Shares of the Trust are limited liability investments, certain circumstances such as bankruptcy or indemnification could increase a shareholder’s liability.
The Shares of the Trust are limited liability investments; shareholders may not lose more than 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 Trust any distribution they received at a time when the Trust was in fact insolvent or in violation of its Trust Agreement. Shareholders also agree in the Trust Agreement that they will indemnify the Trust for any harm suffered by the Trust as a result of the shareholders actions unrelated to the activities of the Trust.
Risks Related to the Sponsor
The Trust and the Sponsor may have conflicts of interests.
The Trust is subject to actual and potential inherent conflicts involving the Sponsor, various brokers and Authorized Participants. The Sponsor’s officers, directors and employees do not devote their time exclusively to the Trust. These persons are directors, officers or employees of other entities that may compete with the Trust for their services. They could have a conflict between their responsibilities to the Trust and to those other entities.
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Shareholders have only very limited voting rights and have the power to replace the Sponsor only under specific circumstances. Shareholders do not participate in the management of the Trust and do not control the Sponsor, so they do not have any influence over basic matters that affect the Trust.
Shareholders have very limited voting rights with respect to the Trust’s affairs and 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). Shareholders may elect a replacement sponsor only if the Sponsor resigns voluntarily or loses its limited liability company charter. Shareholders are not permitted to participate in the management or control of the Trust or the conduct of its activities. Shareholders must therefore rely upon the duties and judgment of the Sponsor to manage the Trust’s affairs.
The Sponsor is leanly staffed and relies heavily on key personnel to manage the Trust.
In managing and directing the day-to-day activities and affairs of the Trust, the Sponsor relies heavily on the services of its Chief Executive Officer, Ronald Gutstein and its Chief Financial Officer, Shari Crawford. If any of the group were to leave or be unable to carry out his present responsibilities, it may have an adverse effect on the management of the Trust.
Risks Related to Taxation
Shareholders do not have the rights enjoyed by investors in certain other financial instruments.
As interests in a grantor trust, the Shares have none of the statutory rights normally associated with the ownership of shares of a business corporation, including, for example, the right to bring “oppression” or “derivative” actions. Apart from the rights afforded to them by federal and state securities laws, Shareholders have only those rights relative to the Trust, the Trust property and the Shares that are set forth in the Depositary Trust Agreement. In this connection, the Shareholders have limited voting and distribution rights. They do not have the right to elect directors. See “Description of the Shares” for a description of the limited rights of the Shareholders.
The Trust has not requested a ruling from the Internal Revenue Service (“IRS”) regarding the tax treatment of the Trust.
Neither Sponsor nor Trustee has requested a ruling from the IRS regarding the tax status of the Trust. If the IRS were to determine (and be sustained in that determination) that the Trust is not a “grantor trust” for U.S. federal income tax purposes, the Trust could be subject to more complex and costly tax reporting requirements that could reduce the amount of cash available for distribution to shareholders. Specifically, if the Trust were not treated as a grantor trust for U.S. federal income tax purposes, the Trust should be treated as a partnership for such purposes. Although the Trust would not become subject to U.S. federal income taxation at the entity level as a result of treatment as a partnership, and items of income, gain, loss and deduction would flow through to shareholders, the Trust’s tax reporting requirements would be more complex and costly to implement and maintain, and its distributions to shareholders could be reduced as a result.
Shareholders could incur a tax liability without an associated distribution of the Trust.
In the normal course of operations it is possible that the Trust could incur a taxable gain in connection with the sale of EUAs that is otherwise not associated with a distribution. In the event that this occurs, shareholders may be subject to tax due to the grantor trust status of the Trust even though there is not a corresponding distribution from the Trust.
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Proceeds received by the Trust in the form of deposits from the issuance of Baskets consist of EUAs. Such deposits are at all times maintained in the Union Registry. Such deposits are held by the Trust until (i) delivered to Authorized Participants in connection with redemptions of Baskets or (ii) sold at the direction of the Sponsor to pay fees due to the Sponsor and Trust expenses and liabilities not assumed by the Sponsor.
The following is a more complete description of EUAs, including, without limitation, information about the history of EUAs, the EU ETS, and the global carbon credit market.
Description of EU Emissions Trading Scheme
Background of EU Emissions Trading Scheme
EU Emissions Trading System (“EU ETS”) is a “cap and trade” system. It caps the total volume of Green House Gas (“GHG”) emissions from installations and aircraft operators responsible for around 40% of EU GHG emissions. While the cap was previously set “bottom-up” from the relevant national allocation plans, since 2013 it has been set centrally by the EU which applies EU-wide.
The EU ETS is administered by the EU Commission, which issues a predefined amount of emission allowances through auctions or free allocation. Every year, this amount decreases slightly, with the objective that emissions are forced to reduce over time.
The system allows trading of emission allowances so that the total emissions of the installations and aircraft operators stays within the cap and the lowest cost measures can be taken up to reduce emissions. The EU ETS is a major tool of the European Union in its efforts to meet emissions reductions targets now and into the future. The trading approach helps to combat climate change in a cost-effective and economically efficient manner. As the largest emissions trading system for reducing GHG emissions, the EU ETS (together with the linked systems in Norway, Switzerland, Iceland and Lichtenstein) covers more than 11,000 power stations and industrial plants in 31 countries, and flights between airports of participating countries.
In 2012, EU ETS operations were centralized into a single EU registry operated by the EU Commission (the “Union Registry”). The Union Registry covers all countries participating in the EU ETS.
Types of EU Emissions Allowance
There are two types of EU emissions allowance: (i) general allowances for stationary installations (“EUA”); and (ii) allowances for the aviation sector (“EUAA”). The Trust intends to hold EUAs only.
An EUA represents the right to emit one metric ton of CO2 equivalent (tCO2e) into the atmosphere by operators of stationary installations (“Covered Entities”). By the end of April each year, all Covered Entities are required to surrender EUAs equal to the total volume of actual emissions from their installation for the last calendar year. EU ETS operators can trade (buy and sell) EUAs to achieve EU ETS compliance.
The cap of the total volume of GHG emissions for Covered Entities will decrease each year by a linear reduction factor. The cap for 2013 from stationary installations was set at 2,084,301,856 allowances. During Phase III, this cap decreased each year by a linear reduction factor (“LRF”) of 1.74% of the average total quantity of allowances issued annually in 2008-2012. This amounts to a reduction of 38,264,246 allowances each year.
The linear reduction factor was set in line with the EU-wide climate action targets for 2020 — the overall 20% emissions reduction target and the EU ETS sector-specific 21% emissions reduction target relative to 2005.
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In Phase IV, the cap on emissions is subject to an annual linear reduction factor of 2.2% and will increase to 5.1% beginning in 2024 and 5.38% beginning in 2025 in accordance with the European Union’s Fit for 55 initiative (the “Initiative”), which refers to a set of recently adopted laws and regulations aimed at reducing the European Union’s net GHG emissions by at least 55% by 2030. This gradual reduction in the carbon allowances will be effected by a corresponding reduction in the amount of EUAs made available at auction. The amount of EUAs that are removed from an auction, up to 400 million EUAs, are placed in a Market Stability Reserve (MSR) (discussed in greater detail below) for a twelve-month period. Regardless, the number of EUAs available each year will decrease slightly but will have a negligible impact on the availability of EUAs in the open market. This is because the gradual decrease in “issued” EUAs is and will likely be offset by Covered Entities adjusting their operations to emit fewer GHGs which will decrease the amount of EUAs Covered Entities are required to surrender each year. In addition in any year, if the total number of EUAs in circulation is less than 400 million, 100 million allowances shall be released from the MSR and added to the volume of allowances to be auctioned. If the MSR has fewer than 100 million EUAs in reserve, all allowances in reserve shall be released. The Sponsor believes that there is sufficient liquidity in the daily EUA spot and futures markets to enable the creation and redemption of Baskets by Authorized Participants without difficulty even with the gradual annual, limited decrease in supply of EUAs.
Compliance Phases
The EU ETS was developed with five phases of adoption, each phase having slightly more restrictive processes and procedures designed to gradually reduce the amount of greenhouses gasses emitted throughout the EU:
Phase I (2005 – 2007) only covered power generators and energy-intensive industries. Virtually all allowances were given to businesses for free during this period. The only cost imposed was a €40/ton fine for noncompliance.
Phase 2 (2008 – 2012) saw free allocations drop to 90%, with auctions being held for the non-freely distributed allowances. There were also 6.5% fewer allowances granted and the noncompliance penalty rose to €100/ton. During this period, Iceland, Liechtenstein, and Norway joined the EU ETS. The aviation industry was also brought under the auspices of the EU ETS. In an effort to ease tracking of and help facilitate trading, the Union Registry replaced national registries in order to consolidate records of ownership. The empirical data collected through these two phases helped guide the reforms instituted for future phases.
Phase 3 (2013 – 2020) included a number of key reforms:
• A single, EU-wide cap on emissions rather than a system of national caps;
• A transition to virtually all allowances being auctioned rather than freely distributed;
• Inclusion of more sectors of the economy and more types of emissions covered;
• Creation of the NER 300 Programme which set aside 300 million allowances to fund the deployment of technologies in renewable energy and carbon capture; and
• The creation of a Market Stability Reserve (MSR) whose goal is to aid in the maintenance of an orderly market for allowances was established. The MSR adjusts auction supply according to how many allowances are in circulation. Every year the EU publishes the Total Net Allowances in Circulation (TNAC). On May 12, 2022, the European Commission published that the TNAC was 1,449,214,182. If the allowance surplus exceeds or drops below certain predetermined levels, the number of EUAs auctioned the following year are adjusted.
Phase 4 (2021 – 2030) includes a goal of at least a 55% net reduction in greenhouse gas emissions by 2030. In July of 2021 the European Commission adopted a series of proposals describing how it intends to reach this benchmark, which will require all sectors covered by the EU ETS to reduce their emissions by 43% compared to 2005 levels. One of the key paths to reaching this goal is to cut the overall number of allowances issued each year. This process is known as the LRF. The Phase 4 LRF is set at 2.2% per year. It is possible that the LRF could be adjusted higher to 4.2% per year in order to meet the more ambitious EU 2030 emission reduction goals as set forth in the Initiative.
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Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0740&from=EN: p. 12
Auctioning
Depending on the sector, the transition to auctioning has taken place progressively. According to the Joint Procurement Agreement, 28 Countries (25 EU member states plus Liechtenstein, Norway, and Iceland) use a common platform called the European Energy Exchange (“EEX”) to conduct their regularly scheduled auctions. Germany and Poland have opted out of the common auction but also utilize the EEX for auctions. These auctions take place on a regularly scheduled basis; the number of allowances being auctioned is disclosed on a schedule prior to auction.
Since 2013, power generators must buy all their allowances, with exceptions for some countries. The manufacturing industry received 80% of its allowances for free in 2013. This proportion decreased gradually annually to 30% in 2020, with the exception of sectors that were deemed to be exposed to carbon leakage. Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with less restrictive emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries. Consequently, to safeguard the competitiveness of industries covered by the EU ETS, the production from sectors and sub-sectors deemed to be exposed to a significant risk of carbon leakage receives a higher share of free allowances compared to the other industrial installations. A list of such sectors is published by the EU Commission. 15% of the allowances in circulation in the aviation sector are auctioned.
While the overall auction volume is written into law, the actual annual auction volume varies significantly:
(a) The MSR adjusts auction supply based on the surplus of allowances in the market. Every year, the EU Commission assesses the “Total Net Allowances in Circulation” (TNAC). If the allowance surplus exceeds 833 million allowances, 24% (as of 2031: 12%) of that surplus is withdrawn from auctions over the next 12 months and placed in a reserve. If the surplus drops below 400 million allowances, the auction volume of the next 12 months is increased by 100 million allowances until the reserve is depleted. In connection with the Initiative (discussed above), the MSR was reformed to provide that, if the allowance surplus is between 833 million and 1.096 billion, then the number of allowances equal to the difference between the TNAC and 833 million will be withdrawn from auctions over the next 12 months and placed in a reserve, and if the allowance surplus exceeds 1.096 billion allowances, then 24% (as of 2031: 12%) of that surplus is withdrawn from auctions over the next 12 months and placed in a reserve. The reforms set the number of allowances that can be held in the MSR at 400 million, with any surplus allowances being cancelled. The reforms also mandate the release of 75 million allowances to the extent that the average allowance price for the preceding six calendar months is more than 2.4 times the average allowance price at auctions for the preceding two year period. The mandatory release provision is only available once every 12 months.
(b) For administrative reasons, some countries are forced to delay the sale of allowances, e.g. because they failed to appoint an auctioneer in time.
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(c) Some allowances are earmarked for special purposes such as financing low carbon technology innovation. The monetisation of such allowances (and therefore the timing of these sales) can vary over time.
(d) In the case that not all allowances that are earmarked for free allocation are indeed issued, the remaining volume is auctioned towards the end of a trading period.
In order to participate directly in an EUA auction on the EEX, one must be a:
• Compliance buyer
• Investment firm or credit institution
• Business grouping of compliance buyers
• Other intermediary specifically authorized by the home member state
Major holders and allowance use cases
There is limited publicly available data on individuals or individual organizations’ holdings in physical carbon allowances. Primarily, carbon allowances are held for three different use cases:
(a) Complying with the EU ETS: Companies that need to surrender allowances under the EU ETS hold allowances to surrender them annually. These positions are typically built over time and ultimately surrendered at time of compliance. Therefore, the largest emitters in the EU ETS hold a significant amount of allowances, which include entities such as large utilities with a substantial share of fossil fuel fired power plants, cement companies, steel producers, chemical producers, oil and gas majors and airlines.
(b) Providing financial services for hedging purposes or speculation, such as clearing houses for the European Energy Exchange (EEX) or the Intercontinental Exchange (ICE), or banks holding allowances for their clients.
(c) Trading on and speculating around price moves, using physical emission allowances. This can take many forms, including “yield trades”, which includes holding a physical allowance and selling an EUA future at a premium to gain the yield in the forward curve; or outright positions for short term or long term speculation.
In addition to holding physical allowances, there is a liquid secondary futures and options market that is primarily used for hedging future emissions or speculating. Active players include large compliance entities, investment banks and hedge funds.
Trading EU Allowances
Transactions in allowances in the EU ETS take place between accounts in the European Union registry. Actors in the EU ETS first need to open an account with the Union Registry to be able to perform any transactions in EU Allowances. Accounts can be held by individuals and by organizations, although the precise rules (e.g. around account holder domicile) depend upon the specific national registry approached by the applicant. More details on opening a registry account can be found in Commission Regulation (EU) No 389/2013 (https://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX%3A32013R0389).
Transfer instructions are given electronically by an authorized representative of the transferring account, which indicates the number of allowances to be transferred and the details of the recipient’s account. These instructions for the physical transfer are generally given after a trade has been confirmed and approved by both parties, either OTC or on an exchange.
Transferring allowances from a holding account to another account is subject to a 26- hour delay for security reasons. Holding accounts can only transfer allowances to other accounts on their trusted account list. Authorized representatives (natural persons) of the account holders can add new trusted accounts to their list after a security delay of seven days. However, trading accounts have more flexibility and allow transfers without delay to accounts on the trusted account list and with a 26- hour delay when transferring to accounts not on the list. In contrast, transfers to accounts not on the list is not permitted for holding accounts.
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Any transaction is also subject to a two-factor authentication process (signature process): all transfer instructions must be confirmed with a code that is sent via a text message to the registered mobile phone of the account representative initiating the transaction in the Union Registry.
There are times at which the EU registry is inaccessible for scheduled or unscheduled maintenance, during which no transactions can be initiated.
Trading Location
The EU ETS is linked to small emissions trading systems in Europe (Norway, Switzerland, Iceland and Liechtenstein), but not to any other major cap and trade markets. Therefore, allowances handed out in the EU ETS are not transferable to any registry outside of the EU ETS, and cannot be used for compliance in any other cap and trade market.
There are a number of other trading systems globally, and like the EU ETS, no allowances of any of these systems can be used in any other system:
(a) Western Climate Initiative (WCI): The US state of California and the Canadian province Quebec created a linked cap and trade market, that covers >80% of emissions.
(b) Regional Greenhouse Gas Initiative (RGGI): a group of U S east coast states created a linked market that covers power generators only.
(c) The China National ETS: Technically not a cap and trade scheme (as the amount of allowances is not fixed but calculated according to historic production of units), this system is poised to be the world’s largest carbon market. In early 2021, it includes only coal fired power generation and all allowances are handed out for free, but the regulator plans to expand the scope and reduce the share of free allocation.
(d) South Korea ETS: A comprehensive market covering the majority of Korean emissions
On top of such (multi)national approaches, the Paris Agreement aims at establishing a global carbon market between countries. However, the details are yet to be defined.
Registry Accounts
The Union Registry is an online database that holds accounts for Covered Entities, for aircraft operators as well as trading accounts for participants not covered under the EU ETS. The Union Registry records, amongst other things, (i) national implementation measures (which is a list of installations covered by the EU ETS Directive in each EU country and any free allocation to each of those installations in Phase III); (ii) accounts of companies or individuals holding such allowances; (iii) transfers of allowances (“transactions”) performed by account holders; (iv) annual verified CO2 emissions from installations and aircraft operators; and (v) annual reconciliation of allowances and verified emissions, where each company must have surrendered enough allowances to cover all its verified emissions.
The Union Registry can be accessed online in a similar manner to online banking systems. The operational and technical requirements of the Union Registry are specified in the Registries Regulation.
As mentioned above, a legal or natural person must open an account in the Union Registry before being able to participate in the EU ETS and perform transactions with allowances. Depending on the nature of the account holder and his role or activities, the following account types are available: operator holding accounts; aviation operator holding accounts; verifier accounts; person holding accounts; trading accounts; and national accounts.
To open an account, the account holder has to provide specific supporting evidence on the account holder and representatives (natural persons) that are authorized to use the account. The relevant national administrator checks these documents prior to activation of the account.
The European Union Transaction Log (“EUTL”) also automatically checks, records, and authorizes all transactions that take place between accounts in the Union Registry to ensure that transfers are in accordance with the EU ETS rules.
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Pricing of Allowances and Trading Volume
There are currently two primary avenues for trading EUAs: The primary market involves participation in a regularly scheduled auction. The secondary market involves transactions between buyers and sellers on regulated markets via trading in spot, options, and futures contracts. There are also over-the-counter transactions, but they comprise a negligible percentage of transactions.
Liquidity differs between EUAs and EUAAs: Since fewer of the latter exist, the liquidity in both primary and secondary markets is lower for EUAAs than for EUAs.
The EUA markets are generally liquid:
(a) On a near-daily basis, EUA auctions are held, with the caveat that from mid-December to mid-January, auctions are paused. Also, August auction volumes are typically 50% lower than average to account for less trading activity due to summer holidays. Prices achieved in these auctions are published on various publicly-accessible websites, including the European Commission’s primary website.
(b) As at the Prospectus Date, the secondary market sees trading volumes of €2bn daily on average, with the majority of the liquidity in the futures market. Prices for secondary market transactions are published on various publicly-accessible websites, including those of the exchanges.
The auction venue provides transparency by releasing the auction data (total number of EUAs auctioned, the clearing price, bids received, and the cover ratio) shortly after the completion of each auction at 11am CET. Usually, the secondary market trades in a very close range around the primary market at that time.
The secondary market trading takes place on the EEX, ICE Endex, and Nasdaq Oslo exchanges. In their February 2023 publication, Carbon Market Year in Review 2022, Refinitiv estimated the total EUA market size to be €751.5 billion, up 10% versus 2020. The report further states that the EU ETS comprised 87% of the global market in compliance jurisdictions. The price for EUAs has ranged materially over the years, with the price generally increasing as the scheme has moved into later years.
There is no price management in the EU ETS, with the exception that if the primary auction clears significantly below the secondary market range preceding the auction, the auction can be cancelled. (This has occurred in the past when bidding interest was insufficient.) The unsold volume is then added to the next few auctions.
Most liquidity in the secondary market is achieved by trading futures contracts. These contracts have expiration going out as far as 2030. The most liquid contract is the single day futures contract on EUAs (the “Daily EUA Future”), which settles each day at the close of trading. Generally, Daily EUA Futures trade from approximately 2:00 a.m. Eastern Time (“E.T.”) to approximately 12:00 p.m. E.T. The pre-market trading session typically commences at 1:45 a.m. E.T. each trading day. The settlement price is fixed each business day and is published by the exchange at approximately 12:15 E.T. Final cash settlement occurs the first business day following the expiry day. The trading hours for spot EUAs on EEX are 8:00 a.m to 6:00 p.m. Central European Time (“C.E.T.”), and trade registrations are possible until 6:45 p.m. Trades concluded before 4:00 p.m. C.E.T. are settled on the next business day, while trades after 4:00 p.m. are settled on the day after the first business day.
The EEX calculates and publishes an EEX end of day index on the price of EEX EUA spot contracts (the “EUA End of Day Index”). The value of the EUA End of Day Index is calculated based on an algorithm using data regarding the prices of qualifying trades and the average bids and asks of orders that meet certain order quantity requirements. In order for data regarding trades and orders to be used for calculating the value of the EUA End of Day Index, the trades or orders must satisfy certain requirements regarding (i) quantity of traded contracts, (ii) quantity of contracts per order, (iii) minimum duration of the cumulated valid best bid and best ask, and (iv) maximum spread per contract. The EUA End of Day Index calculation methodology depends on the number of valid trades and orders which fulfil the product-specific parameters. The data used for calculating the EUA End of Day Index can also come from fair values collected in a price committee or from other price sources. The EUA End of Day Index price calculated is then validated against actual market prices.
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The current value (spot price) for a EUA is greatly influenced by a number of factors, including regulatory changes, world event’s and general level of economic activity. These primary concerns interact with one another to influence the supply and demand balance. As discussed earlier, the EU use of the MRS and the linear reduction factor have great influence regarding the overall supply of EUAs available to the market. There has also recently been a proposal within the EU of implementing a Carbon Border Adjustment Mechanism (CBAM), with a goal to “equalize the price of carbon between domestic products and imports and ensure that the EU’s climate objectives are not undermined by production relocating to countries with less ambitious policies.”
Past and future performance of the EUAs
As movements in the price of EUAs are expected to directly affect the price of the Shares, investors should understand what the recent movements in the price of EUAs have been. Investors, however, should also be aware that past movements in the EUA price are not indicators of future movements. The following chart provides historical background on the price of EUAs.
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(1) EU emissions dropped significantly following the 2008/09 Financial Crisis, resulting in the EU ETS having an over-supply of Allowances in Phase 2 of the ETS (which was concluded in 2012), and consequently Phase 2 EUA prices dropped significantly as no emissions abatement was required. As an increase in decarbonization emissions at that time was politically unrealistic, the EU Commission instead implemented two measures within Phase 3 of the EU ETS.
(2) First, in 2014, the EU implemented “backloading,” which temporarily withheld 900 million Allowances from the market to stabilize the market with the aim of encouraging faster decarbonization.
(3) Second, in 2017, the EU followed up with the implementation of the Market Stability Reserve, which institutionalizes a supply adjustment based on emission trends. This has made the EU ETS more resilient against external impacts and reduces the likelihood of future regulatory intervention.
(4) COVID lockdowns caused a short term price fall as immediate demand crashed when industrial production was shuttered in Spring 2020 (amongst other COVID effects), but the EU’s Green New Deal and announcement of more ambitious decarbonization targets under the Paris Agreement have led to increases in the price of EUAs in 2021 to record highs.
(5) The Russian invasion of Ukraine in February 2022 triggered a gas price surge which forced some commodity trading and other companies to raise cash for margin calls. This in turn caused some liquidations of EUA positions in the market that resulted in a rapid descent in EUA spot and futures prices, some of which has been recovered in the short term.
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Regulation
As far as the EU ETS is concerned, it is established pursuant to the EU ETS Directive, the Auctioning Regulation and the Registries Regulation.
The EU ETS Directive governs the companies involved while the Auctioning Regulation details the sale of allowances and the Registries Regulation regulates the Union Registry and transfer of allowances.
Any major changes to the EU ETS are implemented through amendments of the EU ETS Regulation, which requires a full Comitology process on EU level. More technical aspects are implemented though the regulations.
As with all EU law, the EU ETS Directive establishes a legal framework that needs to be translated into national law in each member state. The linked emissions trading schemes (Iceland, Liechtenstein, Norway and Switzerland) need to adjust their respective rules accordingly to remain linked to the EU ETS.
EU emissions allowances and any derivatives thereof are considered financial instruments respectively under points 11 and 4 of Section C of Annex 1 to the Markets in Financial Instruments Directive II (“MiFID II”). Accordingly, certain investment services and activities relating to EU emissions allowances may be licensable activities under MiFID II.
Similarly, under Article 82B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended from time to time, “RAO”) and only in relation to, amongst others, “an investment firm or qualifying credit institution” that is “providing or performing investment services and activities on a professional basis,” EU emissions allowances and any derivatives thereof are considered “specified investments” for the purposes of FSMA. Accordingly, firms specified in Article 82B(2) engaging in “specified activities” (as defined under FSMA and the RAO) relating to EU emissions allowances may be conducted a regulated activity requiring authorization under FSMA.
Due to the existing legal framework, data regarding the EU carbon market is fragmented, with each available dataset having a specific scope regarding the counterparties and types of instruments covered. Additionally, while all EU ETS operations have been centralized in the Union Registry since 2012, there is no centralized market monitoring of the EU Carbon Market and is instead largely conducted by individual EU member states, namely Germany, Netherlands and Norway. This lack of centralized market monitoring of the EU carbon market at the EU level may make it more difficult for potential market manipulation and abuse practices to be identified. However, EUAs are financial instruments under the EU’s Market Abuse Regulation (“MAR”) and as such are subject to the full set of laws and regulations applicable to financial instruments under MAR, MiFID II and the Markets in Financial Instruments Regulation (“MiFIR”).
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The activities of the Trust are limited to: (1) issuing Baskets in exchange for EUAs deposited with the Trust, as consideration; (2) selling EUAs (or transferring EUAs, at the Sponsor’s discretion, to pay the Management Fee) as necessary to cover the Sponsor’s Management Fee and Trust expenses, if any, not assumed by the Sponsor and other liabilities; and (3) delivering EUAs in exchange for Baskets surrendered for redemption. The Trust is not actively managed. It does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the price of EUAs.
Trust Objective
The investment objective of the Trust is for the Shares to reflect the performance of the price of EUAs, less the expenses of the Trust’s operations. The Trust intends to achieve this objective by investing substantially all of its assets in EUAs. The Trust will invest in EUAs on a non-discretionary basis (i.e., without regard to whether the value of EUAs is rising or falling over any particular period).
Barring the forced liquidation of the Trust, the Trust will not purchase or sell EUAs directly, although the Sponsor may sell EUAs to pay certain expenses. Instead, when it sells or redeems its Shares, it will do so in “in-kind” transactions. Authorized Participants will deliver EUAs to the Trust in exchange for Shares when they purchase Shares, and the Trust will deliver EUAs to such Authorized Participants when they redeem Shares from the Trust. All EUAs will be held in the Union Registry. The Transfer Agent will facilitate the processing of purchase and sale orders in Baskets from the Trust.
CREATION AND REDEMPTION OF SHARES
The Trust creates and redeems Shares from time to time, but only in one or more Baskets. The creation and redemption of baskets is only made in exchange for delivery to the Trust or the distribution by the Trust of the amount of EUAs represented by the Baskets being created or redeemed, the amount of which is equal to the combined NAV of the number of Shares included in the baskets being created or redeemed determined as of 4:00 p.m., New York Time, on the day the order to create or redeem Baskets is properly received. Creations of Baskets may only be settled after the requisite EUAs are deposited in the Trust’s Union Registry account.
Authorized Participants are the only persons that may place orders to create and redeem baskets. To become an Authorized Participant, a person must enter into an Authorized Participant Agreement with the Sponsor. The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets and for the delivery of the EUAs required for such creation and redemptions. The Authorized Participant Agreement and the related procedures attached thereto may be amended by the Trust, without the consent of any shareholder or Authorized Participant. Authorized Participants pay the Administrator a transaction fee of $100 for each order they place to create or redeem one or more Baskets. The transaction fee may be waived, reduced, increased or otherwise changed by the Sponsor, taking into account the volume of creation and redemption orders and the cost to the Administrator and Sponsor of processing the creation and redemption orders, among other factors. Authorized Participants who make deposits with the Trust in exchange for Baskets receive no fees, commissions or other form of compensation or inducement of any kind from either the Trust or the Sponsor, and no such person will have any obligation responsibility to the Sponsor or the Trust to effect any sale or resale of Shares.
Prior to initiating any creation or redemption order, an Authorized Participant must have the ability to direct the transfer of EUAs into the Trust’s Union Registry account in connection with the purchase of Baskets in such a manner that the EUAs can be attributed to the Authorized Participant. Likewise, the Authorized Participant, or its agent, shall have the ability to accept EUAs from the Trust’s Union Registry account in connection with the redemption of Baskets. Some Authorized Participants or their affiliates may from time to time buy or sell EUAs and may profit in these instances. The Sponsor believes that the size and operation of the EUA market make it unlikely that Authorized Participants’ direct activities in the EUA market will significantly impact the price of EUAs or the Trust’s Shares. Authorized Participants must be (1) a DTC Participant; (2) registered as a broker-dealer under the Exchange Act and regulated by Financial Industry Regulatory Authority, or FINRA, or some other self-regulatory organization or will be exempt from being or otherwise not required to be so regulated or registered; and (3) qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Each Authorized Participant will have its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
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Under the Authorized Participant Agreement, the Sponsor, and the Trust under limited circumstances, have agreed to indemnify the Authorized Participants against certain liabilities, including liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to make in respect of those liabilities.
The following description of the procedures for the creation and redemption of Baskets is only a summary and an investor should refer to the relevant provisions of the Trust Agreement and the form of Authorized Participant Agreement for more detail. The Trust Agreement and form of Authorized Participant Agreement are filed as exhibits to the registration statement of which this Prospectus is a part.
Creation Procedures
On any business day, an Authorized Participant may place an order with the Administrator, which must be approved by the Marketing Agent, to create one or more Baskets. For purposes of processing creation and redemption orders, a “business day” means any day other than a day when the Exchange, the New York Stock Exchange, EEX, ICE Endex, Nasdaq Oslo or other exchange material to the valuation or operation of the Fund, or the calculation of EUAs or Daily EUA Futures, is closed for regular trading. Purchase orders must be placed by 11:00 a.m., New York Time, or the close of regular trading on the Exchange, whichever is earlier. The day on which an order is received by the Transfer Agent and approved by the Marketing Agent, is considered the purchase order date. Creation orders received by the Transfer Agent on or after the order cut-off time on a business day shall be considered received at the opening of business on the next business day and shall have as their purchase order date such next business day.
By placing a purchase order, an Authorized Participant agrees to deposit EUAs with the Trust. Prior to the delivery of Baskets for a purchase order, the Authorized Participant must also have wired the nonrefundable transaction fee due for the creation order.
Determination of Required Deposits
The total deposit of EUAs required to create each Basket, or a Creation Basket Deposit, is an amount of EUAs that is in the same proportion to the total assets of the Trust (net of accrued expenses and other liabilities) on the date the order to purchase is properly received, as the number of Shares to be created under the purchase order is in proportion to the total number of Shares outstanding on the date the order is received.
On each day that the Exchange is open for regular trading, the Administrator adjusts the quantity of EUAs constituting the Basket Deposit as appropriate to reflect accrued expenses. The computation is made by the Administrator as promptly as practicable after 4:00 p.m. (New York time). The Administrator determines the Basket Deposit for a given day by dividing the number of EUAs held by the Trust as of the opening of business on that business day, adjusted for the amount of EUAs constituting estimated accrued but unpaid fees and expenses of the Trust as of the opening of business on that business day, by the quotient of the number of Trust Shares outstanding at the opening of business divided by 50,000. Fractions of an EUA less than one EUA are disregarded for purposes of the computation of the Basket Deposit. The Basket Deposit so determined is communicated via electronic mail message to all Authorized Participants and made available on the Sponsor’s website for the Shares. The Exchange also publishes the Basket Deposit determined by the Administrator as indicated above.
Because the disregarded EUA amounts will always be less than a single EUA, the value of which will be spread over all of the Trust’s outstanding Shares, which will be at least 50,000 Shares, which is the size of a Basket, the Sponsor has determined that those amounts will always be de minimis.
Assuming the price of a single EUA is €64.85, which was the price on the EUA End of Day Index as of January 15, 2024, and a whole EUA is disregarded from the Basket Deposit needed to acquire one 50,000 Share Basket, the effect on NAV per Share of disregarding fractional EUAs would be €0.001297 if the Trust had 50,000 Shares outstanding following the creation. If it had 100,000 Shares outstanding following the creation, the effect of disregarding a single EUA would be €0.0006485 per Share. Because the disregarded amount would always be less than one EUA, the effect on per share NAV of disregarding a fraction of an EUA would be less than these amounts.
The chart below illustrates the cumulative and per creation order impact to investors of disregarding fractional EUAs over a series of Basket creations. It is based on the following assumptions:
• no redemptions;
• the price of a single EUA remains constant at €64.85;
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• one EUA is discounted in each subsequent Basket creation (in reality the amount discounted would always be a fraction of an EUA); and
• the changes reflected in NAV per Share are solely the result of discounting one EUA in each creation transaction.
The hypothetical example assumes the Trust has 50,000 Shares outstanding, and shows the effect on NAV per Share of discounting one EUA in subsequent investments at different levels (one, two, three, four or five Baskets at a time).
|
Number of Baskets (Shares) Created |
Subsequent Basket Creations |
Euros Discounted |
Cumulative Effect on NAV |
|||||||||||||
|
1 |
2 Outstanding Shares = 100,000 + number created |
3 Outstanding Shares = 150,000 + number created |
4 Outstanding Shares = 200,000 + number created |
5 Outstanding Shares = 250,000 + number created |
||||||||||||
|
1 (50,000 Shares) |
€ |
0.0006485 (per share) |
0.00043233 (per share); 0.00108083 (cumulative per share) |
0.00032425 (per share); 0.00140508 (cumulative per share) |
0.0002594 (per share); 0.00166448 (cumulative per share) |
0.00021617 (per share); 0.00188065 (cumulative per share) |
0.00188065 (cumulative per share) |
0.000000000483 |
% |
|||||||
|
2 (100,000 Shares) |
€ |
0.00043233 (per share); 0.00108083 (cumulative per share) |
0.00032425 (per share); 0.00140508 (cumulative per share) |
0.0002594 (per share); 0.00166448 (cumulative per share) |
0.00021617 (per share); 0.00188065 (cumulative per share) |
0.00018529 (per share); 0.00206594 (cumulative per share) |
0.00206594 (cumulative per share) |
0.000000000455103 |
% |
|||||||
|
3 (150,000 Shares) |
€ |
0.00032425 (per share); 0.00140508 (cumulative per share) |
0.0002594 (per share); 0.00166448 (cumulative per share) |
0.00021617 (per share); 0.00188065 (cumulative per share) |
0.00018529 (per share); 0.00206594 (cumulative per share) |
0.00016212 (per share); 0.00222806 (cumulative per share) |
0.00222806 (cumulative per share) |
0.000000000429464 |
% |
|||||||
|
4 (200,000 Shares) |
€ |
0.0002594 (per share); 0.00166448 (cumulative per share) |
0.00021617 (per share); 0.00188065 (cumulative per share) |
0.00018529 (per share); 0.00206594 (cumulative per share) |
0.00016212 (per share); 0.00222806 (cumulative per share |
0.00014411 (per share); 0.00237217 (cumulative per share) |
0.00237217 (cumulative per share) |
0.000000000406437 |
% |
|||||||
|
5 (250,000 Shares) |
€ |
0.00021617 (per share); 0.00188065 (cumulative per share) |
0.00018529 (per share); 0.00206594 (cumulative per share) |
0.00016212 (per share); 0.00222806 (cumulative per share) |
0.00014411 (per share); 0.00237217 (cumulative per share) |
0.0001297 (per share); 0.00250187 (cumulative per share) |
0.00250187 (cumulative per share) |
0.000000000385793 |
% |
|||||||
It is highly unlikely that discounting an EUA would ever affect the Trust’s NAV per share by more than a penny per share, and, due to the large size of Baskets, it is impossible that discounting an EUA would ever reduce per share NAV by a material amount (e.g., more than one half of one percent).
Delivery of Required Deposits
An Authorized Participant who places a purchase order is responsible for arranging for the delivery to the Trust’s Union Registry account with the required EUA deposit by 2:00 p.m. New York time on the second business day following the purchase order date. Upon receipt of the EUA deposit amount in the Trust’s Union Registry account, the Union Registry will notify the Sponsor that the EUAs have been deposited.
Upon receipt of confirmation from the Union Registry that the EUA deposit amount has been received, the Administrator will direct DTC to credit the number of Shares created to the Authorized Participant’s DTC account.
EUAs held in the Trust’s Union Registry account are the property of the Trust and are not traded, leased, or loaned under any circumstances.
There may be circumstances where an Authorized Participant can only deliver whole lots of EUAs, consisting of 1,000 EUAs, in exchange for Baskets of Shares. However, a Basket will not likely equal the weight represented by a whole lot of EUAs, but rather will require the contribution of an amount of EUAs that represents a fraction of a whole lot in addition to a whole lot of EUAs. Therefore, to facilitate the creation of Baskets, an Authorized Participant who must provide a fraction of a lot of EUAs may credit the Trust’s Union Registry account with a whole lot of EUAs and the books and records of the Trust and the Authorized Participant will reflect a liability of the Trust for the pro rata portion of EUA lot that is not owned by the Trust.
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Suspension of Purchase Orders
The Sponsor may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date: (1) for any period during which the Exchange, the New York Stock Exchange, EEX, ICE Endex, Nasdaq Oslo or other exchange material to the valuation or operation of the Trust is closed, or when trading is suspended or restricted on such exchanges in EUAs or Daily EUA Futures, other than customary weekend or holiday closings, or trading of Shares on the Exchange is suspended or restricted, or (2) during an emergency as a result of which delivery, disposal or evaluation of EUAs is not reasonably practicable. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
Rejection of Purchase Orders
The Sponsor or its designee has the absolute right, but does not have any obligation, to reject any purchase order or Basket Deposit if the Sponsor determines that:
• the purchase order or Basket Deposit is not in proper form;
• it would not be in the best interest of the shareholders of the Trust;
• the acceptance of the purchase order or the Basket Deposit would have adverse tax consequences to the Trust or its shareholders;
• the acceptance or receipt of which would, in the opinion of counsel to the Sponsor, be unlawful; or
• circumstances outside the control of the Trust, the Sponsor, the Marketing Agent or the Union Registry make it, for all practical purposes, not feasible to process Baskets.
None of the Sponsor, the Marketing Agent or the Union Registry will be liable for the rejection of any purchase order or Basket Deposit.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets. On any business day, an Authorized Participant may place an order with the Administrator to redeem one or more Baskets. Redemption orders must be placed by 11:00 p.m., New York Time, or the close of regular trading on the Exchange, whichever is earlier. A redemption order will be effective on the date it is received by the Transfer Agent and approved by the Marketing Agent (“Redemption Order Date”). Redemption orders received by the Transfer Agent on or after the order cut-off time on a business day shall be considered received at the opening of business on the next business day and shall have as their Redemption Order Date such next business day.
Determination of Redemption Distribution
The redemption distribution from the Trust consists of a movement to the Union Registry account of the redeeming Authorized Participant or its agent the amount of EUAs held by the Trust evidenced by the Shares being redeemed. Fractions of an EUA included in the redemption distribution smaller than one EUA are disregarded. The redemption distribution due from the Trust will be delivered once the Administrator notifies the Sponsor that the Authorized Participant has delivered the Shares represented by the Baskets to be redeemed to the Trust’s DTC account. If the Trust’s DTC account has not been credited with all of the Shares of the Baskets to be redeemed, the redemption distribution will be delayed until such time as the confirmation of delivery of all such Shares. Only whole Baskets will be redeemable.
Delivery of Redemption Distribution
The redemption distribution due from the Trust will be delivered to the Authorized Participant or its agent on the second business day following the Redemption Order Date if, by 2:00 p.m. New York Time, on such business day, the Trust’s DTC account has been credited with the Baskets to be redeemed. If the Trust’s DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution will be delivered to the extent of whole Baskets received. Any remainder of the redemption distribution is delivered on the next business day to the extent of remaining whole Baskets received if the Administrator receives the fee applicable to the extension of the
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redemption distribution date which the Administrator may, from time to time, determine and the remaining Baskets to be redeemed are credited to the Trust’s DTC account by 2:00 p.m. New York time on such next business day. Any further outstanding amount of the redemption order may be cancelled. Once the Administrator notifies the Sponsor that the Shares have been received in the Trust’s DTC account, the Sponsor instructs the Union Registry to transfer the redemption EUA amount from the Trust’s Union Registry account to the Union Registry account of the Authorized Participant or its agent.
The Sponsor is the only entity that may initiate a withdrawal of EUAs from the Trust’s Union Registry account, and the only accounts that may receive EUAs from the Trust’s Union Registry account are the Union Registry accounts of the Authorized Participants, their agents or the Sponsor.
Suspension or Rejection of Redemption Orders
The Sponsor may, in its discretion, suspend the right of redemption, or postpone the redemption settlement date, (1) for any period during which the Exchange, the New York Stock Exchange, EEX, ICE Endex, Nasdaq Oslo or other exchange material to the valuation or operation of the Fund is closed, or when trading is suspended or restricted on such exchanges in EUAs or Daily EUA Futures, other than customary weekend or holiday closings, or trading of Shares on the Exchange is suspended or restricted, or (2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of EUAs is not reasonably practicable. For example, the Sponsor may determine that it is necessary to suspend redemptions to allow for the orderly liquidation of the Trust’s assets. If the Sponsor has difficulty liquidating the Trust’s positions, e.g., because of a market disruption event or an unanticipated delay in the liquidation of a position in an over the counter contract, it may be appropriate to suspend redemptions until such time as such circumstances are rectified.
Redemption orders must be made in whole Baskets. The Sponsor acting by itself or through the person authorized to take redemption orders in the manner provided in the Authorized Participant Agreement may, in its sole discretion, reject any redemption order (1) the Sponsor determines not to be in proper form, (2) if the fulfillment of the order, in the opinion of its counsel, might be unlawful, or (3) if circumstances outside the control of the Sponsor, the person authorized to take redemption orders in the manner provided in the Authorized Participant Agreement or the Union Registry make it, for all practical purposes, not feasible to process.
None of the Sponsor, the Administrator, or the Union Registry will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
Creation and Redemption Transaction Fee
To compensate the Administrator for expenses incurred in connection with the creation and redemption of Baskets, an Authorized Participant is required to pay a transaction fee of $100 to the Administrator to create or redeem Baskets, which does not vary in accordance with the number of Baskets in such order. The transaction fee may be waived, reduced, increased or otherwise changed by the Sponsor, taking into account the volume of creation and redemption orders and the cost to the Administrator and Sponsor of processing the creation and redemption orders, among other factors. The Sponsor will notify DTC of any change in the transaction fee and will not implement any increase in the fee for the redemption of Baskets until thirty (30) days after the date of notice.
Tax Responsibility
Authorized Participants are responsible for any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable to the creation or redemption of Baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized Participant, and agree to indemnify the Sponsor and the Trust if they are required by law to pay any such tax, together with any applicable penalties, additions to tax and interest thereon.
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Secondary Market Transactions
The Trust issues Shares in Baskets to Authorized Participants from time to time in exchange for deposits of the amount of EUAs represented by the Baskets being created. A current list of Authorized Participants is available from the Administrator and the Sponsor.
As discussed above, Authorized Participants are the only persons that may place orders to create and redeem Baskets. Authorized Participants must be registered broker-dealers or other securities market participants, such as banks and other financial institutions that are not required to register as broker-dealers to engage in securities transactions. An Authorized Participant is under no obligation to create or redeem Baskets, and an Authorized Participant is under no obligation to offer to the public Shares of any Baskets it does create.
Authorized Participants that do offer to the public Shares from the Baskets they create will do so at per-Share offering prices that are expected to reflect, among other factors, the trading price of the Shares on the Exchange, the NAV of the Trust at the time the Authorized Participant purchased the Baskets, the NAV of the Shares at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of EUAs or other portfolio investments. Baskets are generally redeemed when the price per Share is at a discount to the per Share NAV. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices. An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. Authorized Participants who make deposits with the Trust in exchange for Baskets receive no fees, commissions or other forms of compensation or inducement of any kind from either the Trust or the Sponsor and no such person has any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of Shares. Shares trade in the secondary market on the Exchange.
Shares are expected to trade in the secondary market on the Exchange. Shares may trade in the secondary market at prices that are lower or higher relative to their NAV per Share. The amount of the discount or premium in the trading price relative to the NAV per Share may be influenced by various factors, including the number of investors who seek to purchase or sell Shares in the secondary market and the liquidity of EUAs.
Investors who decide to buy or sell Shares of the Trust will place their trade orders through their brokers and may incur customary brokerage commissions and charges. Prior to this offering, there has been no public market for the Shares. The Shares are expected to be listed for trading, subject to notice of issuance, on the Exchange under a ticker symbol to be announced prior to the commencement of trading.
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The Trust will issue Shares in Baskets to Authorized Participants from time to time in exchange for EUAs. A current list of the Authorized Participants is available from the Administrator and the Sponsor. The Trust will not issue fractions of a Basket to Authorized Participants. Because new Shares can be created and issued on an ongoing basis, at any point during the life of the Trust, a “distribution,” as such term is used in the Securities Act, will be occurring. The initial authorized participant (“Initial Purchaser”) is a statutory underwriter under Section 2(a)(11) of the Securities Act. Subsequent Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities will result in their being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus-delivery and liability provisions of the Securities Act. For example, an Authorized Participant, other broker-dealer firm or its client will be deemed a statutory underwriter if it purchases a Basket from the Trust, breaks the Basket down into the constituent Shares and sells the Shares to its customers; or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for the Shares. A determination of whether one is an underwriter must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to categorization as an underwriter.
The Initial Purchaser will purchase 50,000 Shares, which compose each initial Basket. The Initial Purchaser intends to reoffer the initial Baskets at a per Share offering price that will vary, depending on, among other factors, the market price of EUAs and the trading price of the Shares on NYSE Arca. The Initial Purchaser will not receive from the Trust, the Sponsor, the Trustee or any of their affiliates a fee or other compensation in connection with the sale of the Shares. The Trust will not bear any expenses in connection with the offering or sale of the initial Baskets.
As of the date of this Prospectus, the following entities have each executed an Authorized Participant Agreement and are the only Authorized Participants.
• Goldman Sachs & Co. LLC
Prospective shareholders who purchase Shares through a commission/fee-based brokerage account may pay commissions/fees charged by the brokerage account. Prospective shareholders are encouraged to review the terms of their brokerage accounts for details on applicable charges.
The Sponsor or Marketing Agent, or an affiliate of the Sponsor or Marketing Agent, may directly or indirectly make cash payments to certain broker-dealers for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including the Trust, or for other activities, such as participation in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. In addition, the Sponsor and/or Marketing Agent may enter into arrangements with certain financial intermediaries pursuant to which such intermediaries will agree to promote certain ETFs/exchange traded products (“ETPs”) to their customers and agree not to charge certain of their customers any commissions when those customers purchase or sell shares of participating ETFs/ETPs. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant, are paid by the Sponsor and/or Marketing Agent from their own resources and not from the assets of the Trust. In addition, the Sponsor or Marketing Agent, or an affiliate of the Sponsor or Marketing Agent, may also reimburse expenses or make payments from their own assets to other persons, including Authorized Participants, in consideration of services or other activities that they believe may facilitate investment in the Trust.
Dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus-delivery exemption provided by section 4(3) of the Securities Act.
Prospective shareholders intending to create or redeem Baskets through Authorized Participants in transactions not involving a broker-dealer registered in such shareholder’s state of domicile or residence should consult their legal advisor regarding applicable broker-dealer or securities regulatory requirements under the state securities laws prior to such creation or redemption.
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The Sponsor has agreed to indemnify certain parties against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that such parties may be required to make in respect of those liabilities. The Trustee has agreed to reimburse such parties, solely from and to the extent of the Trust’s assets, for indemnification and contribution amounts due from the Sponsor in respect of such liabilities to the extent the Sponsor has not paid such amounts when due.
The offering Baskets are being made in compliance with FINRA Conduct Rule 2310. Authorized Participants will not receive from the Trust or the Sponsor any compensation in connection with an offering of the Shares. Accordingly, there is, and will be, no payment of underwriting compensation in connection with such offering of Shares in excess of 10% of the gross proceeds of the offering.
The Shares will trade on the Exchange under the symbol “CTWO”.
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The Trust
The Trust was formed as a Delaware statutory trust on January 12, 2023. The Trust will seek to provide shareholders with exposure to the price of EUAs, before expenses of the Trust’s operations. INVESTING IN THE TRUST INVOLVES RISKS SIMILAR TO THOSE INVOLVED WITH AN INVESTMENT DIRECTLY IN EUAS, BUT IT IS NOT A PROXY FOR INVESTING DIRECTLY IN EUAS. The Trust is governed by the Trust Agreement between the Sponsor and the Trustee. The Trust Agreement sets out the rights of the shareholders and the rights and obligations of the Trust and the Trustee. Delaware State law governs the Trust Agreement. The following is a summary of material provisions of the Trust Agreement. It is qualified by reference to the entire Trust Agreement, which is filed as an exhibit to the registration statement of which this Prospectus is a part.
The assets of the Trust consist primarily of EUAs. EUAs will be sold in ‘in-kind’ transactions: (1) to pay the expenses of the Trust not assumed by the Sponsor; (2) in connection with redemptions of Baskets; and (3) if the Trust terminates and liquidates its assets. The sale of EUAs by the Trust, including the sale of EUAs to generate cash to pay its fees and expenses, will be a taxable event for shareholders. See “U.S. Federal Income Tax Consequences — Taxation of U.S. Shareholders.”
The Trust is not registered as an investment company under the 1940 Act and is not required to register under such act. The Trust will not hold or trade in commodity futures contracts regulated by the Commodity Exchange Act, as administered by the CFTC. The Trust is not a commodity pool for purposes of the Commodity Exchange Act and neither the Sponsor, nor the Trustee is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares.
The number of outstanding Shares is expected to increase and decrease from time to time as a result of the creation and redemption of Baskets. The creation and redemption of Baskets requires the delivery to the Trust or the distribution by the Trust of the amount of EUAs represented by the net asset value of the Baskets being created or redeemed. The total amount of EUAs required for the creation of Baskets will be based on the combined net assets represented by the number of Baskets being created or redeemed.
The Trust has no fixed termination date.
Trust Expenses
The Trust’s only ordinary recurring expenses are expected to be the Sponsor’s Management Fee, paid monthly in arrears, in an amount equal to 0.79% per annum of the daily NAV of the Trust. In exchange for the Management Fee, the Sponsor has agreed to assume all routine operational, administrative and other ordinary expenses of the Trust, including, but not limited to, each of the Trustee’s, Administrator’s, Cash Custodian’s, Transfer Agent’s and Marketing Agent’s monthly fee and out-of-pocket expenses and expenses reimbursable in connection with such service provider’s respective agreement; the marketing support fees and expenses; exchange listing fees; SEC registration fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and routine legal expenses. The Sponsor also paid the costs of the Trust’s organization and the initial sale of the Shares.
The Trust will be responsible for reimbursing the Sponsor or its affiliates for paying all the extraordinary fees and expenses, if any, of the Trust. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount. The Trust will either (i) cause the Sponsor to receive EUAs from the Trust in such quantity as may be necessary to pay the Management Fee or (ii) sell EUAs in such quantity as may be necessary to permit payment in cash of the Management Fee and other Trust expenses and liabilities not assumed by the Sponsor, if any.
The Trust will cause EUAs to be sold through dealers in OTC transactions or directly on the EEX, ICE Endex, and Nasdaq Oslo exchanges through which the Trust may reasonably expect to obtain a favorable price and good execution of orders. The Trust may consider the market price expected to be obtained by such dealer or through such exchange and the ability of the dealer or exchange to conduct the sale of EUAs with a minimal impact on the market price of EUAs. The Trust may offset the importance of one factor against the remaining factors. The Trust shall not be liable for loss incurred by reason of any sale. See “U.S. Federal Income Tax Consequences — Taxation of U.S. Shareholders” for information on the tax treatment of EUAs sales.
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The Trust will also cause the sale of the Trust’s EUAs if the sale is required by applicable law or regulation or sell the Trust’s EUAs in connection with the termination and liquidation of the Trust.
Cash held by the Administrator or the Cash Custodian pending payment of the Trust’s expenses will not bear any interest.
Calculating NAV
The Trust’s Net Asset Value (NAV) is calculated by:
• Determining the current market value of the Trust’s total assets;
• Subtracting any liabilities (which include estimated accrued but unpaid fees and expenses); and
• Dividing that total by the number of outstanding shares.
The Administrator calculates the NAV of the Trust once each NYSE Arca trading day. The NAV for a particular day is released after the markets close, which is typically 4PM ET. The Administrator uses the EUA End of Day Index value as established by the EEX. EEX determines and releases this value daily. The Administrator also converts the value of Euro denominated assets into USD equivalent using published foreign currency exchange prices by an independent pricing vendor. Third parties supplying quotations or market data may include, without limitations, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.
In addition, in order to provide updated information relating to the Trust for use by investors and market professionals, an updated indicative fund value (“IFV”) is made available through on-line information services throughout the core trading session hours of 9:30 am E.T. to 4:00p.m. E.T. on each trading day. The IFV is calculated by using the prior day’s closing NAV per share of the Trust as a base and updating that value throughout the trading day to reflect changes in the most recently reported mid-point of the bid/ask spread of spot EUAs traded on the EEX. All major exchanges that trade either EUAs or Daily EUA Futures, such as the EEX, ICE ENDEX, and Nasdaq Oslo exchanges, provide real time pricing information to the general public through data vendors such as Bloomberg. Additionally, the trading prices for EUAs and the daily EUA End of Day Index value and historical EUA End of Day Index values are disseminated by on-line subscription services or by one or more major market data vendors during the NYSE Arca Core Trading Session of 9:30 a.m. to 4:00 p.m. E.T. The IFV disseminated during the NYSE Arca core trading session hours should not be viewed as an actual real time update of the NAV, because the NAV is calculated using a different manner and it is calculated only once at the end of each trading day based upon the relevant end of day values of the Trust’s investments.
It should also be noted that although the IFV is disseminated throughout the core trading session, the customary trading hours for EUAs, the Trust’s primary asset, are 2am to 12 pm ET. This means that there is a gap in time at the end of each day during which the Trust’s shares are traded on the NYSE Arca, but real-time trading prices for EUAs are not available. During such gaps in time the IFV will be calculated based on the end of day price of EUAs immediately preceding the trading session.
During customary trading hours for EUAs the IVF will be calculated as follows:
(((Most recently reported EUA End of Day Index value × number of EUAs held by Trust) × Euro to U.S. dollar exchange rate) - accrued expenses)/number of Shares outstanding
Outside customary trading hours for EUAs the IVF will be calculated as follows:
(((end of day price of EUAs immediately preceding the trading session × number of EUAs held by Trust) × Euro to U.S. dollar exchange rate) - accrued expenses)/number of Shares outstanding
The NYSE Arca disseminates the IFV through the facilities of CTA/CQ High Speed Lines. In addition, the IFV is published on the NYSE Arca’s website and is available through on-line information services such as Bloomberg. The Trust, the Sponsor and its affiliates are not involved in, or responsible for, the calculation or dissemination of the IFV and make no warranty as to its accuracy.
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Impact of Trust Expenses on the Trust’s Net Asset Value
The Trust sells EUAs to raise the funds needed for the payment of the Sponsor’s Management Fee. Additionally, at the Sponsor’s discretion, the Trust may pay the Sponsor’s Management Fee in EUAs. See “The Sponsor — The Sponsor’s Management Fee.” The purchase price received as consideration for such sales is the Trust’s sole source of funds to cover its liabilities. The Trust does not engage in any activity designed to derive a profit from changes in the price of EUAs. EUAs not sold to redeem Baskets of Shares, or to cover the Sponsor’s Management Fee and any other Trust expenses or liabilities not assumed by the Sponsor, will be held by the Trust. As a result of the recurring sales of EUAs necessary to pay the Sponsor’s Management Fee, the net asset value of the Trust and, correspondingly, the fractional amount of EUAs represented by each Share will decrease over the life of the Trust. New EUAs received in exchange for additional new Baskets issued by the Trust, do not reverse this trend.
Termination of the Trust
The Sponsor will notify shareholders at least 30 days before the date for termination of the Trust Agreement and the Trust if any of the following occurs:
• Shares are delisted from the Exchange and are not approved for listing on another national securities exchange within five business days of their delisting;
• 180 days have elapsed since the Trustee notified the Sponsor of the Trustee’s election to resign or since the Sponsor removed the Trustee, and a successor trustee has not been appointed and accepted its appointment;
• The SEC determines that the Trust is an investment company under the 1940 Act, and the Sponsor has made the determination that termination of the Trust is advisable;
• The CFTC determines that the Trust is a commodity pool under the Commodity Exchange Act, and the Sponsor has made the determination that termination of the Trust is advisable;
• The Trust is determined to be a “money service business” under the regulations promulgated by FinCEN under the authority of the US Bank Secrecy Act and is required to comply with certain FinCEN regulations thereunder or is determined to be a “money transmitter” (or equivalent designation) under the laws of any state in which the Trust operates and is required to seek licensing or otherwise comply with state licensing requirements, and the Sponsor has made the determination that termination of the Trust is advisable;
• A United States regulator requires the Trust to shut down or forces the Trust to liquidate its EUAs;
• Any ongoing event exists that either prevents the Trust from making or makes impractical the Trust’s reasonable efforts to make a fair determination of the price of EUAs for purposes of determining the net asset value of the Trust;
• The Sponsor determines that the aggregate net assets of the Trust in relation to the operating expenses of the Trust make it unreasonable or imprudent to continue the activities of the Trust;
• The Trust fails to qualify for treatment, or ceases to be treated, as a “grantor trust” under the Code or any comparable provision of the laws of any State or other jurisdiction where that treatment is sought, and the Sponsor determines that, because of that tax treatment or change in tax treatment, termination of the Trust is advisable;
• 60 days have elapsed since DTC or another depository has ceased to act as depository with respect to the Shares, and the Sponsor has not identified another depository that is willing to act in such capacity;
• The Trustee elects to terminate the Trust after the Sponsor is conclusively deemed to have resigned effective immediately as a result of the Sponsor being adjudged bankrupt or insolvent, or a receiver of the Sponsor or of its property being appointed, or a trustee or liquidator or any public officer taking charge or control of the Sponsor or of its property or affairs for the purpose of rehabilitation, conservation or liquidation and a successor sponsor has not been appointed; or
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• The Sponsor elects to terminate the Trust after the Trustee, Administrator or the Cash Custodian (or any successor trustee, administrator or custodian) resigns or otherwise ceases to be the trustee, administrator or custodian of the Trust, as applicable, and no replacement trustee, administrator and/or custodian acceptable to the Sponsor is engaged.
In addition, the Trust may be dissolved at any time for any reason by the Sponsor in its sole discretion. In respect of termination events that rely on Sponsor determinations to terminate the Trust (e.g., if the CFTC determines that the Trust is a commodity pool under the CEA; the Trust is determined to be a money transmitter under the regulations promulgated by FinCEN; the Trust fails to qualify for treatment, or ceases to be treated, as a grantor trust for U.S. federal income tax purposes; or, following a resignation by a trustee or custodian, the Sponsor determines that no replacement is acceptable to it), the Sponsor may make any such determination in its sole discretion. The Sponsor may consider, without limitation, the profitability to the Sponsor and other service providers of the operation of the Trust, any obstacles or costs relating to the operation or regulatory compliance of the Trust relating to the determination’s triggering event, and the ability to market the Trust to investors. To the extent that the Sponsor determines to continue operation of the Trust following a determination’s triggering event, the Trust will be required to alter its operations to comply with the triggering event. In the instance of a determination that the Trust is a commodity pool, the Trust and the Sponsor would have to comply with regulations and disclosure and reporting requirements applicable to commodity pools and commodity pool operators or commodity trading advisers. In the event that the Trust is determined to be a money transmitter, the Trust and the Sponsor will have to comply with applicable federal and state registration and regulatory requirements for money transmitters and/or money service businesses. In the event that the Trust ceases to qualify for treatment as a grantor trust for U.S. federal tax purposes, the Trust will be required to alter its disclosure and tax reporting procedures and may no longer be able to operate or to rely on pass-through tax treatment. In each such case and in the case of the Sponsor’s determination as to whether a potential successor trustee or custodian is acceptable to it, the Sponsor shall not be liable to anyone for its determination of whether to continue or to terminate the Trust.
Upon termination of the Trust, following completion of winding up of its operations by the Sponsor, the Trustee, upon written directions of the Sponsor, shall cause a certificate of cancellation of the Trust’s Certificate of Trust to be filed in accordance with applicable Delaware law. Upon the termination of the Trust, the Sponsor shall be discharged from all obligations under the Trust Agreement except for its certain obligations that survive termination of the Trust Agreement.
Amendments
The Trust Agreement can be amended by the Sponsor in its sole discretion and without the shareholders’ consent by making an amendment, a Trust Agreement supplemental thereto, or an amended and restated trust agreement. Any such restatement, amendment and/or supplement hereto shall be effective on such date as designated by Sponsor in its sole discretion. However, any amendment to the Trust Agreement that affects the duties, liabilities, rights or protections of the Trustee shall require the Trustee’s prior written consent, which it may grant or withhold in its sole discretion. Every shareholder, at the time any amendment so becomes effective, shall be deemed, by continuing to hold any Shares or an interest therein, to consent and agree to such amendment and to be bound by the Trust Agreement as amended thereby. In no event shall any amendment impair the right of Authorized Participants to surrender Baskets and receive therefore the amount of Trust assets represented thereby (less fees in connection with the surrender of Shares and any applicable taxes or other governmental charges), except in order to comply with mandatory provisions of applicable law.
Governing Law; Consent to New York Jurisdiction
The Trust Agreement and the rights of the Sponsor, the Trustee, DTC (as registered owner of the Trust’s global certificates for Shares) and the shareholders under the Trust Agreement are governed by the laws of the State of Delaware. The Sponsor, the Trust, DTC, each Authorized Participant by its delivery of an Authorized Participant Agreement and each shareholder by the acceptance of a Share consents to the jurisdiction of the courts of the State of New York.
Fiscal Year
The fiscal year of the Trust is October 1 to September 30. The Sponsor may select an alternate fiscal year.
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The Trust is authorized under the Trust Agreement to create and issue an unlimited number of Shares. The Trust will create Shares in Baskets (a Basket equals a block of 50,000 Shares) only upon the order of an Authorized Participant. The Shares represent units of fractional undivided beneficial interest in the net assets of the Trust and have no par value. The Shares of the Trust are expected to be listed for trading, subject to notice of issuance, on the Exchange under the symbol “CTWO.” The Trust’s Shares may be bought and sold on the Exchange like any other exchange-listed security.
Shareholders may obtain pricing information on EUAs from various financial information service providers, including Bloomberg. In addition, the Trust’s website (www.cotwoadvisors.com) will provide pricing information for EUAs and the Shares. Market prices for the Shares will be available from a variety of sources including brokerage firms, information websites and other information service providers. The net asset value of the Trust will be published by the Sponsor on each day that the Exchange is open for regular trading and will be posted on the Trust’s website.
Cash and Other Distributions
If the Trust is terminated and liquidated, the Sponsor will distribute to the shareholders any amounts remaining after the satisfaction of all outstanding liabilities of the Trust and the establishment of such reserves for applicable taxes, other governmental charges and contingent or future liabilities as the Sponsor shall determine. See “Description of the Trust — Termination of the Trust.” Shareholders of record on the record date fixed by the Sponsor (or one of its delegates) for a distribution will be entitled to receive their pro rata portion of any distribution.
If the Sponsor and Trustee determines that there is more cash being held in the Trust than is reasonably expected to be needed to pay the Trust’s expenses in the near future, the Sponsor at its discretion can either distribute the extra cash to DTC for further distribution to shareholders or use it to acquire additional EUAs. The Trust has no obligation to make periodic distributions to shareholders.
Registered holders of Shares will receive these distributions in proportion to the number of Shares owned. Before making a distribution, the Administrator will deduct any applicable withholding taxes and any fees and expenses of the Trust that have not been paid. It will distribute only whole U.S. dollars and cents and will round fractional cents down to the nearest whole cent. Neither the Sponsor nor the Administrator will be responsible if the Sponsor determines that it is unlawful or impractical to make a distribution available to registered holders.
Description of Limited Rights
The Shares do not represent a traditional investment and should not be viewed as similar to “shares” of a corporation operating a business enterprise with management and a board of directors. A shareholder will not have the statutory rights normally associated with the ownership of shares of a corporation; however, the DSTA does provide shareholders the right to bring “oppression” or “derivative” actions. All of the Shares are of the same class with equal rights and privileges. Each of the Shares is transferable, is fully paid and nonassessable and entitles the holder to vote on the limited matters upon which shareholders may vote under the Trust Agreement. The Shares do not entitle their holders to any conversion or pre-emptive rights or, except as provided below, any redemption rights or rights to distributions.
Voting Rights
Under the Trust Agreement, Shareholders have no voting rights except as the Sponsor may consider desirable and so authorize in its sole discretion.
Book-Entry Form
Individual certificates will not be issued for the Shares. Instead, one or more global certificate will be deposited by the Transfer Agent with DTC and registered in the name of Cede & Co., as nominee for DTC. The global certificates will evidence all of the Shares outstanding at any time. Shareholders are limited to: (1) participants in DTC such as banks, brokers, dealers and trust companies (“DTC Participants”); (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC Participant (“Indirect Participants”); and (3) those banks, brokers, dealers, trust companies and others who hold interests in the Shares through DTC Participants or Indirect Participants. The Shares are only transferable through the book-entry system of DTC. Shareholders who are not DTC Participants may transfer
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their Shares through DTC by instructing the DTC Participant holding their Shares (or by instructing the Indirect Participant or other entity through which their Shares are held) to transfer the Shares. Transfers are made in accordance with standard securities industry practice.
DTC may decide to discontinue providing its service with respect to Baskets and/or the Shares by giving notice to the Transfer Agent and the Sponsor. Under such circumstances, the Sponsor will find a replacement for DTC to perform its functions at a comparable cost or, if a replacement is unavailable, the Sponsor will terminate the Trust.
The rights of the shareholders generally must be exercised by DTC Participants acting on their behalf in accordance with the rules and procedures of DTC. Because the Shares can only be held in book-entry form through DTC and DTC Participants, shareholders must rely on DTC, DTC Participants and any other financial intermediary through which they hold the Shares to receive the benefits and exercise the rights described in this section. Shareholders should consult with their broker or financial institution to find out about procedures and requirements for securities held in book-entry form through DTC.
Share Splits
If the Sponsor believes that the per share price in the secondary market for Shares has fallen outside a desirable trading price range, the Sponsor may declare a split or a reverse split in the number of Shares outstanding and make a corresponding change in the number of Shares constituting a Basket.
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The Sponsor, COtwo Advisors LLC, is a Delaware limited liability company. The Sponsor’s mailing address is 140 Elm Street, Suite 6, New Canaan, CT 06840. The Sponsor has no experience or history of past performance in managing an investment vehicle like the Trust.
The Sponsor’s Role
The Sponsor: (1) will select the Trustee, Administrator, Transfer Agent, Cash Custodian, Marketing Agent and any other Trust service providers; (2) will negotiate various agreements and fees for the Trust; (3) will develop a marketing plan for the Trust on an ongoing basis and prepare marketing materials regarding the Shares; (4) will maintain the Trust’s web site; and (5) will perform such other services as the Sponsor believes that the Trust may require.
The Sponsor arranged for the creation of the Trust, the registration of the Shares for their public offering in the United States and the listing of the Shares on the Exchange. The Sponsor also paid the costs of the Trust’s organization and the initial sale of the Shares, including applicable SEC registration fees. In exchange for the Management Fee, the Sponsor has agreed to assume to pay all of the routine operational, administrative and other ordinary expenses of the Trust, including, but not limited to, the following administrative and marketing expenses incurred by the Trust: each of the Trustee’s, Administrator’s, Cash Custodian’s, Transfer Agent’s and Marketing Agent’s monthly fee and out-of-pocket expenses and expenses reimbursable in connection with such service provider’s respective agreement; the marketing support fees and expenses; exchange listing fees; SEC registration fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and routine legal expenses. The Sponsor is not responsible for interest expenses and certain litigation expenses and other non-recurring or extraordinary fees and expenses.
While the Sponsor will not exercise day-to-day oversight over the Trust’s service providers, the Sponsor will engage the Transfer Agent, the Marketing Agent, the Administrator and the Cash Custodian to assist in implementing the creation and redemption process for the Trust.
Liability of the Trust Parties and Indemnification
The Trust Agreement provides that the Trust Parties will not assume any obligation nor shall be subject to any liability to any registered owner of Shares, Authorized Participant or other person (including liability with respect to the worth of the Trust property), except that the Trust Parties agree to perform their obligations under the Trust Agreement without gross negligence, willful misconduct or bad faith. Under the Delaware Limited Liability Company Act and the governing documents of the Sponsor, the member(s) of the Sponsor are not responsible for the debts, obligations and liabilities of the Sponsor solely by reason of being the member(s) of the Sponsor. The Sponsor or any of its respective directors, officers, managers, members, employees, agents or affiliates will not be liable if the Sponsor is prevented, forbidden, subject to civil or criminal action or penalty or delayed in meeting its obligations under the Trust Agreement by reason of any law, regulation, governmental or regulatory authority, stock exchange, or by reason of any act of God or war or terrorism or other circumstances beyond its control. The Trust Parties will not be liable by reason of any non-performance or delay in the performance of any action which may be performed under the Trust Agreement or by exercising, or not, any discretion provided for in the Trust Agreement.
The Trust Parties (including their members, managers, directors, officers, employees, affiliates (as such term is defined under the Securities Act) and subsidiaries) shall be indemnified from the Trust and held harmless against any loss, liability or expense incurred without (1) gross negligence, bad faith or willful misconduct on the part of such indemnified party arising out of or in connection with the performance of its obligations under the Trust Agreement and under each other agreement entered into by the Trust Parties in furtherance of the administration of the Trust (including, without limiting the scope of the foregoing, the Fund Administration and Accounting Agreement, the Transfer Agency and Service Agreement, the Cash Custody Agreement, the Marketing Agent Agreement and any Authorized Participant Agreement) or any actions taken in accordance with the provisions of the Trust Agreement or such other agreement or (2) reckless disregard on the part of such indemnified party of its obligations and duties under the Trust Agreement or such other agreement. Such indemnity shall include payment from the Trust of the reasonable costs and expenses incurred by such indemnified party in investigating or defending itself against any claim or liability in their capacity as Trust Parties. Any amounts payable to an indemnified party may be payable in advance or shall be secured by a lien on the Trust’s assets. The Trust Parties may, in their discretion, undertake any action which it may
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deem necessary or desirable in respect of the Trust Agreement and the interests of the shareholders and, in such event, the reasonable legal expenses and costs of any such actions shall be expenses and costs of the Trust and the Trust Parties shall be entitled to be reimbursed therefor by the Trust.
The Sponsor may rely on information provided by the Administrator from the records of the Trust for securities filings, including a free writing prospectus or marketing materials. If such information is incorrect or omits material information and is the foundation for a claim against the Sponsor, the Sponsor may be entitled to indemnification from the Trust.
Principals and Key Personnel of the Trust and the Sponsor
The following principals and key employees serve in the below capacities on behalf of the Sponsor:
|
Name and Age |
Position(s) Held with |
Length of Time |
Principal Occupation(s) |
|||
|
Ronald Gutstein |
Chief Executive Officer |
Since Inception |
Institutional Trader and Market Maker, Access Securities (an institutional broker-dealer); Trustee, IVA Fiduciary Trust |
|||
|
Shari Crawford |
Chief Financial Officer |
Since Inception |
Shari J. Crawford, Chief Compliance Officer, Access Securities, LLC |
The Sponsor’s Management Fee
The Sponsor’s Management Fee accrues daily and is paid monthly in arrears at an annualized rate equal to 0.79% of the net asset value of the Trust. The Trust may pay the Sponsor’s Management Fee in either EUAs or cash.
Successor Sponsors
If the Sponsor is conclusively deemed to have resigned effective immediately as a result of the Sponsor being adjudged bankrupt or insolvent, or a receiver of the Sponsor or of its property is appointed, or a trustee or liquidator or any public officer takes charge or control of the Sponsor or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Trustee may terminate and liquidate the Trust and distribute its remaining assets. The Trustee has no obligation to appoint a successor sponsor or to assume the duties of the Sponsor and neither will have any liability to any person because the Trust is or is not terminated as described in “Description of the Trust — Termination of the Trust” above. The dissolution of the Sponsor, or its ceasing to exist as a legal entity from, or for, any cause, shall not operate to terminate the Trust Agreement insofar as the duties and obligations of the Trustee are concerned.
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The sole Trustee of the Trust is Wilmington Trust, National Association, a national banking association. The Trustee’s principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The Trustee is unaffiliated with the Sponsor. The Trustee’s duties and liabilities with respect to the offering of Shares and the management of the Trust are limited to its express obligations under the Trust Agreement.
The Trustee’s Role
The Trustee is the trustee of the Trust for the sole and limited purpose of fulfilling the requirements of the DSTA. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the DSTA. Under the Trust Agreement, the Trustee has delegated to the Sponsor the exclusive management and control of all aspects of the activities of the Trust.
General Duty of Care of Trustee
The Trustee is a fiduciary under the Trust Agreement; provided, however, that the fiduciary duties and responsibilities and liabilities of the Trustee are limited by, and are only those specifically set forth in, the Trust Agreement. For limitations of the fiduciary duties of the Trustee, see the limitations on liability set forth in “The Trustee — Limitation on Trustee’s Liability.”
Limitation on Trustee’s Liability
Under the Trust Agreement, the Trust Parties have exclusive control of the management of all aspects of the activities of the Trust and the Trustee has only nominal duties and liabilities to the Trust, as described in the remainder of this paragraph. The Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement of Section 3807(a) of the DSTA that the Trust have at least one (1) trustee with a principal place of business in the State of Delaware. The duties of the Trustee will be limited to (i) accepting legal process served on the Trust in the State of Delaware, (ii) the execution of any certificates required to be filed with the Delaware Secretary of State which the Delaware Trustee is required to execute under the DSTA, (iii) taking such action under the Trust Agreement as it may be directed in writing by the Trust Parties from time to time; provided, however, that the Trustee shall not be required to take any such action if it shall have determined, or shall have been advised by counsel, that such performance is likely to involve the Trustee in personal liability or is contrary to the terms of the Trust Agreement or of any document contemplated thereby to which the Trust or the Trustee is a party or is otherwise contrary to law, and (iv) any other duties specifically allocated to the Trustee in the Trust Agreement or agreed in writing with the Trust Parties from time to time. To the extent that, at law or in equity, the Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or shareholders, such duties and liabilities will be replaced by the duties and liabilities of the Trustee expressly set forth in the Trust Agreement. The Trustee will have no obligation to supervise, nor will it be liable for, the acts or omissions of the Trust Parties, Administrator, Transfer Agent, Marketing Agent, Cash Custodian or any other entity or person.
Neither the Trustee, either in its capacity as trustee on in its individual capacity, nor any director, officer or controlling person of the Trustee is, or has any liability as, the issuer, director, officer or controlling person of the issuer of the Shares. The Trustee’s liability in connection with the issuance and sale of the Shares is limited solely to the express obligations of the Trustee as set forth in the Trust Agreement.
The Trust Agreement provides that the Trustee will not assume any obligation nor shall be subject to any liability to any registered or beneficial owner of Shares, Authorized Participant or other person (including liability with respect to the worth of the Trust property), except that the Trustee agrees to perform its obligations under the Trust Agreement without gross negligence, willful misconduct or bad faith. The Trustee and each of its officers, affiliates, directors, employees, and agents will be indemnified by the Trust from and against any losses, claims, taxes, damages, reasonable expenses, and liabilities incurred with respect to the creation, operation or termination of the Trust, the execution, delivery or performance of the Trust Agreement or the transactions contemplated thereby; provided that the indemnified party acted without willful misconduct, bad faith or gross negligence. In no event will the Trustee be liable for acting or omitting to act in reliance upon the advice of or information from legal counsel, accountants or any other person believed by it in good faith to be competent to give such advice or information. The Trustee or any of its respective directors, officers, managers, members, employees, agents or affiliates will not be liable if the
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Trustee is prevented, forbidden, subject to civil or criminal penalty or delayed in meeting its obligations under the Trust Agreement by reason of any law, regulation, governmental regulatory authority, stock exchange, or by reason of any act of God or war or terrorism or other circumstances beyond its control.
The Trustee will not be liable by reason of any non-performance or delay in the performance of any action which may be performed under the Trust Agreement or by exercising, or not, any discretion provided for in the Trust Agreement. The Trustee will not be liable for any indirect, consequential, punitive or special damages, regardless of the form of action and whether or not any such damages were foreseeable or contemplated, or for an amount in excess of the value of the Trust’s assets.
Indemnification of the Trustee
The Trust Agreement provides that the Trustee, its directors, officers, employees, shareholders, agents and affiliates (as defined under the Securities Act) shall be indemnified from the Trust and held harmless against any loss, liability or expense (including the reasonable fees and expenses of counsel) arising out of or in connection with the performance of its obligations under the Trust Agreement, or otherwise by reason of the Trustee’s acceptance of the Trust incurred without (1) gross negligence, bad faith, willful misconduct or willful malfeasance on the part of such indemnified party in connection with the performance of its obligations under the Trust Agreement or any such other agreement, effecting any actions taken in accordance with the provisions of the Trust Agreement or any such other agreement or (2) reckless disregard on the part of such indemnified party of its obligations and duties under the Trust Agreement or any such other agreement. Such indemnity shall include payment from the Trust of the costs and expenses incurred by such indemnified party in investigating or defending itself against any such loss, liability or expenses or related claim. Any amounts payable to an indemnified party may be payable in advance or shall be secured by a lien on the Trust.
Indemnity for Actions Taken to Protect the Trust
The Trustee is under no obligation to appear in, prosecute or defend any action that in its opinion may involve it in expense or liability, unless it is furnished with reasonable security and indemnity against the expense or liability. The Trustee’s costs and expenses resulting from actions taken to protect the Trust and the rights and interests of shareholders under the Trust Agreement are deductible from and will constitute a lien against the Trust’s assets.
Resignation, Discharge or Removal of Trustee; Successor Trustees
The Trustee may resign at any time by giving at least 60 days advance written notice to the Sponsor. The Sponsor may remove the Trustee at any time by giving at least 60 days advance written notice to the Trustee. Upon effective resignation or removal, the Trustee will be discharged of its duties and obligations.
If the Trustee resigns or is removed, the Sponsor, acting on behalf of the shareholders, shall use its reasonable efforts to appoint a successor trustee. Any successor Trustee must satisfy the requirements of Section 3807 of the DSTA. Any resignation or removal of the Trustee and appointment of a successor Trustee shall not become effective until a written acceptance of appointment is delivered by the successor Trustee to the outgoing Trustee and the Sponsor and any fees and expenses due to the outgoing Trustee are paid or waived by the outgoing Trustee. Following compliance with the preceding sentence, the successor shall become fully vested with the rights, powers, duties and obligations of the outgoing Trustee under the Trust Agreement, with like effect as if originally named as Trustee, and the outgoing Trustee shall be discharged of its duties and obligations therein. If no successor Trustee shall have been appointed and shall have accepted such appointment within sixty (60) days after the giving of such notice of resignation or removal, the Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee resigns and no successor trustee is appointed within 180 days after the date the Trustee issues its notice of resignation, the Sponsor will terminate and liquidate the Trust and distribute its remaining assets.
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State Street Bank and Trust Company serves as the Administrator. The Administrator’s office is located at 1 Lincoln Street, Boston, Massachusetts 02110. Information regarding creation and redemption Basket composition, net asset value of the Trust, transaction fees for the creation and redemption of Baskets and the names of the parties that have executed an Authorized Participant Agreement may be obtained from the Administrator.
The Administrator’s Role
The Administrator is generally responsible for the day-to-day administration of the Trust, including keeping the Trust’s operational records. The Administrator’s principal responsibilities include: (1) valuing the Trust’s EUAs and calculating the net asset value per share of the Trust; (2) supplying pricing information to the Sponsor for the Trust’s website; and (3) receiving and reviewing reports on the custody of and transactions in cash and EUAs from the Cash Custodian and the Union Registry, respectively, and taking such other actions in connection with the custody of cash as the Sponsor instructs and (4) accounting and other fund administrative services. The Administrator shall, with respect to directing the Cash Custodian, act in accordance with the instructions of the Sponsor.
The Administrator intends to regularly communicate with the Sponsor in connection with the administration of the Trust. The Administrator, along with the Sponsor, will liaise with the Trust’s legal, accounting and other professional service providers as needed. The Administrator will assist and support the Sponsor with the preparation of all periodic reports required to be filed with the SEC on behalf of the Trust. The Administrator’s monthly fees and out-of-pocket expenses will be paid by the Sponsor. Affiliates of the Administrator may from time to time act as Authorized Participants or purchase or sell EUAs or Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Administrator will keep proper books of registration and transfer of Shares at its office located in 1 Lincoln Street, Boston, Massachusetts 02110 or such office as it may subsequently designate. These books and records are open to inspection by any person who establishes to the Administrator’s satisfaction that such person is a shareholder at all reasonable times during the usual business hours of the Trustee. The Administrator will keep a copy of the Trust Agreement on file in its office which will be available for inspection on reasonable advance notice at all reasonable times during its usual business hours by any shareholder.
The Fund Administration and Accounting Agreement will be in effect for an initial term of 3 years from the commencement of the Trust’s operation, the first date on which the Administrator is entitled to receive fees under the Administration Agreement. The Administration Agreement automatically renews for additional one (1) year periods thereafter, unless terminated by the Trust or the Administrator on at least ninety (90) days’ prior written notice.
Resignation, Discharge or Removal of Administrator
Either the Sponsor or the Administrator may terminate the Fund Administration and Accounting Agreement for cause for the reasons set forth in the Fund Administration and Accounting Agreement, such as either party’s bankruptcy or committing a material breach of the Fund Administration and Accounting Agreement. The Trust may terminate the Fund Administration and Accounting Agreement prior to the expiration of the initial term upon ninety (90) days’ prior written notice in the event that the Sponsor determines to liquidate the Trust and terminate its registration with the SEC.
Limitation on Administrator’s Liability
The Administrator will not be liable for the disposition of EUAs or moneys, or in respect of any valuation or calculation which it makes under the Fund Administration and Accounting Agreement or otherwise, or for any action taken or omitted or for any loss or injury resulting from its actions or its performance or lack of performance of its duties under the Fund Administration and Accounting Agreement in the absence of negligence, willful misconduct or bad faith on its part. In no event will the Administrator be liable for acting in accordance with or conclusively relying upon any instruction, notice, demand, certificate or document (i) from the Sponsor or the Cash Custodian or any entity acting on behalf of either which the Administrator believes is given as authorized by the Trust Agreement and under the Fund Administration and Accounting Agreement or the Cash Custody Agreement, respectively; or (ii) from or on behalf of any Authorized Participant which the Administrator believes is given pursuant to or is authorized by an Authorized Participant Agreement (provided that the Administrator has complied with the verification procedures
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specified in the Authorized Participant Agreement). In no event will the Administrator be liable for acting or omitting to act in reliance upon the advice of or information from legal counsel, accountants or any other person believed by it in good faith to be competent to give such advice or information. In addition, the Administrator will not be liable for any delay in performance or for the non-performance of any of its obligations under the Fund Administration and Accounting Agreement by reason of causes beyond its reasonable control, including acts of God, war or terrorism. The Administrator will not be liable for any indirect, consequential, punitive or special damages, regardless of the form of action and whether or not any such damages were foreseeable or contemplated, or for an amount in excess of the value of the Trust’s assets.
The Administrator may employ agents, attorneys, accountants, auditors and other professionals and shall not be answerable for the default or misconduct of any of them if they were selected with reasonable care.
Indemnification of the Administrator
The Administrator, its directors, employees and agents shall be indemnified from the Trust and held harmless against any loss, liability or expense (including, but not limited to, the reasonable fees and expenses of counsel) arising out of or in connection with the performance of its obligations under the Fund Administration and Accounting Agreement and under each other agreement entered into by the Administrator in furtherance of the administration of the Trust (including, without limiting the scope of the foregoing, any Authorized Participant Agreement) or for any other loss incurred without negligence, willful misconduct or bad faith in connection with the performance of its obligations under or any actions taken in accordance with the provisions of the Fund Administration and Accounting Agreement or any such other agreement. Such indemnity shall include payment from the Trust of the costs and expenses incurred by such indemnified party in defending itself against any claim or liability in its capacity as Administrator.
Governing Law
The Administration Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts.
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State Street Bank and Trust Company serves as the Transfer Agent. The Transfer Agent’s office is located at 1 Lincoln Street, Boston, Massachusetts 02110. The Transfer Agent, among other things, provides transfer agent services with respect to the creation and redemption of Baskets by Authorized Participants, the issuance and redemption of Shares, the payment, if any, of distributions with respect to the Shares, the recording of the issuance of the Shares and the maintaining of certain records therewith.
The Transfer Agent’s Role
The Transfer Agent’s responsibilities include: (1) receiving and processing orders from Authorized Participants for the creation and redemption of Baskets; and (2) coordinating the processing of orders from Authorized Participants with the Marketing Agent, the Cash Custodian, the Trust and The Depository Trust Company (“DTC”).
The Transfer Agent’s fees and expenses are to be paid by the Sponsor pursuant to the terms of the Transfer Agency and Service Agreement.
The Transfer Agency and Service Agreement will be in effect for an initial term of three (3) years from the commencement of the Trust’s operation, the first date on which the Transfer Agent is entitled to receive fees under the Transfer Agency and Service Agreement. The Transfer Agency and Service Agreement automatically renews for additional one (1) year periods thereafter, unless terminated by the Trust or the Transfer Agent on at least ninety (90) days’ prior written notice.
Resignation, Discharge or Removal of Transfer Agent
Either the Trust or the Transfer Agent may terminate the Transfer Agency and Service Agreement for cause for the reasons set forth in the Transfer Agency and Service Agreement, such as either party’s bankruptcy or committing a material breach of the Transfer Agency and Service Agreement. The Trust may terminate the Transfer Agency and Service Agreement prior to the expiration of the initial term upon ninety (90) days’ prior written notice in the event that the Sponsor determines to liquidate the Trust and terminate its registration with the SEC.
Limitation on Transfer Agent’s Liability
The Transfer Agent will not be liable for the disposition of EUAs or moneys, or for any action taken or omitted or for any loss or injury resulting from its actions or its performance or lack of performance of its duties under the Transfer Agency and Service Agreement in the absence of negligence, willful misconduct or bad faith on its part. In no event will the Transfer Agent be liable for acting in accordance with or conclusively relying upon any instruction, notice, demand, certificate or document (i) from the Sponsor, the Trustee, the Administrator or the Cash Custodian or any entity acting on behalf of any of them which the Transfer Agent believes is given as authorized by the Trust Agreement, the Administration Agreement or the Cash Custody Agreement, respectively; or (ii) from or on behalf of any Authorized Participant which the Transfer Agent believes is given pursuant to or is authorized by an Authorized Participant Agreement (provided that the Transfer Agent has complied with the verification procedures specified in the Authorized Participant Agreement). In no event will the Transfer Agent be liable for acting or omitting to act in reliance upon the advice of or information from legal counsel, accountants or any other person believed by it in good faith to be competent to give such advice or information. In addition, the Transfer Agent will not be liable for any delay in performance or for the non-performance of any of its obligations under the Transfer Agency and Service Agreement by reason of causes beyond its reasonable control, including acts of God, war or terrorism. The Transfer Agent will not be liable for any indirect, consequential, punitive or special damages, regardless of the form of action and whether or not any such damages were foreseeable or contemplated, or for an amount in excess of the value of the Trust’s assets.
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Indemnification of Transfer Agent
The Transfer Agent, its directors, employees and agents shall be indemnified by the Trust and held harmless against any loss, liability or expense (including, but not limited to, the reasonable fees and expenses of counsel) arising out of or in connection with the performance of its obligations under the Transfer Agency and Service Agreement and under each other agreement entered into by the Transfer Agent in furtherance of the administration of the Trust (including, without limiting the scope of the foregoing, any Authorized Participant Agreement) or for any other loss incurred without negligence, willful misconduct or bad faith in connection with the performance of its obligations under or any actions taken in accordance with the provisions of the Transfer Agency and Service Agreement or any such other agreement. Such indemnity shall include payment from the Trust of the costs and expenses incurred by such indemnified party in defending itself against any claim or liability in its capacity as Transfer Agent.
Governing Law
The Transfer Agency and Services Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts.
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Foreside Fund Services, LLC, a Delaware limited liability company registered as a broker-dealer under the Securities Exchange Act of 1934 (“Exchange Act”) and a member of FINRA, serves as the Marketing Agent. The Marketing Agent’s principal office is located at Three Canal Plaza, Suite 100, Portland, ME 04101.
The Marketing Agent’s Role
The Marketing Agent’s responsibilities shall include: (1) working with the Transfer Agent to review and accept or reject orders placed by Authorized Participants with the Transfer Agent; (2) reviewing and approving all sales and marketing materials for compliance with applicable laws, and filing such materials with FINRA as required by the Securities Act, and the rules promulgated thereunder, and (3) facilitating arrangements between the Sponsor, the Transfer Agent and broker-dealers for the purchase and redemption of Baskets. All such sales and marketing materials must be approved, in writing, by the Marketing Agent prior to use.
The Marketing Agent will generally make it known in the brokerage community that prospectuses and product descriptions are available, including by (i) advising the Exchange on behalf of its member firms of the same, (ii) making such disclosure in all marketing and advertising materials prepared and/or filed by the Marketing Agent with FINRA, and (iii) as may otherwise be required by the SEC. The Marketing Agent shall not bear any costs associated with printing prospectuses and all other such materials.
The Marketing AgentAgreement shall be effective on the date set forth above, and unless terminated as provided therein, shall continue for two years from its effective date, and thereafter from year to year, provided such continuance is approved annually by the Trust.
Resignation, Discharge or Removal of Marketing Agent
The Marketing Agent Agreement shall be effective from the commencement of the Trust’s operations, and unless terminated, shall continue for two years from its effective date, and thereafter from year to year, provided such continuance is approved annually by the Trust. The Marketing Agent Agreement may be terminated at any time, without payment of any penalty, as to the Trust by the Marketing Agent, on at least sixty (60) days’ prior written notice or the Trust.
Limitation on Marketing Agent’s Liability
The Marketing Agent will not be liable for any delay in performance or for the non-performance of any of its obligations under the Marketing Agent Agreement by reason of causes beyond its reasonable control, including acts of God, war or terrorism. The Marketing Agent will not be liable for any indirect, consequential, punitive or special damages, regardless of the form of action and whether or not any such damages were foreseeable or contemplated.
Indemnification of Marketing Agent
The Trust agrees to indemnify and hold harmless the Marketing Agent, its affiliates and each of their respective directors, officers and employees and agents and any person who controls the Marketing Agent within the meaning of Section 15 of the Securities Act (any of the Marketing Agent, its officers, employees, agents and directors or such control persons, for purposes of this paragraph, an “Marketing Agent Indemnitee”) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon (i) Marketing Agent’s services as Marketing Agent for the Trust pursuant to the Marketing Agent Agreement; (ii) any claim that the registration statement, prospectus, product description, shareholder reports, sales literature and advertisements specifically approved by the Trust and Sponsor or other information filed or made public by the Trust (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 therein or necessary in order to make the statements therein (and in the case of the prospectus and product description, in light of the circumstances under which they were made) not misleading under the Securities Act, or any other statute or the common law; (iii) the breach by the Trust of any obligation, representation or warranty contained in the Marketing Agent Agreement; or (iv) the Trust’s failure to comply in any material respect with applicable securities laws.
Governing Law
The Marketing Agent Agreement shall be governed by the laws of the State of New York.
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State Street Bank and Trust Company, a Massachusetts trust company, serves as the Cash Custodian. The Cash Custodian has a trust office at 1 Lincoln Street, Boston, Massachusetts 02110. The Cash Custodian is subject to supervision by the Board of Governors of the Federal Reserve System.
The Cash Custodian’s Role
The Cash Custodian is responsible for holding the Trust’s cash as well as receiving and dispensing cash on behalf of the Trust in connection with the payment of Trust expenses.
The Cash Custodian’s fees and expenses are to be paid by the Sponsor. The Cash Custodian and its affiliates may from time to time act as Authorized Participants or purchase or sell EUAs or Shares for their own account, as an agent for their customers and for accounts over which they exercise investment discretion. The Sponsor, on behalf of the Trust, has entered into the Cash Custody Agreement with the Cash Custodian, under which the Cash Custodian maintains the Trust Account.
The Cash Custody Agreement shall be in effect commencing upon the operation of the Trust and shall continue until terminated.
Resignation, Discharge or Removal of Cash Custodian
Either the Trust or the Cash Custodian may terminate the Cash Custody Agreement for cause for the reasons set forth in the Cash Custody Agreement, such as either party’s bankruptcy or committing a material breach of the Cash Custody Agreement.
Limitation on Cash Custodian’s Liability
Custodian shall exercise reasonable care and diligence in carrying out all of its duties and obligations under the Cash Custody Agreement. Except as otherwise expressly provided therein, Cash Custodian shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys’ and accountants’ fees (collectively, “Losses”), incurred by or asserted against the Trust, except those Losses arising out of Cash Custodian’s own negligence, bad faith, willful misfeasance, or reckless disregard of its duties hereunder. In no event shall the Cash Custodian be liable to the Trust for special, indirect or consequential damages, or lost profits or loss of business, arising in connection with the Cash Custody Agreement. The Cash Custodian shall not be liable: (i) for acting in accordance with any Proper Instruction (as defined in the Cash Custody Agreement) or if a Proper Instruction is not required, any other instruction reasonably believed by Cash Custodian to be given by or on behalf of a person authorized to do so; (ii) for a delay in processing or any failure to process any Proper Instruction to the extent permitted under the Cash Custody Agreement, subject to the conditions set out therein; (iii) for the failure of the Trust or any person authorized by it to comply with the Trust’s obligations under the Cash Custody Agreement; (iv) for any other acts and omissions of the Trust, any person authorized by it or any third party; and (v) for any Losses due to forces beyond the control of Cash Custodian, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, or interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services.
Indemnification of Cash Custodian
The Trust agrees to indemnify Cash Custodian and hold Cash Custodian harmless from and against any and all any costs, expenses, damages, liabilities or claims, including attorneys’ and accountants’ fees (collectively, “Losses”) sustained or incurred by or asserted against Cash Custodian by reason of or as a result of any action or inaction, or arising out of Cash Custodian’s performance under the Cash Custody Agreement, including reasonable fees and expenses of counsel incurred by Cash Custodian in a successful defense of claims by the Trust; provided however, that the Trust shall not indemnify Cash Custodian for those Losses arising out of Cash Custodian’s own negligence, bad faith, willful misfeasance, reckless disregard for its duties thereunder. This indemnity shall be a continuing obligation of the Trust, its successors and assigns, notwithstanding the termination of the Cash Custody Agreement.
Governing Law
The Cash Custody Agreement is governed by Massachusetts law.
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General
The Trust Parties have not established formal procedures to resolve all conflicts of interest and, as a result, the Trust Parties could resolve a potential conflict in a manner that is not in the best interest of the Trust or the shareholders. Consequently, shareholders may be dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. Although the Trust Parties attempt to monitor these conflicts, it is extremely difficult, if not impossible, for the Trust Parties to ensure that all of these conflicts will not, in fact, result in adverse consequences to the Trust, the NAV of the Shares and ultimately the market price of the Shares.
Prospective shareholders should be aware that the Trust presently intends to assert that shareholders have, by subscribing for Shares of the Trust, consented to the following conflicts of interest in the event of any proceeding alleging that such conflicts violated any duty owed by the Sponsor to shareholders.
The Trust Parties
The Trust Parties intend to devote, and to cause their professional staff to devote, sufficient time and resources to manage properly the affairs of the Trust consistent with its or their respective fiduciary duties to the Trust and others.
Proprietary Trading
Trust Parties, their employees and their affiliates (collectively, “Affiliated Parties”) may engage in long or short transactions in EUAs in their personal accounts (subject to certain internal employee trading policies and procedures), and in doing so may take positions opposite to those held by the Trust or may compete with the Trust for positions in the marketplace.
Records of trading by Affiliated Parties will not be available for inspection by shareholders. Because Affiliated Parties may trade EUAs for their own accounts at the same time as the Trust, prospective shareholders should be aware that such persons may take positions in EUAs which are opposite, or ahead of, the positions taken for the Trust. Affiliated Parties will not engage in the Basket creation and redemption process, or act as counterparties to the Trust in EUA transactions.
There can be no assurance that any of the foregoing will not have an adverse effect on the performance of the Trust.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income tax consequences relevant to the purchase, ownership and disposition of the Shares, but does not purport to be a complete analysis of all potential tax consequences. The discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), the regulations promulgated thereunder by the U.S. Treasury (the “Treasury Regulations”), rulings and pronouncements issued by the IRS, and judicial decisions, all as of the date hereof and all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a holder of the Shares. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following discussion, and there can be no assurance that the IRS will agree with such statements and conclusions.
This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a holder of the Shares in light of such holder’s particular circumstances or to holders subject to special rules, including, without limitation: banks, insurance companies and other financial institutions; U.S. expatriates and certain former citizens or long-term residents of the United States; holders subject to the alternative minimum tax; dealers in securities or currencies; traders in securities; partnerships, S corporations or other pass-through entities; U.S. Shareholders (as defined below) whose functional currency is not the U.S. dollar; controlled foreign corporations; tax-exempt organizations; passive foreign investment companies; a regulated investment company, a real estate investment trust or other financial conduit (or shareholders of such entity); a retirement plan, individual retirement account or tax deferred account; persons holding the Shares as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction transaction; and persons deemed to sell the Shares under the constructive sale provisions of the Code. This discussion also does not address the U.S. federal income tax consequences to beneficial owners of the Notes subject to the special tax accounting rules under Section 451(b) of the Code. The discussion deals only with Notes held as “capital assets” within the meaning of Section 1221 of the Code. Moreover, the effects of other U.S. federal tax laws (such as estate and gift tax laws) and any applicable state, local or foreign tax laws are not discussed.
As used herein, “U.S. Shareholder” means a beneficial owner of a Share who is for U.S. federal income tax purposes:
• an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the “substantial presence” test under Section 7701(b) of the Code;
• a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more “United States persons” within the meaning of Section 7701(a)(30) of the Code can control all substantial trust decisions, or, if the trust was in existence on August 20, 1996, and it has elected to continue to be treated as a United States person.
A “Non-U.S. Shareholder” is a beneficial owner of a Share who is neither a U.S. Shareholder nor a partnership for U.S. federal income tax purposes.
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Shares, the U.S. federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships holding Shares, and persons holding interests in such partnerships, should each consult their own tax advisors as to the consequences of investing in the Shares in their individual circumstances.
Taxation of the Trust
The Sponsor and the Trustee will treat the Trust as a grantor trust for U.S. federal income tax purposes. As a result, the Trust itself will not be subject to U.S. federal income tax. Instead, the Trust’s income and expenses will flow through to the holders of the Shares, and the Trustee will report the Trust’s income, gains, losses and deductions to the IRS on that basis.
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There can be no assurance that the IRS will agree with the Sponsor and Trustee’s treatment of the Trust as a grantor trust for U.S. federal income tax purposes, and it is possible that the IRS or another tax authority could challenge such treatment. Neither the Sponsor nor the Trustee will request a ruling from the IRS with respect to the classification of the Trust for U.S. federal income tax purposes. If the IRS were to assert successfully that the Trust is not classified as a grantor trust, the Trust would be classified as a partnership for U.S. federal income tax purposes, which may affect timing and other tax consequences to the holders of the Shares.
The following discussion assumes that the Trust will be classified as a grantor trust for U.S. federal income tax purposes.
Taxation of U.S. Shareholders
Holders of Shares will be treated, for U.S. federal income tax purposes, as if they directly owned a pro rata share of the underlying assets held in the Trust. Holders of Shares also will be treated as if they directly received their respective pro rata shares of the Trust’s income, if any, and as if they directly incurred their respective pro rata shares of the Trust’s expenses.
In the case of a holder of the Shares that acquires its Shares in exchange for EUAs, the delivery of EUAs to the Trust in exchange for a pro rata share of the underlying EUAs represented by the Shares will not be a taxable event to the holder, and the holder’s tax basis and holding period for the holder’s pro rata share of the EUAs held in the Trust will be the same as its tax basis and holding period for the EUAs delivered in exchange therefor. For purposes of this discussion, and unless stated otherwise, it is assumed that all of a holder’s Shares are acquired on the same date and at the same price per Share. Holders that hold multiple lots of Shares, or that are contemplating acquiring multiple lots of Shares, should consult their own tax advisers as to the determination of the tax basis and holding period for the underlying EUAs related to such Shares.
When the Trust sells EUAs, for example to pay expenses, a holder of the Shares will recognize gain or loss in an amount equal to the difference between (a) the holder’s pro rata share of the amount realized by the Trust upon the sale and (b) the holder’s tax basis for its pro rata share of the EUAs that was sold. Such gain or loss will generally be long-term or short-term capital gain or loss, depending upon whether the holder has a holding period in its Shares of longer than one year. A holder’s tax basis for its share of any EUA sold by the Trust generally will be determined by multiplying the holder’s total basis for its share of all of the EUAs held in the Trust immediately prior to the sale, by a fraction the numerator of which is the amount of EUAs sold, and the denominator of which is the total amount of the EUAs held in the Trust immediately prior to the sale. After any such sale, a holder’s tax basis for its pro rata share of the EUAs remaining in the Trust will be equal to its tax basis for its share of the total amount of the EUAs held in the Trust immediately prior to the sale, less the portion of such basis allocable to its share of the EUAs that were sold.
Upon a holder’s sale of some or all of its Shares, the holder will be treated as having sold the portion or all, respectively, of its pro rata share of the EUAs held in the Trust at the time of the sale that is attributable to the Shares sold. Accordingly, the holder generally will recognize gain or loss on the sale in an amount equal to the difference between (a) the amount realized pursuant to the sale of the Shares, and (b) the holder’s tax basis for the portion of its pro rata share of the EUAs held in the Trust at the time of sale that is attributable to the Shares sold, as determined in the manner described in the preceding paragraph.
A redemption of some or all of a holder’s Shares in exchange for the underlying EUAs represented by the Shares redeemed generally will not be a taxable event to the holder. The holder’s tax basis for the EUAs received in the redemption generally will be the same as the holder’s tax basis for the portion of its pro rata share of the EUAs held in the Trust immediately prior to the redemption that is attributable to the Shares redeemed. The holder’s holding period with respect to the EUAs received should include the period during which the holder held the Shares redeemed. A subsequent sale of the EUAs received by the holder will be a taxable event, unless a nonrecognition provision of the Code applies to such sale.
After any sale or redemption of less than all of a holder’s Shares, the holder’s tax basis for its pro rata share of the EUAs held in the Trust immediately after such sale or redemption generally will be equal to its tax basis for its share of the total amount of the EUAs held in the Trust immediately prior to the sale or redemption, less the portion of such basis which is taken into account in determining the amount of gain or loss recognized by the holder upon such sale or, in the case of a redemption, that is treated as the basis of the EUAs received by the holder in the redemption.
55
An additional tax of 3.8% is imposed on certain “net investment income” (or “undistributed net investment income,” in the case of certain U.S. holders that are estates and trusts) received by certain U.S. holders with adjusted gross income above certain threshold amounts. “Net investment income” generally includes capital gains from the disposition of property. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the Shares.
Brokerage Fees and Trust Expenses
Any brokerage or other transaction fee incurred by a holder in purchasing Shares will be treated as part of the holder’s tax basis in the underlying assets of the Trust. Similarly, any brokerage fee incurred by a holder in selling Shares will reduce the amount realized by the holder with respect to the sale.
Holders will be required to recognize the full amount of gain or loss upon a sale of EUAs by the Trust (as discussed above), even though some or all of the proceeds of such sale are used by the Trustee to pay Trust expenses. Holders may deduct their respective pro rata shares of each expense incurred by the Trust to the same extent as if they directly incurred the expense. Shareholders who are individuals, estates or trusts, or certain closely held corporations, however, may be subject to various limitations on their ability to use their allocable share of the Trust’s deductions and losses. For example, miscellaneous itemized deductions, including expenses for the production of income, are not currently deductible for taxable years beginning before January 1, 2026. Prospective holders should consult their own tax advisers regarding the U.S. federal income tax consequences of holding Shares in light of their particular circumstance.
Taxation of Non-U.S. Shareholders
A Non-U.S. Shareholder generally should not be subject to U.S. federal income tax with respect to gain recognized upon the sale or other disposition of Shares, or upon the sale of EUAs by the Trust, unless (1) the Non-U.S. Shareholder is an individual and is present in the United States for 183 days or more during the taxable year of the sale or other disposition, and the gain is treated as being from United States sources; or (2) the gain is effectively connected with the conduct by the Non-U.S. Shareholder of a trade or business in the United States and certain other conditions are met.
Information Reporting and Backup Withholding
The Trustee will file certain information returns with the IRS, and provide certain tax-related information to holders, in connection with the Trust. To the extent required by applicable regulations, each holder will be provided with information regarding its allocable portion of the Trust’s annual income (if any) and expenses. A U.S. Shareholder may be subject to U.S. backup withholding tax, at a rate of 24%, in certain circumstances unless it provides its taxpayer identification number and complies with certain certification procedures. Non-U.S. Shareholders may have to comply with certification procedures to establish that they are not a United States person, and some Non-U.S. Shareholders will be required to meet certain information reporting or certification requirements imposed by the Foreign Account Tax Compliance Act, in order to avoid certain information reporting and withholding tax requirements.
Backup withholding is not an additional tax, and taxpayers may use amounts withheld as a credit against their U.S. federal income tax liability or may claim a refund if they timely provide certain information to the IRS.
56
PURCHASES BY EMPLOYEE BENEFIT PLANS
Although there can be no assurance that an investment in the Trust will achieve the investment objectives of an employee benefit plan in making such investment, the Trust has certain features that may be of interest to such a plan. For example, because they are not taxpaying entities, employee benefit plans are not subject to paying annual tax on profits (if any) of the Trust.
General
The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Code, which a fiduciary of an “employee benefit plan” as defined in, and subject to the fiduciary responsibility provisions of, ERISA or of a “plan” as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest the plan’s assets in the Trust (such “employee benefit plans” and “plans” being referred to herein as “Plans,” and such fiduciaries with investment discretion being referred to herein as “Plan Fiduciaries”). The following summary is not intended to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciary’s own counsel.
In general, the terms “employee benefit plan” as defined in ERISA and “plan” as defined in Section 4975 of the Code together refer to any plan or account of various types which provide retirement benefits or welfare benefits to an individual or to an employer’s employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit-sharing plans, “simplified employee pension plans,” Keogh plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Trust, including the role that such an investment in the Trust would play in the Plan’s overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Trust, must be satisfied that such investment in the Trust is a prudent investment for the Plan, that the investments of the Plan, including the investment in the Trust, are diversified so as to minimize the risk of large losses and that an investment in the Trust complies with the documents of the Plan and related trust.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING SHARES MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. AN INVESTMENT IN THE TRUST IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE TRUST IS NOT INTENDED AS A COMPLETE INVESTMENT PROGRAM.
“Plan Assets”
ERISA and a regulation issued thereunder (the “Plan Asset Rules”) contain rules for determining when an investment by a Plan in an entity will result in the underlying assets of such entity being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., “plan assets”). Those rules provide that assets of an entity will not be plan assets of a Plan which purchases an interest therein if certain exceptions apply, including (i) an exception applicable if the equity interest purchased is a “publicly-offered security” (the “Publicly-Offered Security Exception”) and (ii) an exception applicable if the investment by all “benefit plan investors” is not “significant” or certain other exceptions apply (the “Insignificant Participation Exception”).
The Publicly-Offered Security Exception applies if the equity interest is a security that is (1) “freely transferable,” (2) part of a class of securities that is “widely held” and (3) either (a) part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or (b) sold to the Plan as part of a public offering pursuant to an effective registration statement under the Securities Act and the class of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred. The Plan Asset Rules state that the determination of whether a security is “freely transferable” is to be made based on all relevant facts and circumstances. Under the Plan Asset Rules, a class of securities is “widely held” only if it is of a class of securities owned by 100 or more shareholders independent of the issuer and of each other.
57
The Shares of the Trust should be considered to be publicly-offered securities. First, the Shares will be sold as part of a public offering pursuant to an effective registration statement under the Securities Act, and the Shares will be timely registered under the Exchange Act. Second, it appears that the Shares will be freely transferable because the Shares of the Trust will be freely tradable on the Exchange like any other exchange- listed security. Finally, it is anticipated that the Shares will be owned by at least 100 shareholders independent of the Trust. Therefore, the underlying assets of the Trust should not be considered to constitute assets of any Plan that purchases Shares.
Ineligible Purchasers
In general, Shares may not be purchased with the assets of a Plan if the Sponsor, the Administrator, the Trustee, the Transfer Agent, the Custodian, the Marketing Agent, the Exchange, or any of their respective affiliates or any of their respective employees either: (a) has investment discretion with respect to the investment of such plan assets; (b) has authority or responsibility to give or regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such advice will be based on the particular investment needs of the Plan; or (c) is an employer maintaining or contributing to such Plan. A party that is described in clause (a) or (b) of the preceding sentence is a fiduciary under ERISA and the Code with respect to the Plan, and any such purchase might result in a “prohibited transaction” under ERISA and the Code.
Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in the Trust are based on the provisions of the Code and ERISA as currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that will not make the foregoing statements incorrect or incomplete.
ALLOWING AN INVESTMENT IN THE TRUST IS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE SPONSOR OR ANY OF ITS AFFILIATES, AGENTS OR EMPLOYEES THAT THIS INVESTMENT MEETS SOME OR ALL OF THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR ANY SUCH PARTICULAR PLAN. THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH THE PLAN’S ATTORNEY AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN THE TRUST IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN, CURRENT TAX LAW AND ERISA.
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PERFORMANCE, FINANCIALS AND OTHER INFORMATION
After the end of each fiscal year, the Sponsor will cause to be prepared an annual report for the Trust containing audited financial statements. The annual report will be in such form and contain such information as will be required by applicable laws, rules and regulations and may contain such additional information which the Sponsor determines shall be included. The annual report shall be filed with the SEC and the Exchange and shall be distributed to such persons and in such manner, as shall be required by applicable laws, rules and regulations.
The Sponsor is responsible for the registration and qualification of the Shares under the federal securities laws. The Sponsor will also prepare, or cause to be prepared, and file any periodic reports or updates required under the Exchange Act. The Administrator will assist and support the Sponsor in the preparation of such reports.
The Administrator will make such elections, file such tax returns, and prepare, disseminate and file such tax reports, as it is advised to by its counsel or accountants or as required from time to time by any applicable statute, rule or regulation.
The Trust is aware of no existing or pending legal proceedings against it, nor is it involved as a plaintiff in any proceeding or pending litigation.
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Potter Anderson & Corroon LLP has advised the Trust and the Sponsor in connection with the validity of the Shares being offered hereby. Eversheds Sutherland (US) LLP advised the Trust and the Sponsor with respect to their responsibilities and with respect to matters relating to the Trust. Eversheds Sutherland (US) LLP has prepared the sections “U.S. Federal Income Tax Consequences” with respect to U.S. federal income tax matters and “Purchases By Employee Benefit Plans” with respect to ERISA. Certain opinions of counsel will be filed with the SEC as exhibits to the registration statement of which this Prospectus is a part.
The financial statements incorporated in this Prospectus have been audited by Cohen & Company, Ltd., an independent registered public accounting firm.
PRIVACY POLICY
The Trust and the Sponsor may collect or have access to certain nonpublic personal information about current and former investors. Nonpublic personal information may include information received from investors, such as an investor’s name, social security number and address, as well as information received from brokerage firms about investor holdings and transactions in Shares.
The Trust and the Sponsor do not disclose nonpublic personal information except as required by law or as described in their Privacy Policy. In general, the Trust and the Sponsor restrict access to the nonpublic personal information they collect about investors to those of their and their affiliates’ employees and service providers who need access to such information to provide products and services to investors.
The Trust and the Sponsor maintain safeguards that comply with federal law to protect investors’ nonpublic personal information. These safeguards are reasonably designed to (1) ensure the security and confidentiality of investors’ records and information, (2) protect against any anticipated threats or hazards to the security or integrity of investors’ records and information, and (3) protect against unauthorized access to or use of investors’ records or information that could result in substantial harm or inconvenience to any investor. Third-party service providers with whom the Trust and the Sponsor share nonpublic personal information about investors must agree to follow appropriate standards of security and confidentiality, which includes safeguarding such nonpublic personal information physically, electronically and procedurally.
A copy of the Sponsor’s current Privacy Policy, which is applicable to the Trust, is provided to investors annually and is also available at www.cotwoadvisors.com.
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WHERE YOU CAN FIND MORE INFORMATION
Until [ ], 2023 (25 calendar days after the date of this Prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a Prospectus. This is in addition to the dealers’ obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Additional information about the Trust’s investments is or will be available in the Trust’s annual and quarterly reports. In the annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Trust’s performance during the last fiscal year, as applicable.
To make shareholder inquiries, for more detailed information on the Trust, or to request any of the documents incorporated by reference in this prospectus free of charge, please:
Call: (203) 594-9988
Monday through Friday
8:00 a.m. – 8:00 p.m. (Eastern time)
Write: COtwo Advisors Physical European Carbon Allowance Trust
COtwo Advisors, LLC
140 Elm Street, Suite 6
New Canaan, CT 06840
Visit: www.cotwoadvisors.com
Information about the Trust can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the Trust is available on the EDGAR Database on the SEC’s Internet site at www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
No person is authorized to give any information or to make any representations about the Trust and its shares not contained in this Prospectus and you should not rely on any other information. Read and keep this Prospectus for future reference.
COtwo Advisors Physical European Carbon Allowance Trust
140 Elm Street, Suite 6,
New Canaan, CT 06840
The Trust is distributed by
Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, ME 04101
61
COtwo Advisors Physical European Carbon Allowance Trust
INDEX TO FINANCIAL STATEMENTS
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F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Sponsor of COtwo Advisors Physical European Carbon Allowance Trust
Opinion on the Financial Statement
We have audited the accompanying statement of assets and liabilities of COtwo Advisors Physical European Carbon Allowance Trust (the “Fund”) as of December 7, 2023, and the related notes (collectively referred to as the “financial statement”). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Fund as of December 7, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
This financial statement is the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Fund’s auditor since 2023.
COHEN & COMPANY, LTD.
Philadelphia, Pennsylvania
January 11, 2024
F-2
COtwo Advisors Physical European Carbon Allowance Trust
Statements of Assets and Liabilities
December 7, 2023
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The accompanying notes are an integral part of these financial statements.
F-3
COtwo Advisors Physical European Carbon Allowance Trust
Notes to the Financial Statements
December 7, 2023
1. ORGANIZATION
COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”) was formed as a Delaware statutory trust on January 12, 2023. The Trust is governed by the Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”) dated November 27, 2023 between COtwo Advisors LLC (the “Sponsor”) and Wilmington Trust, National Association (the “Trustee”).
The Trust has not commenced investment activities nor issued common units of beneficial interest, or “Shares,” as of December 7, 2023. There were no receipts or disbursements of cash to or from the Trust since the Trust’s formation. The Trust did not receive any revenue, capital gains (losses), or incur any expenses, during this time period and therefore, do not have any performance history.
The investment objective of the Trust is for the Shares to reflect the performance of the price of EU Carbon Emission Allowances for stationary installations (“EUAs”), less the expenses of the Trust’s operations. The Trust’s assets will consist of EUAs, which are issued via the European Union Emission Trading System (“ETS”) and permit the holder to emit one ton of carbon dioxide equivalent or other greenhouse gas. The Trust will occasionally hold cash for short periods to pay Trust expenses.
The Sponsor is the sponsor of the Trust. The Sponsor: (1) will select the Trust’s trustee, administrator, transfer agent, cash custodian, marketing agent and any other Trust service providers; (2) will negotiate various agreements and fees for the Trust; (3) will develop a marketing plan for the Trust on an ongoing basis and prepare marketing materials regarding the Shares; (4) will maintain the Trust’s web site; and (5) will perform such other services as the Sponsor believes that the Trust may require.
Undefined capitalized terms shall have the meaning as set forth in the registration statement.
2. SIGNIFICANT ACCOUNTING POLICIES
The Sponsor has determined that the Trust falls within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services — Investment Companies, and has concluded that for reporting purposes, the Trust is classified as an Investment Company. The Trust is not registered as an investment company under the Investment Company Act of 1940 and is not required to register under such act.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires those responsible for preparing financial statements to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the Trust.
2.1 Emerging growth company
The Trust is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations that are not otherwise applicable to the Trust. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Trust is choosing to “opt out” of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
F-4
COtwo Advisors Physical European Carbon Allowance Trust
Notes to the Financial Statements
December 7, 2023
2. SIGNIFICANT ACCOUNTING POLICIES (cont.)
2.2 Valuation of EUAs
The Trust follows the provisions of ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 provides guidance for determining fair value and requires increased disclosure regarding the inputs to valuation techniques used to measure fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
All EUAs will be held in the Trust’s account at the European Union Registry (the “Union Registry”). The cost basis of EUAs received in connection with a creation order is recorded by the Trust at the fair value of EUAs at 4:00 p.m., New York time, on the creation date for financial reporting purposes. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors. The fair value of EUAs is determined using that day’s end of day index measuring the price of EUA spot contracts (the “EUA End of Day Index”) traded on the European Energy Exchange AG (“EEX”).
The EEX as a regulated market in Germany for spot and derivatives transactions is supervised by the Exchange Supervisory Authority. The value of the EUA End of Day Index is calculated based on an algorithm using data regarding the prices of qualifying trades and the average bids and asks of orders that meet certain order quantity requirements. In order for data regarding trades and orders to be used for calculating the value of the EUA End of Day Index, the trades or orders must satisfy certain requirements regarding (i) quantity of traded contracts, (ii) quantity of contracts per order, (iii) minimum duration of the cumulated valid best bid and best ask, and (iv) maximum spread per contract.
ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The three levels of inputs are as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access.
Level 2: Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments and similar data.
Level 3: Unobservable inputs for the asset or liability to the extent that relevant observable inputs are not available, representing the Trust’s own assumptions about the assumptions that a market participant would use in valuing the asset or liability, and that would be based on the best information available.
The Sponsor anticipates categorizing the Trust’s investment in EUAs as a Level 1 asset within the ASC 820 hierarchy.
2.3 Expenses
The Trust’s only ordinary recurring fee is expected to be the fee paid to the Sponsor, which will accrue daily at an annualized rate equal to 0.79% of the average daily net asset value of the Trust, paid monthly in arrears.
2.4 Creations and Redemptions of Shares
The Trust issues and redeems in one or more blocks of 50,000 Shares (a block of 50,000 Shares is called a “Basket”) only to Authorized Participants. The creation and redemption of Baskets will only be made in exchange for the delivery to the Trust or the distribution by the Trust of the amount of EUAs represented by the Baskets being created or redeemed, the amount of which will be based on the number of EUAs represented by the number of Shares included in the Baskets being created or redeemed determined on the day the order to create or redeem Baskets is properly received.
Orders to create and redeem Baskets may be placed only by Authorized Participants. An Authorized Participant must: (1) be a registered broker-dealer and a member in good standing with the Financial Industry Regulatory Authority (“FINRA”); (2) be a participant in DTC; and (3) have entered into an Authorized Participant Agreement with the
F-5
COtwo Advisors Physical European Carbon Allowance Trust
Notes to the Financial Statements
December 7, 2023
2. SIGNIFICANT ACCOUNTING POLICIES (cont.)
Sponsor. The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets and for the delivery of the EUAs required for such creations and redemptions. A transaction fee of $100 will be assessed on all creation and redemption orders. Multiple Baskets may be created on the same day.
Authorized Participants who make deposits with the Trust in exchange for Baskets will receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or the Trust, and no such person has any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of Shares.
2.5 Organization Costs
The costs of the Trust’s organization and the initial offering of the Shares will be borne directly by the Sponsor. The Trust will not be obligated to reimburse the Sponsor.
2.6 Income Taxes
The Trust will be classified as a “grantor trust” for United States federal income tax purposes. As a result, the Trust itself will not be subject to United States federal income tax. Instead, the Trust’s income and expenses will “flow through” to the Shareholders, and the Sponsor will report the Trust’s income, gains, losses and deductions to the Internal Revenue Service on that basis. At December 7, 2023, no amounts had “flowed through” to the shareholders.
3. PROPOSED OFFERING
The Trust is offering an indeterminate amount of securities of the Trust. The Trust will calculate and pay registration fees, if any, in accordance with Rule 456(d) of the Securities Act. In accordance with Rules 456(d) and 457(u) under the Securities Act, the Trust is deferring payment of these registration fees and will pay these registration fees on an annual net basis no later than 90 days after the end of each fiscal year.
Shares of the Trust are expected to be listed and traded on the NYSE Arca, Inc. after they are initially purchased by Authorized Participants. The initial Authorized Participant will make a minimum initial purchase of at least two Baskets of 50,000 Shares at a per Share price equal to the value of 10,000 EUAs on the initial offering date. The Trust will not commence trading unless and until its initial Authorized Participant effects the minimum initial purchase. Following the initial purchase by the initial Authorized Participant, shares of the Trust will be offered to Authorized Participants in Baskets at the Trust’s net asset value per Share (“NAV”). Market prices for the Shares may be different from their NAV.
4. RELATED PARTIES — SPONSOR, TRUSTEE, CUSTODIAN AND MARKETING FEES
A fee is paid to the Sponsor as compensation for services performed under the Trust Agreement. In exchange for the Sponsor fee, the Sponsor has agreed to assume all routine operational, administrative and other ordinary expenses of the Trust, including, but not limited to, the monthly fee, out-of-pocket expenses and expenses reimbursable in connection with such service provider’s respective agreement payable to each of the Trust’s trustee, administrator, cash custodian, transfer agent and marketing agent; the marketing support fees and expenses; exchange listing fees; SEC registration fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and routine legal expenses. The Sponsor’s fee, paid monthly in arrears, is equal to 0.79% per annum of the daily net asset value of the Trust.
The Sponsor, from time to time, may temporarily waive all or a portion of the Sponsor’s fee at its discretion for a stated period of time. Presently, the Sponsor does not intend to waive any part of its fee.
At the date of formation of the Trust, there were no amounts payable to related parties.
F-6
COtwo Advisors Physical European Carbon Allowance Trust
Notes to the Financial Statements
December 7, 2023
5. RISKS
In accordance with Statement of Position No. 94-6, Disclosure of Certain Significant Risks and Uncertainties, the Trust’s sole business activity is the investment in EUAs. The price of EUAs is affected by numerous factors beyond the Trust’s control, including the following: (a) global or regional political, economic, environmental or financial events and situations (including pandemics, such as COVID-19); (b) investors’ expectations with respect to the future rates of inflation and movements in world equity, financial, environmental, commodity and property markets; (c) the activities and emissions of energy-intensive sectors (including manufacturing facilities, oil refineries, power stations and, aviation) may impact the demand for EUAs; (d) the relevant rules of cap and trade programs outside the European Union (including how allowances are made available to operators or market participants, such as free allocations or auctions) and links put in place between mandatory cap and trade programs and voluntary schemes (enabling carbon allowances of one mandatory program or voluntary scheme to be used for the purposes of another mandatory program or voluntary scheme) may impact the supply of EUAs; (e) the rate of progress in the innovation, introduction and expansion of technologies and techniques in the reduction of emissions of greenhouse gases (or the capture and storage thereof); (f) the use by governments of different policies to encourage or require the reduction of emissions of greenhouse gases; (g) lobbyist, political or governmental goals or policies with respect to climate change and the imposition of environmental plans or climate goals; (h) the cost and implications of non-compliance with the European Union Emissions Trading System (including both monetary and non-monetary penalties on operators subject to the European Union Emissions Trading System for failure to surrender sufficient EUAs); (i) investment and trading activities of hedge funds, commodity funds and other speculators; (j) interest rates and currency exchange rates, particularly the strength of and confidence in the Euro; and (k) the ability of the greenhouse gas emitting companies to pass on the cost of emissions credits to consumers.
6. INDEMNIFICATION FOOTNOTE
The Trust’s members, managers, directors, officers, employees, affiliates (as such term is defined under the Securities Act) and subsidiaries) (collectively, the “Trust Parties”) shall be indemnified from the Trust and held harmless against any loss, liability or expense incurred without (1) gross negligence, bad faith or willful misconduct on the part of such indemnified party arising out of or in connection with the performance of its obligations under the Trust Agreement and under each other agreement entered into by the Trust Parties in furtherance of the administration of the Trust (including, without limiting the scope of the foregoing, the administration agreement, the transfer agency agreement, the cash custody agreement, the marketing agent agreement and any Authorized Participant Agreement) or any actions taken in accordance with the provisions of the Trust Agreement or such other agreement or (2) reckless disregard on the part of such indemnified party of its obligations and duties under the Trust Agreement or such other agreement. Such indemnity shall include payment from the Trust of the reasonable costs and expenses incurred by such indemnified party in investigating or defending itself against any claim or liability in their capacity as Trust Parties. Any amounts payable to an indemnified party may be payable in advance or shall be secured by a lien on the Trust’s assets. The Trust Parties may, in their discretion, undertake any action which it may deem necessary or desirable in respect of the Trust Agreement and the interests of the shareholders and, in such event, the reasonable legal expenses and costs of any such actions shall be expenses and costs of the Trust and the Trust Parties shall be entitled to be reimbursed therefor by the Trust.
7. SUBSEQUENT EVENTS
Management has evaluated the events and transactions that have occurred through the date the financial statements were issued and noted no items requiring adjustment of the financial statements or additional disclosures.
F-7
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate (except as indicated) of the amount of fees and expenses (other than underwriting commissions and discounts) payable by the registrant in connection with the issuance and distribution of the Shares pursuant to the prospectus contained in this registration statement.
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Amount |
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SEC registration fee (actual) |
$ |
(1) |
|
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Auditor’s fees and expenses |
$ |
5,000(2) |
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|
Legal fees and expenses |
$ |
120,000(2) |
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|
Printing expenses |
$ |
5,000(2) |
|
|
Miscellaneous expenses |
$ |
15,000(2) |
|
|
Total |
$ |
(2) |
|
____________
(1) Applicable registration fees have been deferred in accordance with Rules 456(d) and 457(u) under the Securities Act and will be paid on an annual net basis no later than 90 days after the end of each fiscal year and are therefore not estimable at this time.
(2) Because an indeterminable amount of securities is covered by this Registration Statement, the total expenses in connection with the issuance and distribution of the Shares are, therefore, not currently determinable.
Item 14. Indemnification of Directors and Officers
The Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”) provides that the Sponsor shall be indemnified by the Trust against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with its activities for the Trust, provided that (i) the Sponsor was acting on behalf of or performing services for the Trust, and has determined, in good faith, that such course of conduct was in the best interests of the Trust, and such liability or loss was not the result of gross negligence, willful misconduct, or a breach of the Trust Agreement on the part of the Sponsor and (ii) any such indemnification will only be recoverable from the Trust estate. All rights to indemnification permitted by the Trust Agreement and payment of associated expenses shall not be affected by the dissolution or other cessation to exist of the Sponsor, or the withdrawal, adjudication of bankruptcy or insolvency of the Sponsor, or the filing of a voluntary or involuntary petition in bankruptcy under Title 11 of the Bankruptcy Code by or against the Sponsor.
Notwithstanding the foregoing, the Sponsor shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of U.S. federal or state securities laws unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves the indemnification of such expenses (including, without limitation, litigation costs), (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves the indemnification of such expenses (including, without limitation, litigation costs) or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made.
The Trust shall not incur the cost of that portion of any insurance which insures any party against any liability, the indemnification of which is prohibited by the Trust Agreement.
Expenses incurred in defending a threatened or pending civil, administrative or criminal action suit or proceeding against the Sponsor shall be paid by the Trust in advance of the final disposition of such action, suit or proceeding, if (i) the legal action relates to the performance of duties or services by the Sponsor on behalf of the Trust; (ii) the legal action is initiated by a party other than the Trust; and (iii) the Sponsor undertakes to repay the advanced funds with interest to the Trust in cases in which it is not entitled to indemnification under the Trust Agreement.
For purposes of the indemnification provisions of the Trust Agreement, the term “Sponsor” includes, in addition to the Sponsor, any other covered person performing services on behalf of the Trust and acting within the scope of the Sponsor’s authority as set forth in the Trust Agreement.
II-1
In the event the Trust is made a party to any claim, dispute, demand or litigation or otherwise incurs any loss, liability, damage, cost or expense as a result of or in connection with any Shareholder’s (or assignee’s) obligations or liabilities unrelated to the business of the Trust, such Shareholder (or assignees cumulatively) shall indemnify, defend, hold harmless, and reimburse the Trust for all such loss, liability, damage, cost and expense incurred, including attorneys’ and accountants’ fees.
Item 15. Recent Sales of Unregistered Securities
None.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
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Exhibit No. |
Description |
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3.1 |
Amended and Restated Declaration of Trust and Trust Agreement of the Registrant.* |
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3.2 |
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5.1 |
Potter Anderson & Corroon LLP relating to the legality of the Shares.* |
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8.1 |
Opinion of Eversheds Sutherland (US) LLP with respect to federal income tax consequences.* |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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23.1 |
Consent of Potter Anderson & Corroon LLP. (Included in Exhibit 5.1)* |
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23.2 |
Consent of Eversheds Sutherland (US) LLP. (Included in Exhibit 8.1)* |
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23.3 |
||
|
107 |
____________
* Filed herewith.
(1) As filed on May 12, 2023.
(b) Financial Statement Schedules
The financial statement schedules are either not applicable or the required information is included in the financial statements and footnotes related thereto.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
II-2
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i), (ii), and (iii) of this section do not apply if the registration statement is on Form S-1 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the registrant is subject to Rule 430C (§230.430C of this chapter), each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New Canaan, state of Connecticut, on January 16, 2024.
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By: |
COtwo Advisors LLC, Sponsor |
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By |
/s/ Ronald Gutstein |
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Ronald Gutstein |
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Principal Executive Officer |
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By: |
/s/ Shari Crawford |
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Shari Crawford |
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Principal Financial Officer |
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Principal Accounting Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. The document may be executed by signatories hereto on any number of counterparts, all of which shall constitute one and the same instrument.
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Signature |
Title |
Date |
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/s/ Ronald Gutstein |
Principal Executive Officer |
January 16, 2024 |
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Ronald Gutstein |
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Signature |
Title |
Date |
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/s/ Shari Crawford |
Principal Financial Officer |
January 16, 2024 |
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Shari Crawford |
Principal Accounting Officer |
II-5
Exhibit 3.1
AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT
OF
COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST
DATED AS OF NOVEMBER 27, 2023
TABLE OF CONTENTS
| Page | ||||
| ARTICLE I. NAME, PURPOSE AND DEFINITIONS | 1 | |||
| Section 1.01. | Name | 1 | ||
| Section 1.02. | Purpose | 1 | ||
| Section 1.03. | Definitions | 2 | ||
| Section 1.04. | Grantor Trust | 4 | ||
| ARTICLE II. SHARES | 4 | |||
| Section 2.01. | Division of Beneficial Interest | 4 | ||
| Section 2.02. | Ownership of Shares | 5 | ||
| Section 2.03. | Transfer of Shares | 5 | ||
| Section 2.04. | Investments in the Trust | 5 | ||
| Section 2.05. | Status of Shares and Limitation of Personal Liability | 5 | ||
| Section 2.06. | Designation and Rights of Shares | 6 | ||
| Section 2.07. | Creations and Issuance of Creation Baskets | 6 | ||
| Section 2.08. | Redemption of Creation Baskets | 7 | ||
| ARTICLE III. DELAWARE TRUSTEE | 7 | |||
| Section 3.01. | Term; Resignation | 7 | ||
| Section 3.02. | Duties | 7 | ||
| Section 3.03. | Compensation and Expenses of the Delaware Trustee | 8 | ||
| Section 3.04. | Liability of Delaware Trustee | 8 | ||
| Section 3.05. | Indemnification | 11 | ||
| Section 3.06. | Successor Delaware Trustee | 11 | ||
| Section 3.07. | Merger or Consolidation of Delaware Trustee | 12 | ||
| ARTICLE IV. THE SPONSOR | 12 | |||
| Section 4.01. | Management of the Trust | 12 | ||
| Section 4.02. | Authority of Sponsor | 12 | ||
| Section 4.03. | Obligations of Sponsor | 13 | ||
| Section 4.04. | Compensation of the Sponsor | 15 | ||
| Section 4.05. | Liability of Sponsor and Indemnification | 15 | ||
i
| ARTICLE V. BOOKS OF ACCOUNT AND CERTIFICATE OF TRUST | 16 | |||
| Section 5.01. | Books of Account | 16 | ||
| Section 5.02. | Certificate of Trust | 16 | ||
| ARTICLE VI. AMENDMENT OF TRUST AGREEMENT | 17 | |||
| ARTICLE VII. TERM | 17 | |||
| ARTICLE VIII. TERMINATION/REORGANIZATION | 17 | |||
| Section 8.01. | Termination of the Trust | 17 | ||
| Section 8.02. | Merger and Consolidation | 19 | ||
| Section 8.03. | Dissolution of Sponsor Not to Terminate Trust | 19 | ||
| ARTICLE IX. SHAREHOLDERS’ VOTING POWERS AND MEETINGS | 19 | |||
| Section 9.01. | Voting Powers | 19 | ||
| Section 9.02. | Voting Power and Meetings | 19 | ||
| Section 9.03. | Place of Meetings | 20 | ||
| Section 9.04. | Notice of Shareholders’ Meeting | 20 | ||
| Section 9.05. | Adjourned Meeting; Notice | 20 | ||
| Section 9.06. | Voting Procedure | 20 | ||
| Section 9.07. | Quorum and Required Vote | 20 | ||
| Section 9.08. | Action by Written Consent | 20 | ||
| Section 9.09. | Record Dates | 21 | ||
| Section 9.10. | Waiver of Notice by Consent of Absent Shareholders | 21 | ||
| Section 9.11. | Proxies | 21 | ||
| ARTICLE X. ARTICLE X MISCELLANEOUS PROVISIONS | 21 | |||
| Section 10.01. | Certain Matters Relating to Shareholders | 21 | ||
| Section 10.02. | Delaware Law to Govern | 22 | ||
| Section 10.03. | Provisions in Conflict with Law or Regulations | 23 | ||
| Section 10.04. | Notices | 23 | ||
| Section 10.05. | Headings | 23 | ||
| Section 10.06. | Counterparts | 23 | ||
| Section 10.07. | Patriot Act | 24 | ||
| Section 10.08. | Entire Agreement | 24 | ||
| Section 10.09. | Severability | 24 | ||
| Section 10.10. | Direction | 24 | ||
ii
COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST
AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT
WHEREAS, THIS AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT of COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST is made and entered into as of November 27, 2023, by COTWO ADVISORS LLC, as sponsor, and WILMINGTON TRUST, NATIONAL ASSOCIATION, a national banking association, as Delaware Trustee, for the purpose of continuing a Delaware statutory trust in accordance with the provisions hereinafter set forth;
WHEREAS, COtwo Advisors LLC and Wilmington Trust, National Association formed the Trust on January 12, 2023, as a statutory trust organized, pursuant to the Delaware Statutory Trust Act and entered into a Declaration of Trust and Trust Agreement dated as of January 12, 2023 (the “Initial Declaration”); and
WHEREAS, COtwo Advisors LLC desires to amend and restate the Trust Agreement to amend, clarify, and revise certain terms and conditions upon which the Trust is administered prior to launch of the Trust.
NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Initial Declaration is amended and restated in its entirety and each party hereby agrees as follows:
ARTICLE I
NAME, PURPOSE AND DEFINITIONS
Section 1.01. Name. This trust shall be known as the “COtwo Advisors Physical European Carbon Allowance Trust.” The Sponsor shall conduct the business of the Trust under this name or any other name as the Sponsor may from time to time determine in its sole discretion. Any name change shall become effective on the execution by the Sponsor of an instrument setting forth the new name and the filing of a certificate of amendment pursuant to Section 3810(b)(1) of the Delaware Act. Any such instrument shall not require the approval of the Shareholders but shall have the status of an amendment to this Trust Agreement.
Section 1.02. Purpose. The purpose of the Trust is to provide Shareholders with exposure to the daily change in the U.S. dollar price of carbon credits, before expenses and liabilities of the Trust. The Sponsor intends for the Trust to be operated and treated for U.S. federal income tax purposes as an “‘investment’ trust” as defined in Treasury Regulation § 301.7701-4(c)(1) and to be treated as a “grantor trust” described in sections 671-679 of the Code. All provisions in this Trust Agreement are intended to be construed such that the Trust does not lose its status as an “‘investment’ trust” treated as a “grantor trust”. It is not the intention of the Sponsor to create a general partnership, limited partnership, limited liability company, joint stock association, corporation, bailment or any form of legal relationship other than a Delaware Statutory Trust. The Trust shall be entitled to exercise all of the powers and privileges granted to a statutory trust formed under the laws of the State of Delaware, now or hereafter in force.
1
Section 1.03. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided:
“Administrator” means any Person from time to time engaged to perform administration services for the Trust pursuant to authority delegated by the Sponsor.
“Affiliate” shall mean, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Person.
“Authorized Participant” means a person who (1) is a registered broker-dealer under the Securities Exchange Act of 1934 and is a member in good standing of the Financial Industry Regulatory Authority (“FINRA”) or other securities market participant such as a bank or other financial institution which is not required to register as a broker-dealer or be a member of FINRA to engage in securities transactions, (2) is a participant in DTC and (3) has entered into an Authorized Participant Agreement. Only Authorized Participants may place orders to create or redeem one or more Creation Baskets.
“Authorized Participant Agreement” shall mean an agreement entered into by each Authorized Participant which provides the procedures for the creation and redemption of Creation Baskets and for the delivery of the carbon credits required for such creations and redemptions.
“Business Day” shall mean any day other than (i) a Saturday or a Sunday, or (ii) a day on which the New York Stock Exchange or Federal Reserve is closed, or (iii) a day on which banks in the States of New York, Delaware or such other states in which the principal offices of Sponsor or Corporate Trust Office of the Delaware Trustee are subsequently located, as specified in writing by such part to the other parties hereto is required, or authorized by law, to close.
“By-Laws” shall mean the By-Laws of the Trust, if any, as amended from time to time which By-Laws are expressly herein incorporated by reference as part of the “governing instrument” within the meaning of the Delaware Act (defined herein).
A “carbon credit” shall mean a European Union Allowance, entitling the holder to emit a specified amount of carbon dioxide or carbon-equivalent greenhouse gas under the European Emission Trading System. Multiple units are called “carbon credits.”
“carbon credit Custodian” means an entity designated to act as custodian of the Trust’s carbon credits pursuant to a written agreement with the Trust or Sponsor on behalf of the Trust.
“Certificate of Trust” means the Certificate of Trust of the Trust in the form filed with the Secretary of State of the State of Delaware pursuant to Section 3810 of the Delaware Act as amended or restated from time to time.
“Code” means the Internal Revenue Code of 1986, as amended.
“Control” and/or “Controlled” mean that the specified party, directly or indirectly, has the power to direct or cause the direction of the management and policies of an entity through the ownership of voting securities, by contract or otherwise.
“Creation Basket” shall mean a block of 50,000 Shares or more or such other amount as established from time to time by the Sponsor. Multiple blocks are called “Creation Baskets.”
“Cash Custodian” means an entity designated to act as custodian of the Trust’s cash pursuant to a written agreement with the Trust or Sponsor on behalf of the Trust.
2
“Custody Agreement (carbon credits)” means a written agreement entered into by the Trust or Sponsor with a carbon credit Custodian providing for the deposit, safekeeping or delivery of carbon credits held by the Trust and related services.
“Custody Agreement (cash)” means a written agreement entered into by the Trust or Sponsor with a Cash Custodian providing for the deposit, safekeeping or delivery of cash held by the Trust and related services.
“Delaware Act” shall mean the Delaware Statutory Trust Act (12 Del. C. § 3801 et seq.), as such statute may be amended or interpreted from time to time, and any legislative enactment which may replace or supersede such Act.
“Delaware Trustee” shall mean Wilmington Trust, National Association or any successor Delaware Trustee designated as such by operation of law or appointed as herein, acting not in its individual capacity but solely as Delaware Trustee of the Trust.
“DTC” shall mean the Depository Trust Company. DTC is a limited purpose trust company organized under New York law, a member of the U.S. Federal Reserve System and a clearing agency registered with the SEC pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC will act as the securities depository for the Shares.
“DTC Participant” shall mean a Participant in DTC, such as a bank, broker, dealer or trust company.
“Exchange” means the primary exchange or other securities market on which the Shares are listed for trading.
“Expenses” shall have the meaning assigned to such term in Section 3.05 herein.
“Indemnified Parties” shall have the meaning assigned to such term in Section 3.05 herein.
“Person” means and includes individuals, corporations, partnerships, trusts, associations, joint ventures, estates and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign.
“Prospectus” shall have the meaning assigned to such term in Section 4.02(e) herein.
“Redemption Order” shall have the meaning assigned to such term in Section 2.08(a) herein.
“Registration Statement” means the current registration statement of the Trust as filed with the SEC, either pending effectiveness or already effective, as the same may at any time and from time to time be amended or supplemented.
“Responsible Officer” means with respect to the Delaware Trustee, the president, any vice president, any assistant vice president, any trust officer or assistant trust officer or any other officer of the Delaware Trustee, otherwise engaged in performing functions similar to those performed by any of the above designated officers, in each case having direct responsibility over this Trust Agreement and the Trust and, with respect to a particular matter, to whom such matter is referred because of such officer’s knowledge of and familiarity with the particular subject.
“SEC” means the U.S. Securities and Exchange Commission.
3
“Shareholder” means a record owner of at least one outstanding Share.
“Share” shall mean an equal proportionate unit of beneficial interest into which the beneficial interest of the Trust shall be divided. “Shares” includes fractions of Shares as well as whole Shares.
“Sponsor” means COtwo Advisors LLC, or any entity into which it may be merged or with which it may be consolidated, or any entity resulting from any merger or consolidation to which it shall be a party, or any entity succeeding to all or substantially all of its business as sponsor of the Trust, or any successor Sponsor designated as such by operation of law or any successor Sponsor appointed as herein provided.
“Sponsor Agreement” means an agreement between the Trust and the Sponsor setting forth, among other things, the Sponsor’s compensation for its services as Sponsor of the Trust.
“Sponsor Indemnified Party” shall have the meaning assigned to such term in Section 4.05(c) herein.
“Transaction Documents” means this Trust Agreement, the Custody Agreement (carbon credits), the Custody Agreement (cash), the Sponsor Agreement and any other document to which the Trust is a signatory or is bound.
“Trust” means COtwo Advisors Physical European Carbon Allowance Trust, a Delaware statutory trust established under the Delaware Act by the filing of the Certificate of Trust in the Office of the Secretary of State of the State of Delaware on January 12, 2023.
“Trust Agreement” shall mean this Amended and Restated Declaration of Trust and Trust Agreement, as amended or restated from time to time.
“Trust Property” means the property of the Trust and, specifically, the carbon credits and cash owned or held by or for the account of the Trust.
Section 1.04. Grantor Trust. Nothing in this Trust Agreement, any Custody Agreement (cash or carbon credits), the Sponsor Agreement or otherwise shall be construed to give the Delaware Trustee or Sponsor the power to vary the investment of the Shareholders (within the meaning of Treasury Regulation Section 301.7701-4(c) under the Code or any similar or successor provision of the regulations under the Code), nor shall the Sponsor give the Delaware Trustee any direction that would vary the investment of the Shareholders. Neither the Delaware Trustee nor the Sponsor shall be liable to any Person for any failure of the Trust to qualify as a “grantor trust” under the Code or any comparable provision of the laws of any State or other jurisdiction where that treatment is sought, except that this sentence shall not limit the Sponsor’s responsibility for the administration of the Trust in accordance with this Trust Agreement.
ARTICLE II
SHARES
Section 2.01. Division of Beneficial Interest. The beneficial interest in the Trust shall be divided into Shares. Each Share of the Trust shall represent an equal beneficial interest in the net assets of the Trust, and each holder of Shares shall be entitled to receive such holder’s pro rata share of distributions of income and capital gains, if any.
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All Shares issued hereunder shall be fully paid and non-assessable. No Share shall have any priority or preference over any other Share of the Trust. All distributions, if any, shall be made ratably among all Shareholders from the assets of the Trust according to the number of Shares held of record by such Shareholders on the record date for any distribution or on the date of termination of the Trust, as the case may be. Except as otherwise provided by the Sponsor, Shareholders shall have no preemptive or other right to subscribe to any additional Shares. Every Shareholder, by virtue of having purchased or acquired a Share, shall have expressly consented and agreed to be bound by the terms of this Trust Agreement.
The Sponsor shall have full power and authority, in its sole discretion, without seeking the approval of the Delaware Trustee or the Shareholders (i) to divide the beneficial interest in the Trust into an unlimited amount of Shares, with or without par value, as the Sponsor shall determine, without thereby materially changing the proportionate beneficial interest of the holders of the Shares, and (ii) to divide or combine the Shares into a greater or lesser number without thereby materially changing the proportionate beneficial interest of the Shares in the assets held.
Section 2.02. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent for the Trust. No certificates certifying the ownership of Shares shall be issued except as the Sponsor may otherwise determine from time to time. The Sponsor may make such rules as it considers appropriate for the issuance of Share certificates, transfer of Shares and similar matters. The record books of the Trust as kept by the Trust, or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders and as to the number of Shares held from time to time by each.
Section 2.03. Transfer of Shares. Except as otherwise provided by the Sponsor, Shares shall be transferable on the books of the Trust only by the record holder thereof or by his duly authorized agent upon delivery to the Sponsor, the Trust’s transfer or similar agent or other Person designated by the Sponsor of a duly executed instrument of transfer, together with a Share certificate if one is outstanding, and such evidence of the genuineness of each such execution and authorization and of such other matters as may be required by the Sponsor. Upon such delivery, and subject to any further requirements specified by the Sponsor or contained in the By-Laws, if any, the transfer shall be recorded on the books of the Trust. Until a transfer is so recorded, the Shareholder of record of Shares shall be deemed to be the holder of such Shares for all purposes hereunder.
Section 2.04. Investments in the Trust. Investments in the Trust may be accepted by the Trust from such Persons, at such times and on such terms as the Sponsor from time to time may authorize. Each investment shall be credited to the Shareholder’s account in the form of full and fractional Shares of the Trust at the net asset value per Share next determined after receipt of the investment; provided, however, that the Sponsor may, in its sole discretion, impose a sales charge, transaction fee or other charges upon investments or place such other restrictions on investments as the Sponsor, in its sole discretion, deems appropriate.
Section 2.05. Status of Shares and Limitation of Personal Liability. The ownership of the Trust Property and the right to conduct the business of the Trust described herein are vested exclusively in the Sponsor. The Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any Trust Property, rights or interests of the Trust, nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. Every Shareholder, by virtue of having purchased a Share, shall become a Shareholder of the Trust and shall be held to have expressly assented and agreed to be bound by the terms hereof and to have become a party hereto. The death, incapacity, dissolution, termination or bankruptcy of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust, the Sponsor or the Delaware Trustee, but entitles such representative only to the rights of such Shareholder under this Trust Agreement. Ownership of Shares shall not constitute the Shareholders as partners. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except as specified in this Trust Agreement or as specified by the Trust or the Sponsor when creating the Shares). No Shareholder shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation for profit incorporated under the Delaware General Corporation Law.
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Section 2.06. Designation and Rights of Shares. Shares of the Trust shall have the following rights and preferences:
(a) Voting. All Shares of the Trust entitled to vote on a matter shall vote without differentiation on a one vote per each Share (including fractional votes for fractional shares) basis, as set forth in Article IX herein.
(b) Equality. All the Shares shall represent an equal proportionate undivided interest in the assets of the Trust (subject to the liabilities of the Trust), and each Share shall be equal to each other Share.
(c) Fractions. Any fractional Share shall carry proportionately all the rights and obligations of a whole Share, including rights with respect to voting, receipt of dividends and distributions, redemption of Shares and termination of the Trust.
Section 2.07. Creations and Issuance of Creation Baskets.
(a) The following procedures, except to the extent otherwise provided in the Authorized Participant Agreement for each Authorized Participant, which may be amended from time to time in accordance with the provisions of such Authorized Participant Agreement (and any such amendment will not constitute an amendment of this Trust Agreement), apply to the creation and issuance of Creation Baskets. Subject to the limitations upon and requirements for issuance of Creation Baskets stated herein and in such procedures, the number of Creation Baskets which may be issued by the Trust is unlimited.
(i) On any Business Day, an Authorized Participant may submit a request to create one or more Creation Baskets (such request by an Authorized Participant, a “Purchase Order”) in the manner provided in the Authorized Participant Agreement. Purchase Orders will be processed only from Authorized Participants with respect to which an Authorized Participant Agreement is in full force and effect.
(ii) Any Purchase Order is subject to rejection by the Sponsor at its sole discretion as set forth in the Authorized Participant Agreement.
(b) After accepting an Authorized Participant’s Purchase Order, the Sponsor will issue and deliver Creation Baskets to fill an Authorized Participant’s Purchase Order in the manner provided in the Authorized Participant Agreement, but only if the Sponsor has received (A) the non-refundable transaction fee due for such Purchase Order, (B) an amount of carbon credits in each case equal to the net asset value per Share (“NAV”) of the Trust multiplied by the number of Shares to be created under the Purchase Order by the end of the next Business Day following the Purchase Order Date (as defined in the Authorized Participant Agreement). Upon issuing a Creation Basket pursuant to a Purchase Order of an Authorized Participant, the Transfer Agent will deposit the Creation Basket with DTC in accordance with DTC’s customary procedures, for credit to the account of the Authorized Participant that placed the Purchase Order.
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(c) The procedures set forth in this Section 2.07 may be changed from time-to-time at the sole discretion of the Sponsor.
Section 2.08. Redemption of Creation Baskets.
(a) The following procedures, except to the extent otherwise provided in the Authorized Participant Agreement for each Authorized Participant, which may be amended from time to time in accordance with the provisions of such Authorized Participant Agreement (and any such amendment will not constitute an amendment of this Trust Agreement), apply to the redemption of Creation Baskets.
(i) On any Business Day, an Authorized Participant may submit a request to redeem one or more Creation Baskets standing to the credit of the Authorized Participant on the records of DTC (such request, a “Redemption Order”) in the manner provided in the Authorized Participant Agreement. Redemption Orders will be processed only from Authorized Participants with respect to which an Authorized Participant Agreement is in full force and effect.
(ii) Any Redemption Order is subject to rejection by the Sponsor at its sole discretion as set forth in the Authorized Participant Agreement.
(iii) After accepting an Authorized Participant’s Redemption Order, the Sponsor will deliver the redemption distribution to fill a Participant’s Redemption Order in the manner provided in the Authorized Participant Agreement, but only if the Sponsor has received (A) the non-refundable transaction fee due for such Redemption Order and (B) notice that the Sponsor’s account at DTC has been credited with all Shares comprising the Creation Baskets being tendered for redemption.
(b) The procedures set forth in this Section 2.08 may be changed from time-to-time at the sole discretion of the Sponsor.
ARTICLE III
DELAWARE TRUSTEE
Section 3.01. Term; Resignation.
(a) The Delaware Trustee shall be appointed by the Sponsor and shall serve for the duration of the Trust or until the earlier of (i) the effective date of the Delaware Trustee’s resignation, or (ii) the effective date of the removal of the Delaware Trustee by the Sponsor.
(b) The Delaware Trustee may resign at any time by giving sixty (60) days’ written notice to the Sponsor. The Delaware Trustee may be removed at any time by the Sponsor upon sixty (60) days’ written notice to the Delaware Trustee.
Section 3.02. Duties. Notwithstanding any other provision of this Trust Agreement to the contrary, the Delaware Trustee is appointed to serve as trustee of the Trust in the State of Delaware for the sole and limited purpose of satisfying the requirement of Section 3807(a) of the Delaware Act that the Trust have at least one trustee with a principal place of business in Delaware. The duty and authority to manage the business and affairs of the Trust is hereby vested in the Sponsor, which duty and authority the Sponsor may delegate to agents or managers as provided herein, all pursuant to Section 3806(b)(7) of the Delaware Act, and it is understood and agreed by the parties hereto that the Delaware Trustee shall have none of the duties or liabilities of the Sponsor or its delegates. The duties of the Delaware Trustee shall be limited to (i) accepting legal process served on the Trust in the State of Delaware, and (ii) the execution of any certificates required to be filed with the Secretary of State of the State of Delaware which the Delaware Trustee is required to execute under Section 3811 of the Delaware Act. The Delaware Trustee shall have no duty to know or inquire as to the performance or nonperformance of any provision of any agreement, instrument, or document. The Delaware Trustee shall provide prompt notice to the Sponsor of its performance of any of the foregoing. The Delaware Trustee shall not have any implied rights, duties (including fiduciary duties arising at law or in equity), obligations and liabilities with respect to the business and affairs of the Trust, the beneficial owners thereof or any other Person, pursuant to this Trust Agreement or any other document, and it is hereby understood and agreed by the other parties hereto that such duties are hereby eliminated and replaced with the express duties provided herein. The Sponsor shall reasonably keep the Delaware Trustee informed of any actions taken by the Sponsor with respect to the Trust that would reasonably be expected to affect the rights, obligations or liabilities of the Delaware Trustee hereunder or under the Delaware Trust Statute.
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Section 3.03. Compensation and Expenses of the Delaware Trustee. The Delaware Trustee (or any successor Delaware Trustee) shall be entitled to receive compensation from the Sponsor or from the Trust for its services in accordance with such schedules as shall have been separately agreed to from time to time in writing by the Delaware Trustee and the Sponsor or the Trust. Subject to prior written notification and approval of the Sponsor, which shall not be unreasonably withheld, the Delaware Trustee may consult with counsel (who may be counsel for the Sponsor or for the Delaware Trustee). The reasonable legal fees incurred in connection with such consultation shall be reimbursed to the Delaware Trustee pursuant to this Section 3.03, provided that no such fees shall be payable to the extent that they are incurred as a result of the Delaware Trustee’s gross negligence or willful misconduct.
Section 3.04. Liability of Delaware Trustee. The Delaware Trustee shall not be liable for the default or misconduct of the Trust, the Sponsor, any Administrator, the carbon credit Custodian, the Cash Custodian, any Shareholder or any other Person hereunder or under any Transaction Document or otherwise, nor shall the Trustees be liable for any delay in the performance or failure to perform its duties if such failure is a result of another party failing to perform their responsibilities, and the Trustees shall not be liable for any acts or omissions of the Sponsor, nor shall the Delaware Trustee be liable for supervising or monitoring the performance and the duties and obligations of the Sponsor or the Trust , and the Delaware Trustee may assume performance by the Trust, the Sponsor, any Administrator, the carbon credit Custodian, the Cash Custodian, any Shareholder or any other Person hereunder or under any Transaction Document. The Delaware Trustee shall not be liable for any acts taken or omissions made by it in good faith in accordance with the direction of the Sponsor. The Delaware Trustee shall not be liable under any circumstances, except for a breach of its obligations pursuant to this Trust Agreement or its own willful misconduct or gross negligence. In particular, but not by way of limitation:
(i) the Delaware Trustee shall not be liable for any error of judgment made in good faith, except to the extent such error of judgment constitutes gross negligence on its part;
(ii) no provision in this Trust Agreement shall require the Delaware Trustee to expend or risk its personal funds or otherwise incur any financial liability in the performance of its rights or powers hereunder, if the Delaware Trustee shall have reasonable grounds for believing that the payment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it;
(iii) no circumstances shall the Delaware Trustee be liable for any representation, warranty, covenant, agreement, or indebtedness of the Trust;
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(iv) the Delaware Trustee shall not be personally responsible for or in respect of the validity or sufficiency of this Trust Agreement or for the due execution hereof by the Sponsor or for the value of the Trust Property;
(v) the Delaware Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, entitlement order, approval or other paper or document;
(vi) the Delaware Trustee may conclusively rely on and shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper reasonably believed by it to be genuine and reasonably believed by it to be signed by the proper party or parties. The Delaware Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, the Delaware Trustee may for all purposes hereof rely on a certificate, signed by the Sponsor, as to such fact or matter, and such certificate shall constitute full protection to the Delaware Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon;
(vii) the Delaware Trustee shall be entitled to rely on and shall not be liable for any action taken or omitted to be taken by the Delaware Trustee in accordance with the advice of counsel or other professionals retained or consulted by the Delaware Trustee;
(viii) in the exercise or administration of the Trust hereunder, the Delaware Trustee at the expense of the Trust (a) may act directly or through agents, custodians, nominees, or attorneys pursuant to agreements entered into with any of them, and the Delaware Trustee shall not be liable for the default, conduct or misconduct of such agents, custodians, nominees or attorneys if such agents or attorneys shall have been selected by the Delaware Trustee in good faith; and (b) at the expense of the Trust may consult with counsel, accountants, experts and other skilled persons to be selected by it in good faith and employed by it, and it shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants, experts or other skilled persons, all of which action or inaction shall be deemed to be duly authorized;
(ix) except as expressly provided in this Section 3.04, in accepting and performing the Trust hereby created, the Delaware Trustee acts solely as Delaware Trustee hereunder and not in its individual capacity, and all persons having any claim against the Delaware Trustee by reason of the transactions contemplated by this Trust Agreement shall look only to the Trust’s property for payment or satisfaction thereof;
(x) in no event shall the Delaware Trustee be responsible or liable for special, indirect, punitive, incidental or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Delaware Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action;
(xi) the Delaware Trustee shall not be obligated to give any bond or other security for the performance of any of its duties hereunder;
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(xii) the permissive rights of the Delaware Trustee to act under this Trust shall not be construed as a duty and, with respect to such permissive rights, the Delaware Trustee shall not be answerable for other than its gross negligence or willful misconduct, and the Delaware Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of the Sponsor, pursuant to the provisions of this Trust Agreement, unless advanced necessary costs and the Delaware Trustee is offered security or indemnity (satisfactory to the Delaware Trustee in its sole and absolute discretion) against the costs, expenses and liabilities which may be incurred by it in compliance with such request or direction;
(xiii) in no event shall the Delaware Trustee be liable for forces beyond its control including strikes, work stoppages, acts of war or terrorism, civil or military disturbances, insurrection, revolution, epidemics or pandemics, nuclear or natural catastrophes or acts of God and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services;
(xiv) whenever the Delaware Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Trust Agreement or is unsure as to the application of any provision of this Trust Agreement or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Trust Agreement permits any determination by the Delaware Trustee or is silent or is incomplete as to the course of action that the Delaware Trustee is required to take with respect to a particular set of facts, the Delaware Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Sponsor, requesting instruction, and to the extent the Delaware Trustee acts in good faith in accordance with any written instruction of the Sponsor received, the Delaware Trustee shall not be liable on account of such action to any Person. If the Delaware Trustee shall not have received appropriate written instruction within ten days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action as it may deem to be in the best interests of the Shareholders, and shall have no liability to any Person for such action or inaction;
(xv) the Delaware Trustee shall not be required to take any action or refrain from taking action under this Trust Agreement if the Delaware Trustee has reasonably determined, or has been advised by counsel, that such action is likely to result in personal liability on the part of the Delaware Trustee, or is contrary to the terms hereof or is otherwise contrary to applicable law;
(xvi) the Delaware Trustee shall not be under any duty to succeed to, assume or otherwise perform any of the duties of the Sponsor, any Administrator, the carbon credit Custodian or the Cash Custodian, or to appoint a successor or replacement in the event of their resignation or removal, or to remove and replace the Sponsor, any Administrator, the carbon credit Custodian or the Cash Custodian, in the event of a default, breach or failure of performance on the part of such Persons with respect to its duties and obligations under the terms of the Transaction Documents;
(xvii) the Delaware Trustee shall have no duty or responsibility to cause the Trust to respond to, defend, participate in or otherwise act in connection with any regulatory, administrative, governmental, investigative or other proceeding or inquiry relating in any way to the Trust, its assets or the conduct of its business;
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(xviii) the Delaware Trustee shall not be deemed to have knowledge or notice of any fact or event unless a Responsible Officer of the Delaware Trustee has actual knowledge thereof or unless written notice of such fact or event is received by a Responsible Officer of the Delaware Trustee and such notice references the fact or event. Absent written notice in accordance with this Section, the Delaware Trustee may conclusively assume that no such fact or event has occurred. The Delaware Trustee shall have no duty to inquire into, investigate or take any action to determine whether any event (including any default, event of default or breach representation or warranty) has in fact occurred and shall have no duty to make any determination as to the materiality or effect of any fact, matter or event (including any default, event of default or breach of representation or warranty), or, to make any demand or claim for repurchase of any part of the Trust Property;
(xix) the Delaware Trustee shall have no responsibility for (1) preparing, filing or recording any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or lien granted to it or the Trust hereunder or under any Transaction Document, (2) any Trust licensing or qualifications to do business, (3) tax filings, (4) monitoring or enforcing the satisfaction of any risk retention requirements or (5) preparing or filing any Securities Exchange Commission filing for the Trust or to record this Trust Agreement or any Transaction Document; and
(xx) prior to taking or refraining from taking any action hereunder, the Delaware Trustee shall be entitled to request, receive, rely upon and act in accordance with, officer’s certificates or opinions of counsel provided at the expense of the party requesting the Delaware Trustee to take such action or inaction and shall incur no liability and shall be fully protected in acting or refraining from acting in accordance with such officer’s certificates and opinions of counsel.
Section 3.05. Indemnification. The Sponsor agrees, whether or not any of the transactions contemplated hereby shall be consummated, to assume liability for, and does hereby indemnify, protect, save and keep harmless, the Delaware Trustee (in its capacity as Delaware Trustee and individually) and its successors, assigns, legal representatives, officers, directors, shareholders, employees, agents and servants (the “Indemnified Parties”) from and against any and all liabilities, obligations, losses, damages, penalties, taxes (excluding any taxes payable by the Delaware Trustee on or measured by any compensation received by the Delaware Trustee for its services hereunder or any indemnity payments received by the Delaware Trustee pursuant to this Section), claims, actions, suits, costs, expenses or disbursements (including customary and documented legal fees and expenses and legal fees and expenses incurred pursuant to enforcement of said indemnification rights) of any kind and nature whatsoever (collectively, “Expenses”), which may be imposed on, incurred by or asserted against the Indemnified Parties in any way relating to or arising out of the formation, operation or termination of the Trust, the execution, delivery and performance of any other agreements to which the Trust is a party or the action or inaction of the Delaware Trustee hereunder or thereunder, except for Expenses resulting from the gross negligence or willful misconduct of any of the Indemnified Parties, as finally determined by any court of competent jurisdiction without possibility of appeal. To the extent not paid by the Sponsor within 30 days, the Trust shall be additionally liable for such amounts. The obligations of the Sponsor and the Trust to indemnify the Indemnified Parties as provided herein shall survive the termination of this Trust Agreement.
Section 3.06. Successor Delaware Trustee. Upon the resignation or removal of the Delaware Trustee, the Sponsor shall appoint a successor Delaware Trustee by delivering a written instrument to the outgoing Delaware Trustee. Any successor Delaware Trustee must satisfy the requirements of Section 3807 of the Delaware Act. Any resignation or removal of the Delaware Trustee and appointment of a successor Delaware Trustee shall not become effective until a written acceptance of appointment is delivered by the successor Delaware Trustee to the outgoing Delaware Trustee and the Sponsor and any fees and expenses due to the outgoing Delaware Trustee are paid or waived by the outgoing Delaware Trustee. Following compliance with the preceding sentence, the successor shall become fully vested with the rights, powers, duties and obligations of the outgoing Delaware Trustee under this Trust Agreement, with like effect as if originally named as Delaware Trustee, and the outgoing Delaware Trustee shall be discharged of its duties and obligations herein. If no successor Delaware Trustee shall have been appointed and shall have accepted such appointment within sixty (60) days after the giving of such notice of resignation or removal, the Delaware Trustee may petition any court of competent jurisdiction for the appointment of a successor Delaware Trustee.
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Section 3.07. Merger or Consolidation of Delaware Trustee.
(a) Any entity (i) into which the Delaware Trustee may be merged or consolidated, (ii) that may result from any merger, conversion or consolidation to which the Delaware Trustee shall be a party, or (iii) that may succeed to all or substantially all of the corporate trust business of the Delaware Trustee, shall be the successor of the Delaware Trustee hereunder, provided such entity shall be eligible pursuant to the Delaware Act, without the execution or filing of any instrument or any further act on the part of any of the parties hereto.
(b) Upon the happening of any of the events described in Section 3.06 or 3.07(a) with respect to the Delaware Trustee, the successor Delaware Trustee shall, to the extent required by Delaware law, cause an amendment to the Trust’s certificate of trust to be filed with the Secretary of State of the State of Delaware, in accordance with the provisions of Section 3810 of the Delaware Act, indicating the change with respect to such Delaware Trustee’s identity.
ARTICLE IV
THE SPONSOR
Section 4.01. Management of the Trust. Pursuant to Sections 3806(a) and 3806(b)(7) of the Delaware Act, the Trust shall be managed by the Sponsor and the conduct of the Trust’s business shall be controlled and conducted solely by the Sponsor in its sole discretion in accordance with this Trust Agreement. Any determination as to what is in the interests of the Trust made by the Sponsor in good faith shall be conclusive. In construing the provisions of this Trust Agreement, the presumption shall be in favor of a grant of power to the Sponsor except as limited, restricted or prohibited by the express provisions of this Trust Agreement (e.g., see Section 1.04). The enumeration of any specific power in this Trust Agreement shall not be construed as limiting the aforesaid or any other power.
Section 4.02. Authority of Sponsor. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Trust Agreement, and except as limited, restricted or prohibited by the express provisions of this Trust Agreement (e.g., see Sections 1.02 and 1.04) or the Delaware Act, the Sponsor shall have and may exercise on behalf of the Trust, all powers and rights the Sponsor, in its sole discretion, deems necessary, proper, convenient or advisable to effectuate and carry out the purposes, activities and objectives of the Trust, which shall include, without limitation, the following:
(a) To enter into, execute, deliver and maintain, and to cause the Trust to perform its obligations under, contracts, agreements (including, but not limited to, insurance agreements), the Transaction Documents, and any or all other documents and instruments, and to do and perform all such things as may be in furtherance of Trust purposes or necessary or appropriate for the offer and sale of the Shares and the conduct of Trust activities and administration, and the activities and administration of the Trust, including, but not limited to contracts with third parties for services; provided, however, that such services may be performed by an Affiliate or Affiliates of the Sponsor so long as the Sponsor has made a good faith determination that the terms and conditions of the agreement pursuant to which such Affiliate is to perform services for the Trust are commercially reasonable;
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(b) To establish, maintain, deposit into, and/or otherwise draw upon accounts on behalf of the Trust with appropriate custodial, banking or other institutions, and execute and/or accept any instrument or agreement incidental to the Trust’s business and in furtherance of its purposes, any such instrument or agreement so executed or accepted by the Sponsor in the Sponsor’s name shall be deemed executed and accepted on behalf of the Trust, as applicable, by the Sponsor;
(c) To deposit, withdraw, pay, retain and distribute carbon credits and Trust Property, or any portion thereof, in any manner consistent with the provisions of this Trust Agreement;
(d) To place carbon credits for the Trust with exchanges and/or OTC market participants directly or through any electronic or other trading system;
(e) To supervise the preparation and filing of the Registration Statement and the Trust’s prospectus (the “Prospectus”) and to execute the Registration Statement on behalf of the Trust;
(f) To pay or authorize the payment of distributions to the Shareholders and pay or authorize the payment of the expenses of the Trust;
(g) To acquire (solely pursuant to Section 2.07), hold, distribute or dispose of Trust Property, and to do any and all acts and things for the maintenance, preservation, and protection of Trust Property;
(h) To exercise powers and right of subscription or otherwise with respect to the ownership of Trust Property;
(i) To prepare and file an application to enable the Shares to be traded on the Exchange and to take any other action and execute and deliver any documents that may be necessary to effectuate such trading;
(j) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or against the Trust, or any matter in controversy, including but not limited to claims for taxes;
(k) To contract with any Person(s) appointing such Person(s), including any Affiliate, to provide services to the Trust, including without limitation, accountants, administrators, auditors, exchanges and over-the-counter (“OTC”) market participants, index providers, transfer agents, shareholder servicing agents, marketing agents or other agents for the Trust; and
(l) To enter into the Sponsor Agreement on terms and conditions acceptable to the Sponsor.
The agreement pursuant to which an Affiliate is to perform services for the Trust shall be terminable by the Trust without penalty upon discovery of acts of fraud or willful malfeasance of the Affiliate in performing its duties thereunder.
Section 4.03. Obligations of Sponsor. In addition to the obligations expressly provided by the Delaware Act or this Trust Agreement, the Sponsor shall:
(a) Execute, file, record and/or publish all certificates, statements and other documents and do any and all other things as may be appropriate for the formation, qualification and operation of the Trust and for the conduct of its business in all appropriate jurisdictions;
(b) Retain independent public accountants to audit the accounts of the Trust;
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(c) Employ attorneys to represent the Trust;
(d) Select the Trust’s Delaware Trustee, administrator, transfer agent, custodian(s), exchange counterparties and OTC market participant counterparties, index provider, marketing agent(s); insurer(s) and any other service provider(s) and cause the Trust to enter into contracts with such service provider(s);
(e) Negotiate and enter into insurance agreements to secure and maintain the insurance coverage to the extent deemed appropriate by the Sponsor;
(f) Develop a marketing plan for the Trust on an ongoing basis and prepare marketing materials regarding the Trust;
(g) Maintain the Trust’s website;
(h) Enter into an Authorized Participant Agreement with each Authorized Participant and discharge the duties and responsibilities of the Trust and the Sponsor thereunder;
(i) Receive directly or through its delegates from Authorized Participants and process or cause its delegates to process properly submitted Purchase Orders, as described in Section 2.07 herein and in the Authorized Participant Agreement;
(j) In connection with Purchase Orders, receive directly or through its delegates the number of carbon credits in an amount equal to the net asset value of a Creation Basket from Authorized Participants;
(k) In connection with Purchase Orders, after accepting an Authorized Participant’s Purchase Order and receiving carbon credits, as applicable, in an amount equal to the NAV of the Creation Basket(s), the Sponsor or its delegate will direct the Transfer Agent to credit the Creation Baskets to fill the Participant’s Purchase Order within one Business Day immediately following the Purchase Order Date;
(l) Receive directly or through its delegates from Authorized Participants and process or cause its delegates to process properly submitted Redemption Orders, as described in Section 2.08 herein and in the Authorized Participant Agreement;
(m) In connection with Redemption Orders, after receiving the Redemption Order specifying the number of Creation Baskets that the Authorized Participant wishes to redeem and after the Trust’s DTC account has been credited with the Creation Baskets to be redeemed, the Sponsor or its delegates transfer to the Redeeming Authorized Participant: an amount of carbon credits, in each case equal to the NAV of the Trust multiplied by the number of Shares to be Redeemed under the Redemption Order;
(n) Assist in the preparation and filing of reports and proxy statements (if any) to the Shareholders, the periodic updating of the Registration Statement and Prospectus and other reports and documents for the Trust required to be filed by the Trust with the SEC and other governmental bodies;
(o) Use its best efforts to maintain the status of the Trust as a grantor trust for U.S. federal income tax purposes;
(p) Monitor all fees charged to the Trust, and the services rendered by the service providers to the Trust, to determine whether the fees paid by, and the services rendered to, the Trust are at competitive rates and are the best price and services available under the circumstances, and if necessary, renegotiate the fee structure to obtain such rates and services for the Trust;
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(q) Perform such other services as the Sponsor believes the Trust may from time to time require; and
(r) In general, to carry out any other business in connection with or incidental to any of the foregoing powers, to do everything necessary, suitable or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power herein set forth, either alone or in association with others, and to do every other act or thing incidental or appurtenant or growing out of or connected with the aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed as both objects and powers, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Sponsor. Any action by the Sponsor hereunder shall be deemed an action on behalf of the Trust, and not an action in an individual capacity.
The Sponsor shall be entitled to delegate its obligations under this Trust Agreement and applicable law to third parties, including any Affiliate, and shall not be liable for the actions of such third party to the extent the selection of such third party was made with reasonable care or, as applicable, the selection of such Affiliate was made in accordance with Section 4.02(a).
Notwithstanding any other provision of this Trust Agreement to the contrary, neither the Trust, Trustee (on behalf of the Trust), or Sponsor (on behalf of the Trust) shall (i) acquire any Trust Property, except in accordance with Section 2.07 or (ii) sell, transfer or otherwise dispose of any Trust Property, except (a) in accordance with Section 2.08, (b) to acquire cash to pay expenses of the Trust, or (c) in accordance with Section 8.01(c).
Section 4.04. Compensation of the Sponsor. The Sponsor shall be entitled to compensation for its services as Sponsor of the Trust as set forth in the Sponsor Agreement. The Delaware Trustee shall have no liability or responsibility for amounts paid to the Sponsor pursuant to this Section 4.04. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of its fee payable under this Section 4.04. The Sponsor is under no obligation to waive its fees hereunder, and any such waiver shall create no obligation to waive fees during any period not covered by the applicable waiver. Any fee waiver by the Sponsor shall not operate to reduce the Sponsor’s obligations hereunder.
Section 4.05. Liability of Sponsor and Indemnification.
(a) The Sponsor shall not be under any liability to the Trust, the Delaware Trustee or any Shareholder for any action taken or for refraining from the taking of any action in good faith pursuant to this Trust Agreement, or for errors in judgment or for depreciation or loss incurred by reason of the sale of any carbon credits or other assets held in trust hereunder; provided, however, that this provision shall not protect the Sponsor against any liability to which it would otherwise be subject by reason of its own gross negligence, bad faith, or willful misconduct. The Sponsor may rely in good faith on any paper, order, notice, list, affidavit, receipt, evaluation, opinion, endorsement, assignment, draft or any other document of any kind prima facie properly executed and submitted to it by the Delaware Trustee, the Delaware Trustee’s counsel or by any other Person for any matters arising hereunder. The Sponsor shall in no event be deemed to have assumed or incurred any liability, duty, or obligation to any Shareholder or to the Delaware Trustee other than as expressly provided for herein. The Trust shall not incur the cost of that portion of any insurance which insures any party against any liability, the indemnification of which is herein prohibited.
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(b) Unless otherwise expressly provided herein:
(i) whenever a conflict of interest exists or arises between the Sponsor or any of its Affiliates, on the one hand, and the Trust, on the other hand; or
(ii) whenever this Trust Agreement or any other agreement contemplated herein or therein provides that the Sponsor shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust, the Sponsor shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Sponsor, the resolution, action or terms so made, taken or provided by the Sponsor shall not constitute a breach of this Trust Agreement or any other agreement contemplated herein or of any duty or obligation of the Sponsor at law or in equity or otherwise.
(c) The Sponsor and its shareholders, members, directors, officers, employees, Affiliates and subsidiaries (each a “Sponsor Indemnified Party”) shall be indemnified by the Trust and held harmless against any loss, liability or expense incurred hereunder without gross negligence, bad faith, or willful misconduct on the part of such Sponsor Indemnified Party arising out of or in connection with the performance of its obligations hereunder or any actions taken in accordance with the provisions of this Trust Agreement. Any amounts payable to a Sponsor Indemnified Party under this Section 4.05 may be payable in advance or shall be secured by a lien on the Trust. The Sponsor shall not be under any obligation to appear in, prosecute or defend any legal action which in its opinion may involve it in any expense or liability; provided, however, that the Sponsor may, in its discretion, undertake any action which it may deem necessary or desirable in respect of this Trust Agreement and the rights and duties of the parties hereto and the interests of the Shareholders and, in such event, the legal expenses and costs of any such action shall be expenses and costs of the Trust and the Sponsor shall be entitled to be reimbursed therefor by the Trust. The obligations of the Trust to indemnify the Sponsor Indemnified Parties as provided herein shall survive the termination of this Trust Agreement.
ARTICLE V
BOOKS OF ACCOUNT AND CERTIFICATE OF TRUST
Section 5.01. Books of Account. Proper books of account for the Trust shall be kept and shall be audited annually by an independent certified public accounting firm selected by the Sponsor in its sole discretion, and there shall be entered therein all transactions, matters and things relating to the Trust’s business as are required by the Securities Act of 1933, as amended, and all other applicable rules and regulations, and as are usually entered into books of account kept by Persons engaged in a business of like character. The books of account shall be kept at the principal office of the Trust, the Administrator or any other service provider engaged by the Sponsor to perform such service.
Section 5.02. Certificate of Trust. Except as otherwise provided in the Delaware Act or this Trust Agreement, the Sponsor shall not be required to mail a copy of any Certificate of Trust filed with the Secretary of State of the State of Delaware to each Shareholder; however, such certificates shall be maintained at the principal office of the Trust and shall be available for inspection and copying by the Shareholders in accordance with this Trust Agreement.
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ARTICLE VI
AMENDMENT OF TRUST AGREEMENT
Except as specifically provided herein, the Sponsor, in its sole discretion and without Shareholder consent, may amend or otherwise supplement this Trust Agreement by making an amendment, a Trust Agreement supplemental hereto, or an amended and restated declaration of trust and trust agreement. Any such restatement, amendment and/or supplement hereto shall be effective on such date as designated by Sponsor in its sole discretion. Any amendment to the Trust Agreement that affects the duties, liabilities, rights or protections of the Delaware Trustee shall require the Delaware Trustee’s prior written consent, which it may grant or withhold in its sole discretion.
Prior to the execution of any amendment to this Trust Agreement, the Delaware Trustee shall be entitled to receive and rely upon an opinion of counsel stating that the execution of such amendment is authorized or permitted by this Trust Agreement and an officer’s certificate from the Sponsor that all conditions precedent to the execution of such amendment have been met or otherwise satisfied. The Delaware Trustee may, but shall not be obligated to, enter into any such amendment which affects the Delaware Trustee’s own duties, liabilities, rights or protections under this Trust Agreement or otherwise.
ARTICLE VII
TERM
The term for which the Trust shall exist shall be perpetual, unless terminated pursuant to the provisions of Article VIII hereof or as otherwise provided by law.
ARTICLE VIII
TERMINATION/REORGANIZATION
Section 8.01. Termination of the Trust.
Subject to the notice requirements in this Section 8.01, the Trust may dissolve, windup and thereafter terminate upon the following:
(a) at any time and for any reason by the Sponsor in its sole discretion;
(b) at any time upon the occurrence of the following events:
(i) the Shares are delisted from the NYSE Arca and are not approved for listing on another national securities exchange within five Business Days of their delisting;
(ii) 180 days have elapsed since the Delaware Trustee notified the Sponsor of the Delaware Trustee’s election to resign or since the Sponsor removed the Delaware Trustee, and a successor Delaware Trustee has not been appointed and accepted its appointment;
(iii) the SEC determines that the Trust is an investment company under the Investment Company Act of 1940, as amended, and the Sponsor has made the determination that termination of the Trust is advisable;
(iv) the Commodity Futures Trading Commission determines that the Trust is a commodity pool under the Commodity Exchange Act of 1936, and the Sponsor has made the determination that termination of the Trust is advisable;
(v) the Trust is determined to be a “money service business” under the regulations promulgated by FinCEN under the authority of the US Bank Secrecy Act and is required to comply with certain FinCEN regulations thereunder or is determined to be a “money transmitter” (or equivalent designation) under the laws of any state in which the Trust operates and is required to seek licensing or otherwise comply with state licensing requirements, and the Sponsor has made the determination that termination of the Trust is advisable;
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(vi) a United States regulator requires the Trust to shut down or forces the Trust to liquidate its carbon credits;
(vii) any ongoing event exists that either prevents the Trust from making or makes impractical the Trust’s reasonable efforts to make a fair determination of the price of carbon credits for purposes of determining the net asset value of the Trust;
(viii) the Sponsor determines that the aggregate net assets of the Trust in relation to the operating expenses of the Trust make it unreasonable or imprudent to continue the business of the Trust;
(ix) the Trust fails to qualify for treatment, or ceases to be treated, as a “grantor trust” under the Code or any comparable provision of the laws of any State or other jurisdiction where that treatment is sought, and the Sponsor determines that, because of that tax treatment or change in tax treatment, termination of the Trust is advisable;
(x) 60 days have elapsed since DTC or another depository has ceased to act as depository with respect to the Shares, and the Sponsor has not identified another depository that is willing to act in such capacity;
(xi) the Sponsor is conclusively deemed to have resigned effective immediately as a result of the Sponsor being adjudged bankrupt or insolvent, or a receiver of the Sponsor or of its property being appointed, or a trustee or liquidator or any public officer taking charge or control of the Sponsor or of its property or affairs for the purpose of rehabilitation, conservation or liquidation and a successor sponsor has not been appointed; or
(xii) the Sponsor elects to terminate the Trust after the Delaware Trustee, Administrator or the Custodian (or any successor Delaware Trustee, administrator or custodian) resigns or otherwise ceases to be the Delaware Trustee, administrator or custodian of the Trust, as applicable, and no replacement Delaware Trustee, administrator and/or custodian acceptable to the Sponsor is engaged.
(c)Written notice of termination with respect to the Trust, specifying the anticipated date of termination and the anticipated period during which the assets of the Trust will be liquidated, generally shall be given by the Sponsor to Shareholders of the Trust at least thirty (30) days prior to termination of the Trust. Within a reasonable period of time after such termination the Sponsor shall, subject to any applicable provisions of law, sell all of the carbon credits not already distributed to Authorized Participants redeeming Creation Baskets, as provided herein, if any, in such a manner so as to effectuate orderly sales and a minimal market impact, and may thereafter hold the net proceeds of any such sale, together with any other cash then held by it under this Trust Agreement, uninvested and without liability for interest, for the pro rata benefit of the beneficial owners of Shares that had not theretofore been redeemed. The Sponsor shall not be liable for or responsible in any way for depreciation or loss incurred by reason of any sale or sales made in accordance with the provisions of this Section 8.01. The Sponsor may suspend its sales of carbon credits upon the occurrence of unusual or unforeseen circumstances, including, but not limited to, a suspension in trading of carbon credits or similar market event. Upon receipt of proceeds from the sale of the last carbon credit held hereunder, the Sponsor shall:
(i) pay to itself individually from the Trust an amount equal to the sum of (1) any compensation due it for extraordinary or other services, (2) any advances made but not yet repaid and (3) reimbursement of any other disbursements as provided herein;
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(ii) deduct from the Trust any amounts which it, in its sole discretion, shall deem necessary or appropriate to pay on behalf of the Trust all outstanding fees, expenses and indemnities of the Delaware Trustee then due and owing, any applicable taxes or other governmental charges that may be payable by the Trust and any other contingent or future liabilities of the Trust;
(iii) distribute each Shareholder’s interest in the remaining assets of the Trust; and
(iv) disseminate to each Shareholder a final statement as of the date of the computation of the amount distributable to the Shareholders.
(c) Upon termination of the Trust, following completion of winding up of its business under the Delaware Act by the Sponsor, the Delaware Trustee, upon written directions and expense of the Sponsor, shall cause a certificate of cancellation of the Trust’s Certificate of Trust to be filed in accordance with the Delaware Act.
Section 8.02. Merger and Consolidation. The Sponsor may cause (i) the Trust to be merged into or consolidated with, converted to or to sell all or substantially all of its assets to, another trust or entity; (ii) the Shares of the Trust to be converted into beneficial interests in another statutory trust (or series thereof); or (iii) the Shares of the Trust to be exchanged for shares in another trust or company under or pursuant to any state or federal statute to the extent permitted by law.
For the avoidance of doubt, the Sponsor, with written notice to the Shareholders, may approve and effect any of the transactions contemplated under (i) — (iii) above without any vote or other action of the Shareholders.
Section 8.03. Dissolution of Sponsor Not to Terminate Trust. The dissolution of the Sponsor, or its ceasing to exist as a legal entity from, or for, any cause, shall not operate to terminate this Trust Agreement insofar as the duties and obligations of the Delaware Trustee are concerned.
ARTICLE IX
SHAREHOLDERS’ VOTING POWERS AND MEETINGS
Section 9.01. Voting Powers. Except as required under applicable Federal law or under the rules or regulations of an Exchange, Shareholders shall have no voting rights hereunder (including with respect to mergers, consolidations or conversions of the Trust or transfers to or domestication in any jurisdiction by the Trust or any other matters that under the Delaware Act default voting rights are provided to holders of beneficial interests). The Shareholders shall have the right to vote on other matters only as the Sponsor may consider desirable and so authorize in its sole discretion. To the extent that federal or Delaware law is amended, modified or interpreted by rule, regulation, order, or no-action letter to (on a mandatory basis) expand, eliminate or limit Shareholders’ right to vote on any specific matter, the Shareholders’ right to vote shall be deemed to be amended, modified or interpreted in accordance therewith without further approval by the Sponsor or the Shareholders. Nothing set forth in this Trust Agreement shall be construed so as to constitute the Shareholders from time to time as partners or members of an association; nor shall any Shareholder ever be liable to any third person by reason of any action taken by the parties to this Trust Agreement, or for any other cause whatsoever. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. Shares may be voted in person or by proxy or in any manner determined by the Sponsor.
Section 9.02. Voting Power and Meetings. Meetings of the Shareholders may be called by the Sponsor for such purposes as may be prescribed by law or by this Trust Agreement.
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Section 9.03. Place of Meetings. A meeting of Shareholders shall be held at any place designated by the Sponsor or an officer of the Trust.
Section 9.04. Notice of Shareholders’ Meeting. All notices of meetings of Shareholders shall be sent or otherwise given to each Shareholder of record not less than seven nor more than one hundred and twenty days before the date of the meeting in the manner determined by the Sponsor. The notice shall specify: (a) the place, date and hour of the meeting; and (b) the general nature of the business to be transacted.
Section 9.05. Adjourned Meeting; Notice. Any Shareholders’ meeting, whether or not a quorum is present, may be adjourned from time to time by the Sponsor or by the vote of a majority of the Shares of the Trust, as the case may be, represented at that meeting, either in person or by proxy. When any meeting of Shareholders is adjourned to another time or place, notice need not be given of the adjourned meeting at which the adjournment is taken, unless a new record date of the adjourned meeting is fixed or unless the adjournment is for more than sixty days from the date set for the original meeting, in which case the Sponsor shall set a new record date. Notice of any such adjourned meeting shall be given to each Shareholder of record entitled to vote at the adjourned meeting. At any adjourned meeting, the Trust may transact any business which might have been transacted at the original meeting.
Section 9.06. Voting Procedure. The Trust shall be authorized to solicit, and a Shareholder shall be entitled to submit a proxy ballot containing the voting instructions of such Shareholder, in person, or by U.S. mail, overnight mail, express mail, telephone, electronic mail, telefacsimile, telegraph, internet or other electronic media, provided however, that the Sponsor or an officer of the Trust may limit or delineate the types of media and methods by which a Shareholder may submit voting instructions. On any matter any Shareholder may vote part of the Shares in favor of the proposal and refrain from voting the remaining Shares or vote them against the proposal, but if the Shareholder fails to specify the number of Shares which the Shareholder is voting affirmatively, it will be conclusively presumed that the Shareholder’s approving vote is with respect to the total Shares that the Shareholder is entitled to vote on such proposal.
Section 9.07. Quorum and Required Vote. Except when a larger quorum is required by applicable law or by this Trust Agreement, the presence (in person or by ballot) of thirty-three and one-third percent (33 1/3%) of the Shares entitled to vote shall constitute a quorum at a Shareholders’ meeting. Any meeting of Shareholders may be adjourned consistent with the provisions of Section 9.05 above, whether or not a quorum is present. When a quorum is present at any meeting, a majority of the Shares represented at the meeting shall decide any questions except when a different vote is required by any provision of this Trust Agreement or by applicable law.
Section 9.08. Action by Written Consent. Any action taken by Shareholders may be taken without a meeting if Shareholders holding a majority of the Shares entitled to vote on the matter (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement or federal law) or holding a majority (or such larger proportion as aforesaid) of the entitled to vote separately on the matter consent to the action in writing or by other electronic means (such as via telephone or the internet) and such written consent or a record of such electronic consent is filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
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Section 9.09. Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof, the Sponsor may from time to time fix a date, which shall be not more than one-hundred and twenty days before the date of any meeting of Shareholders, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof, and in such case only Shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date. For the purpose of determining the Shareholders who are entitled to receive payment of any dividend or of any other distribution, or whenever for any reason there is a split, reverse split or other change in the outstanding Shares, or whenever the Sponsor shall find it necessary or convenient in respect of any matter, the Sponsor may from time to time fix a date, which shall be before the date for the payment of such dividend or such other payment, as the record date for determining the Shareholders having the right to receive such dividend or distribution. Without fixing a record date the Sponsor may for voting and/or distribution purposes close the register or transfer books for all or any part of the period between a record date and a meeting of Shareholders or the payment of a distribution.
Section 9.10. Waiver of Notice by Consent of Absent Shareholders. Any Shareholder may waive notice, which waiver may be submitted by U.S. mail, overnight mail, express mail, telephone, electronic mail, telefacsimile, telegraph, internet or other electronic media. The waiver of notice need not specify either the business to be transacted or the purpose of any meeting of Shareholders. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the beginning of the meeting.
Section 9.11. Proxies. Every person entitled to vote on any matter shall have the right to do so either in person or by one or more agents authorized by a written or electronic proxy authorized by the person and filed with the Sponsor. A proxy shall be deemed authorized if the Shareholder’s name is placed on the proxy (whether by manual signature, typewriting, telephonic or internet transmission or otherwise) by the Shareholder or the Shareholder’s attorney-in-fact. A validly authorized proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it before the vote pursuant to that proxy by a writing delivered to the Trust stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing that proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Trust before the vote pursuant to that proxy is counted; provided however, that no proxy shall be valid after the expiration of eleven months from the date of the proxy unless otherwise provided in the proxy.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.01. Certain Matters Relating to Shareholders.
(a) By the purchase and acceptance or other lawful delivery and acceptance of Shares, each Shareholder shall be deemed to be a beneficiary of the Trust created by this Trust Agreement and vested with beneficial undivided interest in the Trust to the extent of the Shares owned beneficially by such Shareholder, subject to the terms and conditions of this Trust Agreement. Upon issuance as provided herein, Shares shall be fully paid and non-assessable.
(b) The death or incapacity of any Shareholder shall not operate to terminate this Trust Agreement or the Trust, nor entitle such Shareholder’s legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of the Trust, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. Each Shareholder expressly waives any right such Shareholder may have under any rule of law, or the provisions of any statute, or otherwise, to require the Trust, Sponsor or the Delaware Trustee at any time to account, in any manner other than as expressly provided in this Trust Agreement, in respect of the carbon credits or moneys from time to time received, held and applied by the Sponsor hereunder.
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(c) Except as otherwise provided under Delaware law, the Shareholders shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the general corporation law of Delaware and no Shareholder shall be liable for claims against, or debts of the Trust in excess of his capital contribution and his share of the Trust property and undistributed profits, except in the event that the liability is founded upon misstatements or omissions contained in such Shareholder’s Authorized Participant Agreement delivered in connection with his purchase of Shares. In addition, and subject to the exceptions set forth in the immediately preceding sentence, the Trust shall not make a claim against a Shareholder with respect to amounts distributed to such Shareholder or amounts received by such Shareholder upon redemption unless, under Delaware law, such Shareholder is liable to repay such amount.
(d) Every written note, bond, contract, instrument, certificate or undertaking made or issued by the Sponsor shall give notice to the effect that the same was executed or made by or on behalf of the Trust and that the obligations of such instrument are not binding upon any Shareholder individually but are binding only upon the assets and property of the Trust, and no resort shall be had to the Shareholders’ personal property for satisfaction of any obligation or claim thereunder, and appropriate references may be made to this Trust Agreement and may contain any further recital which the Sponsor deems appropriate, but the omission thereof shall not operate to bind any Shareholder individually or otherwise invalidate any such note, bond, contract, instrument, certificate or undertaking.
(e) It is the intent of the parties that the execution, delivery and performance of the transactions contemplated by this Trust Agreement will not result in the Delaware Trustee being required to obtain a license or make a registration under any federal or state law including rules pertaining to virtual currencies under Title 23, Part 200 of New York Codes, Rules and Regulations, the U.S. Commodity Exchange Act or any federal or state law regulating, money transmitters, money services business, providers of prepaid or stored value or similar entities, or virtual currency business.
Section 10.02. Delaware Law to Govern. The validity and construction of this Trust Agreement and all amendments hereto shall be governed by the laws of the State of Delaware, and the rights of all parties hereto and the effect of every provision hereof shall be subject to and construed according to the laws of the State of Delaware without regard to the conflict of laws provisions thereof; provided, however, that causes of action for violations of U.S. federal securities laws shall not be limited by this Section 10.02, and provided further, that the parties hereto intend that the provisions hereof shall control over any contrary or limiting statutory or common law of the State of Delaware (other than the Delaware Act) and that, to the maximum extent permitted by applicable law, there shall not be applicable to the Trust, the Delaware Trustee, the Sponsor, the Shareholders or this Trust Agreement any provision of the laws (statutory or common) of the State of Delaware (other than the Delaware Act) pertaining to trusts which relate to or regulate in a manner inconsistent with the terms hereof: (a) the filing with any court or governmental body or agency of trustee accounts or schedules of trustee fees and charges, (b) affirmative requirements to post bonds for trustees, officers, agents, or employees of a trust, (c) the necessity for obtaining court or other governmental approval concerning the acquisition, holding or disposition of real or personal property, (d) fees or other sums payable to trustees, officers, agents or employees of a trust, (e) the allocation of receipts and expenditures to income or principal, (f) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding of trust assets, or (g) the establishment of fiduciary or other standards or responsibilities or limitations on the acts or powers of trustees or managers that are inconsistent with the limitations on liability or authorities and powers of the Delaware Trustee or the Sponsor set forth or referenced in this Trust Agreement. Section 3540 of Title 12 of the Delaware Act shall not apply to the Trust. The Trust shall be of the type commonly called a “statutory trust,” and without limiting the provisions hereof, the Trust may exercise all powers that are ordinarily exercised by such a statutory trust under Delaware law. The Trust specifically reserves the right to exercise any of the powers or privileges afforded to statutory trusts and the absence of a specific reference herein to any such power, privilege or action shall not imply that the Trust may not exercise such power or privilege or take such actions.
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Section 10.03. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Trust Agreement are severable, and if the Sponsor shall determine, with the advice of counsel, that any of such provisions is in conflict with the Code, the Delaware Act or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Trust Agreement; provided, however, that such determination shall not affect any of the remaining provisions of this Trust Agreement or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of this Trust Agreement shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Trust Agreement in any jurisdiction.
Section 10.04. Notices.
All notices and other communications under this agreement shall be in writing in English, signed by the party giving it, and shall be deemed given, if to the Delaware Trustee or the Sponsor, when delivered personally, on the next Business Day after delivery to a recognized overnight courier or mailed first class (postage prepaid) or when sent by facsimile to the parties (which facsimile copy shall be followed, in the case of notices or other communications sent to the Delaware Trustee or the Sponsor, by delivery of the original) at the following addresses (or to such other address as a party may have specified by notice given to the other parties pursuant to this provision):
| If to the Sponsor, to: | COtwo Advisors LLC | |||
| Attn: Ronald Gutstein | ||||
| 140 Elm Street, Suite 6 | ||||
| New Canaan, CT 06840 | ||||
| If to the Delaware Trustee, to: | Wilmington Trust, National Association | |||
|
Attn: David Young Rodney Square North | ||||
| 1100 North Market Street | ||||
| Wilmington, DE 19890 | ||||
Any notice to be given to a Shareholder shall be duly given if mailed or delivered to DTC Participants designated by DTC for delivery to Shareholders.
Section 10.05. Headings. The headings used in this Trust Agreement have been inserted for convenience and shall not modify, define, limit or expand the express provisions of this Trust Agreement.
Section 10.06. Counterparts. This Trust Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Each party agrees that this Trust Agreement and any other documents to be delivered in connection herewith may be electronically signed, and that any electronic signatures appearing on this Trust Agreement or such other documents shall be deemed the same as handwritten signatures for the purposes of validity, enforceability, and admissibility.
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Section 10.07. Patriot Act. In order to comply with laws, rules, regulations and executive orders in effect from time to time applicable to banking institutions, including those relating to the funding of terrorist activities and money laundering, including the Customer Identification Program requirements established under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Title III of Pub. L. 107 56 (signed into law October 26, 2001) and its implementing regulations (collectively, USA PATRIOT Act), the Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Requirements and such other laws, rules, regulations and executive orders in effect from time to time applicable to banking institutions (“Applicable Law”), the Delaware Trustee is required to obtain, verify and record certain information relating to individuals and entities which establish or maintain a business relationship with the Delaware Trustee. Accordingly, the Sponsor shall cause to be provided to the Delaware Trustee, upon its reasonable request from time to time such identifying information and documentation as may be available to the Sponsor in order to enable the Delaware Trustee to comply with Applicable Law.
Pursuant to Applicable Law, the Delaware Trustee is required to obtain on or before closing, and from time to time thereafter, documentation to verify and record information that identifies each person who opens an account. For a non-individual person such as a business entity, a charity, a trust or other legal entity, the Delaware Trustee will ask for documentation to verify the entity’s formation and existence, its financial statements, licenses, tax identification documents, identification and authorization documents from individuals claiming authority to represent the entity and other relevant documentation and information (including beneficial owners of such entities). To the fullest extent permitted by Applicable Law, the Delaware Trustee may conclusively rely on, and shall be fully protected and indemnified in relying on, any such information received. Failure to provide such information may result in an inability of the Delaware Trustee to perform its obligations hereunder, which, at the sole option of the Delaware Trustee, may result in the Delaware Trustee’s resignation in accordance with the terms of Section 3.01 hereof.
Section 10.08. Entire Agreement. This Trust Agreement and the exhibits hereto set forth the entire agreement and understanding of the parties related to this transaction and supersedes all prior agreements and understandings, oral or written.
Section 10.09. Severability. In case any provision in this Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
Section 10.10. Direction. The Delaware Trustee is hereby directed to execute this Trust Agreement and the Sponsor confirms that all conditions precedent under the Initial Declaration have been satisfied.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Declaration of Trust and Trust Agreement to be duly executed and delivered as of November 27, 2023.
|
COTWO ADVISORS, LLC as Sponsor | ||
| By: |
/s/ Ronald Gutstein | |
| Title: | Chief Executive Officer | |
| Name: | Ronald Gutstein | |
|
WILMINGTON TRUST, NATIONAL ASSOCIATION as Delaware Trustee | ||
| By: |
/s/ David Young | |
| Title: | Vice President | |
| Name: | David Young | |
Exhibit 5.1
Potter Anderson & Corroon LLP 1313 N. Market Street, 6th Floor Wilmington, DE 19801-6108 302.984.6000 potteranderson.com |
 |
January 16, 2024
To each Addressee listed on
Schedule A attached hereto
Re: COtwo Advisors Physical European Carbon Allowance Trust
Ladies and Gentlemen:
We have acted as Delaware counsel to COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”) in connection with the matters set forth herein. This opinion is being delivered to you at your request. Capitalized terms used but not otherwise defined in this letter (including Exhibit 1 attached hereto and incorporated herein by this reference) shall have the meanings assigned thereto in the Trust Agreement (as defined in Exhibit 1).
For purposes of this letter, our review of documents has been limited to the review of originals or copies furnished to us of the documents listed on Exhibit 1, and we have not reviewed any documents other than the documents listed on Exhibit 1. In particular, we have not reviewed and express no opinion as to any document (other than the documents listed on Exhibit 1) that is referred to in, incorporated by reference into, or attached (as an exhibit, schedule, or otherwise) to any of the documents reviewed by us. The opinions in this letter relate only to the documents specified in such opinions, and not to any exhibit, schedule, or other attachment to, or any other document referred to in or incorporated by reference into, any of such documents. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions in this letter. We have conducted no factual investigation of our own, and have relied solely upon the documents reviewed by us, the statements and information set forth in such documents, and the additional matters recited or assumed in this letter, all of which we assume to be true, complete, and accurate and none of which we have investigated or verified.
Based upon and subject to the foregoing, and subject to the assumptions, exceptions, qualifications, and limitations in this letter, it is our opinion that:
1. The Trust has been duly formed and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, 12 Del. C. § 3801 et seq. (the “DST Act”).
To each Addressee listed on
Schedule A attached hereto
January 16, 2024
Page 2
2. Shares of the Trust issued on or after the date hereof in accordance with the Trust Agreement on the terms determined by the Sponsor are validly issued, fully paid and non-assessable beneficial interests in the Trust.
3. Except to the extent otherwise provided in the Trust Agreement, each beneficial owner of a Share is entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware.
The opinions in this letter are subject to the following assumptions, exceptions, qualifications, and limitations, in addition to those above:
A. The opinions in this letter are limited to the laws of the State of Delaware in effect on the date hereof (not including tax laws, insurance laws, antitrust laws, emergency laws, securities laws, and laws applicable due to the particular nature or scope of the assets or activities of the Trust, and rules, regulations, orders, and decisions relating thereto), and we have not considered and express no opinion on the effect of, concerning matters involving, or otherwise with respect to any other laws of any jurisdiction (including, without limitation, federal laws of the United States of America), or rules, regulations, orders, or decisions relating thereto.
B. We have assumed: (i) except as stated in numbered paragraph 1, the due incorporation or formation, as the case may be, due organization, and valid existence in good standing under the laws of all relevant jurisdictions of the Trust and each of the parties and each of the signatories (other than natural persons) to each of the documents reviewed by us; (ii) that none of the Trust or such parties or signatories has dissolved or terminated; (iii) except as stated in numbered paragraph 2 above, that each of such parties and signatories had and has the power and authority to execute, deliver (and, as applicable, file and/or issue), and perform each of such documents; (iv) except as stated in numbered paragraph 2 above, the due authorization, execution, delivery (and, as applicable, filing and/or issuance), and performance of each of such documents by each of such parties and signatories; (v) the legal capacity of all relevant natural persons; (vi) that any waiver under any document reviewed by us has been given voluntarily, intelligently, and knowingly; (vii) the satisfaction of all conditions and compliance with all obligations under each of the documents reviewed by us; and (viii) the due issuance of the Shares, and receipt of full consideration therefor, in accordance with the Trust Agreement and the Consent.
C. We have assumed that: (i) all signatures on all documents reviewed by us are genuine; (ii) all documents furnished to us as originals are authentic; (iii) all documents furnished to us as copies or specimens conform to the originals thereof; (iv) all documents furnished to us in final draft or final or execution form have not been terminated, rescinded, altered, or amended, are in full force and effect, and conform to the final, executed originals of such documents; (v) the Trust Agreement constitutes the entire “governing instrument” (as defined in the DST Act) of the Trust; (vi) each document reviewed by us constitutes a legal, valid, and binding obligation of each of the parties thereto, enforceable against each of such parties in accordance with its terms; (vii) to the extent that any document reviewed by us is an amended or amended and restated agreement, that such document amended or amended and restated such agreement as in effect prior thereto in accordance with its terms; (viii) the ownership of the Shares of the Trust will be recorded on the books of the Trust and the transfer of such Shares will be registered upon books maintained for that purpose by or on behalf of the Trust; (ix) each Share is, or is of a type, dealt in or traded on securities exchanges or securities markets; (x) the Sponsor will exercise its authority under the Trust Agreement to cause the Trust to create and issue Shares, and that the Shares will be created, issued, offered and sold to the Shareholders in accordance with each Purchase Order, each Authorized Participant Agreement, the Registration Statement (as defined below), the Consent, the Trust Agreement, and any other document or writing relating to the creation, issuance and offering of, and subscription for, Shares; and (xi) to the extent determined by the Sponsor from time to time, certificates certifying the ownership of the Shares shall be issued by the Trust upon the issuance of such Shares.
To each Addressee listed on
Schedule A attached hereto
January 16, 2024
Page 3
D. We express no opinion as to (i) ownership of, title to, or any interest in any property, or (ii) any provision in any document that purports to apply to a person or entity not a party thereto, to restrict or prohibit transfer of an interest by operation of law, or that would permit or require the making of distributions or payments other than as permitted under the DST Act or other applicable law.
E. The opinions in this letter are subject to (i) bankruptcy, insolvency, fraudulent transfer, fraudulent conveyance, preferential transfer, moratorium, receivership, rehabilitation, conservation, reorganization, liquidation, and other similar laws relating to or affecting the rights and remedies of creditors generally, (ii) principles of equity (regardless of whether considered and applied in a proceeding in equity or at law, and including, without limitation, applicable law relating to fiduciary duties), (iii) standards of good faith, fair dealing, course of dealing, course of performance, materiality, and reasonableness that may be applied by a court, considerations of public policy, and the exercise of judicial discretion, and (iv) the effect of federal or state securities law and public policy considerations on the enforceability of provisions relating to exculpation, indemnification or contribution.
F. We have not participated in the preparation of the Registration Statement (as defined below) or any offering materials relating to the Trust, and we assume no responsibility for and express no opinion as to the contents of any such materials.
We consent to the filing of this opinion letter with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form S-1 filed by the Trust with the Securities and Exchange Commission on or about the date hereof, as the same may be amended or supplemented from time to time (the “Registration Statement”), and to the use of the name of our firm therein. In giving the foregoing consent, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. There are no implied opinions in this letter. This letter speaks only on the date hereof, and we undertake no obligation to advise anyone of any changes in the foregoing subsequent to the delivery of this letter.
| Very truly yours, | |
| /s/ Potter Anderson & Corroon LLP | |
| MPM/AGF |
Schedule A
COtwo Advisors Physical European Carbon Allowance Trust
Exhibit 1
| 1. | The Certificate of Trust of the Trust, as filed with the office of the Secretary of State of the State of Delaware (the “Secretary of State”) on January 12, 2023 |
| 2. | The Declaration of Trust and Trust Agreement of the Trust, dated as of January 12, 2023, by COtwo Advisors LLC, as Sponsor, and Wilmington Trust, National Association, as Delaware trustee. |
| 3. | The Amended and Restated Declaration of Trust and Trust Agreement of the Trust, dated as of November 27, 2023 (the “Trust Agreement”), by COtwo Advisors LLC, as Sponsor, and Wilmington Trust, National Association, as Delaware Trustee. |
| 4. | A Certificate of Good Standing for the Trust, dated January 16, 2024, obtained from the Secretary of State. |
| 5. | The Written Consent of the Sponsor of the Trust, dated January 11, 2024 (the “Consent”). |
Exhibit 8.1
 |
Eversheds Sutherland (US) LLP 700 Sixth Street, NW, Suite 700 Washington, DC 20001-3980 D: +1 202.383.0256 F: +1 202.637.3593 jonsambur@ eversheds-sutherland.com |
January 16, 2024
COtwo Advisors LLC
140 Elm Street, Suite 6,
New Canaan, CT 06840
Re: Registration Statement on Form S-1 to be filed with the SEC on or about January 16, 2024 with respect to COtwo Advisors Physical European Carbon Allowance Trust
Ladies and Gentleman:
We have acted as tax counsel for COtwo Advisors LLC, a Delaware limited liability company, with respect to certain legal matters in connection with the offer and sale of units of fractional undivided beneficial interest in and ownership of COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”). We have also participated in the preparation of a Registration Statement on Form S-1 (the “Registration Statement”) to which this opinion letter is an exhibit. In connection therewith, we have participated in the preparation of the discussion set forth under the caption “U.S. Federal Income Tax Consequences” (the “Discussion”) in the Registration Statement.
In rendering our opinions, we have considered the representation letter dated January [16], 2024 (the “Representation Letter”) and relied upon the Internal Revenue Code of 1986, as amended (the “Code”), the regulations promulgated thereunder (the “Regulations”), rulings and other judicial decisions regarding the Code and the Regulations by the courts, and administrative interpretations of the Code and the Regulations by the Internal Revenue Service (“IRS”), all as they exist as of the date hereof. The Code, Regulations, rulings and judicial decisions by the courts, and IRS administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect.
Based on the foregoing, we are of the opinion that:
| 1. | The Discussion, subject to the qualifications and assumptions stated in the Discussion, the limitations and qualifications set forth herein, and the representations in the Representation Letter, although general in nature, constitutes, in all material respects, a fair and accurate summary under current law of the material United States federal income tax consequences of the ownership and disposition of a unit of the Trust. The United States federal income tax consequences of the ownership and disposition of a unit of the Trust by a holder will depend upon that holder’s particular situation, and we express no opinion as to the completeness of the Discussion as applied to any particular holder. |
* * * * *
Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.
This opinion letter is limited to the matters specifically set forth herein, and no opinions are intended to be implied or may be inferred beyond those expressly stated herein. Our opinions are rendered as of the date hereof and we assume no obligation to update or supplement these opinions or any matter related to these opinions to reflect any change of fact, circumstances, or law after the date hereof.
Furthermore, our opinions are not binding on the IRS or a court. In addition, we must note that our opinions represent merely our best legal judgment on the matters presented and that others may disagree with our conclusions herein. There can be no assurance that the IRS will not take a contrary position or that a court would agree with our opinions if litigated.
We hereby consent to the filing of this opinion letter as an exhibit to the Registration Statement and to the references to our firm—Eversheds Sutherland (US) LLP—and these opinions contained in the Discussion. In giving this consent, we do not admit that we are “experts” under the Securities Act of 1933, as amended, or under the rules and regulations of the Securities and Exchange Commission relating thereto, with respect to any part of the Registration Statement.
| Very truly yours, | |
| /s/ Eversheds Sutherland (US) LLP | |
| Eversheds Sutherland (US) LLP |
Exhibit 10.1
FORM OF
COtwo
Advisors Physical European Carbon Allowance Trust
AUTHORIZED PARTICIPANT AGREEMENT
This Authorized Participant Agreement (the “Agreement”), dated as of __________, is entered into by and among ________________ (the “Authorized Participant”), COtwo Advisors Physical European Carbon Allowance Trust, a Delaware statutory trust (the “Trust”), and COtwo Advisors, LLC, a Delaware limited liability company, as sponsor of the Trust (the “Sponsor”).
SUMMARY
As provided in the Amended and Restated Declaration of Trust and Trust Agreement of the Trust, as amended (the “Trust Agreement”) as currently in effect and described in the Prospectus (defined below), units of fractional undivided beneficial interest in and ownership of the Trust (the “Shares”) may be created or redeemed by the Sponsor for an Authorized Participant in aggregations of a minimum of fifty thousand (50,000) Shares (each aggregation, a “Creation Unit”). Creation Units are offered only pursuant to a registration statement of the Trust on Form S-1, as amended (Registration No.: 333-271910), as declared effective by the Securities and Exchange Commission (“SEC”) and as the same may be amended from time to time thereafter or any successor registration statement in respect of Shares of the Trust (collectively, the “Registration Statement”) together with the prospectus of the Trust (the “Prospectus”) included therein. Under the Trust Agreement, the Sponsor is authorized to issue Creation Units to, and redeem Creation Units from, authorized participants, only through the facilities of the Depository Trust Company (“DTC”), or a successor depository, and only in exchange for an amount of EU Carbon Emission Allowances for stationary installations (“EUAs”) that is transferred between the Authorized Participant and the Trust. When the Trust issues Creation Units in exchange for EUAs, the EUAs transferred by an Authorized Participant to the Trust are deposited in the Trust’s account with the European Union (“EU”) registry operated by the EU Commission (the “Union Registry”). When the Trust redeems Creation Units tendered for redemption by an Authorized Participant in exchange for EUAs, the EUAs will be transferred from the Trust’s Union Registry account into a Union Registry account designated by the Authorized Participant.
This Agreement and the Procedures (defined below) set forth the specific procedures by which the Authorized Participant may create or redeem Creation Units. Because new Shares can be created and issued on an ongoing basis, at any point during the valid existence of the Trust, a “distribution,” as such term is used in the Securities Act of 1933, as amended (“1933 Act”), may be occurring. The Authorized Participant is cautioned that some of its activities may result in its being deemed a participant in a distribution in a manner which would render it a statutory underwriter and subject it to the prospectus-delivery and liability provisions of the 1933 Act. The Authorized Participant should review the “Plan of Distribution” portion of the Prospectus and consult with its own counsel in connection with entering into this Agreement and submitting Orders (defined below).
Capitalized terms used but not defined in this Agreement shall have the meanings assigned to such terms in the Trust Agreement or Authorized Participant Procedures Handbook set forth in Attachment A hereto (the “Procedures”).
To give effect to the foregoing premises and in consideration of the mutual covenants and agreements set forth below, the parties hereto agree as follows:
Section 1. Order Placement. To place orders for the Sponsor (or its agent) to create or redeem one or more Creation Units, the Authorized Participant must follow the procedures for creation and redemption referred to in Section 3 of this Agreement and the Procedures described in Attachment A, as each may be amended, modified or supplemented from time to time.
Section 2. Status, Representations and Warranties of the Parties.
(a) The Authorized Participant represents and warrants and covenants the following:
(i) The Authorized Participant is a participant of DTC (as such a participant, a “DTC Participant”). If the Authorized Participant ceases to be a DTC Participant, the Authorized Participant shall give prompt notice to the Sponsor of such event, and this Agreement shall terminate immediately as of the date the Authorized Participant ceased to be a DTC Participant.
(ii) Unless Section 2(a)(iii) applies, the Authorized Participant either (i) is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (“1934 Act”), and is a member in good standing of the Financial Industry Regulatory Authority (the “FINRA”), or (ii) is exempt from being, or otherwise is not required to be, licensed as a broker-dealer or a member of FINRA, and in either case is qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. In connection with the purchase or redemption of Creation Units and any related offers or sales of Shares, the Authorized Participant will maintain any such registrations, qualifications and membership in good standing and in full force and effect throughout the term of this Agreement. The Authorized Participant will comply with all applicable federal laws, the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder, and with the FINRA By-Laws and Conduct Rules of FINRA if it is a FINRA member, to the extent the foregoing relates to the Authorized Participant’s transactions in and activities with respect to Shares, and that it will not offer or sell Shares in any state or jurisdiction where they may not lawfully be offered and/or sold.
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(iii) If the Authorized Participant is offering or selling Shares in jurisdictions outside the several states, territories and possessions of the United States and is not otherwise required to be registered, qualified or a member of FINRA as set forth in Section 2(a)(ii) above, the Authorized Participant will, in connection with such offers and sales, (i) observe the applicable laws of the jurisdiction in which such offer and/or sale is made, (ii) comply with the prospectus delivery and other requirements of the 1933 Act, and the regulations promulgated thereunder, and (iii) if the Authorized Participant is not otherwise required to be registered, qualified or a member of FINRA as set forth in Section 2(a)(ii) above, conduct its business in accordance with the FINRA Conduct Rules, in each case, to the extent the foregoing relates to the Authorized Participant’s transactions in, and activities with respect to, Shares.
(iv) The Authorized Participant has policies, procedures, and internal controls in place that are reasonably designed to comply with applicable anti-money laundering laws and regulations, including applicable provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), and the regulations promulgated thereunder, if the Authorized Participant is subject to the requirements of the USA PATRIOT Act.
(v) The Authorized Participant acknowledges that in addition to satisfying the prospectus delivery and disclosure requirements of the 1933 Act, it and any other participant in the distribution of the Shares purchased by the Authorized Participant may have an obligation to comply with the prospectus delivery requirements under the Commodity Exchange Act (the “CEA”). The Sponsor agrees that if it becomes aware of any new delivery or disclosure requirement under the 1933 Act or the CEA relating to Shares, other than the current obligation to deliver the Prospectus, it shall use reasonable efforts to advise the Authorized Participant of such requirement(s).
(vi) The Authorized Participant agrees not to enforce against the Trust and Sponsor any patent rights with respect to the business of the Trust. For avoidance of doubt, this provision will only be effective during time periods in which the Agreement is in effect and shall not survive termination thereof.
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(b) The Sponsor represents and warrants that on the date hereof and at each time of purchase by the Authorized Participant of a Creation Unit from the Trust (each such time, the “Time of Purchase”), that:
(i) on the effective date of the Registration Statement and at each Time of Purchase, the Trust’s Registration Statement shall be effective and no stop order of the SEC with respect thereto shall have been issued and no proceedings for such purpose shall have been instituted or, to the Sponsor’s knowledge, will then be contemplated by the SEC; the Registration Statement complied when it became effective and complies at the Time of Purchase in all material respects with the requirements of the 1933 Act, and the Prospectus complied as of its date, and complies at the Time of Purchase, in all material respects with the requirements of the 1933 Act; and the conditions to the use of Form S-1 have been satisfied; the Registration Statement did not when it became effective and does not at the Time of Purchase contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus did not, as of its date and does not at the Time of Purchase, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and, the documents comprising the Disclosure Package (as defined below) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Sponsor makes no warranty or representation with respect to any statement contained in the Registration Statement, the Prospectus or the Disclosure Package in reliance upon and in conformity with information concerning the Authorized Participant and furnished in writing by or on behalf of the Authorized Participant to the Sponsor expressly for use therein. The “Disclosure Package” is the Prospectus and any amendments and supplements thereto at the Time of Purchase and any free writing prospectus as defined in Rule 405 of the 1933 Act (a “FWP”) prepared by, for or on behalf of the Sponsor before the Time of Purchase and intended for general distribution;
(iii) the Sponsor has been duly organized and, on the effective date of the Registration Statement and at each Time of Purchase, will be validly existing as a limited liability company in good standing under the laws of the State of Delaware, with full power and authority to act as the sponsor of the Trust as described in the Registration Statement and the Prospectus, and has all requisite power and authority to execute and deliver this Agreement;
(iv) at the time the Sponsor makes an offer of Shares following the filing of the Registration Statement, neither the Trust nor the Sponsor will be an “ineligible issuer” as defined in Rule 405 of the 1933 Act; and
(v) the Sponsor shall provide to the Authorized Participant copies of the then current Prospectus and any printed supplemental information in reasonable quantities upon request, the Sponsor will promptly notify the Authorized Participant when a revised, supplemented or amended Prospectus is available, the Sponsor will deliver or otherwise make available to the Authorized Participant copies of such revised, supplemented or amended Prospectus at such time and in such numbers as to enable the Authorized Participant to comply with any obligation the Authorized Participant may have to deliver such Prospectus to customers or in response to the Authorized Participant’s reasonable request, the Sponsor will make such revised, supplemented or amended Prospectus available to the Authorized Participant no later than the effective date thereof, and the Sponsor will be deemed to have complied with this paragraph when the Authorized Participant has received such revised, supplemented or amended Prospectus at the address indicated below the signature line of the Authorized Participant in such number of hard copies as to enable the Authorized Participant to comply with any obligation it may have to deliver such Prospectus to customers or as it may have reasonably requested.
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(c) The Sponsor, on its own behalf and in its capacity as sponsor of the Trust, agrees:
(i) to endeavor, upon receipt of request from the Authorized Participant therefore, to file a post-effective amendment to the Registration Statement removing any reference to the Authorized Participant thereunder; and
(ii) to advise the Authorized Participant promptly, confirming such advice in writing, of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of, a stop order suspending the effectiveness of the Registration Statement, and, if the SEC should enter a stop order suspending the effectiveness of the Registration Statement, to use its best efforts to obtain the lifting or removal of such order as soon as possible.
(d) The Authorized Participant shall have the ability to direct the transfer of EUAs into the Trust’s Union Registry account in connection with the purchase of Creation Units in such a manner that the EUAs can be attributed to the Authorized Participant. Likewise, the Authorized Participant shall have the ability to accept EUAs from the Trust’s Union Registry account in connection with the redemption of Creation Units.
Section 3. Orders.
(a) All orders to create or redeem Creation Units shall be made in accordance with the terms of the Trust Agreement, this Agreement and the Procedures. Each party will comply with such foregoing terms and procedures to the extent applicable to it. The Sponsor may issue, or cause to be issued, additional or other procedures from time to time relating to the manner of creating or redeeming Creation Units which are not related to the Procedures, and the Authorized Participant will comply with such procedures of which it has received notice delivered in accordance with Section 18(c) within a commercially reasonable time following receipt of such notice.
(b) The Authorized Participant acknowledges and agrees that each order to create a Creation Unit (a “Purchase Order”) and each order to redeem a Creation Unit (a “Redemption Order”, and each Purchase Order and Redemption Order, an “Order”) delivered to the Sponsor, or the Sponsor’s designee, may not be revoked by the Authorized Participant after the specified Cut-off Time for the applicable Fund.
(c) The Sponsor may, in its discretion, suspend the right of repurchase, or postpone the purchase settlement date, (i) for any period during which the NYSE Arca, Inc. (“Arca”), the New York Stock Exchange, European Energy Exchange (“EEX”), ICE Endex exchange, Nasdaq Oslo exchange or other exchange material to the valuation or operation of the Trust is closed, or when trading is suspended or restricted on such exchanges in EUAs or the single day futures contract on EUAs (“Daily EUA Futures”), other than customary weekend or holiday closings, or trading of Shares on the Exchange is suspended or restricted, or (ii) during an emergency as a result of which delivery, disposal or evaluation of EUAs is not reasonably practicable. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
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The Sponsor, or its designee, shall also have the absolute right, but shall have no obligation, to reject any Purchase Order if the Sponsor or its designee determines that (i) the Purchase Order is not to be in proper form; (ii) acceptance of the Purchase Order would not be in the best interest of the Beneficial Owners; (iii) acceptance of the Purchase order would have adverse tax consequences to the Trust or to the Beneficial Owners; (iv) the acceptance or receipt of which could, in the opinion of counsel to the Sponsor, be unlawful; or (v) if circumstances outside the control of the Sponsor, or its designee, make it for all practical purposes not feasible to process creations of Creation Units. The Sponsor shall not be liable to any person by reason of the rejection of any Purchase Order.
(d) The Sponsor, or its designee, shall reject any Redemption Order (i) the Sponsor determines not to be in proper form, (ii) the fulfillment of the Redemption Order, in the opinion of Sponsor’s counsel, would be illegal under applicable laws and regulations, or (iii) if circumstances outside the control of the Sponsor, or its designee, make it, for all practical purposes, not feasible to process. The Sponsor, or its designee, shall have no liability to any person for rejecting a Redemption Order in such circumstances.
(e) The Sponsor may, in its discretion, suspend the right of redemption, or postpone the applicable Redemption Settlement Time, (1) for any period during which Arca, the New York Stock Exchange, EEX, ICE Endex, Nasdaq Oslo or other exchange material to the valuation or operation of the Trust is closed, or when trading is suspended or restricted on such exchanges in EUAs or Daily EUA Futures, other than customary weekend or holiday closings, or trading of Shares on the Exchange is suspended or restricted, or (2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of EUAs is not reasonably practicable. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
(f) The Authorized Participant hereby consents to the use of recorded telephone lines whether or not such use is reflected in the Procedures. In the event that the Sponsor, the Trust, or any of their affiliated persons becomes legally compelled to disclose to any third party any recording involving communications with the Authorized Participant, the Sponsor agrees to provide the Authorized Participant with reasonable advance written notice identifying the recordings to be so disclosed, together with copies of such recordings, so that the Authorized Participant may seek a protective order or other appropriate remedy with respect to the recordings or waive its right to do so. In the event that such protective order or other remedy is not obtained, or the Participant waives its right to seek such protective order or remedy, the Sponsor, the Trust, or any of their affiliated persons, as the case may be, agrees to furnish only that portion of the recorded conversation that, according to legal counsel, is legally required to be furnished and will exercise its best efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded the recorded conversation. The Sponsor, the Trust, and their affiliated persons shall not otherwise disclose to any third party any recording involving communications with the Authorized Participant without the Authorized Participant’s express written consent, except the Sponsor and the Trust may disclose to a regulatory or self-regulatory organization, to the extent required by applicable rule or law, recordings involving communications with the Authorized Participant.
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Section 4. Fees. To compensate the Transfer Agent for services in processing the creation and redemption of Creation Units and to offset some or all of the transaction costs, an Authorized Participant is required to pay a fixed transaction fee that is described in the Trust’s Prospectus. An order may include multiple Creation Units. The transaction fee(s) may be reduced, increased or otherwise changed by the Sponsor at its sole discretion.
Section 5. EUA Transfers.
(a) Any EUAs to be transferred in connection with any Order shall be transferred into or out of, as applicable, the Trust’s Union Registry Account, in accordance with the Procedures. The Authorized Participant shall be responsible for all costs and expenses relating to or connected with any transfer of EUAs into or out of the Trust’s Union Registry account.
(b) Each of the Trust and the Sponsor will have no liability for loss or damages suffered by the Authorized Participant in respect of any account where the Authorized Participant maintains custody of EUAs. The liability of the Union Registry or other EUA custodian with respect to any such loss or damage will be governed by the terms of any account opening documents or other agreements received from such custodian.
Section 6. Authorized Persons. Concurrently with the execution of this Agreement and as requested in writing from time to time thereafter, the Authorized Participant shall deliver to the Sponsor, or its designee, a certificate, duly certified as appropriate by its secretary or other duly authorized official, in the form of Exhibit A, setting forth the names and signatures of all persons authorized to give instructions relating to activity contemplated hereby or by any other notice, request or instruction given on behalf of the Authorized Participant (each, an “Authorized Person”). The Sponsor may accept and rely upon such certificate as conclusive evidence of the facts set forth therein and shall consider such certificate to be in full force and effect until the Sponsor, or its designee, receives a superseding certificate bearing a subsequent date and duly certified as described above. Upon the termination or revocation of authority of any Authorized Person by the Authorized Participant, the Authorized Participant shall give prompt written notice of such fact to the Sponsor and such notice shall be effective upon receipt by the Sponsor. The Sponsor shall issue, or caused to be issued, to each Authorized Person a unique personal identification number (the “PIN Number”) by which such Authorized Person shall be identified and by which instructions issued by the Authorized Participant hereunder shall be authenticated. The PIN Number shall be kept confidential by the Authorized Participant and shall only be provided to the Authorized Person. If, after issuance, the Authorized Person’s PIN Number is changed, the new PIN Number shall become effective on a date mutually agreed upon by the Authorized Participant and the Sponsor.
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Section 7. Redemption. The Authorized Participant represents and warrants that it will not initiate a Redemption Order (as described in the Procedures) with the Sponsor for the purpose of redeeming a Creation Unit unless (i) it owns outright or has the right or authority to tender for redemption the Creation Units to be redeemed and to receive the entire proceeds of the redemption, and (ii) such Creation Units have not been loaned or pledged to another party and are not the subject of a repurchase agreement, securities lending agreement or any other arrangement which, under the circumstances, would preclude the delivery of such Creation Units to the Sponsor on the second Business Day following the Redemption Order Date. A “Business Day” means any day other than a day when any of Arca, the New York Stock Exchange, EEX, ICE Endex, Nasdaq Oslo or other exchange material to the valuation or operation of the Trust, or the calculation of EUAs or Daily EUA Futures, is closed for regular trading.
Section 8. Role of Authorized Participant.
(a) The Authorized Participant acknowledges that, for all purposes of this Agreement and the Trust Agreement, the Authorized Participant shall have no authority to act as agent for the Trust or the Sponsor in any matter or in any respect.
(b) The Authorized Participant will make itself and its employees available, upon reasonable request, during normal business hours to consult with the Sponsor or its designees concerning the performance of the Authorized Participant’s responsibilities under this Agreement.
(c) Notwithstanding the provisions of Section 8(b), the Authorized Participant will maintain records of all sales of Creation Units made by or through it and, upon reasonable request of the Sponsor, except if prohibited by applicable law and subject to any privacy obligations or other obligations arising under federal or state securities laws it may have to its customers, will furnish the Sponsor with the names and addresses of the purchasers of such Creation Units and the number of Creation Units purchased if and to the extent that the Sponsor has been requested to provide such information to the Commodities Futures Trading Commission, Securities Exchange Commission, Financial Industry Regulatory Authority, or Internal Revenue Service (“Fund Regulators”).
(d) The Authorized Participant, as a DTC Participant, agrees that it shall be bound by all of the obligations of a DTC Participant in addition to any obligations that it undertakes hereunder or in accordance with the Prospectus.
(e) The Authorized Participant agrees, subject to any privacy, confidentiality or other obligations it may have to its customers arising under federal or state securities laws or the applicable rules of any self-regulatory organization, to assist the Sponsor in ascertaining certain information regarding sales of Shares made by or through the Authorized Participant upon request of the Trust or the Sponsor that is necessary for the Trust to comply with its obligations to distribute information to its shareholders under applicable state or federal securities laws; provided that consistent with market practice, the Authorized Participant may undertake to deliver prospectuses, proxy material, annual and other reports of the Trust or other similar information that the Trust is obligated to deliver to its shareholders, to the Authorized Participant’s customers that custody Shares with the Authorized Participant, after receipt from the Trust or the Sponsor of sufficient quantities to allow mailing thereof to such customers. The Sponsor agrees that the names and addresses and other information concerning the Authorized Participant’s customers are and shall remain the sole property of the Authorized Participant, and none of the Sponsor, the Trust or any of their respective affiliates shall use such names, addresses or other information for any purposes except in connection with the performance of their duties and responsibilities hereunder and except for servicing and informational mailings related to the Trust referred to in this Section 8(d) of this Agreement.
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Section 9. Indemnification.
(a) The Authorized Participant hereby indemnifies and holds harmless the Sponsor, its respective direct or indirect affiliates (as defined below) and its respective directors, sponsors, partners, members, managers, officers, employees and agents (each, an “AP Indemnified Party”) from and against any losses, liabilities, damages, costs and expenses (including reasonable attorney’s fees and the reasonable cost of investigation) incurred by such AP Indemnified Party as a result of: (i) any breach by the Authorized Participant of any provisions of this Agreement that relates to the Authorized Participant, including its representations, warranties and covenants; (ii) any failure on the part of the Authorized Participant to perform any of its obligations set forth in this Agreement; (iii) any failure by the Authorized Participant to comply with applicable laws and rules and regulations of self-regulatory organizations to the extent the foregoing relates to the Authorized Participant’s transactions in, and activities with respect to, Shares under this Agreement, except that the Authorized Participant shall not be required to indemnify an AP Indemnified Party to the extent that such failure was caused by the Authorized Participant’s adherence to instructions given or representations made by the Sponsor or any AP Indemnified Party, as applicable; (iv) any actions of such AP Indemnified Party in reasonable reliance upon any instructions issued by the Authorized Participant in accordance with the Procedures believed by the AP Indemnified Party to be genuine and to have been given by the Authorized Participant, except to the extent that the Authorized Participant had previously revoked a PIN Number used in giving such instructions or representations (where applicable) and such revocation was given by the Authorized Participant and received by the Trust in accordance with the terms of Section 6 hereto; or (v) (A) any representation by the Authorized Participant, its employees or its agents or other representatives about the Shares, any AP Indemnified Party or the Trust that is not consistent with the Trust’s then-current Prospectus made in connection with the offer or the solicitation of an offer to buy or sell Shares and (B) any untrue statement or alleged untrue statement of a material fact contained in any research reports, marketing material and sales literature described in Section 13(b) or any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein when read together with the Prospectus, in light of the circumstances under which they were made, not misleading to the extent that such statement or omission relates to the Shares or any AP Indemnified Party, unless, in either case, such representation, statement or omission was made or included by the Authorized Participant at the written direction of the Sponsor or is based upon any omission or alleged omission by the Sponsor to state a material fact in connection with such representation, statement or omission necessary to make such representation, statement or omission not misleading. The Authorized Participant shall not be liable under its indemnity agreement contained in this paragraph with respect to any claim made against any AP Indemnified Party unless the AP Indemnified Party shall have notified the Authorized Participant in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the AP Indemnified Party (or after the AP Indemnified Party shall have received notice of service on any designated agent). However, failure to notify the Authorized Participant of any claim shall not relieve the Authorized Participant from any liability which it may have to any AP Indemnified Party against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph and shall only release it from such liability under this paragraph to the extent it has been materially prejudiced by such failure to give notice. The Authorized Participant shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Authorized Participant elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the AP Indemnified Party in the suit, and who shall not, except with the consent of the AP Indemnified Parties, be counsel to the Authorized Participant. If the Authorized Participant does not elect to assume the defense of any suit, it will reimburse the AP Indemnified Party for the reasonable fees and expenses of any counsel retained by them.
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(b) The Sponsor hereby agrees to indemnify and hold harmless the Authorized Participant, its respective subsidiaries, affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 17 of the 1933 Act (each, a “Sponsor Indemnified Party”) from and against any losses, liabilities, damages, costs and expenses (including reasonable attorneys’ fees and the reasonable cost of investigation) incurred by such Sponsor Indemnified Party as a result of (i) any breach by the Sponsor of any provision of this Agreement that relates to the Sponsor; (ii) any failure on the part of the Sponsor to perform any obligation of the Sponsor set forth in this Agreement; (iii) any failure by the Sponsor to comply with applicable laws and the rules and regulations of any governmental entity or any self-regulatory organization; (iv) any untrue statements or omissions made in any promotional material or sales literature furnished to the Authorized Participant or otherwise approved in writing by the Trust; (v) actions of such Sponsor Indemnified Party in reasonable reliance upon any instructions issued or representations made by the Sponsor or the Trust in accordance with this Agreement or Attachment A hereto reasonably believed by the Authorized Participant to be genuine and to have been given by the Sponsor or the Trust; or (vi) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement of the Trust as originally filed with the SEC or in any amendment thereof, or in the Prospectus, or in any amendment thereof or supplement thereto, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except those statements in the Registration Statement or the Prospectus based on information furnished in writing by or on behalf of the Authorized Participant expressly for use in the Registration Statement or the Prospectus. The Sponsor shall not be liable under its indemnity agreement contained in this paragraph with respect to any claim made against any Sponsor Indemnified Party unless the Sponsor Indemnified Party shall have notified the Sponsor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Sponsor Indemnified Party (or after the Sponsor Indemnified Party shall have received notice of service on any designated agent). However, failure to notify the Sponsor of any claim shall not relieve the Sponsor from any liability which it may have to any Sponsor Indemnified Party against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph and shall only release it from such liability under this paragraph to the extent it has been materially prejudiced by such failure to give notice. The Sponsor shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Sponsor elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Sponsor Indemnified Party in the suit and who shall not, except with the consent of the Sponsor Indemnified Party, be counsel to the Sponsor. If the Sponsor does not elect to assume the defense of any suit, it will reimburse the Sponsor Indemnified Party in the suit for the reasonable fees and expenses of any counsel retained by them.
(c) No indemnifying party, as described in paragraphs (a) and (b) above, shall, without the written consent of the AP Indemnified Party or the Sponsor Indemnified Party, as the case may be, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the AP Indemnified Party or Sponsor Indemnified Party, as the case may be, from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any AP Indemnified Party or Sponsor Indemnified Party, as the case may be.
(d) The Sponsor and the Authorized Participant agree promptly to notify each other of the commencement of any proceedings or litigation against it and, in the case of the Sponsor, against any of the Sponsor’s officers or directors, in connection with the issuance and sale of the Shares or in connection with the Registration Statement or the Prospectus.
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Section 10. Liability.
(a) Limitation of Liability. Neither the Sponsor nor the Authorized Participant shall be liable to each other or to any other person for any damages arising out of any mistake or error in data provided to any of them by a third party or out of any interruption or delay in the electronic means of communications used by them.
(b) Tax Liability. The Authorized Participant shall be responsible for the payment of any transfer tax, sales or use tax, stamp tax, recording tax, value added tax and any other similar tax or government charge applicable to the creation or redemption of any Creation Unit made pursuant to this Agreement, regardless of whether or not such tax or charge is imposed directly on the Authorized Participant. To the extent the Sponsor or the Trust is required by law to pay any such tax or charge, the Authorized Participant agrees to promptly indemnify such party for any such payment, together with any applicable penalties, additions to tax or interest thereon upon reasonable notice thereof; provided, however, that the Authorized Participant shall not indemnify the Trust or the Sponsor for any tax or charge or any penalties, additions to tax or interest thereon to the extent that such payments result from the Sponsor’s, the Trust’s, or their designee’s willful misconduct, negligence, or bad faith.
Section 11. Acknowledgment. The Authorized Participant acknowledges receipt of a (i) copy of the Trust Agreement and (ii) the current Prospectus of the Trust, and represents that it has reviewed and understands such documents. The Sponsor and the Trust agree to process Orders, or cause its agents to process Orders, in accordance with the provisions of the Prospectus of the Trust, the Trust Agreement, and the Procedures.
Section 12. Effectiveness and Termination. Upon the execution of this Agreement by the parties hereto, this Agreement shall become effective in this form as of the date first set forth above, and may be terminated at any time by any party upon thirty (30) days prior written notice to the other parties unless earlier terminated: (i) in accordance with Section 2(a)(i); (ii) upon written notice to the Authorized Participant by the Sponsor in the event of a material breach by the Authorized Participant of this Agreement or the procedures described or incorporated herein; (iii) immediately in the circumstances described in Section 18(j); or (iv) at such time as the Trust is terminated pursuant to the Trust Agreement. This Agreement supersedes any prior agreement between the parties hereto with respect to the subject matter contained herein.
Section 13. Marketing Materials; Representations Regarding Shares; Identification in Registration Statement.
(a) The Authorized Participant represents, warrants and covenants that (i) it will not, in connection with any sale or solicitation of a sale of Shares, make, or permit any of its representatives to make, any representations concerning the Shares or any AP Indemnified Party other than representations not inconsistent with (A) the then-current Prospectus of the Trust, (B) printed information approved by the Sponsor as information supplemental to such Prospectus or (C) any promotional materials or sales literature furnished to the Authorized Participant by the Sponsor, and (ii) the Authorized Participant will not furnish or cause to be furnished to any person or display or publish any information or material relating to the Shares or any AP Indemnified Party that are inconsistent with the Trust’s then-current Prospectus. Copies of the then-current Prospectus of the Trust and any such printed supplemental information will be supplied by the Sponsor to the Authorized Participant in reasonable quantities upon request.
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(b) Notwithstanding the foregoing or anything to the contrary in this Agreement, the Authorized Participant and its affiliates may without the written approval of the Sponsor or the Trust prepare and circulate in the regular course of their businesses research, sales literature, reports, and other similar materials that include information, opinions or recommendations relating to the Shares, provided that such research, sales literature, reports, and other similar materials comply with applicable FINRA rules.
(c) The Authorized Participant and its affiliates may prepare and circulate in the regular course of their businesses, without having to refer to the Shares or the Trust’s then-current Prospectus, data and information relating to the price of EUAs.
(d) The Authorized Participant hereby agrees that for the term of this Agreement the Sponsor, or its designee, may deliver the then-current Prospectus, and any revisions, supplements or amendments thereto or recirculation thereof, to the Authorized Participant in Portable Document Format (“PDF”) via electronic mail to (or to such other address as may be provided by the Authorized Participant from time to time) in lieu of delivering the Prospectus in paper form. The Authorized Participant may revoke the foregoing agreement at any time by delivering written notice to the Sponsor, or the Sponsor’s designee, and, whether or not such agreement is in effect, the Authorized Participant may, at any time, request reasonable quantities of the Prospectus, and any revisions, supplements or amendments thereto or recirculation thereof, in paper form from the Sponsor or its designee. The Authorized Participant acknowledges that it has the capability to access, view, save and print material provided to it in PDF and that it will incur no appreciable extra costs by receiving the Prospectus in PDF instead of in paper form. The Sponsor will, when requested by the Authorized Participant, make available, or cause to be made available, at no cost the software and technical assistance necessary to allow the Authorized Participant to access, view and print the PDF version of the Prospectus.
(e) For as long as this Agreement is effective, if required by the SEC, the Authorized Participant agrees to be identified as an authorized participant of the Trust (i) in the section of the Prospectus included within the Registration Statement entitled “Creation and Redemption of Shares” and in any other section as may be required by the SEC and (ii) on the Trust’s website. Upon the termination of this Agreement, (i) during the period prior to when the Sponsor qualifies and in its sole discretion elects to file on Form S-3, the Sponsor will remove such identification from the Prospectus in the amendment of the Registration Statement next occurring after the date of the termination of this Agreement and, during the period after when the Sponsor qualifies and in its sole discretion elects to file on Form S-3, the Sponsor will promptly file a current report on Form 8-K indicating the withdrawal of the Authorized Participant as an authorized participant of the Trust and (ii) the Sponsor will promptly update the Trust’s website to remove any identification of the Authorized Participant as an authorized participant of the Trust.
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Section 14. Certain Covenants of the Sponsor. The Sponsor, on its own behalf and as sponsor of the Trust, covenants and agrees:
(a) to advise the Authorized Participant promptly of the happening of any event during the term of this Agreement which could require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and, during such time, to prepare and furnish, at the expense of the Trust, to the Authorized Participant promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change;
(b) to furnish directly or cause to be furnished to the Authorized Participant, at each time (i) the Registration Statement or the Prospectus is amended or supplemented by the filing of a post-effective amendment, (ii) a new Registration Statement is filed to register additional Shares in reliance on Rule 429 under the 1933 Act, and (iii) there is financial information incorporated by reference into the Registration Statement or the Prospectus, such customary documents and certificates in form and content as reasonably requested and agreed; and
(c) to cause the Trust to file a post-effective amendment to the Registration Statement no less frequently than once per calendar year on or about the same time that the Trust files an annual report pursuant to Section 13 or 15(d) of the 1934 Act (including the information contained in such report), until such time as the Trust’s reports filed pursuant to Section 13 or 15(d) of the 1934 Act are incorporated by reference in the Registration Statement.
Section 15. Title To EUAs. The Authorized Participant represents and warrants on behalf of itself and any party for which it acts that upon delivery of a Creation Basket Deposit (as defined in the Trust’s Prospectus) to the Trust in accordance with the terms of the Trust Agreement and this Agreement, the Trust will acquire good and unencumbered title to the EUAs which is the subject of such Creation Basket Deposit, free and clear of all pledges, security interests, liens, charges, taxes, assessments, encumbrances, equities, claims, options or limitations of any kind or nature, fixed or contingent, and not subject to any adverse claims, including any restriction upon the sale or transfer of all or any part of such EUAs which is imposed by any agreement or arrangement entered into by the Authorized Participant or any party for which it is acting in connection with a Purchase Order.
Section 16. Force Majeure. No party to this Agreement shall incur any liability for any delay in performance, or for the non-performance, of any of its obligations under this Agreement by reason of any cause beyond its reasonable control. This includes any act of God or war or terrorism, any breakdown, malfunction or failure of transmission in connection with or other unavailability of any wire or communication facilities, any transport, port, or airport disruption, industrial action, acts and regulations and rules of any governmental or supra-national bodies or authorities or regulatory or self-regulatory organization or failure of any such body, authority or organization for any reason, to perform its obligations.
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Section 17. Ambiguous Instructions. If a Purchase Order Form or a Redemption Order Form contains order terms that differ from the information provided in the telephone call at the time of issuance of the applicable order number, the Sponsor will use commercially reasonable efforts to contact one of the Authorized Persons of the Authorized Participant to request confirmation of the terms of the Order. If an Authorized Person confirms the terms as they appear in the Order, then the Order will be accepted and processed. If an Authorized Person contradicts the Order terms, the Order will be deemed invalid, and a corrected Order must be received by the Sponsor. If the Sponsor is not able to contact an Authorized Person, then the Order shall be accepted and processed in accordance with its terms notwithstanding any inconsistency from the terms of the telephone information. In the event that an Order contains terms that are not complete or are illegible, the Order will be deemed invalid and the Sponsor will attempt to contact one of the Authorized Persons of the Authorized Participant to request retransmission of the Order.
Section 18. Miscellaneous.
(a) Amendment and Modification. This Agreement, the Procedures attached as Attachment A and the Exhibits hereto may be amended, modified or supplemented by the Trust and the Sponsor, without consent of the Authorized Participant from time to time by the following procedure. After the amendment, modification or supplement has been agreed to, the Sponsor will mail a copy of the proposed amendment, modification or supplement to the Authorized Participant in accordance with Section 18(c) below. For the purposes of this Agreement, mail will be deemed received by the recipient thereof on the third (3rd) day following the deposit of such mail into the United States postal system. Within fifteen (15) calendar days after its deemed receipt, the amendment, modification or supplement will become part of this Agreement, the Attachments or the Exhibits, as the case may be, in accordance with its terms. If at any time there is any material amendment, modification or supplement of any COtwo Advisors Physical European Carbon Allowance Trust Authorized Participant Agreement (other than this Agreement), the Sponsor will promptly mail a copy of such amendment, modification or supplement to the Authorized Participant.
(b) Waiver of Compliance. Any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but any such written waiver, or the failure to insist upon strict compliance with any obligation, covenant, agreement or condition herein, shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.
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(c) Notices. Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery, by postage prepaid registered or certified United States first class mail, return receipt requested, by nationally recognized overnight courier (delivery confirmation received) or by telex, telegram or telephonic facsimile or similar means of same day delivery (transmission confirmation received), with a confirming copy regular mail, postage prepaid. For avoidance of doubt, notices may not be given or transmitted by electronic mail. Unless otherwise notified in writing, all notices to the Trust shall be given or sent to the Sponsor. All notices shall be directed to the address or telephone or facsimile numbers indicated below the signature line of the parties on the signature page hereof.
(d) Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns.
(e) Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party without the prior written consent of the other parties, which shall not be unreasonably withheld, except that any entity into which a party hereto may be merged or converted or with which it may be consolidated or any entity resulting from any merger, conversion, or consolidation to which such party hereunder shall be a party, or any entity succeeding to all or substantially all of the business of the party, shall be the successor of the party under this Agreement and except that the Sponsor may delegate its obligations hereunder to the Distributor or the Administrator by advance written notice to the Authorized Participant. The party resulting from any such merger, conversion, consolidation or succession shall notify the other parties hereto of the change. Any purported assignment in violation of the provisions hereof shall be null and void. Notwithstanding the foregoing, this Agreement shall be automatically assigned to any successor trustee or Sponsor at such time such successor qualifies as a successor trustee or Sponsor under the terms of the Trust Agreement. Furthermore, the Authorized Participant may assign its rights, interests or obligations hereunder to an affiliate without mutual written consent of any other party.
(f) Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York (regardless of the laws that might otherwise govern under applicable New York conflict of laws principles) as to all matters, including matters of validity, construction, effect, performance and remedies. Each party hereto irrevocably consents to the jurisdiction of the courts of the State of New York and of any federal court located in the Borough of Manhattan in such State in connection with any action, suit or other proceeding arising out of or relating to this Agreement or any action taken or omitted hereunder, and waives any claim of forum non conveniens and any objections as to laying of venue. Each party further waives personal service of any summons, complaint or other process and agrees that service thereof may be made by certified or registered mail directed to such party at such party’s address for purposes of notices hereunder. Each party hereby waives its right to a trial by jury of any claim arising under or in connection with this Agreement.
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(g) Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement, and it shall not be necessary in making proof of this Agreement as to any party hereto to produce or account for more than one such counterpart executed and delivered by such party.
(h) Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement.
(i) Entire Agreement. This Agreement and the Trust Agreement, along with any other agreement or instrument delivered pursuant to this Agreement and the Trust Agreement, supersede all prior agreements and understandings between the parties with respect to the subject matter hereof, provided, however, that the Authorized Participant shall not be deemed by this provision to be a party to the Trust Agreement.
(j) Severance. If any provision of this Agreement is held by any court or any act, regulation, rule or decision of any other governmental or supra national body or authority or regulatory or self-regulatory organization to be invalid, illegal or unenforceable for any reason, it shall be invalid, illegal or unenforceable only to the extent so held and shall not affect the validity, legality or enforceability of the other provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter of this Agreement and the deletion of such portion of this Agreement will not substantially impair the respective benefits, obligations, or expectations of the parties to this Agreement. If this Agreement as so modified substantially impairs the respective benefits, obligations, or expectations of the parties to this Agreement, it shall be subject to immediate termination upon written notice by the terminating party delivered in accordance with Section 18(c) of this Agreement.
(k) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party.
(l) Survival. Sections 9 (Indemnification) and 19 (No Promotion) hereof shall survive the termination of this Agreement.
(m) Other Usages. The following usages shall apply in interpreting this Agreement: (i) references to a governmental or quasigovernmental agency, authority or instrumentality shall also refer to a regulatory body that succeeds to the functions of such agency, authority or instrumentality; and (ii) “including” means “including, but not limited to.”
Section 19. No Promotion. Except as provided in Section 13(e) of this Agreement, each of the Trust and the Sponsor agrees that it will not, without the prior written consent of the Authorized Participant in each instance, (i) use in advertising, publicity or otherwise the name of the Authorized Participant or any affiliate of the Authorized Participant, or any partner or employee of the Authorized Participant, nor any trade name, trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof owned by the Authorized Participant or its affiliates, or (ii) represent, directly or indirectly, that any product or any service provided by the Trust or the Sponsor has been approved or endorsed by the Authorized Participant.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Authorized Participant, the Trust and the Sponsor, on behalf of the Trust, have caused this Agreement to be executed by their duly authorized representatives as of the date first set forth above.
COtwo Advisors, Sponsor of COtwo Advisors Physical European Carbon Allowance Trust
| By: | ||
| Name: | Ron Gutstein | |
| Title: | Chief Executive Officer | |
| Address: | 140 Elm Street, Suite 6, | |
| New Canaan, CT 06840 | ||
| Telephone: | (203) 731-7675 | |
| AUTHORIZED PARTICIPANT | ||
| By: | ||
| Name: | ||
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EXHIBIT A
___________________
FORM OF AUTHORIZED PERSONS OF AUTHORIZED PARTICIPANT
The following are the names, titles and signatures of all persons (each an “Authorized Person”) authorized to give instructions relating to any activity contemplated by the Authorized Participant Agreement or any other notice, request or instruction on behalf of the Authorized Participant pursuant to the _____________ Authorized Participant Agreement.
| Authorized Participant: | ||
| Name: | ||
| E-Mail Address: | ||
| Telephone: | ||
| Fax: | ||
| Name: | ||
| E-Mail Address: | ||
| Telephone: | ||
| Fax: | ||
| Name: | ||
| E-Mail Address: | ||
| Telephone: | ||
| Fax: | ||
| Name: | ||
| E-Mail Address: | ||
| Telephone: | ||
| Fax: |
| Certified By: | ||
| Name: | ||
| Title: | ||
| Date: |
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ATTACHMENT A
COtwo Advisors Physical European Carbon Allowance Trust
AUTHORIZED PARTICIPANT PROCEDURES HANDBOOK
This document supplements the Prospectus with respect to the procedures to be used by (i) the Transfer Agent and Distributor in processing orders for the purchase of Creation Units of the Fund (“Creation Orders”) and (ii) the Transfer Agent in processing orders redeeming Creation units of the Fund (“Redemption Orders,” and together with Creation Orders, “Orders”).
A Participant is required to have signed the Participant Agreement. Upon acceptance by the Trust of the Participant Agreement, the Transfer Agent or Distributor, as the case may be, will assign a personal identification number (“PIN”) to each Authorized Person authorized to act for the Participant. This will allow a Participant through its Authorized Person(s) to place an order with respect to Creation Units.
TO PLACE AN ORDER FOR PURCHASE OR REDEMPTION OF CREATION UNITS
| 1. | Orders by Telephone. |
a. Order Number. Call to Receive an Order Number. An Authorized Person for the Participant will call the telephone representative at the number listed on the Fund’s order form (“Order Form”) not later than the cut-off time for placing Orders with the Fund as set forth in the Order Form (the “Order Cut-Off Time”) to receive an Order Number. Non-standard Orders generally must be arranged with the Trust in advance of Order placement. The Order Form (as may be revised from time to time) is incorporated into and made a part of this Agreement.
Upon verifying the authenticity of the caller (as determined by the use of the appropriate PIN) and the terms of the Order, the telephone representative will issue a unique Order Number. All Orders with respect to the purchase or redemption of Creation Units are required to be in writing and accompanied by the designated Order Number. Incoming telephone calls are queued and will be handled in the sequence received. Calls placed before the Order Cut-Off Time will be processed even if the call is taken after this cut-off time. ACCORDINGLY, DO NOT HANG UP AND REDIAL. INCOMING CALLS THAT ARE ATTEMPTED LATER THAN THE Order Cut-Off Time WILL NOT BE ACCEPTED.
NOTE THAT THE TELEPHONE CALL IN WHICH THE ORDER NUMBER IS ISSUED INITIATES THE ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE ORDER. AN ORDER IS ONLY COMPLETED AND PROCESSED UPON RECEIPT OF WRITTEN INSTRUCTIONS VIA THE ORDER FORM CONTAINING THE DESIGNATED ORDER NUMBER, AUTHORIZED INDIVIDUALS’ SIGNATURES AND TRANSMITTED BY FACSIMILE.
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b. Place the Order. An Order Number is only valid for a limited time. The Order Form for purchase or redemption of Creation Units must be sent by facsimile to the telephone representative within 20 minutes of the issuance of the Order Number. In the event that the Order Form is not received within such time period, the telephone representative will attempt to contact the Participant to request immediate transmission of the Order. Unless the Order Form is received by the telephone representative upon the earlier of (i) within 15 minutes of contact with the Participant or (ii) 45 minutes after the Order Cut-Off Time, the Order will be deemed invalid.
c. Await Receipt of Confirmation.
| (i) | Clearing Process. The Distributor (in the case of purchases) or the Transfer Agent (in the case of redemptions) shall issue a confirmation of Order acceptance within approximately 15 minutes of its receipt of an Order Form received in good form. In the event the Participant does not receive a timely confirmation from the Distributor or the Transfer Agent, it should contact the telephone representative at the business number indicated. |
| (ii) | Outside the Clearing Process. In lieu of receiving a confirmation of Order acceptance, the DTC Participant will receive an acknowledgment of Order acceptance. The DTC Participant shall deliver on settlement date the Deposit Securities and/or cash (in the case of purchases) or the Creation Unit size aggregation of Shares on trade date plus one (in the case of redemptions) to the Trust through DTC. The Trust shall settle the transaction on the prescribed settlement date. |
d. Ambiguous Instructions. In the event that an Order Form contains terms that differ from the information provided in the telephone call at the time of issuance of the Order Number, the telephone representative will attempt to contact the Participant to request confirmation of the terms of the Order. If an Authorized Person confirms the terms as they appear in the Order Form then the Order will be accepted and processed. If an Authorized Person contradicts its terms, the Order will be deemed invalid and a corrected Order Form must be received by the telephone representative not later than the earlier of (i) within 15 minutes of such contact with the Participant or (ii) 45 minutes after the Order Cut-Off Time. If the telephone representative is not able to contact an Authorized Person, then the Order shall be accepted and processed in accordance with the terms of the Order Form notwithstanding any inconsistency from the terms of the telephone information. In the event that an Order Form contains terms that are illegible, as determined in the sole discretion of the Transfer Agent or Distributor (in the case of a Creation Order) or the Transfer Agent (in the case of a Redemption Order), the Order will be deemed invalid and will not be processed. A telephone representative will attempt to contact the Participant to request retransmission of the Order Form, and a corrected Order Form must be received by the telephone representative not later than the earlier of (i) within 15 minutes of such contact with the Participant or (ii) 45 minutes after the Order Cut-Off Time.
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| 2. | Election to Place Orders by Internet. |
a. General. Notwithstanding the foregoing provisions, Orders may be submitted through the Internet (“Web Order Site” or “Fund Connect”), but must be done so in accordance with the terms of this Agreement, the Prospectus, the Web Order Site, the State Street Fund Connect Buy-Side User Agreement (which must be separately entered into by the Participant) (the “Fund Connect Agreement”) and the applicable Fund Connect User Guide (or any successor documents). To the extent that any provision of this Agreement is inconsistent with any provision of any Fund Connect Agreement, the Fund Connect Agreement shall control with respect to State Street’s provision of the Web Order Site; provided, however, it is not the intention of the parties to otherwise modify the rights, duties and obligations of the parties under the Agreement, which shall remain in full force and effect until otherwise expressly modified or terminated in accordance with its terms. Notwithstanding the forgoing, the Participant acknowledges that references to the applicable Fund Connect User Guide (or any successor documents) contained herein are for instructional purposes only, and such Fund Connect User Guide (or any successor documents) does not contain any additional representations, warranties or obligations by the Trust, the Transfer Agent, the Distributor or their respective agents.
b. Certain Acknowledgements. The Participant acknowledges and agrees (i) that the Trust, the Transfer Agent, the Distributor and their respective agents may elect to review any Order placed through the Web Order Site manually before it is executed and that such manual review may result in a delay in execution of such Order; (ii) that during periods of heavy market activity or other times, it may be difficult to place Orders via the Web Order Site and the Participant may place Orders as otherwise set forth in Attachment A; and (iii) that any transaction information, content, or data downloaded or otherwise obtained through the use of the Web Order Site are done at the Participant’s own discretion and risk.
EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THE FUND CONNECT AGREEMENT AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE WEB ORDER SITE IS PROVIDED “AS IS,” “AS AVAILABLE” WITH ALL FAULTS AND WITHOUT ANY WARRANTY OF ANY KIND. SPECIFICALLY, WITHOUT LIMITING THE FOREGOING, ALL WARRANTIES, CONDITIONS, OTHER CONTRACTUAL TERMS, REPRESENTATIONS, INDEMNITIES AND GUARANTEES WITH RESPECT TO THE WEB ORDER SITE, WHETHER EXPRESS, IMPLIED OR STATUTORY, ARISING BY LAW, CUSTOM, PRIOR ORAL OR WRITTEN STATEMENTS BY THE TRUST, THE TRANSFER AGENT, THE DISTRIBUTOR OR THEIR RESPECTIVE AGENTS, AFFILIATES, LICENSORS OR OTHERWISE (INCLUDING, BUT NOT LIMITED TO AS TO TITLE, SATISFACTORY QUALITY, ACCURACY, COMPLETENESS, UNINTERRUPTED USE, NON-INFRINGEMENT, TIMELINESS, TRUTHFULNESS, SEQUENCE, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE AND ANY IMPLIED WARRANTIES, CONDITIONS AND OTHER CONTRACTUAL TERMS ARISING FROM TRADE USAGE, COURSE OF DEALING OR COURSE OF PERFORMANCE) ARE HEREBY OVERRIDDEN, EXCLUDED AND DISCLAIMED.
c. Election to Terminate Placing Orders by Internet. The Participant may elect at any time to discontinue placing Orders through the Web Order Site without providing notice under the Agreement.
| 3. | Acknowledgment Regarding Telephone and Internet Transactions. During periods of heavy market activity or other times, the Participant acknowledges it may be difficult to reach the Trust by telephone or to transact business over the Internet via the Web Order Site. Technological irregularities may also make the use of the Internet and Web Order Site slow or unavailable at times. The Trust may terminate the receipt of redemption or exchange Orders by telephone or the Internet at any time, in which case you may redeem or exchange Shares by other means. |
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ATTACHMENT A
AUTHORIZED PERSONS CERTIFIED AUTHORIZED PERSONS OF PARTICIPANT
The following are the names, titles and signatures of all persons (each an “Authorized Person”) authorized to give instructions relating to any activity contemplated by this AB Active ETFs, Inc. Authorized Participant Agreement, or any other notices, request or instruction on behalf of Participant pursuant to this Authorized Participant Agreement or request on behalf of AP with respect to said Orders or any other activity contemplated by the Agreement.
| NAME(1) | TITLE(1) | SIGNATURE(1) | TELEPHONE NUMBER(1) | E-MAIL ADDRESS(1) | User Location (Country) | PERMISSION (2)* | ||||||
| * | Permissions: |
RO- Read-Only (Allows users to see account information and run reports, but not place trades)
ET – Execute Trades (Allows user to place trades directly on to Fund Connect)
| (1) | Required information. |
| (2) | Required information to use the Web Order Site. |
| Signed on behalf of the Authorized Participant: | ||
| By: | ||
| Name: | ||
| Title: | ||
| Date: | ||
Exhibit 10.2
MARKETING AGENT AGREEMENT
THIS AGREEMENT is made and entered into as of this 24th day of May, 2023, by and among COtwo Advisors Physical European Carbon Allowance Trust, a Delaware statutory trust (the “Trust”), COtwo Advisors LLC, a Delaware limited liability company (the “Sponsor”) with respect to Section 19 only, and Foreside Fund Services, LLC, a Delaware limited liability company (“Foreside”).
WHEREAS, the Trust is a statutory trust organized under the laws of the State of Delaware;
WHEREAS, the Trust filed with the U.S. Securities and Exchange Commission (the “SEC”) a Registration Statement for the Trust under the Securities Act of 1933, as amended (the “1933 Act”);
WHEREAS, the Trust intends to create and redeem shares of beneficial interest in the Trust (the “Shares”) only in creation unit aggregations (“Creation Unit”) on a continuous basis, and list the Shares on one or more national securities exchanges;
WHEREAS, the Trust desires to retain Foreside to provide certain services in connection with the offering of the Shares (as amended from time to time);
WHEREAS, Foreside is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”);
WHEREAS, the Trust desires to retain Foreside to provide certain services to the Trust; and
WHEREAS, Foreside is willing to provide certain services for the Trust on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:
1. Services.
Foreside agrees to serve as the marketing agent of the Trust on the terms and for the period set forth in this Agreement.
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2. Definitions.
Wherever they are used herein, the following terms have the following respective meanings:
“Prospectus” means the Prospectus and Statement of Additional Information, if any, constituting parts of the Registration Statement of the Trust under the 1933 Act as such Prospectus and Statement of Additional Information, if any, may be amended or supplemented and filed with the SEC from time to time;
“Registration Statement” means the registration statement most recently filed from time to time by the Trust with the SEC and effective under the 1933 Act, as such registration statement is amended by any amendments thereto at the time in effect;
All other capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Registration Statement and the Prospectus.
3. Duties of Foreside
| a) | Foreside shall use commercially reasonable efforts to provide the following services to the Trust: |
| (i) | at the request of the Trust, Foreside shall assist the Trust with Authorized Participant Agreements between and among Authorized Participants, the Trust, and the applicable Transfer Agent, for the creation and redemption of Creation Units of the Trust; |
| (ii) | maintain copies of confirmations of Creation Unit creation and redemption order acceptances and produce such copies upon reasonable request from the Trust or Sponsor; |
| (iii) | make available copies of the Prospectus to Authorized Participants who have purchased Creation Units in accordance with the Authorized Participant Agreements; |
| (iv) | maintain telephonic, electronic mail and/or access to direct computer communications links with the Transfer Agent; |
| (v) | review and approve, prior to use, all Trust advertising, sales and marketing materials submitted to Foreside for review by the Trust (“Marketing Materials”) for compliance with applicable SEC and FINRA advertising rules, and file all such Marketing Materials required to be filed with FINRA. Foreside agrees to furnish to the Trust or the Sponsor any comments provided by FINRA with respect to such Marketing Materials; |
| (vi) | ensure that all direct requests by Authorized Participants for Prospectuses are fulfilled; |
| (vii) | work with the Transfer Agent to review and approve orders placed by Authorized Participants and transmitted to the Transfer Agent. The Trust acknowledges that Foreside shall not be obligated to approve any certain number of orders for Creation Units; and |
| b) | The services furnished by Foreside hereunder are not to be deemed exclusive and Foreside shall be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby. |
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4. Duties of the Trust
| a) | The Trust agrees to create, issue, and redeem Creation Units of the Trust in accordance with the procedures described in the Prospectus. Upon reasonable notice to Foreside, and in accordance with the procedures described in the Prospectus, the Trust reserves the right to reject any order for Creation Units or to stop all receipts of such orders at any time. |
| b) | The Trust shall deliver to Foreside copies of the following documents: |
| (i) | the current Prospectus for the Trust; |
| (ii) | any relevant policies and procedures adopted by the Sponsor or the Trust or its service providers that are applicable to the services provided by Foreside; and |
| (iii) | any other documents, materials or information that Foreside shall reasonably request to enable it to perform its duties pursuant to this Agreement. |
| c) | The Trust shall thereafter deliver to Foreside as soon as is reasonably practical any and all amendments to the documents required to be delivered under this Section. |
| d) | The Trust shall arrange to provide the listing exchanges with copies of Prospectuses, Statements of Additional Information, and product descriptions that are required to be provided by the Trust to purchasers in the secondary market. |
| e) | The Trust will make it known that Prospectuses and Statements of Additional Information and product descriptions are available by making sure such disclosures are in all marketing and advertising materials prepared by the Trust. |
5. Representations, Warranties and Covenants of the Client.
A. The Trust hereby represents and warrants to Foreside, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
| (i) | it is duly organized and in good standing under the laws of its jurisdiction of organization; |
| (ii) | this Agreement has been duly authorized, executed and delivered by the Trust and, when executed and delivered, will constitute a valid and legally binding obligation of the Trust, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; |
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| (iii) | it is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; |
| (iv) | the Trust’s Registration Statement, Prospectus and Marketing Materials have been prepared, in all material respects, in conformity with the requirements of the 1933 Act and SEC rules and regulations; |
| (v) | the Trust’s Registration Statement (including its statement of additional information) and Prospectus do not and shall not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that all statements or information furnished to Foreside pursuant to this Agreement shall be true and correct in all material respects; and |
| (vi) | all Marketing Materials shall contain all statements required to be stated therein in accordance with the 1933 Act and SEC rules and regulations; and do not and shall not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; |
| (vii) | all necessary approvals, authorizations, consents, or orders of or filings with any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency have been or will be obtained by the Trust in connection with the issuance and sale of the Shares, including registration of the Shares under the 1933 Act, and any necessary qualification under the securities or blue-sky laws of the various jurisdictions in which the Shares are being offered. |
B. The Trust shall fully cooperate in the efforts of Foreside in the provision of the services. In addition, the Trust shall keep Foreside fully informed of its affairs as they relate to the Trust and shall provide to Foreside from time-to-time copies of all information that Foreside may reasonably request for use in connection with the provision of the Services.
6. Representations, Warranties and Covenants of Foreside.
A. Foreside hereby represents and warrants to the Trust, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
| (i) | it is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; |
| (ii) | this Agreement has been duly authorized, executed and delivered by Foreside and, when executed and delivered, will constitute a valid and legally binding obligation of Foreside, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; |
| (iii) | it is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; and |
| (iv) | it is registered as a broker-dealer under the 1934 Act and is a member in good standing of FINRA. |
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7. Compensation.
As compensation for the services performed by Foreside under this Agreement, Trust shall pay to Foreside the fees and expenses set forth in Exhibit A hereto (as amended from time to time).
8. Indemnification.
| a) | The Trust shall indemnify, defend and hold Foreside, its affiliates and each of their respective members, managers, directors, officers, employees, representatives and any person who controls or previously controlled Foreside within the meaning of Section 15 of the 1933 Act (collectively, the “Foreside Indemnitees”), free and harmless from and against any and all losses, claims, demands, liabilities, damages and expenses (including the costs of investigating or defending any alleged losses, claims, demands, liabilities, damages or expenses and any reasonable counsel fees incurred in connection therewith) (collectively, “Losses”) that any Foreside Indemnitee may incur arising out of or relating to (i) the Trust’s breach of any of its obligations, representations, warranties or covenants contained in this Agreement; (ii) the Trust’s failure to comply in all material respects with any applicable laws, rules or regulations; or (iii) any claim that the Prospectus, Marketing Materials or other information filed or made public by the Trust (as from time to time amended) includes or included an untrue statement of a material fact or omits or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading provided, however, that the Trust’s obligation to indemnify any of the Foreside Indemnitees shall not be deemed to cover any Losses arising out of any untrue statement or alleged untrue statement or omission or alleged omission made in the Prospectus or any such Marketing Materials or other information filed or made public by the Trust in reliance upon and in conformity with information provided by Foreside to the Trust, in writing, for use in such Prospectus or any such Marketing Materials. |
| b) | Foreside shall indemnify, defend and hold the Trust, its affiliates, and each of their respective directors, officers, employees, representatives, and any person who controls or previously controlled the Trust within the meaning of Section 15 of the 1933 Act (collectively, the “Trust Indemnitees”), free and harmless from and against any and all Losses that any Trust Indemnitee may incur under the 1933 Act, the 1934 Act, any other statute (including Blue Sky laws) or any rule or regulation thereunder, or under common law or otherwise, arising out of or relating to (i) Foreside’s breach of any of its obligations, representations, warranties or covenants contained in this Agreement; (ii) Foreside’s failure to comply in all material respects with any applicable laws, rules, or regulations; or (iii) any claim that the Prospectus, Marketing Materials or other information filed or made public by the Trust (as from time to time amended) include or included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with information furnished to the Trust by Foreside, in writing, for use in such Prospectus, Marketing Materials or other information filed or made public by the Trust. |
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| c) | In no case (i) is the indemnification provided by an indemnifying party to be deemed to protect against any liability the indemnified party would otherwise be subject to by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the indemnifying party to be liable under this Section with respect to any claim made against any indemnified party unless the indemnified party notifies the indemnifying party in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the indemnified party (or after the indemnified party shall have received notice of service on any designated agent). |
| d) | Failure to notify the indemnifying party of any claim shall not relieve the indemnifying party from any liability that it may have to the indemnified party against whom such action is brought, on account of this Section, unless failure or delay to so notify the indemnifying party prejudices the indemnifying party’s ability to defend against such claim. The indemnifying party shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the indemnifying party elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the indemnified party. In the event that indemnifying party elects to assume the defense of any suit and retain counsel, the indemnified party shall bear the fees and expenses of any additional counsel retained by them. If the indemnifying party does not elect to assume the defense of any suit, it will reimburse the indemnified party for the reasonable fees and expenses of any counsel retained by them. The indemnifying party agrees to notify the indemnified party promptly of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the purchase or redemption of any of the Creation Units or the Shares. |
| e) | No indemnified party shall settle any claim against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 8(a) or 8(b) above, without prior written notice to and consent from the indemnifying party, which consent shall not be unreasonably withheld. No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. |
| f) | This section 8 shall survive the termination of this Agreement. |
9. Limitations on Damages.
Neither Party shall be liable for any consequential, special or indirect losses or damages suffered by the other Party, whether or not the likelihood of such losses or damages was known by the Party.
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10. Force Majeure.
Neither party shall be liable for losses, delays, failure, errors, interruption or loss of data occurring directly or indirectly by reason of circumstances beyond its reasonable control, including, without limitation, Acts of Nature (including fire, flood, earthquake, storm, hurricane or other natural disaster); action or inaction of civil or military authority; acts of foreign enemies; war; terrorism; riot; insurrection; sabotage; epidemics; labor disputes; civil commotion; or interruption, loss or malfunction of utilities, transportation, computer or communications capabilities, and the other party shall have no right to terminate this Agreement in such circumstances.
11. Duration and Termination.
| a) | This Agreement shall become effective as of the date first set forth above. Unless sooner terminated as provided herein, this Agreement shall continue in effect for two years from the date hereof. Thereafter, if not terminated, this Agreement shall continue automatically in effect for successive one-year periods. |
| b) | Notwithstanding the foregoing, this Agreement may be terminated, without the payment of any penalty, upon no less than sixty (60) days’ written notice by either party. |
12. Confidentiality.
During the term of this Agreement, Foreside and the Trust may have access to non-public confidential information relating to such matters as either party’s business, trade secrets, systems, procedures, manuals, products, contracts, personnel, and clients. As used in this Agreement, “Confidential Information” means non-public or proprietary information belonging to one of the parties that is of value to such party and the disclosure of which could result in a competitive or other disadvantage to such party. Confidential Information includes non-public or proprietary information that may be financial information, proposals and presentations, reports, forecasts, inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities). Confidential Information includes information developed by either party in the course of engaging in the activities provided for in this Agreement, unless: (i) the information is or becomes publicly known through lawful means; (ii) the information is disclosed to the other party without a confidential restriction by a third party who rightfully possesses the information and did not obtain it, either directly or indirectly, from one of the parties, as the case may be, or any of their respective principals, employees, affiliated persons, or affiliated entities. The parties understand and agree that all Confidential Information shall be kept confidential by the other both during and after the term of this Agreement. Each party shall maintain commercially reasonable information security policies and procedures for protecting Confidential Information. The parties further agree that they will not, without the prior written approval by the other party, disclose such Confidential Information, or use such Confidential Information in any way, either during the term of this Agreement or at any time thereafter, except (i) as required in the course of this Agreement, (ii) as provided by the other party, or (iii) as required by applicable law, rule, or regulation or (iv) in response to (A) a routine self-regulatory examination or (B) a request for information directed at the receiving party that is not targeted at the disclosing party; provided, however, that in the case of (iii), the receiving party will, unless otherwise requested by its regulators or prohibited by applicable law, provide the disclosing party with notice thereof as promptly as practicable under the circumstances (provided however that the receiving party shall incur no liability for its failure to provide such notice) so that disclosing party may seek a protective order or other appropriate remedy, and the receiving party shall provide reasonable cooperation to the disclosing party in its attempts to contest such disclosure. Upon termination of this Agreement for any reason, or as otherwise requested by the Trust, all Confidential Information held by or on behalf of the Trust shall be promptly returned to the Trust, or an authorized officer of Foreside will certify to the Trust in writing that all such Confidential Information has been destroyed, provided, however, that the receiving party may retain copies of such materials (i) to the extent required by applicable law or regulatory requirements and (ii) as electronic backup copies of such Confidential Information maintained pursuant to internal document retention requirements, provided that the Receiving Party shall continue to treat such Confidential Information as confidential pursuant to the terms hereof. This section 12 shall survive the termination of this Agreement.
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13. Notice
Any notice required or permitted to be given hereunder by either party to the other shall be deemed sufficiently given if in writing and personally delivered or sent by electronic mail, or registered, certified or overnight mail, postage prepaid, addressed by the party giving such notice to the other party at the address furnished below unless and until modified by Foreside or the Trust, as the case may be. Notice shall be given to each party at the following address, as amended from time to time:
| (i) To Foreside: | (ii) If to the Trust: | |
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Foreside Fund Services, LLC Three Canal Plaza, Suite 100 Portland, ME 04101 Attn: Legal Department Telephone: (207) 553-7110 Email: legal@foreside.com
With a copy to: etp-services@foreside.com |
COtwo Advisors Physical European Carbon Allowance Trust c/o COtwo Advisors LLC 15 Woodcock Lane Ridgefield, CT 06877 Attn: Ronald Gutstein Telephone: (203) 731-7675 Email: [ ]
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14. Transfer Agent
Foreside and the Trust agree that in the course of Foreside’s services that Foreside may need information from time to time from the transfer agent (“Transfer Agent”) as depicted below. The Trust shall promptly notify Foreside in writing of any changes to the Transfer Agent or its contact information.
STATE STREET BANK AND TRUST COMPANY
One Lincoln Street
Boston, Massachusetts 02111
15. Modifications. The terms of this Agreement shall not be waived, altered, modified, amended or supplemented in any manner whatsoever except by a written instrument signed by Foreside and the Trust.
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16. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without regard to the conflicts of law principles thereof.
17. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party. This Agreement shall be binding upon and inure to the benefit of the parties’ representatives, successors, heirs, and permitted assigns, as applicable. A change in control shall not be construed to be an assignment.
18. Survival. The provisions of Sections 8, 9, 10, 12, 15, 18, 19 and 21 of this Agreement shall survive any termination of this Agreement.
19. Anti-Money Laundering. Foreside and the Sponsor both represent and warrant to the other that it has, and shall maintain, an anti-money laundering program (“AML Program”) that, at a minimum, (i) designates a compliance officer to administer and oversee the AML Program, (ii) provides ongoing employee training, (iii) includes an independent audit function to test the effectiveness of the AML Program, (iv) establishes internal policies, procedures, and controls that are tailored to its particular business, (v) provides for the filing of all necessary anti-money laundering reports including, but not limited to, currency transaction reports and suspicious activity reports, and (vi) allows for appropriate regulators to examine its anti-money laundering books and records.
20. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors. This Agreement shall be construed as if drafted jointly by both Foreside and the Trust and no presumptions shall arise favoring any party by virtue of authorship of any provision of this Agreement. This Agreement may be executed by the parties hereto in any number of counterparts, and all of the counterparts taken together shall be deemed to constitute one and the same document. Nothing herein contained shall prevent Foreside from entering into similar distribution arrangements or from providing the services contemplated hereunder to other investment companies or investment vehicles. This Agreement has been negotiated and executed by the parties in English. In the event any translation of this Agreement is prepared for convenience or any other purpose, the provisions of the English version shall prevail.
21. Liability of Sponsor. It is expressly understood and agreed by Foreside that:
(a) this Agreement is executed and delivered on behalf of the Trust by the Sponsor, not individually or personally, but solely as Sponsor of the Trust in the exercise of the powers and authority conferred and vested in it;
(b) the representations, covenants, undertakings and agreements herein made on the part of the Trust are made and intended not as personal representations, undertakings and agreements by the Sponsor but are made and intended for the purpose of binding only the Trust;
(c) nothing herein contained shall be construed as creating any liability on the Sponsor, individually or personally, to perform any covenant of the Trust either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any person claiming by, through or under the parties hereto; and
(d) under no circumstances shall the Sponsor be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, duty, representation, warranty or covenant made or undertaken by the Trust under this Agreement or any other related document.
22. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereto, and supersedes all prior communications, understandings and agreements relating to the subject matter hereof, whether oral or written.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer on one or more counterparts as of the date first above written.
| Foreside Fund Services, LLC | ||
| By: | /s/ Teresa Cowan | |
| Teresa Cowan, President | ||
| COtwo Advisors Physical European Carbon Allowance Trust | ||
| By: COtwo Advisors LLC, not in its individual capacity but solely as Sponsor | ||
| By: | /s/ Ronald Gutstein | |
| Name/title: Ronald Gutstein, Managing Member | ||
| COTwo Advisors LLC (w/ respect to Section 19 | ||
| only) | ||
| By: | /s/ Ronald Gutstein | |
| Name/title: Ronald Gutstein, Managing Member | ||
| By: COtwo Advisors LLC, not in its individual capacity but solely as Sponsor | ||
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EXHIBIT A
Compensation
A-1
Exhibit 10.3
Execution Copy
CUSTODY AGREEMENT
This Agreement (the “Agreement”) is made as of October 1, 2023 (the “Effective Date”) between:
| (1) | Each entity identified on Appendix A, whose jurisdiction of formation is identified opposite its name (the “Client”); and |
| (2) | STATE STREET BANK AND TRUST COMPANY, a bank and trust company organized under the laws of The Commonwealth of Massachusetts, U.S.A. (the “Custodian”). |
| 1 | Definitions and Interpretation |
Defined terms and the general rules of interpretation agreed by the Parties are set forth in Schedule 1.
| 2 | Appointment of the Custodian |
The Client hereby appoints the Custodian to provide the services set out in Sections 3 through 15 below (the “Services”) subject to and in accordance with the terms of this Agreement.
| 3 | Safekeeping Securities |
| 3.1 | Holding Securities. The Custodian will hold Securities delivered or credited to its account under this Agreement directly or through accounts at Subcustodians or CSDs. In turn, Subcustodians will hold Securities directly or through accounts at CSDs. |
| 3.2 | Client Entitlements and Segregation. The Custodian will take the following steps to reflect the Client’s ownership of Securities and to separately identify the Securities of the Client from the proprietary assets of the Custodian, Subcustodians, and CSDs, in accordance with Local Market Practice: |
| 3.2.1 | Accounts at the Custodian. Open and maintain on the records of the Custodian one or more securities accounts in the name of the Client or such other name as the Client may reasonably request (each, a “Securities Account”) and credit Securities to them; |
| 3.2.2 | Accounts at the Subcustodians or CSDs. Open and maintain securities accounts at the Subcustodians or CSDs in which the Custodian is a direct participant, cause Subcustodians to open and maintain securities accounts at CSDs in which the Subcustodian is a participant, and cause Securities to be credited to the relevant accounts. Such accounts: (i) may be commingled (or omnibus) accounts for Securities of multiple customers of the Custodian (or Subcustodian, in the case of accounts opened by the Subcustodian at a CSD) or, in limited markets, segregated (or separate) accounts for Securities of the Client; and (ii) must not include any proprietary securities of the Custodian, the Subcustodian or the CSD; |
| 3.2.3 | Physical Securities. Physically segregate bearer Securities from the proprietary assets of the Custodian, and require that the Subcustodians physically segregate bearer Securities from the Subcustodian’s and the Custodian’s proprietary assets; |
| Information Classification: Limited Access | 1 |
| 3.2.4 | Registration Names. Register certificated Securities (other than bearer securities) in the name of the Client or in the name of the Custodian, a Subcustodian, a CSD or a nominee of any of them, or otherwise in accordance with Local Market Practice and the laws and regulations applicable to the Custodian; and |
| 3.2.5 | Records of Transactions; Reconciliation. Maintain records of the Client’s transactions in the Securities Accounts and reconcile its records of clients’ securities holdings against the records of its Subcustodians and CSDs in which it is a direct participant in accordance with the Custodian’s standard procedures and Local Market Practice. Subcustodians will likewise maintain records of their client’s transactions and reconcile their records of the securities holdings of their clients against the records of the CSDs in which they are a direct participant in accordance with the Subcustodians’ standard procedures and Local Market Practice. |
| 3.3 | Securities Interchangeable. Securities of the Client (whether held in separate or commingled accounts) are fungible with all other securities of the same issue held in such accounts by the Custodian and its Subcustodians. This means that the Client’s redelivery rights in respect of the Securities are not in respect of the Securities actually deposited with the Custodian or a Subcustodian from time to time, but rather in respect of Securities of the same number, class, denomination and issue as those Securities. |
| 3.4 | Acceptance of Securities. Except as otherwise agreed in writing with the Client, the Custodian will only accept custody of Securities and other assets that it is operationally equipped and licensed to hold in the relevant market where it provides custodial services either directly or through an existing Subcustodian and may decline to accept custody of certain securities or asset types that it determines present an unacceptable risk profile or that it or its Subcustodians are not operationally equipped or permitted to hold under any law or regulation. |
| 4 | Cash |
| 4.1 | Cash Accounts. The Custodian will open and maintain in the name of the Client one or more cash deposit accounts (each a “Cash Account”) in such currencies as may be required in connection with the investment activity of the Client. |
| 4.2 | Location of Cash Deposits. Cash received for the Client will be deposited with the Custodian, or with a Subcustodian, depending on the currency and/or the market. The Custodian will designate each currency in a particular market as On Book Cash or Off Book Cash. “On Book Cash” means the currency is maintained in a deposit account with, and recorded as a liability on the balance sheet of, the Custodian (through any of its branches) and “Off Book Cash” means the currency is maintained in a deposit account with, and recorded as a liability on the balance sheet of, a Subcustodian (through any of its branches). The Custodian may change the designation of a currency as On Book or Off Book from time to time. Clients will find the designation of currencies as On Book Cash and Off Book Cash, and any changes to such designations, in the Client Publications. |
| 4.3 | Cash Records. The Custodian will reflect Cash balances held in all On Book and Off Book Client deposit accounts on its books and records and report the balances to the Client. |
| Information Classification: Limited Access | 2 |
| 4.4 | Banking Relationship. In accepting deposits under this Agreement, the Custodian (for On Book Cash) or the relevant Subcustodian (for Off Book Cash) acts as banker and does not hold the money deposited on trust or segregated from its proprietary assets. Accordingly, the Client is an unsecured creditor of the Custodian (for On Book Cash) or the relevant Subcustodian (for Off Book Cash), subject to such rights as may arise in an Insolvency Event as determined under the laws of the jurisdiction of the Custodian or relevant Subcustodian. With respect to Off Book Cash, the Custodian is only responsible for returning the actual amount that the Custodian receives from the Subcustodian. |
| 4.5 | Interest and Charges. Cash Accounts may be interest bearing or non-interest bearing and may be subject to charges or fees on the deposit balance or on a per account basis. The Custodian or the relevant Subcustodian will determine on a periodic basis: |
| 4.5.1 | the interest rates, if any, (which may be positive, zero or negative) or equivalent charges or fees paid or charged to the Client from time to time with respect to a Cash Account; and |
| 4.5.2 | the overdraft rates or equivalent charges or fees and the applicable overdraft thresholds (if any) that will trigger interest charges from time to time for overdrafts, |
in each case, acting in their sole discretion, taking into account market conditions and other relevant commercial considerations. Interest and overdraft rates or other account charges or fees will vary by currency. Details on current rates and deposit account charges are available upon request.
| 4.6 | Overdrafts. The Client must maintain sufficient funds in the Cash Accounts to settle all transactions in the applicable currencies in a timely manner. The Custodian or its Subcustodians may, but are not required to, extend credit under this Agreement. The Custodian reserves the right to decline to process any Proper Instruction or settle any transaction that would result in an overdraft of the Cash Account. If an overdraft arises in the Cash Account, the Client agrees to repay the principal amount of the overdraft upon demand by the Custodian or within five Business Days, whichever is earlier, plus any applicable overdraft fees and interest on the principal overdraft. |
| 5 | Transaction Settlement |
| 5.1 | Settlement. The Custodian will settle all transactions in accordance with Local Market Practice, which may not always be on a delivery-versus-payment or receipt-versus-payment basis. Except as otherwise provided below regarding Contractual Settlement, the Custodian will credit or debit the appropriate Cash Account on an actual settlement or payment basis. |
| 5.2 | Contractual Settlement. In order to facilitate transaction settlement, the Custodian may provisionally credit settlement, maturity or redemption proceeds, or income, dividends and other distributions, on a contractual settlement or predetermined income basis (“Contractual Settlement”), for markets, securities and eligible clients as determined and notified by the Custodian in the Client Publications. The Custodian can terminate or suspend Contractual Settlement for markets, securities or particular clients at any time. |
| 5.3 | Use of Funds. Where Contractual Settlement applies, the Custodian will credit or debit the appropriate Cash Account on the contractual settlement date or payable date for the relevant transaction. This means that (i) the Client will have use of the funds from the date that a sale was contracted to settle or the payable date, which may be earlier than the date payment actually occurs and (ii) the Custodian will have use of the funds debited from the Cash Account from the date that a purchase was contracted to settle until the date that settlement actually occurs. |
| Information Classification: Limited Access | 3 |
| 5.4 | Reversal. The Custodian may reverse any Contractual Settlement credit at any time before actual receipt of the cash payment associated with the credit if the Custodian determines, in its reasonable judgement, that such payment will not be received within 30 days for that transaction or if the Custodian suspends or terminates the provision of Contractual Settlement for those Securities in that market. The Custodian will generally notify the Client two Business Days before any such reversal. |
| 5.5 | Secured Liability. To the extent that the Custodian has not received the cash payment associated with a credit, the amount credited remains a Secured Liability under this Agreement. |
| 6 | Corporate Actions |
| 6.1 | Transmit Information. The Custodian will promptly transmit or make available to the Client all material written information customarily provided by a professional global custodian regarding an applicable Corporate Action, or a brief synopsis of that information, affecting Securities then being held under this Agreement, where (i) that information is received directly from issuers of such Securities or from CSDs or Subcustodians or (ii) that information is publicly available in the relevant market from standard vendors routinely used by professional global custodians provided that the Custodian can verify the accuracy of such information. The Custodian will transmit or make available such Corporate Action data it receives from primary sources (issuers, CSDs and Subcustodians) without further review although it will generally note if such information is single sourced. The Custodian generally will not transmit or make available such Corporate Action data it receives from secondary sources (vendors) unless the accuracy of that information can be verified against at least one additional source. |
| 6.2 | Exercise. The Custodian will process the Client’s elections with respect to any voluntary Corporate Action at the direction of the Client provided it has actual possession of the relevant Securities and it has received Proper Instructions by the deadline specified in the Custodian’s Corporate Action notification (“Corporate Actions Deadline Date”). The Custodian will use reasonable efforts to effect Proper Instructions received after that deadline but will have no responsibility for any failure to exercise such instructions accurately or timely. In the absence of receiving Proper Instructions by the Corporate Actions Deadline Date, the Custodian may take the default action specified in the corporate action notification. In the event of a mandatory Corporate Action, the Custodian will act without Proper Instructions in accordance with Section 22.10. |
| 6.3 | Class Actions. The Custodian will transmit written information received by the Custodian regarding any class action litigation to the extent set out in the Client Publications. The Custodian will not support class action participation by the Client beyond such forwarding of written information. In no event will the Custodian act as a lead plaintiff in a class action. |
| 6.4 | Fractional Positions. Fractional positions resulting from Corporate Actions will be dealt with in accordance with the Client Publications. |
| 7 | Proxy Servicing |
| 7.1 | Transmit Information. The Custodian will forward to the Client all proxies received by the Custodian relating to the Securities then held under this Agreement, for the markets designated in the Client Publications, unless otherwise instructed by the Client. The Custodian will use an agent to assist in the receipt and distribution of proxies and will share the Client’s position and contact information to facilitate such collection and distribution. |
| Information Classification: Limited Access | 4 |
| 7.2 | Voting. The Custodian provides proxy voting services for the markets designated in the Client Publications. The Custodian will cause eligible proxies to be promptly executed by the registered holder in accordance with Proper Instructions and delivered to the issuer of the Securities or its designated agent. In order for the Custodian to provide the voting services, the Custodian must have received such Proper Instructions, must have actual possession of the relevant Securities, and all requirements set out in the Client Publications must have been met, including where applicable receiving an executed power of attorney, in each case by the deadline specified in the Custodian’s proxy notification. |
| 8 | Income Collection |
| 8.1 | Monitoring and Crediting. The Custodian will use reasonable efforts to monitor and collect on a timely basis, in accordance with Local Market Practice, all income and other payments to which the Client is entitled in respect of the Securities held under this Agreement and Securities on loan through the securities lending program sponsored by the Custodian or its Affiliates. The Custodian will credit such amounts to the Cash Account of the Client as received, except where Contractual Settlement applies. |
| 8.2 | Repatriation of Income. The Client is responsible for directing the repatriation of income into the base currency of the Portfolio or another currency selected by the Client, and may enter into separate arrangements to do so, as set out in Section 13 of this Agreement. |
| 9 | Statements and Reports |
| 9.1 | Contents. The Custodian will make available reports to the Client regarding the Portfolio on a periodic basis as selected by the Client from certain online tools made available from time to time by the Custodian or as otherwise agreed with the Client. The reports will include Cash balances, an itemized statement of Securities and Cash and Securities transaction activity. Market values contained in these reports are unaudited and based on the Custodian’s standard pricing vendors and practices. These reports will not include net asset value calculations. |
| 9.2 | Cash and Securities Not Held. The Custodian may agree to incorporate information in respect of cash or securities not held by the Custodian. In making available such information to the Client, the Custodian will rely upon the information provided by the Client or a third party without any requirement to verify the accuracy of such information. The Custodian will not perform any other Services in relation to such cash or securities. |
| 10 | Tax Withholding and Tax Relief |
| 10.1 | Withholding. The Custodian will withhold (or cause to be withheld) the amount of any tax which is required to be withheld by the Custodian or Subcustodian under the Law applicable to the Custodian or Subcustodian based on the Client’s domicile and entity type in respect of any dividend, interest income or other distribution in relation to any Security, and/or the proceeds or income from the sale or other transfer of any Security held by the Custodian. If the Client has not provided the requisite information and documentation, the Custodian is obligated to arrange for maximum withholding. In certain markets, the Client will be required to hire a local tax agent to calculate withholding, as set out in the Client Publications. |
| 10.2 | Tax Relief. The Custodian will apply for a reduction of withholding tax and refund of any tax paid or tax credits in respect of income payments on Securities based on the Client’s entitlement under relevant tax treaties or laws which apply in each market that supports a standard tax reclaim process, in all cases as may be set out from time to time in the Client Publications. The Custodian does not facilitate tax reclaims for tax transparent or pass-through (i.e., multiple-beneficiary) entities such as partnerships, LLCs, common trusts or any other types of entities that are generally ineligible for tax treaty or domestic law tax entitlements, even where the partners or beneficial holders of such entities may be eligible. |
| Information Classification: Limited Access | 5 |
| 10.3 | Documentation. In order for the Custodian to perform the services in this Section 10, the Client will provide the Custodian such information and documentation as may be required from time to time by the Custodian for tax purposes, including documentary evidence of its tax domicile, and its entity type and details of any special ruling or treatment to which the Client may be entitled in relation to countries where the Client engages or proposes to engage in investment activity or where Securities are or will be held. The Client is responsible for ensuring the documentation and information provided is true and accurate in all material respects and will promptly provide the Custodian with all necessary corrections or updates upon becoming aware of any changes or inaccuracies in the documentation or information supplied. The provision of documentation and information under this Section 10.3 will be taken to be a Proper Instruction upon which the Custodian will be entitled to rely for all purposes under this Section 10, including calculating withholding and determining available tax relief, without the need to undertake any further inquiries or verification. |
| 10.4 | Client Responsible for Taxes. The Client will be liable for all taxes, levies or similar obligations which arise as a result of the Client’s investment activity, including in relation to any Cash or Securities held by the Custodian on behalf of the Client, or any related transactions. If any taxes become payable in relation to any prior payment made to the Client by the Custodian, the Custodian may withhold any credit balance in the Client’s Cash Accounts to the extent necessary to satisfy such tax obligation. The Client will also remain liable for any tax deficiency. |
| 10.5 | No Tax Advice. The Client acknowledges that the Custodian is not, and will not be deemed to be, providing tax advice or tax counsel. |
| 11 | Physical Safekeeping of Investment Documents |
| 11.1 | Document Safekeeping. The Custodian may agree to provide physical safekeeping for Investment Documents delivered to it and will return such Investment Documents to the Client upon receipt of Proper Instructions, subject to additional documentation and other requirements as the Custodian may specify from time to time. |
| 11.2 | No Other Services. The Custodian will not otherwise perform any other Services in relation to such Investment Documents. |
| 12 | Alternative Asset Servicing |
| 12.1 | Alternative Assets. The Custodian may agree to reflect the Client’s Alternative Assets on its books, records or statements. Unless otherwise agreed in writing, the Custodian will not perform any other services or assume any obligations in relation to Alternative Assets. The Custodian may, in limited cases, agree to register the Client’s interests in Alternative Assets in the name of the Custodian, subject to additional documentation and other requirements as the Custodian may specify from time to time. |
| 13 | Foreign Exchange |
| 13.1 | Role of Custodian. The role of the Custodian with respect to foreign exchange transactions is limited to facilitating the processing and settlement of such transactions. The Custodian does not have any agency, trust or fiduciary obligation to the Client or any other person in connection with the execution of any foreign exchange transactions, other than the obligation as agent to process the Proper Instructions given by the Client. |
| Information Classification: Limited Access | 6 |
| 13.2 | Role of Counterparties. If the Client enters into any foreign exchange transaction with State Street Bank and Trust Company, a Subcustodian or any of their Affiliates, the Client does so on the basis that these entities are acting as a principal dealer and counterparty, and not as fiduciary or agent to the Client, and the execution services are governed by separate arrangements (including pricing) and do not form part of the Services provided by the Custodian under this Agreement. This applies to foreign exchange transactions entered into by the Client directly with the trading desk of these entities or by Proper Instruction to the Custodian using the indirect foreign exchange services described in the Client Publications. |
| 14 | Subcustodians |
| 14.1 | Use of Subcustodians. The Custodian is authorized to utilize Subcustodians in connection with its performance of the Services, and will notify the Client of the Subcustodians so employed from time to time through the Client Publications. |
| 14.2 | Selection and Monitoring. The Custodian will use reasonable skill, care and diligence in the selection, monitoring and continued utilization of Subcustodians by taking the following actions: (i) annually assess the financial condition of each Subcustodian by reviewing their publicly available financial information, (ii) on a daily basis monitoring the performance by each Subcustodian’ of its duties relative to the Services, and (iii) confirming on an annual basis that each Subcustodian is licensed to act as a subcustodian in its relevant market. |
| 14.3 | Special Subcustodians. At the request of the Client, the Custodian may agree to appoint one or more qualified banks, trust companies or other entities designated by the Client to act as a subcustodian (each a “Special Subcustodian”) for purposes specified by the Client. In connection with the appointment of a Special Subcustodian, the Custodian shall enter into a tri-party subcustodian agreement with the Special Subcustodian and the Client in form and substance approved the Custodian, provided that such agreement shall comply with Law applicable to the Client and shall be consistent with the terms and provisions of this Agreement, to the extent practicable. |
| 15 | Central Securities Depositories |
| 15.1 | Use of Central Securities Depositories. The Custodian and its Subcustodians will use CSDs in connection with the performance of the Services, and will notify the Client of the CSDs so employed from time to time through the Client Publications. |
| 15.2 | Rules of Central Securities Depositories. Where the Custodian or its Subcustodians use CSDs, the Client acknowledges that they will do so in accordance with the terms and conditions of participation or membership in such CSDs and the rules and procedures governing the operation thereof. |
15A Provision of ETF Services
| 15A.1 | Each Client identified on Appendix A as an “ETF Client” is an exchange-traded fund that will issue and redeem shares only in aggregations of a specified number of shares, each called a “Creation Unit,” generally in exchange for a basket of securities and/or instruments and a specified cash payment, as more fully described in the Client’s currently effective prospectus and statement of additional information (collectively, the “Prospectus”). Capitalized terms used in this Section 15A without definition shall have the meanings given to them in the Prospectus. |
| Information Classification: Limited Access | 7 |
| 15A.2 | Determination of Fund Deposit, etc. Subject to and in accordance with the directions of the Investment Manager, the Custodian shall determine for each Client after the end of each trading day on the NYSE Arca (the “Exchange”), in accordance with Board policies and the procedures set forth in the Prospectus, (i) the identity and weighting of the securities in the Deposit Securities and the Fund Securities, (ii) the cash component, and (iii) the amount of cash redemption proceeds (all as described in the Prospectus) required for the issuance or redemption, as the case may be, of Creation Units on such date. The Custodian shall provide or cause to be provided this information to the Client’s distributor and other persons as instructed according to Board policies and shall disseminate such information on each day that the Exchange is open, including through the facilities of the National Securities Clearing Corporation (the “NSCC”), prior to the opening of trading on the Exchange. |
| 15A.3 | Allocation of Deposit Security Shortfalls. Each Client acknowledges that the Custodian maintains only one account on the books of the NSCC for the benefit of all exchange traded funds for which the Custodian serves as custodian, including the Client (collectively, the “ETF Custody Clients”). In the event that (a) two or more ETF Custody Clients require delivery of the same Deposit Security in order to purchase a Creation Unit, and (b) the NSCC, pursuant to its Continuous Net Settlement system, delivers to the Custodian’s NSCC account less than the full amount of such Deposit Security necessary to satisfy in full each affected ETF Custody Client’s required amount (a “Common Deposit Security Shortfall”), then, until all Common Deposit Security Shortfalls for a given Deposit Security are satisfied in full, the Custodian will allocate to each affected ETF Custody Client, on a pro rata basis, securities and/or cash received in the Custodian’s NSCC account relating to such shortfall, first to satisfy any prior unsatisfied Common Deposit Security Shortfall, and then to satisfy the current Common Deposit Security Shortfall. |
| 15A.4 | Creation and Redemption of Creation Units. |
| 15A.4.1 | Creation. The Custodian shall receive and deposit into the Client’s account such payments as are received for Client shares issued or sold in Creation Units. The Custodian will provide timely notification to the Client and the Transfer Agent of any receipt of such payments by the Custodian. |
| 15A.4.2 | Redemption. Upon receipt of instructions from the Client’s Transfer Agent, the Custodian shall set aside funds and securities of the Client to the extent available for payment to, or in accordance with the instructions of, Authorized Participants who have delivered to the Transfer Agent a request for redemption of their shares, in Creation Units, which shall have been accepted by the Transfer Agent, the applicable Fund Securities (or such securities in lieu thereof as may be designated by the Investment Advisor in accordance with the Prospectus) for such Client and the Cash Redemption Amount, if applicable, less any applicable Redemption Transaction Fee. The Custodian will transfer the applicable Fund Securities to or on the order of the Authorized Participant. Any cash redemption payment (less any applicable Redemption Transaction Fee) due to the Authorized Participant on redemption shall be effected through the DTC system or through wire transfer in the case of redemptions effected outside of the DTC system. |
| Information Classification: Limited Access | 8 |
| 16 | Delegation |
| 16.1 | Use of Delegates. The Custodian will have the right, without prior notice to or the consent of the Client, to employ Delegates to provide or assist it in the provision of any part of the Services other than Services required by Law applicable to either Party to be performed by a qualified custodian or CSD. Unless otherwise agreed in a fee schedule, the Custodian will be responsible for the compensation of its Delegates. |
| 16.2 | Provision of Information Regarding Delegates. The Custodian will provide or make available to the Client on a quarterly or other periodic basis information regarding its global operating model for the delivery of the Services, which information will include the identities of Delegates affiliated with the Custodian that perform or may perform any part of the Services, and the locations from which such Delegates perform Services, as well as such other information about its Delegates as the Client may reasonably request from time to time. |
| 16.3 | Third Parties. Nothing in this Section limits or restricts the Custodian’s right to use Affiliates or third parties to perform or discharge, or assist it in the performance or discharge of, any obligations or duties under this Agreement other than the provision of the Services. |
| 17 | Standard of Care and Liability |
| 17.1 | Standard of Care. The Custodian will at all times exercise the reasonable skill, care and diligence expected of a professional provider of custody services to institutional investors and act in good faith and in accordance with generally applicable industry standards and practices in the performance of its duties under this Agreement. |
| 17.2 | Liability for Losses. Subject to the limitations and exclusions of liability in this Agreement, the Custodian will be liable for Losses suffered or incurred by the Client to the extent such Losses are caused by the negligence, wilful default, or fraud of the Custodian in the performance of its obligations under this Agreement. The parties agree that “negligence” will mean a breach by the Custodian of its obligation to exercise the standard of care described in Section 17.1 above. |
| 17.3 | Responsibility for Subcustodians. The Custodian will be liable to the Client for the acts and omissions of its Subcustodians as if it had committed such acts and omissions itself; provided that: |
| 17.3.1 | compliance with the standard of care set out in Section 17.1 will be assessed in accordance with the standards and circumstances prevailing at the time of the act or omission in the local market or jurisdiction in which the Subcustodian is providing the relevant Services; and |
| 17.3.2 | the Custodian will have no liability for Losses resulting from the insolvency or other financial default of a Subcustodian that is not an Affiliate of the Custodian except to the extent that such Losses are caused by the failure of the Custodian to exercise reasonable skill, care and diligence in the selection, monitoring and continued utilization of the Subcustodian as required under Section 14.2. |
| 17.4 | Responsibility for Special Subcustodians. Notwithstanding the provisions of Section 17.3 to the contrary, the Custodian shall not be liable to the Client for Losses suffered or incurred by the Client resulting from the acts or omissions of a Special Subcustodian, except to the extent such Losses are caused by the negligence, wilful default or fraud of the Custodian. In the event of any such Loss, the Custodian shall use commercially reasonable efforts to enforce such rights as it may have against any Special Subcustodian. |
| Information Classification: Limited Access | 9 |
| 17.5 | Responsibility for Delegates. The Custodian will be liable to the Client for the acts and omissions of its Delegates as if it had committed such acts and omissions itself. |
| 17.6 | Force Majeure. Neither Party will be in breach of this Agreement or liable for Losses arising by reason of the occurrence of a Force Majeure Event that prevents, hinders or delays it from or in performing its obligations under this Agreement, except, in the case of the Custodian, to the extent that such Losses are attributable to its breach of its business continuity obligations under this Agreement. |
| 17.7 | No Liability for Certain Losses. The Custodian will not be liable to the Client for any Losses to the extent they arise from or are caused by: |
| 17.7.1 | the Custodian acting upon any (i) Proper Instruction or (ii) if a Proper Instruction is not required in a particular circumstance, any other instruction, information, notice, request, consent, certificate, instrument or other writing that the Custodian reasonably believes to be genuine and to be signed or otherwise given by or on behalf of a person authorized to do so; |
| 17.7.2 | a delay in processing or any failure to process any Proper Instruction to the extent permitted under Section 22, subject to the satisfaction of the conditions set out in that Section, as applicable; |
| 17.7.3 | the failure of the Client or any person authorized by it to comply with the Client’s obligations under this Agreement; or |
| 17.7.4 | any other acts and omissions of the Client, any person authorized by it or any third party, including any Third Party Agent, Market Participant, Authorized Data Source, CSD, or Financial Market Utility. |
| 17.8 | Mutual Exclusion of Indirect and Other Loss. Notwithstanding any other provision of this Agreement, neither Party will be liable to the other for: (i) indirect, consequential, speculative, punitive or special Loss or (ii) loss of profit, revenue, opportunity, business, anticipated savings, goodwill and damage to reputation, or Loss of any similar kind; in each case whether or not a Party has been advised of or otherwise could have anticipated the possibility of such losses, except to the extent any such losses cannot be excluded or limited as a matter of Law applicable to either Party. |
| 18 | Error Correction |
| 18.1 | Error Correction. If an error results from an act or omission of the Custodian in performing the services under this Agreement, the Custodian may take such remedial action as it considers appropriate under the circumstances, which may include effecting corrective transactions involving the Client’s assets, where and to the extent reasonably necessary to place the Client in the position (or its equivalent) it would have been had the error not occurred. The Custodian will be responsible for Losses arising from its errors in accordance with the terms of this Agreement and will be entitled to retain gains arising from its errors or related remedial actions unless otherwise prohibited by Law. Where an error results in a series of related Losses and gains, the Custodian will be entitled to net gains against Losses when permitted by Law. The Custodian will have no duty to notify or account to the Client for any Loss or gain associated with an error it has fully remediated. |
| Information Classification: Limited Access | 10 |
| 19 | Limits on the Scope of the Services |
| 19.1 | No Fiduciary or Implied Duties. The Custodian is responsible only for the duties it has expressly undertaken under this Agreement and no other duties will be implied or inferred, including any fiduciary duties, except to the extent such fiduciary duties may not be disclaimed as a matter of Law. |
| 19.2 | Investment and Other Risk, Client Compliance Matters. The Client bears the risk of investing in Securities or other assets or holding cash denominated in any currency or holding assets in a particular market, including investment risk and risk arising from the political, regulatory, legal or financial infrastructure of such market or otherwise arising from Local Market Practice. The Custodian is not responsible for monitoring or enforcing compliance by the Client or its Investment Manager(s) with any investment or other restriction, guideline or requirement imposed by the Client’s constituent documents or by contract or Law applicable to the Client in connection with investment activity undertaken by or on behalf of the Client. |
| 19.3 | Data Accuracy. The Custodian has no responsibility for, or duty to review, verify or otherwise perform any investigation as to the completeness, accuracy or sufficiency of, any data or information provided by or on behalf of the Client, any persons authorized by the Client, any Third Party Agent, any Market Participant or any Authorized Data Sources, except to the extent the Custodian has agreed in writing to perform reconciliations, variance or tolerance checks or other specific forms of data review under this Agreement. |
| 19.4 | Title. The Custodian is not responsible for title or entitlement to, validity or genuineness, including good deliverable form, of any asset received by the Custodian. |
| 19.5 | Proceedings. The Custodian is not responsible for commencing legal or administrative proceedings on behalf of the Client or relating to the assets held under this Agreement, including in respect of the late payment of income or other payments due to the Client or amounts payable on Securities in default if payment is refused after due demand and presentment. |
| 19.6 | Laws Applicable to the Custodian or Subcustodian. Laws applicable to the Custodian or a Subcustodian may from time to time prohibit or cause delays in the Custodian holding assets, acting on Proper Instructions or providing the Services to the Client in the manner contemplated by this Agreement. In such cases, the Custodian or Subcustodian will be entitled to comply with the Law and, where permitted by such Law, the Parties will seek to resolve the situation to the Parties’ mutual satisfaction. |
| 19.7 | Securities on Loan. Asset servicing is not generally performed for securities on loan unless otherwise noted in this Agreement or agreed by the Parties in writing. Provision of such services with respect to securities on loan may be covered by a separate securities lending or services agreement. |
| 20 | Indemnity |
| 20.1 | Indemnity by Client. Subject to this Section 20 and the exclusions and limitations of liability elsewhere in this Agreement, including Section 17.8, the Client will indemnify the Custodian against any direct Losses incurred by the Custodian (including Losses incurred by Subcustodians or Delegates for which the Custodian is liable) in connection with the performance of its duties under this Agreement, including acting on Proper Instructions and Losses incurred by virtue of being the holder of record of the Client’s Securities, except, in each case, to the extent such Losses result from the Custodian’s negligence, wilful default or fraud (or that of its Subcustodians or Delegates) in the discharge of the Custodian’s duties under this Agreement. |
| Information Classification: Limited Access | 11 |
| 20.2 | Indemnity by Custodian. Subject to this Section 20 and the exclusions and limitations of liability elsewhere in this Agreement, including Section 17.7 and 17.8, the Custodian will indemnify the Client against any direct Losses incurred by the Client, in each case, to the extent such Losses result from the negligence, wilful default or fraud of the Custodian (or that of its Subcustodians or Delegates) in the discharge of the Custodian’s duties under this Agreement. |
| 20.3 | Duty to Mitigate. Each Party will use reasonable efforts to mitigate any Losses in respect of which it claims indemnification under this Agreement. |
| 20.4 | Notice of Claims. A Party seeking indemnification under this Section (“Indemnified Party”) against a third-party claim (“Indemnified Claim”) will promptly provide written notice of such claim to the Party obligated to indemnify (“Indemnifying Party”). The failure to notify the Indemnifying Party will not relieve such Party of any liability under this Section, except to the extent that such failure materially prejudices the investigation and/or defense of the Indemnified Claim. |
| 20.5 | Right to Control Third Party Claims. The Indemnifying Party will, at its own expense, be entitled but not obligated to control and direct the investigation and defense of any Indemnified Claim, except where the Custodian is the Indemnified Party and is seeking indemnification from multiple customers for claims based on common facts or otherwise related to the Indemnified Claim, in which case the Custodian will have the right to control and direct the investigation and defense of such claim, at the expense of (i) the Indemnifying Party or (ii) all of the customers from which indemnification is sought, including the Indemnifying Party, pro rata, as appropriate. Where the Indemnifying Party controls and directs the investigation of the defence of the Indemnified Claim, the Indemnified Party may retain separate counsel at its own expense. If a conflict of interest exists between the Parties with respect to the defense of such claim, the reasonable cost of separate counsel will be an indemnified expense. |
| 20.6 | Settlement of Claims. Neither Party may settle an Indemnified Claim without the consent of the other Party, which consent will not be unreasonably withheld, conditioned or delayed, provided that the Indemnifying Party will have the right to settle an Indemnified Claim without the consent of the Indemnified Party if such settlement: |
| 20.6.1 | involves only the payment of money; |
| 20.6.2 | fully and unconditionally releases the Indemnified Party from any liability in exchange for the amount paid in settlement; and |
| 20.6.3 | does not include any admission of fault or liability in relation to the Indemnified Party. |
| 20.7 | Cooperation. In all cases, each Party will, as applicable, provide reasonable cooperation and assistance to the other Party and keep the other Party apprised as to the status of the Indemnified Claim, including any discussions relating to the settlement of the claim and the details of any settlement offer. |
| Information Classification: Limited Access | 12 |
| 21 | Obligations of the Client |
| 21.1 | Provide Information. The Client will provide or cause to be provided to the Custodian all data, information, documents and instructions concerning the Client and the investment activity of the Client in relation to the Portfolio as may be reasonably necessary or as the Custodian may reasonably request, in each case in a complete, accurate and timely manner, in order to enable the Custodian to discharge its duties under this Agreement. |
| 21.2 | AML Compliance. The Client will comply with all applicable anti-money laundering, sanctions or other financial crime legislation applicable to it and will provide the Custodian with all necessary sanctions questionnaires, declarations and other documentation in order for the Custodian to comply with its anti-money laundering policy. |
| 21.3 | Pass Through Representations. To the extent that the Custodian is required to give (or is deemed to have given) any representation, warranty or undertaking to a third party relating to the Client in accordance with normal market practice in connection with the execution of transaction documents or the issuance or transmission of trade notifications, confirmations and/or settlement instructions, whether using facsimile transmission, industry messaging or matching utilities and/or the proprietary software of Third Party Agents and Market Participants, CSDs or other Financial Market Utilities, the Client will be deemed to have made such representation, warranty or undertaking to the Custodian. |
| 21.4 | Operational Requirements. The Client will adhere to the deadlines and other operational requirements set out in the Client Publications, to facilitate meeting the requirements of CSD’s, Third Party Agents and Market Participants. |
| 21.5 | Client Review and Notification. In accordance with standard market practice, the Client will employ commercially reasonable review and control measures with respect to information provided by the Custodian under this Agreement and give the Custodian prompt written notice of any suspected error or omission or the Client’s inability to access any such Information so as to prevent, stem or mitigate any Losses that may arise from the use of inaccurate data or the inaccessibility of data. |
| 21.6 | Fees. In consideration for the Services provided by the Custodian, the Client will pay the Fees as agreed in a written fee schedule or otherwise agreed in writing by the Parties from time to time. The Fees and any other amounts payable under this Agreement are stated exclusive of any sales, use, excise, value-added, services, consumption, withholding or other similar tax that is assessed on the supply of the Services under an agreement. Any such tax will be payable by the Client. |
| 21.7 | Client Publications. The Client will ensure that it provides the Custodian with and regularly updates, as necessary, e-mail and other contact details for its representatives to enable timely distribution and receipt of the Client Publications. |
| 22 | Proper Instructions |
| 22.1 | Dealings in Cash and Securities. The Custodian will effect all transactions and dealings in Cash and Securities under this Agreement in accordance with Proper Instructions, subject to any other rights it may have under this Agreement. |
| 22.2 | Appointment of Authorized Persons. The Client and each Investment Manager will provide the Custodian with a list of the names and (if applicable) signatures, of Authorized Persons in a form agreed by the parties from time to time. The Custodian may rely upon the authority of each Authorized Person until it receives written notice to the contrary from the Client and has had a reasonable time to act on such notice. |
| Information Classification: Limited Access | 13 |
| 22.3 | Authentication Procedures. The Custodian will implement Authentication Procedures. The Client acknowledges that the Authentication Procedures are intended to provide a commercially reasonable degree of protection against unauthorized transactions of certain types and are not designed to detect errors. Any purported Proper Instruction received by the Custodian in accordance with an Authentication Procedure will be taken to have originated from an Authorized Person and will constitute a Proper Instruction under this Agreement for all purposes. |
| 22.4 | Security Measures by Client. The Client is responsible for ensuring that appropriate security measures are implemented to prevent unauthorized disclosure or use of any Authentication Procedure made available to it or an Investment Manager in connection with this Agreement. |
| 22.5 | No Duty to Verify. Except to the extent the Custodian is required to comply with Authentication Procedures under Section 22.3 above, the Custodian has no duty to verify that personnel of the Client or any Investment Manager engaged in investment activity are authorized to do so or that any instructions received by the Custodian are duly authorized. |
| 22.6 | Decline/Delay in Processing. The Custodian reserves the right to decline to process or delay the processing of any purported Proper Instruction where: |
| 22.6.1 | the Custodian, in good faith, determines that the instruction may not have been properly authorized; |
| 22.6.2 | the instruction is inaccurate, incomplete or unclear; |
| 22.6.3 | the instruction conflicts with the terms of this Agreement or any Law applicable to either Party, Local Market Practice or the Custodian’s standard operating procedures; or |
| 22.6.4 | the Custodian has not been given a reasonable time period to effect the instruction. |
In these circumstances, the Custodian will promptly seek authentication, clarification, correction or amendment of any Proper Instruction, as the case may be.
| 22.7 | Cancellation and Amendment. The Custodian will use reasonable efforts to act on Proper Instructions to cancel or amend previously issued Proper Instructions if: |
| 22.7.1 | the Custodian has not already acted on the previously issued Proper Instructions; and |
| 22.7.2 | the Proper Instruction to cancel or amend is received before the applicable deadlines specified from time to time in the Client Publications or applicable event notification. |
The Custodian is not responsible or liable if the request to cancel or amend cannot be satisfied.
| 22.8 | Oral Instructions. If applicable, the Custodian may act on an oral instruction (given in accordance with an agreed Authentication Procedure) before receipt of any written confirmation and irrespective of whether any subsequent written confirmation conforms to the oral instruction. |
| Information Classification: Limited Access | 14 |
| 22.9 | Conflicting Claims. If there is a dispute or conflicting claim with respect to Securities or Cash held by the Custodian under this Agreement, the Custodian is entitled to refuse to act on a Proper Instruction of the Client or any Investment Manager in relation to the particular Securities or Cash until either (i) the dispute or conflicting claims have been finally determined by a court of competent jurisdiction or settled by agreement between the conflicting parties, and the Custodian has received written evidence satisfactory to it of such determination or agreement, or (ii) the Custodian has received an indemnity, security or both, satisfactory to it and sufficient to hold it harmless from and against any and all Losses which the Custodian may incur as a result of its actions. |
| 22.10 | Matters Not Requiring Proper Instructions. The Client authorises the Custodian in the absence of Proper Instructions to attend to all matters which may be necessary or appropriate to discharge its duties and give effect to the terms of this Agreement, including the execution, in the Client’s name or on its behalf, of any affidavits, certificates of ownership and other certificates and documents relating to Securities. |
| 23 | Creditors Rights |
| 23.1 | Security. To secure the full and timely satisfaction of all Secured Liabilities, the Client hereby grants to the Custodian a security interest in and a right of retention, sale and set off, as applicable, against (i) all of the Client’s Cash, Securities, and other assets, whether now existing or hereafter acquired, in the possession or under the control of the Custodian or its Subcustodians pursuant to this Agreement and (ii) any and all cash proceeds of any of the above (collectively, the “Collateral”). |
| 23.2 | Rights of the Custodian. In the event that the Client fails to satisfy in full any of the Secured Liabilities as and when due and payable, the Custodian will have, in addition to all other rights and remedies arising under this Agreement or under applicable Law, the rights and remedies of a secured party under applicable Law. Without prejudice to the Custodian’s other rights and remedies, the Custodian will be entitled, in each case as and to the extent reasonably necessary to satisfy in full the Secured Liabilities and any related transaction expenses, to (a) exercise its right of retention and withhold delivery of any Collateral and otherwise refuse to act on any Proper Instruction relating to such Collateral, (b) sell or otherwise realize any Collateral, and (c) set off the net proceeds of such sale or realization of Collateral and/or the amount of any deposit balances standing to the credit of the Client in any Cash Account(s) against such Secured Liabilities. |
| 23.3 | Exercise of Rights. The Custodian may exercise its rights and remedies against the Collateral in any manner (including by any method, at any time or place, and on any terms) as it deems, in good faith, to be commercially reasonable under the circumstances, and will use reasonable efforts to effect any sale of Collateral at the prevailing market price in the relevant market. Without limiting the foregoing, the Client acknowledges that it will be commercially reasonable for the Custodian to, among other things: (i) accelerate or cause the acceleration of the maturity of any fixed term deposits comprised in the Collateral and (ii) effect any necessary currency conversions through its own trading desk at such exchange rates as it determines in its reasonable discretion, which rates may include a mark-up from the rates the Custodian receives on the interbank market. |
| 23.4 | Notice. The Custodian will use reasonable efforts to give the Client prior notice of any exercise of the right to sell or otherwise realize Collateral set forth above, provided that the Custodian will not be obligated to give prior notice to the Client or delay exercising its rights pending or after the provision of such notice if, in its reasonable judgment, giving such notice or any such delay would prejudice its ability to obtain satisfaction in full of the Secured Liabilities. |
| Information Classification: Limited Access | 15 |
| 24 | Confidentiality and Use of Data |
| 24.1 | Confidentiality |
| 24.1.1 | No Disclosure Without Consent. Subject to Section 24.2 and Section 24.3, Confidential Information will not be disclosed by the Receiving Party to any third party without the prior consent of the Disclosing Party. |
| 24.1.2 | No limitations of obligations under Agreement or at Law. Except as expressly contemplated by this Agreement, nothing in this Section 24 will limit the confidentiality and data-protection obligations of the Custodian and its Affiliates under this Agreement and Law applicable to the Custodian. |
| 24.2 | Use of Confidential Information and Data |
| 24.2.1 | Use of Confidential Information and Data generally. Subject to this Section 24.2 and Section 24.3, all Confidential Information, including Data, will be used by the Receiving Party for the purpose of providing or receiving services, as applicable, pursuant to this Agreement or otherwise discharging its obligations under this Agreement. |
| 24.2.2 | Use of Data for Indicators. The Custodian and its Affiliates may use Data to develop, publish or otherwise distribute to third parties certain investor behavior “indicators” or “indices” that represent broad trends in the flow of investment funds into various markets, sectors or investment instruments (collectively, the “Indicators”), but only so long as (i) the Data is combined or aggregated with (A) information relating to other customers of the Custodian and/or (B) information derived from other sources, in each case such that the Indicators do not allow for attribution to or identification of such Data with the Client, (ii) the Data represents less than a statistically meaningful portion of all of the data used to create the Indicators and (iii) the Custodian publishes or otherwise distributes to third parties only the Indicators and under no circumstance publishes, makes available, distributes or otherwise discloses any of the Data to any third party, whether aggregated, anonymized or otherwise, except as expressly permitted under this Agreement. |
| 24.2.3 | Economic benefit from Indicators. The Client acknowledges that the Custodian may seek and realize economic benefit from the publication or distribution of the Indicators. |
| 24.3 | Disclosure of Confidential Information and Data |
| 24.3.1 | Disclosure of Confidential Information to Representatives. The Receiving Party may disclose the Disclosing Party’s Confidential Information without the Disclosing Party’s consent to its attorneys, accountants, auditors, consultants and other similar advisors that have a reasonable need to know such Confidential Information (“Representatives”), provided such Confidential Information is disclosed under obligations of confidentiality that prohibit the disclosure or use of such Confidential Information by the Representatives for any purpose other than the specific engagement with the Receiving Party for which the Representative has been retained and that are otherwise no less restrictive than the confidentiality obligations contained in this Agreement. The Parties acknowledge that use of Confidential Information by a Representative to represent its other clients in dealing with the Disclosing Party would constitute a breach of this Section 24.3. Where the Custodian is the Receiving Party, “Representatives” will include its Affiliates and Service Providers (as defined below). |
| Information Classification: Limited Access | 16 |
| 24.3.2 | Disclosure and Use of Confidential Information by Custodian. The Custodian may disclose and permit use (as applicable) of Confidential Information of the Client without the Client’s consent: |
| 24.3.2.1 | to its Affiliates and any of its third-party agents and service providers (“Service Providers”) in connection with the provision of services, the discharge of its obligations under this Agreement or the carrying out of any Proper Instruction, including in accordance with the standard practices or requirements of any Financial Market Utility or in connection with the settlement, holding or administration of Cash, Securities or other instruments; |
| 24.3.2.2 | to its Affiliates in connection with the management of the businesses of the Custodian and its Affiliates, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance and client service management and marketing. |
Where possible, such Confidential Information must be disclosed under obligations of confidentiality or in a manner consistent with industry practice.
| 24.3.3 | Confidential Information and Cloud Computing and Storage. Each Party may store Confidential Information with third-party providers of information technology services, and permit access to Confidential Information by such providers as reasonably necessary for the receipt of cloud computing and storage services and related hardware and software maintenance and support. Such Confidential Information must be disclosed under obligations of confidentiality. |
| 24.3.4 | Disclosure of Confidential Information to comply with law. The Receiving Party may disclose the Disclosing Party’s Confidential Information to the extent such disclosure is required to satisfy any legal requirement (including in response to court-issued orders, investigative demands, subpoenas or similar processes or to satisfy the requirements of any applicable regulatory authority). |
| 24.3.5 | Harm of Unauthorized Disclosure of Confidential Information. Each Party acknowledges that the disclosure to any non-authorized third party of Confidential Information or the use of Confidential Information in breach of this Agreement, may immediately give rise to continuing irreparable injury inadequately compensable in damages at law, and in such cases the Receiving Party agrees to waive any defense that an adequate remedy at law is available if the Disclosing Party seeks to obtain injunctive relief against any such breach or any threatened breach. |
| Information Classification: Limited Access | 17 |
| 24.3.6 | Responsibility for Representatives. Each Party will be responsible for any use or disclosure of Confidential Information of the Disclosing Party in breach of this Agreement by its Representatives as though such Party had used or disclosed such Confidential Information itself. |
| 24.3.7 | No Disclosure to Custodian Asset Manager Division. In no event will the Custodian allow representatives of its asset management division or Affiliates engaged in asset management to have access to or to use Confidential Information of the Client, including Data. |
| 25 | Term and Termination |
| 25.1 | Term. This Agreement will commence on the Effective Date and will continue until terminated in accordance with this Section. |
| 25.2 | Termination Rights. |
| 25.2.1 | Prior Notice. The Parties agree that: |
| 25.2.1.1 | the Client may terminate this Agreement by giving not less than 30 days’ prior written notice to the Custodian; and |
| 25.2.1.2 | the Custodian may terminate this Agreement by giving not less than 90 days’ prior written notice to the Client. |
| 25.2.2 | Immediate Effect. A Party may terminate this Agreement with immediate effect at any time by written notice to the other Party, if: |
| 25.2.2.1 | an Insolvency Event occurs in relation to the other Party; |
| 25.2.2.2 | such other Party is the Client and fails to pay any undisputed Fees as and when due and has failed to cure such breach within 30 days of receipt of notice from the Custodian requesting it to do so; or |
| 25.2.2.3 | such other Party commits a material breach of an obligation under this Agreement and has failed to cure such breach within 30 days of receipt of notice requesting it to do so. |
If the Custodian terminates this Agreement pursuant to sub-sections 25.2.2.1 or 25.2.2.2, the Custodian will continue to provide the Services for a period of up to 120 days subject to payment in full of any overdue undisputed Fees and prepayment of the Fees reasonably expected to be incurred during such 120-day period, or such other financial assurance reasonably acceptable to the Custodian.
| 25.3 | Actions on Termination. |
| 25.3.1 | Successor Custodian. Upon termination of the Agreement, the Custodian will deliver the Portfolio to the successor custodian designated by the Client in Proper Instructions. |
| 25.3.2 | Remaining Portfolio. If any part of the Portfolio remains in the possession of the Custodian or its Subcustodians after the date of termination because the Client fails to designate a successor custodian or otherwise, the Custodian may continue to provide the Services to the Client in consideration of the Fees, as if the Agreement had not terminated. However, the Custodian may, after not less than 30 days’ notice in writing to the Client, cease providing the Services and transfer the Portfolio to the Client, and the Client will do all things and execute all documents necessary or desirable in order to effect that transfer. |
| 25.3.3 | Payment of Fees. Upon termination of this Agreement, Fees will become due and payable for the period to the date of such termination, or, if later, to the date at which any part of the Portfolio held by the Custodian has been fully transferred to a successor custodian or to the Client, other than Fees subject to a bona fide good faith dispute. |
| Information Classification: Limited Access | 18 |
| 26 | Representations and Warranties |
| 26.1 | Each Party. Each Party represents and warrants to the other that: (i) it has the power to enter into and perform its obligations under this Agreement; and (ii) it has duly executed this Agreement by duly authorized persons so as to constitute valid and binding obligations of that Party. |
| 26.2 | Client. The Client further represents and warrants to the Custodian that: (i) it is the beneficial owner of the assets comprising the Portfolio or is entitled to deal with the assets comprising the Portfolio under this Agreement as if it were beneficial owner; and (ii) unless otherwise agreed, the Client acts as principal for the purposes of this Agreement and not as agent for another person. |
| 26.3 | Custodian. The Custodian further represents and warrants to the Client that: (i) it holds such authorisations and licences as are necessary to lawfully perform its obligations under this Agreement; and (ii) it will seek to maintain such authorisations and licenses for the term of this Agreement. |
| 27 | Record Retention and Audit Rights |
| 27.1 | Records. The Custodian will retain the records it is required to maintain under this Agreement in accordance with the Law applicable to the Custodian. |
| 27.2 | Client and Regulator Access. The Custodian will allow the Client and the Client’s regulators or supervisory authorities to perform periodic on-site audits as may be reasonably required to examine the Custodian’s performance of the Services. |
| 27.3 | Frequency and Scope. For inspections requested by the Client (such request will include reasonable advance notice) and agreed to by the Custodian, the Custodian reserves the right to impose reasonable limitations on the number, frequency, timing, and scope of such audits. |
| 27.4 | Limitations on Disclosure. Nothing contained in this Section will obligate the Custodian to provide access to or otherwise disclose: (i) any information that is unrelated to the Client and the provision of the Services to the Client; (ii) any information that is treated as confidential under the Custodian’s corporate policies, including, without limitation, internal audit reports, compliance or risk management plans or reports, work papers and other reports, and information relating to management functions; or (iii) any other documents, reports, or information that the Custodian is obligated or entitled to maintain in confidence as a matter of law or regulation. In addition, any access provided to technology will be limited to a demonstration by the Custodian of the functionality thereof and a reasonable opportunity to communicate with the Custodian’s personnel regarding such technology. |
| Information Classification: Limited Access | 19 |
| 28 | Business Continuity, Internal Controls and Information Security |
| 28.1 | Business Continuity Plans. The Custodian will at all times maintain a business contingency plan and a disaster recovery plan and will take commercially reasonable measures to maintain and periodically test such plans. The Custodian will implement such plans following the occurrence of an event which results in an interruption or suspension of the Services to be provided by the Custodian. |
| 28.2 | Internal Controls Review and Report. The Custodian will retain a firm of independent auditors to perform an annual review of certain internal controls and procedures employed by the Custodian in the provision of the Services and issue a standard System and Organization Controls 1 or equivalent report based on such review. The Custodian will provide a copy of the report to the Client upon request. |
| 28.3 | Information Security Systems and Controls. The Custodian will maintain commercially reasonable information security systems and controls, which include administrative, technical, and physical safeguards that are designed to: (i) maintain the security and confidentiality of the Client’s data; (ii) protect against any anticipated threats or hazards to the security or integrity of the Client’s data, including appropriate measures designed to meet legal and regulatory requirements applying to the Custodian; and (iii) protect against unauthorized access to or use of the Client’s data. |
| 28.4 | Virus Detection. The Custodian will at all times employ a current version of one of the leading commercially available virus detection software programs to test the hardware and software applications used by it to deliver the Services for the presence of any computer code designed to disrupt, disable, harm, or otherwise impede operation. |
| 29 | General |
| 29.1 | Services Not Exclusive; Acting in Various Capacities. The Custodian, its Subcustodians and their Affiliates are part of groups of companies and businesses that, in the ordinary course of their business: |
| 29.1.1 | provide a wide range of financial services to many clients of different kinds; |
| 29.1.2 | engage in transactions for their own account (including acting as banker as outlined in Section 4.4 and acting as foreign exchange counterparty as outlined in Section 13) or for the account of other clients; |
which may result in actual, perceived or potential conflicts between the interests of the Client and the interest of the Custodian, its Subcustodians and their Affiliates or between the interests of clients. The Custodian maintains a conflicts of interest policy, and has implemented procedures and arrangements to identify and manage conflicts of interest.
| 29.2 | Disclosure of Conflicts. In connection with the matters outlined in Section 29.1.1, the Custodian, its Subcustodians and their Affiliates: |
| 29.2.1 | may do business with each client on different contractual or financial terms; |
| 29.2.2 | will seek to profit and is entitled to receive and retain profits and compensation in connection with such activities without any obligation to account to the Client for the same; |
| 29.2.3 | may act as principal in its own interests, or as agent for its other clients; |
| Information Classification: Limited Access | 20 |
| 29.2.4 | may act or refrain from acting based upon information derived from such activities that is not available to the Client; |
| 29.2.5 | are not under a duty to notify or disclose to the Client any information which comes to their notice as a result of such activities; and |
| 29.2.6 | do not have an obligation to consider, act in, or provide information to the Client in respect of, the interests of the Client in connection with such activities, except to the extent (if any) expressly agreed in writing with the Client under the contractual arrangements governing those activities. |
The Custodian may (but is not required to) make any disclosure or notification in connection with such activities to the Client via publication on MyStateStreet.com or other notification mechanism.
| 29.3 | Notice. Unless otherwise specified, all notices, requests, demands and other communications under this Agreement (other than routine operational communications), will be in writing and will be taken to have been given: |
| 29.3.1 | when delivered by hand; |
| 29.3.2 | on the next Business Day after being sent by e-mail (unless the sender receives an automated message that the e-mail has not been delivered); |
| 29.3.3 | on the next Business Day after being sent by overnight courier service for next Business Day delivery; or |
| 29.3.4 | on the third Business Day after being sent by certified or registered mail, return receipt requested; |
in each case to the applicable Party at the address or e-mail address specified on Schedule 2, or such other address or e-mail address as a Party may specify by written notice from time to time.
| 29.4 | Waiver. No failure on the part of any Party to exercise, and no delay on its part in exercising, any right or remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise of that right or remedy, or the exercise of any other right or remedy. |
| 29.5 | Sole Remedy. Subject to the right to seek relief under the specific circumstances expressly permitted in this Agreement, each of the Custodian and the Client agrees that, to the maximum extent permitted by law, a claim for breach of contract under and consistent with the terms of this Agreement will be the sole and exclusive remedy available for any and all matters arising from or in any way relating to this Agreement, the provision of the Services or any conduct (including omissions and alleged conduct) relating to the Agreement or provision of the Services, whether before, during or after the term of this Agreement. Accordingly, to the maximum extent permitted by law, each of the Custodian and the Client, on behalf of itself and its Affiliates, waives any and all other rights and remedies that otherwise would be available to such party in law or equity. |
| 29.6 | Assignment and Successors. The terms of this Agreement are binding on the Parties’ representatives, successors and permitted assigns and this Agreement and any rights or obligations under this Agreement may not be assigned or transferred without the prior written consent of the other Party. However, in the event that either Party becomes the subject of an Insolvency Event, then such Party will have the right to assign or transfer its rights and obligations under this Agreement to any entity to which the Party transfers its business and assets (including a bridge bank or similar entity) and the other Party irrevocably consents to such assignment or transfer. |
| 29.7 | Entire Agreement. This Agreement is the complete and exclusive agreement of the Parties regarding the Services and supersedes, as of the Effective Date, all prior oral or written agreements, arrangements or understandings between the parties relating to the Services. |
| Information Classification: Limited Access | 21 |
| 29.8 | Amendments. This Agreement may be amended by written agreement between the Parties. However, the Custodian may amend this Agreement by giving written notice to the Client of such proposed amendment and the Client will be taken to have consented to the amendment if the Client does not affirmatively object in writing within thirty (30) days. |
| 29.9 | Counterparts and Electronic Signatures. This Agreement may be executed in separate counterparts, each of which will be an original, but which together will constitute one and the same agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the Parties adopt as original any signatures received in electronically transmitted form. This Agreement may be executed by electronic signature (whatever form the electronic signature takes) and the Parties agree that this method of signature is as conclusive of the intention to be bound by this Agreement as if signed by the Parties’ manuscript signatures. |
| 29.10 | Severance. In the event that any part of this Agreement will be determined to be void or unenforceable for any reason, the rest of this Agreement will be unaffected (unless the essential purpose hereof is substantially frustrated by such determination) and will be enforceable in accordance with the rest of its terms as if the void or unenforceable part were not a part of this Agreement. |
| 29.11 | Survival. The provisions of Sections 10 (Tax Withholding and Tax Relief), 17 (Standard of Care and Liability), 20 (Indemnity), 21 (Obligations of the Client-Fees), 23 (Creditors Rights), 24 (Confidentiality and Use of Data) and 25.3 (Actions on Termination) are continuing obligations and will survive termination of this Agreement for any reason. |
| 29.12 | Governing Law and Jurisdiction. This Agreement is governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, and any disputes which may arise out of, under or in connection with this Agreement will be determined by the exclusive jurisdiction of the Massachusetts courts. |
| 29.13 | Jurisdiction-Specific Terms. The additional Jurisdiction-Specific Terms set out on Schedule 3 will apply with respect to Clients domiciled in a designated jurisdiction. |
| 29.14 | Qualified Financial Contracts. In the event that the Client is domiciled and organized outside of the United States, such Client and the Custodian hereby agree to be bound by the terms of the QFC addendum attached hereto as Appendix B. |
| 29.15 | The Parties; Additional Clients |
| 29.15.1 | All references in this Agreement to the “Client” are to each of the client entities listed on Appendix A, individually, as if this Agreement were between the relevant individual Client and the Custodian. Any reference in this Agreement to “the Parties” shall mean the Custodian and the individual Client as to which the matter relates. |
| 29.15.2 | If any entity in addition to those listed on Appendix A would like the Custodian to render Services under the terms of this Agreement, the entity may notify the Custodian in writing. If the Custodian agrees in writing to provide the services, Appendix A will be taken to be amended to include such entity as a Client and that entity (together with the Custodian) will be bound by all Sections of this Agreement. |
| Information Classification: Limited Access | 22 |
Signed by the Parties:
COtwo Advisors Physical European Carbon Allowance Trust
| By: | /s/ Ronald Gutstein | |
| Name: | Ronald Gutstein | |
| Title: | Managing Member | |
| Date: | April 24, 2023 |
STATE STREET BANK AND TRUST COMPANY
| By: | /s/ Danielle Capobianco | |
| Name: | Danielle Capobianco | |
| Title: | Vice President | |
| Date: | 8/24/2023 |
| Information Classification: Limited Access | 23 |
Schedule 1
Definitions
In this Agreement:
“Affiliate” means, with respect to any person, any other person Controlling, Controlled by, or under common Control with, such person at the time in question. For these purposes. “Control” and its derivatives “Controlled” and “Controlling” mean, with regard to any person: (i) the legal or beneficial ownership, directly or indirectly, of fifty percent (50%) or more of the issued share capital or capital stock of that person (or other ownership interest, if not a corporation); (ii) the ability to control, directly or indirectly, fifty per cent (50%) or more of the voting power in relation to that person; or (iii) the legal power to direct or cause the direction of the general management and policies of that person, provided that where Control is being determined with respect to a person that is a limited partnership, Control shall be determined by reference to the satisfaction of any of the above tests with respect to the general partner of the limited partnership
“Alternative Assets” means derivatives, real estate, commodities, private placements, loans, infrastructure holdings, private equity holdings, hedge fund holdings or such other assets (i) not typically held in book-entry form and (ii) not typically held in accounts registered in the name of the Custodian or a Subcustodian, in each case as determined by the Custodian.
“Authentication Procedures” means the use of security codes, passwords, tested communications or other authentication procedures as may be agreed upon in writing by Parties from time to time for purposes of enabling the Custodian to verify that purported Proper Instructions have been originated by an Authorized Person, and will include a Funds Transfer and Transaction Origination Policy Agreement.
“Authorized Data Sources” means third party sources of data and information utilized by the Custodian in the provision of the Services, including issuer and issuer group data; security characteristics and classifications; security prices (OTC and exchange traded); ratings (issuer and issue); exchange, interest, discount and coupon rates; corporate action, dividend, income and tax data; benchmark, index, composite and indice related data (including values, constituents, weights and performance); and other reference and market data and information necessary for the performance of the Services.
“Authorized Person” means a person authorized to give Proper Instructions and otherwise act on the Client’s behalf in connection with this Agreement.
“Business Day” means a day on which the Custodian or the relevant Subcustodian is open for business in the market or country in which a transaction or an action by a Party takes place.
“Cash” means cash in any currency from time to time deposited with the Custodian or Subcustodian under this Agreement.
“Cash Account” has the meaning given to it in Section 4.1.
“Client” means the party named in the preamble. In the case of a trustee or responsible entity signing this agreement in its capacity as trustee or responsible entity of the Trust, “Client” means the trustee or responsible entity acting in such capacity. In the case of an investment entity that is structured as a series organization or umbrella scheme, all references in this Agreement to the “Client” are to the individual series or scheme (as represented by the trustee or responsible entity), as applicable.
“Client Publications” means the general client publications of the Custodian from time to time available to clients and their investment managers, including the Investment Managers’ Guide, Client Guide, Guide to Custody in World Markets, and FX Client Guide.
| Information Classification: Limited Access | 24 |
“Collateral” has the meaning given to it in Section 23.1.
“Confidential Information” means all information provided by or on behalf of a party (the “Disclosing Party”) to the other party (the “Receiving Party”), or collected by a Receiving Party, under or pursuant to this Agreement that is marked “confidential”, “restricted”, “proprietary” or with a similar designation, or that the Receiving Party knows or reasonably should know is confidential, proprietary or a trade secret. The terms and conditions of this Agreement (including any related fee schedule or arrangement) and any Fees will be treated as Confidential Information as to which each Party is a Disclosing Party. Confidential Information will not include information that: (i) is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement: (ii) was known to the Receiving Party (without an obligation of confidentiality) prior to its disclosure; (iii) is independently developed by the Receiving Party without the use of other Confidential Information; (iv) is rightfully obtained on a non-confidential basis from a third party source.
“Contractual Settlement” has the meaning given to it in Section 5.2.
“Corporate Actions” means warrant and option exercises, conversions, exchanges and other capital reorganizations, calls, odd lot tenders/credits, bonus rights, subscription offers/rights, puts, maturities of securities, redemptions, mergers, tender or exchange offers, and rights exercises and expirations. Corporate Actions do not include class actions.
“Corporate Actions Deadline Date” has the meaning given to it in Section 6.2.
“CSD” or “Central Securities Depository” means an entity or generally recognised book-entry or other settlement system or clearing house, central clearing counterparty or agency, acting as a local securities depository, central securities depository or international securities depository, the use of which is customary for securities settlement activities in the jurisdiction(s) in which it holds Securities or Cash in connection with this Agreement, and through which the Custodian may transfer, settle, clear, deposit or maintain Securities whether in certificated or uncertificated form and will include any services provided by any network service provider or carriers or settlement banks used by a CSD.
“Data” means any Confidential Information of the Client relating to its holdings, transactions or other information that the Custodian obtains with respect to the Client in connection with the provision of the Services under this Agreement or any other agreement.
“Delegate” means any agent, subcontractor, consultant and other third party, whether affiliated or unaffiliated with the Custodian. The term Delegate does not include Subcustodians, CSDs, Authorized Data Sources, suppliers of information technology or related services, or Financial Market Utilities.
“Effective Date” has the meaning given to it in the preamble.
“Fees” means the fees charged by the Custodian in consideration for providing the Services and the costs, expenses and disbursements of the Custodian to be reimbursed by the Client, as agreed between the parties from time to time in a separate written fee schedule, or as otherwise agreed in writing.
“Financial Market Utility” means any multilateral system for transferring, clearing, and settling payments, securities, and other financial transactions among or between financial institutions, including payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories.
“Force Majeure Event” means any event or circumstances beyond the reasonable control of the Custodian, including nationalization, expropriation, currency restrictions, suspension or disruption of the normal procedures and practices, or disruption of the infrastructure, of any securities market or CSD, interruptions in telecommunications or utilities, acts of war or terrorism, riots, revolution, acts of God or other similar events or acts.
| Information Classification: Limited Access | 25 |
“Indemnified Claim”, “Indemnified Party” and “Indemnifying Party” each have the meaning given to them in Section 20.4.
“Insolvency Event” means the occurrence of any of the following events in relation to any person: (i) the person generally does not pay its debts as such debts become due, or admits in writing its inability to pay its debts generally, or makes a general assignment for the benefit of creditors; or (ii) any proceeding is instituted by or against such person seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, where any such proceeding is instituted against (but not by) such person, such person does not promptly seek dismissal of such proceeding or its motion or request to dismiss such proceeding is denied (whether or not on an initial, interim or final basis); or (iii) such person proposes or takes any corporate action to authorize any of the preceding actions or anything analogous to the foregoing events occurs in relation to such person under the laws of any jurisdiction.
“Investment Document” means any agreement, subscription, assignment or other document evidencing in physical form an investment of the Client, or providing for the ownership by the Client, in each case that is acceptable to the Custodian. For the avoidance of doubt, it does not include any Security, instrument, certificate, title, agreement or other document that is accompanied by a stock power or instrument of assignment, endorsed to the Custodian or in blank.
“Investment Manager” means each person specified as such by the Client, including its agents and delegates.
“Law” means any statute, ordinance, order, judgment, decree, subordinate legislation, rule or regulation promulgated by any regulatory, administrative or judicial authority or otherwise in force in any jurisdiction, applicable to a Party, that relates to the performance by such Party of the Services or obligations under this Agreement.
“Local Market Practice” means the customary or established practices, procedures and terms in the jurisdiction or market where a transaction occurs, including the rules and procedures of any exchange or over the counter market and any practical constraints that exist with respect to the exercise of shareholder rights, realisation of entitlements or the sale, exchange, purchase, transfer or delivery of Cash or Securities.
“Losses” means all direct losses, damages, claims, costs, expenses or other liabilities (including reasonable attorneys’ fees and other litigation expenses).
“Market Participant” means any issuer, intermediary, exchange, transaction counterparty or other market participant.
“Off Book Cash” has the meaning given to it in Section 4.2.
“On Book Cash” has the meaning given to it in Section 4.2.
“Parties” means the parties set out at the beginning of this Agreement.
“Portfolio” means the Securities and Cash delivered to and held by the Custodian which comprise the assets of the Client over which the Custodian provides the Services pursuant to this Agreement.
| Information Classification: Limited Access | 26 |
“Proper Instructions” means instructions (which may be standing instructions and which includes any security trade advice) received by the Custodian through an agreed Authentication Procedure in any of the following forms:
| (i) | in writing given by an Authorized Person including a facsimile transmission; |
| (ii) | in an electronic communication as may be agreed upon between the Custodian and the Client in writing from time to time; or |
| (i) | by such other means as may be agreed from time to time by the Custodian and the Client . |
“Schedule” or “Schedules” are all of the schedules referenced herein and attached to this Agreement.
“Secured Liabilities” means all liabilities or obligations owed by the Client to the Custodian or its Affiliates relating to this Agreement, including: (a) the obligations of the Client to the Custodian or its Affiliates in relation to any advance of cash or securities or any other extension of credit for any purpose; (b) the obligations of the Client to compensate the Custodian for the provision of the Services; and (c) the indemnity obligations of the Client to the Custodian under Section 20.
“Securities” means securities and such other similar assets as the Custodian may from time to time accept into custody under this Agreement.
“Securities Account” has the meaning given to it in Section 3.2.
“Services” means the services to be provided by the Custodian to the Client in accordance with this Agreement.
“Special Subcustodian” has the meaning given to it in Section 14.3.
“Subcustodian” means any qualified bank, credit institution, trust company or other entity appointed by the Custodian to perform safekeeping, processing and other elements of the Services, including Affiliates or non-Affiliates of the Custodian.
“Third Party Agent” means any provider of services to the Client (other than the Custodian, a Subcustodian or Delegate under this Agreement) including any Investment Manager, adviser or sub-advisor, distributor, broker, dealer, transfer agent, administrator, accounting agent, audit firm, tax firm, or law firm.
Interpretation: Capitalised terms used in this Agreement have the meanings given to them in this Schedule 1 unless otherwise defined. In this Agreement references to “persons” will include legal as well as natural persons or entities, references importing the singular will include the plural (and vice versa), use of the masculine pronoun will include the feminine, use of the terms “include”, “includes” or “including” shall be deemed to be followed by the phrase “without limitation” and any specific examples given following the use of such terms shall be illustrative and in no way limit the general meaning of the words preceding them and numbered schedules, exhibits or Sections will (unless the contrary intention appears) be construed as references to such schedules and exhibits hereto and Sections herein bearing those numbers and any sub-sections thereof. The schedules and exhibits hereto are hereby incorporated herein by reference.
| Information Classification: Limited Access | 27 |
Schedule 2
Notices
(Section 29)
| CUSTODIAN: | STATE STREET BANK AND TRUST COMPANY | |
| Attention: | Danielle Capobianco | |
| CC: | Senior Vice President – Custody Operations and Legal Department | |
| Address: | 1 Lincoln Street, Boston, MA 02111 | |
| Telephone No: | 617-662-3883 | |
| Email: | dcapobianco@statestreet.com |
| CLIENT: | COtwo Advisors Physical European Carbon Allowance Trust | |
| Attention: | [●] | |
| Address: | [●] | |
| Telephone No: | [●] | |
| Email: | [●] |
| Information Classification: Limited Access | 28 |
Schedule 3
Jurisdiction-Specific Terms
None
| Information Classification: Limited Access | 29 |
Appendix A
List of Client Entities
| Fund Name | Jurisdiction of Formation | ETF Client | ||
| COtwo Advisors Physical European Carbon Allowance Trust | Delaware | Yes |
| Information Classification: Limited Access | 30 |
Appendix B
QFC Addendum
Opt-In to U.S. Special Resolution Regime. Notwithstanding anything to the contrary in this Agreement or any other agreement, the parties hereto expressly acknowledge and agree that:
(a) In the event the Custodian becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer or assignment of this Agreement (and any interest and obligation in or under, and any property securing, this Agreement) by the Custodian will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement (and any interest and obligation in or under, and any property securing, this Agreement) were governed by the laws of the United States or a state of the United States; and
(b) In the event the Custodian or an Affiliate of the Custodian becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights with respect to this Agreement that may be exercised against the Custodian are permitted to be exercised to no greater extent than the Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement (and any interest and obligation in or under, and any property securing, this Agreement) were governed by the laws of the United States or a state of the United States.
Adherence to the ISDA Protocol. At such times as the parties to this Agreement have adhered to the ISDA Protocol and this Agreement is or is deemed modified or amended by the ISDA Protocol, the terms of the ISDA Protocol will supersede the terms of this QFC Addendum as included as part of this Agreement, and in the event of any inconsistency between this QFC Addendum and the ISDA Protocol, the ISDA Protocol will prevail.
Definitions. As used in this QFC Addendum:
“Affiliate” has the meaning given in section 2(k) of the Bank Holding Company Act (12 U.S.C. §1841(k)) and section 225.2(a) of the Federal Reserve Board’s Regulation Y (12 CFR § 225.2(a)).
“Default Right” means any:
(i) right of a party, whether contractual or otherwise (including, without limitation, rights incorporated by reference to any other contract, agreement, or document, and rights afforded by statute, civil code, regulation, and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, or modify the obligations of a party thereunder, or any similar rights; and
(ii) right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral, or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee’s right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure.
“ISDA” refers to the International Swaps and Derivatives Association, Inc.
“ISDA Protocol” means the ISDA 2018 U.S. Resolution Stay Protocol as published by ISDA as of July 31, 2018.
“U.S. Special Resolution Regime” means the Federal Deposit Insurance Act (12 U.S.C. §1811–1835a) and regulations promulgated thereunder and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. § 5381–5394) and regulations promulgated thereunder.
| Information Classification: Limited Access | 31 |
Exhibit 10.4
ADMINISTRATION AGREEMENT
This Administration Agreement (“Agreement”) dated and effective as of October 1, 2023, is by and between State Street Bank and Trust Company, a Massachusetts trust company (the “Administrator”), COtwo Advisors Physical European Carbon Allowance Trust, a statutory trust organized under the laws of Delaware (the “Trust”), and, solely with respect to Section 6 hereof, COtwo Advisors TLC, a Delaware limited liability company (the “Sponsor”).
WHEREAS, the Trust is registered with the U.S. Securities and Exchange Commission (“SEC”) by means of a registration statement (“Registration Statement”) under the Securities Act of 1933, as amended (“1933 Act”); and
WHEREAS, the Trust desires to retain the Administrator to furnish certain administrative services to the Trust, and the Administrator is willing to furnish such services, on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows:
| 1. | Appointment of Administrator |
The Trust hereby appoints the Administrator to act as administrator to the Trust for purposes of providing certain administrative and accounting services for the period and on the terms set forth in this Agreement. The Administrator accepts such appointment and agrees to render the services stated herein.
| 2. | Delivery of Documents |
The Trust will promptly deliver to the Administrator copies of each of the following documents and all future amendments and supplements, if any:
| a. | The Trust’s Declaration of Trust; |
| b. | The Trust’s currently effective Registration Statement under the 1933 Act and each Prospectus relating to the Trust and all amendments and supplements thereto as in effect from time to time; |
| c. | A certificate of the COtwo Advisors LLC (the “Sponsor”) authorizing certain individuals on behalf of the Trust to (a) give instructions to the Administrator pursuant to this Agreement and (b) sign checks and pay expenses; and |
| d. | Such other certificates, documents or opinions which the Administrator may, in its reasonable discretion, deem necessary or appropriate in the proper performance of its duties. |
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| 3. | Representations and Warranties of the Administrator |
The Administrator represents and warrants to the Trust that:
| a. | It is a Massachusetts trust company, duly organized and existing under the laws of The Commonwealth of Massachusetts; |
| b. | It has the requisite power and authority to carry on its business in The Commonwealth of Massachusetts; |
| c. | All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; |
| d. | No legal or administrative proceedings have been instituted or threatened which would materially impair the Administrator’s ability to perform its duties and obligations under this Agreement; and |
| e. | Its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Administrator or any law or regulation applicable to it. |
| 4. | Representations and Warranties of the Trust |
The Trust represents and warrants to the Administrator that:
| a. | It is a statutory trust, duly organized, existing and in good standing under the laws of its state of formation; |
| b. | It has the requisite power and authority under applicable laws and by its Declaration of Trust to enter into and perform this Agreement; |
| c. | All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; |
| d. | The Registration Statement been filed and will be effective and remain effective during the term of this Agreement. The Trust also warrants to the Administrator that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Trust offers or sells its shares have been made; |
| e. | No legal or administrative proceedings have been instituted or threatened which would impair the Trust’s ability to perform its duties and obligations under this Agreement; |
| f. | Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Trust or any law or regulation applicable to it; and |
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| g. | As of the close of business on the date of this Agreement, the Trust is authorized to issue unlimited shares of beneficial interest; |
| h. | Where information provided by the Trust or the Trust’s investors includes information about an identifiable individual (“Personal Information”), the Trust represents and warrants that it has obtained all consents and approvals, as required by all applicable laws, regulations, by-laws and ordinances that regulate the collection, processing, use or disclosure of Personal Information, necessary to disclose such Personal Information to the Administrator, and as required for the Administrator to use and disclose such Personal Information in connection with the performance of the services hereunder. The Trust acknowledges that the Administrator may perform any of the services, and may use and disclose Personal Information outside of the jurisdiction in which it was initially collected by the Trust, including the United States and that information relating to the Trust, including Personal Information may be accessed by national security authorities, law enforcement and courts. The Administrator shall be kept indemnified by and be without liability to the Trust for any action taken or omitted by it in reliance upon this representation and warranty, including without limitation, any liability or costs in connection with claims or complaints for failure to comply with any applicable law that regulates the collection, processing, use or disclosure of Personal Information. |
| 5. | Administration Services |
The Administrator shall provide the services as listed on Schedule A, subject to the authorization and direction of the Trust and, in each case where appropriate, the review and comment by the Trust’s independent accountants and legal counsel and in accordance with procedures which may be established from time to time between the Trust and the Administrator.
The Administrator shall perform such other services for the Trust that are mutually agreed to by the parties from time to time, for which the Trust will pay (or cause the Sponsor to pay) such fees as may be mutually agreed upon, including the Administrator’s reasonable out-of- pocket expenses. The provision of such services shall be subject to the terms and conditions of this Agreement.
The Administrator shall provide the office facilities and the personnel determined by it to perform the services contemplated herein.
| 6. | Compensation of Administrator; Expense Reimbursement; Trust Expenses |
The Administrator shall be entitled to reasonable compensation for its services and expenses, as agreed upon from time to time in writing between the Trust and/or the Sponsor and the Administrator.
The Trust agrees promptly to reimburse the Administrator for any equipment and supplies specially ordered by or for the Trust through the Administrator and for any other expenses not contemplated by this Agreement that the Administrator may incur on the Trust’s behalf at the Trust’s request or with the Trust’s consent.
3
The Trust will bear all expenses that are incurred in its operation and not specifically assumed by the Administrator. For the avoidance of doubt, Trust expenses not assumed by the Administrator include, but are not limited to: organizational expenses; cost of services of independent accountants and outside legal and tax counsel (including such counsel’s review of the Registration Statement, Form 10-K, Form 10-Q, Form 8-K, proxy materials, registrations, reports, filings and materials prepared by the Administrator under this Agreement); cost of any services contracted for by the Trust directly from parties other than the Administrator; taxes, insurance premiums and other fees and expenses applicable to its operation; costs incidental to any meetings of shareholders including, but not limited to, legal and accounting fees, proxy filing fees and the costs of preparation (e.g., typesetting, XBRE-tagging, page changes and all other print vendor and EDGAR charges, collectively referred to herein as “Preparation”), printing, distribution and mailing of any proxy materials; costs of Preparation, printing, distribution and mailing, as applicable, of the Trust’s Registration Statements and any amendments and supplements thereto and financial reports; cost of Preparation and filing of the Trust’s tax returns, Form S-l, Form 10- K, Form 10-Q and Form 8-K, and all notices, registrations and amendments associated with applicable federal and state tax and securities laws; all applicable registration fees and filing fees required under federal and state securities laws; the cost of D&O/E&O liability insurance; and the cost of independent pricing services used in computing the Trust’s net asset value.
| 7. | Instructions and Advice |
At any time, the Administrator may apply to any officer of the Sponsor or his or her designee for instructions or the independent accountants for the Trust, with respect to any matter arising in connection with the services to be performed by the Administrator under this Agreement. The Administrator shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Trust) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice.
The Administrator shall not be liable, and shall be indemnified by the Trust, for any action taken or omitted by it in good faith in reliance upon any such instructions or advice or upon any paper or document believed by it to be genuine and to have been signed by the proper person or persons. The Administrator shall not be held to have notice of any change of authority of any person until receipt of written notice thereof from the Trust. Nothing in this section shall be construed as imposing upon the Administrator any obligation to seek such instructions or advice, or to act in accordance with such advice when received.
| 8. | Limitation of Liability and Indemnification |
The Administrator shall be responsible for the performance only of such duties as are set forth in this Agreement and, except as otherwise provided under Section 14, shall have no responsibility for the actions or activities of any other party, including other service providers. The Administrator shall have no liability in respect of any loss, damage or expense suffered by the Trust insofar as such loss, damage or expense arises from the performance of the Administrator’s duties hereunder in reliance upon records that were maintained for the Trust by entities other than the Administrator prior to the Administrator’s appointment as administrator for the Trust. The Administrator shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless solely caused by or resulting from the gross negligence or willful misconduct of the Administrator, its officers or employees. No party shall be liable for any special, indirect, incidental, punitive or consequential damages, including lost profits, of any kind whatsoever (including, without limitation, attorneys’ fees) under any provision of this Agreement or for any such damages arising out of any act or failure to act hereunder, each of which is hereby excluded by agreement of the parties regardless of whether such damages were foreseeable or whether the relevant party or any entity had been advised of the possibility of such damages. In any event, the Administrator’s cumulative liability for each calendar year (a “Liability Period”) with respect to the Trust under this Agreement regardless of the form of action or legal theory shall be limited to two and a half (2.5) times its total annual compensation earned and fees payable hereunder during the preceding Compensation Period, as defined herein, for any liability or loss suffered by the Trust including, but not limited to, any liability relating to the Trust’s compliance with any federal or state tax or securities statute, regulation or ruling during such Liability Period. “Compensation Period” shall mean the calendar year ending immediately prior to each Liability Period in which the event(s) giving rise to the Administrator’s liability for that period have occurred. Notwithstanding the foregoing, the Compensation Period for purposes of calculating the annual cumulative liability of the Administrator for the Liability Period commencing on the date of this Agreement and terminating on December 31, 2023shall be the date of this Agreement through December 31, 2023, calculated on an annualized basis, and the Compensation Period for the Liability Period commencing January 1, 2024 and terminating on December 31, 2024 shall be the date of this Agreement through December 31, 2023, calculated on an annualized basis.
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The Administrator shall not be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action or communication disruption.
The Trust shall indemnify and hold the Administrator and its directors, officers, employees and agents harmless from all loss, cost, damage and expense, including reasonable fees and expenses for counsel, incurred by the Administrator resulting from any claim, demand, action or suit in connection with the Administrator’s acceptance of this Agreement, any action or omission by it in the performance of its duties hereunder, or as a result of acting upon any instructions reasonably believed by it to have been duly authorized by the Trust or upon reasonable reliance on information or records given or made by or on behalf of the Trust or its Sponsor, provided that this indemnification shall not apply to actions or omissions of the Administrator, its officers or employees in cases of its or their own gross negligence or willful misconduct.
The limitation of liability and indemnification contained herein shall survive the termination of this Agreement.
| 9. | Confidentiality |
All information provided under this Agreement by a party (the “Disclosing Party”) to the other party (the “Receiving Party”) regarding the Disclosing Party’s business and operations shall be treated as confidential. Subject to Section 10 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Party’s other obligations under the Agreement or managing the business of the Receiving Party and its Affiliates (as defined in Section 10 below), including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, (c) that is disclosed to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process, (d) that is disclosed as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Administrator or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), or (e) where the party seeking to disclose has received the prior written consent of the party providing the information, which consent shall not be unreasonably withheld.
| 10. | Use of Data |
(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Administrator (which term for purposes of this Section 10 includes each of its parent company, branches and affiliates (“Affiliates”)) may collect and store information regarding the Trust and share such information with its Affiliates, agents and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between the Trust and the Administrator or any of its Affiliates and (ii) to carry out management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance and client service management.
(b) Subject to paragraph (d) below, the Administrator and/or its Affiliates may use any Confidential Information of the Customer (“Data”) obtained by such entities in the performance of their services under this Agreement or any other agreement between the Trust and the Administrator or one of its Affiliates, including Data regarding transactions and portfolio holdings relating to the Trust to develop, publish or otherwise distribute to third parties certain investor behavior “indicators” or “indices” that represent broad trends in the flow of investment funds into various markets, sectors or investment instruments (collectively, the “Indicators”), but only so long as (i) the Data is combined or aggregated with (A) information of other customers of the Administrator and/or (B) information derived from other sources, in each case such that the Indicators do not allow for attribution or identification of such Data with the Trust, (ii) the Data represents less than a statistically meaningful portion of all of the data used to create the Indicators and (iii) the Administrator publishes or otherwise distributes to third parties only the Indicators and under no circumstance publishes, makes available, distributes or otherwise discloses any of the Data to any third party, whether aggregated, anonymized or otherwise, except as expressly permitted under this Agreement.
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(c) The Trust acknowledged that the Administrator may seek to realize economic benefit from the publication or distribution of the Indicators.
(d) Except as expressly contemplated by this Agreement, nothing in this Section 10 shall limit the confidentiality and data-protection obligations of the Administrator and its Affiliates under this Agreement and applicable law. The Administrator shall cause any Affiliate, agent or service provider to which it has disclosed Data pursuant to this Section 10 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.
| 11. | Compliance with Governmental Rules and Regulations; Records |
The Trust assumes full responsibility for complying with all securities, tax, commodities and other laws, rules and regulations applicable to it.
The Administrator agrees that all records which it maintains for the Trust shall at all times remain the property of the Trust, shall be readily accessible during normal business hours by duly authorized officers, employees or agents of the Trust, and shall be promptly surrendered upon the termination of the Agreement or otherwise on written request except as otherwise provided in Section 13. The Administrator further agrees that all records that it maintains for the Trust will be preserved for the periods prescribed by the Administrator’s data retention requirements unless any such records are earlier surrendered as provided above. Records may be surrendered in either written or machine-readable form, at the option of the Administrator. In the event that the Administrator is requested or authorized by the Trust, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Trust by state or federal regulatory agencies, to produce the records of the Trust or the Administrator’s personnel as witnesses or deponents, the Trust agrees to pay (or cause the Sponsor to pay) the Administrator for the Administrator’s time and expenses, as well as the fees and expenses of the Administrator’s counsel incurred in such production.
| 12. | Services Not Exclusive |
The services of the Administrator are not to be deemed exclusive, and the Administrator shall be free to render similar services to others. The Administrator shall be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Trust from time to time, have no authority to act or represent the Trust in any way or otherwise be deemed an agent of the Trust.
| 13. | Effective Period and Termination |
This Agreement shall remain in full force and effect for an initial term ending October 1, 2024 (the “Initial Term”). After the expiration of the Initial Term, this Agreement shall automatically renew for successive 1-year terms (each, a “Renewal Term”) unless a written notice of non-renewal is delivered by the non-renewing party no later than ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, as the case may be. During the Initial Term and thereafter, either party may terminate this Agreement: (i) in the event of the other party’s material breach of a material provision of this Agreement that the other party has either (a) failed to cure or (b) failed to establish a remedial plan to cure that is reasonably acceptable, within 60 days’ written notice of such breach, or (ii) in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction. Upon termination of this Agreement pursuant to this paragraph, the Trust shall pay (or cause the Sponsor to pay) Administrator its compensation due and shall reimburse (or cause the Sponsor to reimburse) Administrator for its costs, expenses and disbursements.
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In the event of: (i) the Trust’s termination of this Agreement with respect to the Trust for any reason other than as set forth in the immediately preceding paragraph or (ii) a transaction not in the ordinary course of business pursuant to which the Administrator is not retained to continue providing services hereunder to the Trust (or its respective successor), the Trust shall pay the Administrator its compensation due through the end of the then-current term (based upon the average monthly compensation previously earned by Administrator with respect to the Trust) and shall reimburse the Administrator for its costs, expenses and disbursements. Upon receipt of such payment and reimbursement, the Administrator will deliver the Trust’s records as set forth herein. For the avoidance of doubt, no payment will be required pursuant to clause (ii) of this paragraph in the event of any transaction such (a) the liquidation or dissolution of the Trust and distribution of the Trust’s assets, (b) a merger of the Trust into, or the consolidation of the Trust with, another entity, or (c) the sale by the Trust of all, or substantially all, of the Trust’s assets to another entity, in each of (b) and (c) where the Administrator is retained to continue providing services to the Trust (or its respective successor) on substantially the same terms as this Agreement.
| 14. | Delegation |
| a. | The Administrator shall have the right, without the consent or approval of the Trust, to employ agents, subcontractors, consultants and other third parties, whether affiliated or unaffiliated, to provide or assist it in the provision of any part of the services stated herein other than services required by applicable law to be performed by the Administrator (each, a “Delegate” and collectively, the “Delegates”), without the consent or approval of the Trust. The Administrator shall be responsible for the services delivered by, and the acts and omissions of, any such Delegate as if the Administrator had provided such services and committed such acts and omissions itself. Unless otherwise agreed in a Fee Schedule, the Administrator shall be responsible for the compensation of its Delegates. |
| b. | The Administrator will provide the Trust with information regarding its global operating model for the delivery of the services on a quarterly or other periodic basis, which information shall include the identities of Delegates affiliated with the Administrator that perform or may perform parts of the services, and the locations from which such Delegates perform services, as well as such other information about its Delegates as the Trust may reasonably request from time to time. |
| c. | Nothing in this Section 14 shall limit or restrict the Administrator’s right to use affiliates or third parties to perform or discharge, or assist it in the performance or discharge, of any obligations or duties under this Agreement other than the provision of the services. |
| 15. | Interpretive and Additional Provisions |
In connection with the operation of this Agreement, the Administrator and the Trust, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of the Trust’s Declaration of Trust. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of the Agreement.
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| 16. | Notices |
Any notice, instruction or other instrument required to be given hereunder will be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following address or such other address as may be notified by any party from time to time:
If to the Trust:
COtwo Advisors LLC
Attn: Ronald Gutstein, Managing Member
Telephone: (203)731-7675
Email: rgutstein@cotwoadvisors.com
If to the Administrator:
State Street Bank and Trust Company
One Congress Street, Suite 1
Boston, MA 02114
Attention: Danielle Capobianco
Telephone: 617-662-3883
with a copy to:
State Street Bank and Trust Company
Legal Division - Global Services Americas
One Lincoln Street
Boston, MA 02110
Attention: Senior Vice President and Senior Managing Counsel
| 17. | Amendment |
This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.
| 18. | Assignment |
This Agreement may not be assigned by (a) the Trust without the written consent of the Administrator or (b) the Administrator without the written consent of the Trust, except that the Administrator may assign this Agreement to a successor of all or a substantial portion of its business, or to an affiliate of the Administrator.
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| 19. | Successors |
This Agreement shall be binding on and shall inure to the benefit of the Trust and the Administrator and their respective successors and permitted assigns.
| 20. | Data Protection |
The Administrator shall implement and maintain a comprehensive written information security program that contains appropriate security measures to safeguard the personal information of the Trust’s shareholders, employees, directors and/or officers that the Administrator receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, “personal information” shall mean (i) an individual’s name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) driver’s license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a person’s account or (ii) any combination of the foregoing that would allow a person to log onto or access an individual’s account. Notwithstanding the foregoing “personal information” shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.
| 21. | Entire Agreement |
This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, warranties or commitments regarding the services to be performed hereunder whether oral or in writing.
| 22. | Waiver |
The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any such term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise or any other right or remedy. Any waiver must be in writing signed by the waiving party.
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| 23. | Severability |
If any provision or provisions of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.
| 24. | Governing Law |
This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts, without regard to its conflicts of laws rules.
| 25. | Reproduction of Documents |
This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, xerographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
| 26. | Counterparts |
This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received via electronically transmitted form.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first written above.
| COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST | ||
| By: | /s/ Ronald S. Gutstein | |
| Name: | Ronald S. Gutstein | |
| Title: | Managing Member | |
| COTWO ADVISORS LLC | ||
| Solely with respect to Section 6 hereof | ||
| By: | /s/ Ronald S. Gutstein | |
| Name: | Ronald S. Gutstein | |
| Title: | Managing Member | |
| STATE STREET BANK AND TRUST COMPANY | ||
| By: | /s/ Danielle Capobianco | |
| Name: | Danielle Capobianco | |
| Title: | Vice President | |
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ADMINISTRATION AGREEMENT
SCHEDULE A
LIST OF SERVICES
| I. | Accounting Services as described in Schedule Al attached hereto; and |
| II. | Administration Treasury Services as described in Schedule A2 attached hereto. |
Schedule Al
Accounting Services
| 1. | Maintain market value of assets in Trust at the frequency agreed with the Trust, using the Authorized Data Sources and in accordance with the methodologies and tolerance checks agreed with the Trust. |
| 2. | Calculate market value of assets in the Trust at the frequency agreed with the Trust, using the Authorized Data Sources and in accordance with the methodologies and tolerance checks agreed with the Trust. |
| 3. | Notify the Trust of any assets that cannot be priced in accordance with the agreed methodology and Authorized Price Sources and provide stale price report whenever any asset cannot be priced for the period agreed with the Trust (e.g. 5 consecutive days). |
| 4. | Record the accrual of income to be received by the Trust. |
| 5. | Accrue expenses for the Trust in accordance with methodology agreed with the Trust, including accruals for tax provisions and management / performance fees and fees for all other service providers (as relevant). |
| 6. | Review any significant differences between accruals and payments. |
| 7. | Record investment transactions (e.g. purchases, sales and transfers) for the Trust as notified by the Trust or its investment manager/other agents. |
| 8. | Record capital activity as required for the Trust. |
| 9. | Calculate the net asset value of the Trust and net asset value per share or unit of ownership (as applicable) of the Trust in accordance with the valuation methodology agreed with the Trust and at the frequency agreed with the Trust. |
| 10. | Publish/distribute NAV information as agreed with the Trust. |
| 11. | Perform agreed reconciliations of the accounting books and records to the records maintained by the investment manager or Trust’s other service providers and counterparties (e.g., custodians, prime brokers, investment managers, banks etc.) at the frequency agreed with the Trust. |
| 12. | Work with relevant third party and/or Trust to resolve any identified exceptions. |
Schedule A2
Administration Treasury Services
| 1. | Coordinate the audit of the Trust’s financial statements by the Trust’s independent accountants, including the preparation of supporting audit workpapers and other schedules; |
| 2. | Prepare for the review by designated officer(s) of the Sponsor financial information required by Form S-l, proxy statements and such other reports, forms or filings as may be mutually agreed upon; |
| 3. | Prepare for the review by designated officer(s) of the Sponsor expenses associated with the Trust’s unitary management fee, arrange for payment of such expenses, and obtain authorization of accrual changes and expense payments; |
| 4. | Provide periodic testing of the Trust with limitations for the Trust contained in the Registration Statement for the Trust as may be mutually agreed upon, including quarterly compliance reporting to the designated officer(s) of the Sponsor; |
| 5. | Prepare and furnish total return performance information for the Trust, including such information on an after-tax basis, calculated in accordance with applicable U.S. securities laws and regulations, as may be reasonably requested by Trust management; |
| 6. | Prepare and disseminate vendor survey information; |
| 7. | Prepare for review by designated officer(s) of the Sponsor financial information to facilitate the Trust’s filing of Rule 424(i) notices, including all exhibits and the coordination of payment, if applicable; |
| 8. | Provide sub-certificates in connection with the certification requirements of the Sarbanes-Oxley Act of 2002 with respect to the services provided by the Administrator; and |
| 9. | Maintain certain books and records of the Trust, as may be mutually agreed upon |
Exhibit 10.5
TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 2023, by and between STATE STREET BANK AND TRUST COMPANY, Massachusetts trust company having its principal office and place of business at One Congress Street, Suite 1, Boston, Massachusetts 02114 (“State Street” or the “Transfer Agent”), COtwo Advisors Physical European Carbon Allowance Trust, a statutory trust having its principal office and place of business at 15 Woodcock Lane, Ridgefield, CT 06877 (the “Trust”), and, solely with respect to Section 2.1 hereof, COtwo Advisors LLC, a Delaware limited liability company having its principal place of business at 15 Woodcock Lane, Ridgefield, CT 06877 (the “Sponsor”).
WHEREAS, the Trust is authorized to issue shares of beneficial interest (“Shares”) representing interests in a portfolio of assets;
WHEREAS, the Trust will issue and redeem Shares only in aggregations of Shares known as “Creation Units” as described in the currently effective prospectus of the Trust (collectively, the “Prospectus”);
WHEREAS, only those entities (“Authorized Participants”) that have entered into an Authorized Participant Agreement with the Sponsor, as sponsor of the Trust, are eligible to place orders for Creation Units;
WHEREAS, the Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York (“DTC”) or its nominee will be the record or registered owner of all outstanding Shares;
WHEREAS, Trust desires to appoint Transfer Agent to act as its transfer agent, dividend disbursing agent and agent in connection with certain other activities; and Transfer Agent is willing to accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto, agree as follows:
1. TERMS OF APPOINTMENT
| 1.1 | Subject to the terms and conditions set forth in this Agreement, the Trust hereby employs and appoints the Transfer Agent to act as, and the Transfer Agent agrees to act as, transfer agent for the Creation Units and dividend disbursing agent of the Trust. |
| 1.2 | Transfer Agency Services. In accordance with procedures established from time to time by agreement between the Trust and the Transfer Agent (the “Procedures”), the Transfer Agent shall: |
| (i) | establish each Authorized Participant’s account in the Trust on the Transfer Agent’s recordkeeping system and maintain such account for the benefit of such Authorized Participant; |
| (ii) | receive and process orders for the purchase of Creation Units from the Authorized Participants, which orders for purchase have been accepted by the Sponsor and the Trust’s distributor prior to such processing; |
| (iii) | generate or cause to be generated and transmitted confirmation of receipt of such purchase orders to the Authorized Participants and, if applicable, transmit appropriate trade instruction to the National Securities Clearance Corporation (“NSCC”); |
| (iv) | receive and process redemption requests and redemption directions from the Authorized Participants or the Sponsor on behalf of the Trust, which redemption requests and redemption directions have been accepted by the Sponsor and the Trust’s distributor, prior to such processing; |
| (v) | with respect to items (i) through (iv) above, the Transfer Agent may execute transactions directly with Authorized Participants; |
| (vi) | with respect to any redemption, to notify the Sponsor when the Authorized Participant has delivered the Shares to be redeemed to the Trust’s DTC account; |
| (vii) | prepare and transmit by means of DTC’s book-entry system payments for any dividends and distributions declared by the Trust; |
| (viii) | record the issuance of Shares of the Trust and maintain a record of the total number of Shares of the Trust which are issued and outstanding; and provide the Trust on a regular basis with the total number of Shares which are issued and outstanding but Transfer Agent shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares to determine if there are authorized Shares available for issuance or to take cognizance of any laws relating to, or corporate actions required for, the issue or sale of such Shares, which functions shall be the sole responsibility of the Trust; and, excluding DTC or its nominee as the record or registered owner, the Transfer Agent shall have no obligations or responsibilities to account for, keep records of, or otherwise related to, the beneficial owners of the Shares; |
| (ix) | process any request from an Authorized Participant to change its account registration; and |
| (x) | except as otherwise instructed by the Trust, the Transfer Agent shall process all transactions in accordance with the procedures mutually agreed upon by the Trust and the Transfer Agent with respect to the proper net asset value to be applied to purchase orders received in good order by the Transfer Agent or by the Trust or any other person or firm on behalf of the Trust or from an Authorized Participant before cut-offs established by the Trust. The Transfer Agent shall report to the Trust any known exceptions to the foregoing. |
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| 1.3 | Additional Services. In addition to, and neither in lieu of nor in contravention of the services set forth in Section 1.2 above, the Transfer Agent shall perform the following services: |
| (i) | The Transfer Agent shall perform such other services for the Trust that are mutually agreed to by the parties from time to time, for which the Trust will pay (or cause the Sponsor to pay) such fees as may be mutually agreed upon, including the Transfer Agent’s reasonable out-of-pocket expenses. The provision of such services shall be subject to the terms and conditions of this Agreement. |
| (ii) | DTC and NSCC. The Transfer Agent shall: (a) accept and effectuate the registration and maintenance of accounts, and the purchase and redemption of Creation Units in such accounts, in accordance with instructions transmitted to and received by the Transfer Agent by transmission from DTC or NSCC on behalf of Authorized Participants; and (b) issue instructions to the Trust’s banks for the settlement of transactions between the Trust and DTC or NSCC (acting on behalf of the applicable Authorized Participant). |
| 1.4 | Authorized Persons. The Trust hereby agrees and acknowledges that the Transfer Agent may rely on the current list of authorized persons, including the Sponsor, as provided or agreed to by the Trust and as may be amended from time to time, in receiving instructions to issue or redeem Creation Units. The Trust agrees and covenants for itself and each such authorized person that any order or sale of or transaction in Creation Units received by it after the order cut-off time as set forth in the Prospectus or such earlier time as designated by the Trust (the “Order Cut-Off Time”), shall be effectuated at the net asset value determined on the next business day or as otherwise required pursuant to the Trust’s then-effective Prospectus, and the Trust or such authorized person shall so instruct the Transfer Agent of the proper effective date of the transaction. |
| 1.5 | Anti-Money Laundering and Client Screening. With respect to the Trust’s offering and sale of Creation Units at any time, and for all subsequent transfers of such interests, the Trust or its delegate shall, to the extent applicable, directly or indirectly and to the extent required by law: (i) conduct know your customer/client identity due diligence with respect to potential investors and transferees in the Shares and Creation Units and shall obtain and retain due diligence records for each investor and transferee; (ii) use its best efforts to ensure that each investor’s and any transferee’s funds used to purchase Creation Units or Shares shall not be derived from, nor the product of, any criminal activity; (iii) if requested, provide periodic written verifications that such investors/transferees have been checked against the United States Department of the Treasury Office of Foreign Assets Control database for any non-compliance or exceptions; and (iv) perform its obligations under this Section in accordance with all applicable anti-money laundering laws and regulations. In the event that the Transfer Agent has received advice from counsel that access to underlying due diligence records pertaining to the investors/transferees is necessary to ensure compliance by the Transfer Agent with relevant anti-money laundering (or other applicable) laws or regulations, the Trust shall, upon receipt of written request from the Transfer Agent, provide the Transfer Agent copies of such due diligence records. |
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| 1.6 | State Transaction (“Blue Sky”) Reporting. If applicable, the Sponsor shall be solely responsible for Trust’s “blue sky” compliance and state registration requirements. |
| 1.7 | Tax Law. The Transfer Agent shall have no responsibility or liability for any obligations now or hereafter imposed on the Trust, any Creation Units, any Shares, a beneficial owner thereof, an Authorized Participant or the Transfer Agent in connection with the services provided by the Transfer Agent hereunder by the tax laws of any country or of any state or political subdivision thereof. It shall be the responsibility of the Trust to notify the Transfer Agent of the obligations imposed on the Trust, the Creation Units, the Shares, or the Transfer Agent in connection with the services provided by the Transfer Agent hereunder by the tax law of countries, states and political subdivisions thereof, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. |
| 1.8 | The Transfer Agent shall provide the office facilities and the personnel determined by it to perform the services contemplated herein. |
2. FEES AND EXPENSES
| 2.1 | Fee Schedule. For the performance by the Transfer Agent of services provided pursuant to this Agreement, the Transfer Agent shall be entitled to receive the fees and expenses set forth in a written fee schedule. |
3. REPRESENTATIONS AND WARRANTIES OF THE TRANSFER AGENT
The Transfer Agent represents and warrants to the Trust that:
| 3.1 | It is a trust company duly organized and existing under the laws of the Commonwealth of Massachusetts. |
| 3.2 | It is duly registered as a transfer agent under Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), it will remain so registered for the duration of this Agreement, and it will promptly notify the Trust in the event of any material change in its status as a registered transfer agent. |
| 3.3 | It is duly qualified to carry on its business in the Commonwealth of Massachusetts. |
| 3.4 | It is empowered under applicable laws and by its organizational documents to enter into and perform the services contemplated in this Agreement. |
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| 3.5 | All requisite organizational proceedings have been taken to authorize it to enter into and perform this Agreement. |
4. REPRESENTATIONS AND WARRANTIES OF THE TRUST
The Trust represents and warrants to the Transfer Agent that:
| 4.1 | The Trust is a statutory trust duly organized, existing and in good standing under the laws of the state of its formation. |
| 4.2 | The Trust is empowered under applicable laws and by its organizational documents to enter into and perform this Agreement. |
| 4.3 | All requisite proceedings have been taken to authorize the Trust to enter into, perform and receive services pursuant to this Agreement and to appoint the Transfer Agent as transfer agent of the Trust. |
| 4.4 | A registration statement under the Securities Act of 1933, as amended (the “Securities Act”), is currently effective and will remain effective, and all appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Trust being offered for sale. |
| 4.5 | Where information provided by the Trust or the Authorized Participants includes information about an identifiable individual (“Personal Information”), the Trust represents and warrants that it has obtained all consents and approvals, as required by all applicable laws, regulations, by-laws and ordinances that regulate the collection, processing, use or disclosure of Personal Information, necessary to disclose such Personal Information to the Transfer Agent, and as required for the Transfer Agent to use and disclose such Personal Information in connection with the performance of the services hereunder. The Trust acknowledges that the Transfer Agent may perform any of the services, and may use and disclose Personal Information outside of the jurisdiction in which it was initially collected by the Trust, including the United States and that information relating to the Trust, including Personal Information of investors may be accessed by national security authorities, law enforcement and courts. The Transfer Agent shall be kept indemnified by and be without liability to the Trust for any action taken or omitted by it in reliance upon this representation and warranty, including without limitation, any liability or costs in connection with claims or complaints for failure to comply with any applicable law that regulates the collection, processing, use or disclosure of Personal Information. |
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5. DATA ACCESS AND PROPRIETARY INFORMATION
| 5.1 | The Trust acknowledges that the databases, computer programs, screen formats, report formats, interactive design techniques, and documentation manuals furnished to the Trust by the Transfer Agent as part of the Trust’s ability to access certain Trust-related data maintained by the Transfer Agent or another third party on databases under the control and ownership of the Transfer Agent (“Data Access Services”) constitute copyrighted, trade secret, or other proprietary information (collectively, “Proprietary Information”) of substantial value to the Transfer Agent or another third party. In no event shall Proprietary Information be deemed Authorized Participant information or the confidential information of the Trust. The Trust agrees to treat all Proprietary Information as proprietary to the Transfer Agent and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Trust agrees for itself and its officers and trustees and their agents, to: |
| (i) | use such programs and databases solely on the Trust’s, or such agents’ computers, or solely from equipment at the location(s) agreed to between the Trust and the Transfer Agent, and solely in accordance with the Transfer Agent’s applicable user documentation; |
| (ii) | refrain from copying or duplicating in any way the Proprietary Information; |
| (iii) | refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform the Transfer Agent in a timely manner of such fact and dispose of such information in accordance with the Transfer Agent’s instructions; |
| (iv) | refrain from causing or allowing Proprietary Information transmitted from the Transfer Agent’s computers to the Trust’s, or such agents’ computer to be retransmitted to any other computer facility or other location, except with the prior written consent of the Transfer Agent; |
| (v) | allow the Trust or such agents to have access only to those authorized transactions agreed upon by the Trust and the Transfer Agent; |
| (vi) | honor all reasonable written requests made by the Transfer Agent to protect at the Transfer Agent’s expense the rights of the Transfer Agent in Proprietary Information at common law, under federal copyright law and under other federal or state law. |
| 5.2 | Proprietary Information shall not include all or any portion of any of the foregoing items that (1) are or become publicly available without breach of this Agreement; (ii) that are released for general disclosure by a written release by the Transfer Agent; or (iii) that are already in the possession of the receiving party at the time of receipt without obligation of confidentiality or breach of this Agreement. |
| 5.3 | If the Trust notifies the Transfer Agent that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Transfer Agent shall use commercially reasonable efforts to correct such failure. Organizations from which the Transfer Agent may obtain certain data included in the Data Access Services are solely responsible for the contents of such data, and the Trust agrees to make no claim against the Transfer Agent arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN “AS IS, AS AVAILABLE” BASIS. THE TRANSFER AGENT EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. |
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| 5.4 | If the transactions available to the Trust include the ability to originate electronic instructions to the Transfer Agent in order to (i) effect the transfer or movement of cash or Creation Units, or (ii) transmit Authorized Participant information or other information, then in such event the Transfer Agent shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Transfer Agent from time to time. |
| 5.5 | Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Section. The obligations of this Section shall survive any earlier termination of this Agreement. |
6. STANDARD OF CARE / LIMITATION OF LIABILITY
| 6.1 | The Transfer Agent shall at all times act in good faith in its performance of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors, including encoding and payment processing errors, unless said errors are caused by its gross negligence, bad faith, or willful misconduct or that of its employees or agents. The parties agree that any encoding or payment processing errors shall be governed by this standard of care, and that Section 4-209 of the Uniform Commercial Code is superseded by this Section. |
| 6.2 | In any event, the Transfer Agent’s cumulative liability for the term of the Agreement for all liability or losses, regardless of the form of action or legal theory, shall be limited to two and a half (2.5) times the fees (excluding expenses) received by the Transfer Agent under this Agreement during the preceding 12-month period. |
| 6.3 | In no event shall either party be liable for special, incidental, indirect, punitive or consequential damages, regardless of the form of action and even if the same were foreseeable. |
7 INDEMNIFICATION
| 7.1 | The Transfer Agent and its affiliates, including their respective officers, directors, employees and agents (the “Indemnitees”), shall not be responsible for, and the Trust shall indemnify and hold the Indemnitees harmless from and against, any and all losses, damages, costs, charges, reasonable counsel fees (including the defense of any lawsuit in which one of the Indemnitees is a named party), payments, expenses and liability arising out of or attributable to: |
| (i) | all actions of the Transfer Agent or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without gross negligence or willful misconduct; |
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| (ii) | the Trust’s breach of any representation, warranty or covenant of the Trust hereunder; |
| (iii) | the Trust’s lack of good faith, gross negligence or willful misconduct; |
| (iv) | reliance upon, and any subsequent use of or action taken or omitted, by the Transfer Agent, or its agents or subcontractors on: (a) any information, records, documents, data, stock certificates or services, which are received by the Transfer Agent or its agents or subcontractors in physical form, or by machine readable input, facsimile, electronic data entry, electronic instructions or other similar means authorized by the Trust, and which have been prepared, maintained or performed by the Trust or any other person or firm on behalf of the Trust, including but not limited to any broker-dealer, third party administrator or previous transfer agent; (b) any instructions or requests of the Sponsor, the Trust or its officers or the Trust’s agents or subcontractors or their officers or employees; (c) any instructions or opinions of legal counsel to the Trust or the Sponsor with respect to any matter arising in connection with the services to be performed by the Transfer Agent under this Agreement which are provided to the Transfer Agent by the Trust or Fund after consultation with such legal counsel; or (d) any paper or document, reasonably believed to be genuine, authentic, or signed by the proper person or persons; |
| (v) | the offer or sale of Creation Units in violation of any requirement under federal or state securities laws or regulations requiring that such Creation Units be registered, or in violation of any stop order or other determination or ruling by any federal or state agency with respect to the offer or sale of such Creation Units; |
| (vi) | the negotiation and processing of any checks, wires and ACH transmissions, including without limitation, for deposit into, or credit to, the Trust’s demand deposit accounts maintained by the Transfer Agent; |
| (vii) | all actions relating to the transmission of Trust, Creation Unit or Authorized Participant data through the NSCC clearing systems, if applicable; and |
| (viii) | any tax obligations under the tax laws of any country or of any state or political subdivision thereof, including taxes, withholding and reporting requirements, claims for exemption and refund, additions for late payment, interest, penalties and other expenses (including legal expenses) that may be assessed, imposed or charged against the Transfer Agent as transfer agent hereunder. |
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| 7.2 | At any time the Transfer Agent may apply to any officer of the Trust or the Sponsor for instructions, and may consult with legal counsel (which may be Trust counsel) with respect to any matter arising in connection with the services to be performed by the Transfer Agent under this Agreement, and the Transfer Agent and its agents or subcontractors shall not be liable and shall be indemnified by the Trust for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. The Transfer Agent, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Trust, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Transfer Agent or its agents or subcontractors by machine readable input, electronic data entry or other similar means authorized by the Trust, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust or the Sponsor. |
8. ADDITIONAL COVENANTS OF THE TRUST AND THE TRANSFER AGENT
| 8.1 | Delivery of Documents. The Trust shall promptly furnish to the Transfer Agent the Declaration of Trust of the Trust and all amendments thereto. |
| 8.2 | Certificates, Checks, Facsimile Signature Devices. The Transfer Agent hereby agrees to establish and maintain facilities and procedures for safekeeping of any stock certificates, check forms and facsimile signature imprinting devices; and for the preparation or use, and for keeping account of, such certificates, forms and devices. |
| 8.3 | Records. The Transfer Agent shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. The Transfer Agent agrees that any records relating to the services provided to the Trust hereunder shall be made available upon reasonable request and preserved for the periods prescribed by the applicable Rules unless such records are earlier surrendered to the Trust. Records may be surrendered in either written or machine-readable form, at the option of the Transfer Agent. In the event that the Transfer Agent is requested or authorized by the Trust, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Trust by state or federal regulatory agencies, to produce the records of the Trust or the Transfer Agent’s personnel as witnesses or deponents, the Trust agrees to pay the Transfer Agent for the Transfer Agent’s time and expenses, as well as the fees and expenses of the Transfer Agent’s counsel, incurred in such production. |
9. CONFIDENTIALITY AND USE OF DATA
| 9.1 | All information provided under this Agreement by a party (the “Disclosing Party”) to the other party (the “Receiving Party”) regarding the Disclosing Party’s business and operations shall be treated as confidential. Subject to Section 9.2 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Party’s other obligations under the Agreement or managing the business of the Receiving Party and its Affiliates (as defined in Section 9.2 below), including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, (c) that is disclosed to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process, (d) that is disclosed as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Transfer Agent or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), or (e) where the party seeking to disclose has received the prior written consent of the party providing the information, which consent shall not be unreasonably withheld. |
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| 9.2 | (a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Transfer Agent (which term for purposes of this Section 9.2 includes each of its parent company, branches and affiliates (“Affiliates”)) may collect and store information regarding the Trust or Fund and share such information with its Affiliates, agents and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between the Trust and the Transfer Agent or any of its Affiliates and (ii) to carry out management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. |
| (b) | Subject to paragraph (d) below, the Transfer Agent and/or its Affiliates may use any Confidential Information of the Trust (“Data”) obtained by such entities in the performance of their services under this Agreement or any other agreement between the Trust and the Transfer Agent or one of its Affiliates, including Data regarding transactions and portfolio holdings relating to the Trust to develop, publish or otherwise distribute to third parties certain investor behavior “indicators” or “indices” that represent broad trends in the flow of investment funds into various markets, sectors or investment instruments (collectively, the “Indicators”), but only so long as (i) the Data is combined or aggregated with (A) information of other customers of the Transfer Agent and/or (B) information derived from other sources, in each case such that the Indicators do not allow for attribution or identification of such Data with the Trust, (ii) the Data represents less than a statistically meaningful portion of all of the data used to create the Indicators and (iii) the Transfer Agent publishes or otherwise distributes to third parties only the Indicators and under no circumstance publishes, makes available, distributes or otherwise discloses any of the Data to any third party, whether aggregated, anonymized or otherwise, except as expressly permitted under this Agreement. |
| (c) | The Trust acknowledges that the Transfer Agent may seek to realize economic benefit from the publication or distribution of the Indicators. |
| (d) | Except as expressly contemplated by this Agreement, nothing in this Section 9.2 shall limit the confidentiality and data-protection obligations of the Transfer Agent and its Affiliates under this Agreement and applicable law. The Transfer Agent shall cause any Affiliate, agent or service provider to which it has disclosed Data pursuant to this Section 9.2 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement. |
| 9.3 | The Transfer Agent affirms that it has, and will continue to have throughout the term of this Agreement, procedures in place that are reasonably designed to protect the privacy of non-public personal consumer/customer financial information to the extent required by applicable laws, rules and regulations. |
10. Effective Period and Termination
This Agreement shall remain in full force and effect for an initial term ending December 1, 2025 (the “Initial Term”). After the expiration of the Initial Term, this Agreement shall automatically renew for successive 1-year terms (each, a “Renewal Term”) unless a written notice of non-renewal is delivered by the non-renewing party no later than one-hundred and twenty (120) days prior to the expiration of the Initial Term or any Renewal Term, as the case may be. During the Initial Term and thereafter, either party may terminate this Agreement: (i) in the event of the other party’s material breach of a material provision of this Agreement that the other party has either (a) failed to cure or (b) failed to establish a remedial plan to cure that is reasonably acceptable, within 60 days’ written notice of such breach, or (ii) in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction. Upon termination of this Agreement pursuant to this paragraph with respect to the Trust, the Trust shall pay (or cause the Sponsor to pay) Transfer Agent its compensation due and shall reimburse (or cause the Sponsor to reimburse) Transfer Agent for its costs, expenses and disbursements.
In the event of: (i) the Trust’s termination of this Agreement for any reason other than as set forth in the immediately preceding paragraph, or (ii) a transaction not in the ordinary course of business pursuant to which the Transfer Agent is not retained to continue providing services hereunder to the Trust, the Trust shall pay (or cause the Sponsor to pay) the Transfer Agent its compensation due through the end of the then-current term (based upon the average monthly compensation previously earned by Transfer Agent with respect to the Trust and shall reimburse (or cause the Sponsor to reimburse) the Transfer Agent for its costs, expenses and disbursements. Upon receipt of such payment and reimbursement, the Transfer Agent will deliver the Trust’s records as set forth herein. For the avoidance of doubt, no payment will be required pursuant to clause (ii) of this paragraph in the event of any transaction such as (a) a merger of the Trust into, or the consolidation of the Trust with, another entity, or (b) the sale by the Trust of all, or substantially all, of its assets to another entity, in each of (a) and (b) where the Transfer Agent is retained to continue providing services to the Trust (or its respective successor) on substantially the same terms as this Agreement.
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11. RESERVED
12. assignment
| 12.1 | Except as provided in Section 13 below, neither this Agreement nor any rights or obligations hereunder may be delegated or assigned by either party without the written consent of the other party. |
| 12.2 | Except as explicitly stated elsewhere in this Agreement, nothing under this Agreement shall be construed to give any rights or benefits in this Agreement to anyone other than the Transfer Agent and the Trust, and the duties and responsibilities undertaken pursuant to this Agreement shall be for the sole and exclusive benefit of the Transfer Agent and the Trust. This Agreement shall inure to the benefit of, and be binding upon, the parties and their respective permitted successors and assigns. |
| 12.3 | This Agreement does not constitute an agreement for a partnership or joint venture between the Transfer Agent and the Trust. Neither party shall make any commitments with third parties that are binding on the other party without the other party’s prior written consent. |
13. DELEGATION; SUBCONTRACTORS
| 13.1 | The Transfer Agent shall have the right, without the consent or approval of the Trust, to employ agents, subcontractors, consultants and other third parties, whether affiliated or unaffiliated, to provide or assist it in the provision of any part of the services stated herein (each, a “Delegate” and collectively, the “Delegates”), without the consent or approval of the Trust. The Transfer Agent shall be responsible for the services delivered by, and the acts and omissions of, any such Delegate as if the Transfer Agent had provided such services and committed such acts and omissions itself. Where required, such Delegate shall be a duly registered transfer agent pursuant to Section 17A(c)(2) of the 1934 Act. |
| 13.2 | The Transfer Agent will provide the Trust with information regarding its global operating model for the delivery of the services on a quarterly or other periodic basis, which information shall include the identities of Delegates affiliated with the Transfer Agent that perform or may perform parts of the services, and the locations from which such Delegates perform services, as well as such other information about its Delegates as the Trust may reasonably request from time to time. Nothing in this Section 13 shall limit or restrict the Transfer Agent’s right to use affiliates or third parties to perform or discharge, or assist it in the performance or discharge, of any obligations or duties under this Agreement other than the provision of the services. |
14. miscellaneous
| 14.1 | Amendment. This Agreement may be amended by a written agreement executed by both parties. |
| 14.2 | Massachusetts Law to Apply. This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts without giving effect to any conflicts of law rules thereof. |
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| 14.3 | Force Majeure. The Transfer Agent shall not be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, work stoppage, power or other mechanical failure, computer virus, natural disaster, acts of war or terrorism, pandemics, governmental actions or communication disruption. |
| 14.4 | Data Protection. The Transfer Agent will implement and maintain a comprehensive written information security program that contains appropriate security measures to safeguard the personal information of the Trust’s shareholders, employees, directors and/or officers that the Transfer Agent receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, “personal information” shall mean (i) an individual’s name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) driver’s license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a person’s account or (ii) any combination of the foregoing that would allow a person to log onto or access an individual’s account. Notwithstanding the foregoing “personal information” shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public. |
| 14.5 | Survival. All provisions regarding indemnification, warranty, liability, and limits thereon, and confidentiality and/or protections of proprietary rights and trade secrets shall survive the termination of this Agreement. |
| 14.6 | Severability. If any provision or provisions of this Agreement shall be held invalid, unlawful, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired. |
| 14.7 | Priorities Clause. In the event of any conflict, discrepancy or ambiguity between the terms and conditions contained in this Agreement and any schedules or attachments hereto, the terms and conditions contained in this Agreement shall take precedence. |
| 14.8 | Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement. The failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any such term, right or remedy or a waiver of any other rights or remedies. No single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise of any other right or remedy. Any waiver must be in writing signed by the waiving party. |
| 14.9 | Entire Agreement. This Agreement and any schedules, exhibits, attachments or amendments hereto constitute the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. |
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| 14.10 | Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received via electronically transmitted form. |
| 14.11 | Reproduction of Documents. This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, digital or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. |
| 14.12 | Notices. Any notice instruction or other instrument required to be given hereunder will be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following address or such other address as may be notified by any party from time to time: |
(a) If to Transfer Agent, to:
State Street Bank and Trust Company
Transfer Agency
Attention: Compliance
1776 Heritage Drive
Mailstop 3S
North Quincy MA 02171
With a copy to:
STATE STREET BANK AND TRUST COMPANY
Legal Division
One Congress Street
Suite 1
Boston, MA 02114
(b) If to the Trust, to:
COtwo Advisors LLC
Attn: Ronald Gutstein, Managing Member
Telephone: (203) 731-7675
Email: rgutstein@cotwoadvisors.com
| 14.13 | Interpretive and Other Provisions. In connection with the operation of this Agreement, the Transfer Agent and the Trust on behalf of each of the Funds, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of the Trust’s governing documents. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. |
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written.
| State Street Bank and Trust Company | |||
| By: | /s/ Danielle Capobianco | ||
| Name: | Danielle Capobianco | ||
| Title: | Vice President | ||
| COtwo Advisors Physical European Carbon Allowance Trust | |||
| By COtwo Advisors LLC, as Sponsor | |||
| By: | /s/ Ronald Gutstein | ||
| Name: | Ronald Gutstein | ||
| Title: | Managing Member | ||
| With respect to section 2.1: | ||
| COTWO ADVISORS LLC | ||
| By: | /s/ Ronald Gutstein | |
| Name: | Ronald Gutstein | |
| Title: | Managing Member | |
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Exhibit 10.6
SPONSOR AGREEMENT
THIS SPONSOR AGREEMENT (the “Agreement”), dated as of December 21, 2023, is made by and between COtwo Advisors LLC, a Delaware limited liability company (“Sponsor”), and COtwo Advisors Physical European Carbon Allowance Trust, a statutory trust organized under the laws of Delaware (the “Trust”).
1. The Trust. The Trust is not an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”) and it is not required to register thereunder. The Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended, and the Sponsor is not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor. The Sponsor is not registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and is not required to register thereunder.
2. Appointment. Pursuant to the terms of the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”), Sponsor was appointed to serve as sponsor for the Trust, with full powers and rights to effectuate and carry out the purposes, activities and objectives of the Trust. Sponsor has accepted such appointment and hereby agrees to render such services to the Trust on the terms and conditions set forth in this Agreement and the Trust Agreement.
3. Duties. Sponsor will perform such duties for the Trust as set forth in Article IV of the Trust Agreement in accordance with Sponsor’s best judgment and as outlined in the Trust’s then-current prospectus included as part of a registration statement filed with the U.S. Securities and Exchange Commission (“SEC”). All of the actions taken on or prior to the date hereof by Sponsor, including, without limitation, all actions taken in connection with the organization and registration of the Trust and the execution of service provider agreements, be, and they hereby are, ratified, affirmed, approved and adopted in all respects.
4. Execution of Trust Documents. Pursuant to the terms of the Trust Agreement, the Sponsor is authorized to execute documents for and on behalf of the Trust. For the avoidance of doubt, when a specified officer of the Trust is required to execute, or executes, a document, including but not limited to filings required to be made with regulatory authorities such as the Securities and Exchange Commission, the following officers of the Sponsor (or persons performing similar functions, including in the event of a vacancy in one or more of the specified Sponsor’s officer positions) shall be authorized to execute the document in the capacities indicated below:
|
Specified Trust Officer |
Sponsor Officer Authorized to Execute Trust Document in the Capacity of the Specified Trust Officer | |
| Principal Executive Officer / Chief Executive Officer / President | Chief Executive Officer / President | |
| Principal Financial Officer / Chief Financial Officer | Chief Financial Officer / Treasurer | |
| Principal Accounting Officer | Chief Financial Officer / Treasurer | |
| Comptroller | Chief Financial Officer / Treasurer | |
| Treasurer | Chief Financial Officer / Treasurer | |
| Vice President | Any Sponsor officer | |
| Secretary | Any Sponsor officer |
5. Reporting; Record Keeping. Sponsor will be available at reasonable times to discuss the activities of the Trust with the trustee of the Trust or its designee. Any written reports supplied by Sponsor to the Trust discussing the activities of the Trust are intended solely for the benefit of the Trust, and the Trust agrees that it will not disseminate such reports to any other party (other than the Trust’s service providers) without the prior consent of Sponsor, except as may be required by applicable law. Sponsor shall make or cause to be made, and shall maintain or cause to be maintained, all records as are required to be made or maintained by it in its capacity as Sponsor of the Trust.
6. Other Accounts. The Trust understands and acknowledges that Sponsor may act as sponsor for various persons other than the Trust. The Trust acknowledges that Sponsor may give advice and take action concerning other persons that may be the same as, similar to or different from the advice given, or the timing and nature of action taken, concerning the Trust. Except to the extent necessary to perform Sponsor’s obligations under this Agreement, nothing herein shall be deemed to limit or restrict the right of Sponsor, or any affiliate of Sponsor or any employee of Sponsor to engage in any other business or to devote time and attention to the management or other aspects of any other business, whether of a similar or dissimilar nature, or to render services of any kind to any other corporation, firm, individual or association.
7. Sponsor’s Compensation. The Trust shall pay to Sponsor a fee as described in Schedule A that is attached hereto and made a part hereof. Such fee shall be computed daily and paid not less than monthly in arrears by the Trust. No other compensation is paid to the Sponsor by the Trust. Sponsor’s compensation is paid in consideration of Sponsor’s (i) services under this Agreement and the Trust Agreement and (ii) the payment by Sponsor of the Trust expenses described in paragraph 8 below. Notwithstanding any other provision to the contrary, the Funds’ organizational and offering costs (“O&O Costs”) shall be borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor hereby agrees not to seek reimbursement from or otherwise require any Fund, the Trust, or any other party to assume any liability, duty or obligation in connection with any such O&O Costs.
8. Ordinary Fees and Expenses. Sponsor shall be responsible for the payment of all of the routine operational, administrative and other ordinary expenses of the Trust, excluding interest expenses and certain litigation expenses and other non-recurring or extraordinary fees and expenses. Extraordinary expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses.
9. Liability and Indemnification. Sponsor will not be liable for losses to the Trust, and Sponsor shall be indemnified, to the extent provided in Section 4.05 of the Trust Agreement.
10. Tax Filings. Except as described in any applicable filings with the SEC, Sponsor will not be responsible for making any tax credit or similar claim or any legal filing on the Trust’s behalf.
11. Governing Law/Disputes. This Agreement is entered into in accordance with and shall be governed by the laws of the State of Delaware; provided, however, that in the event that any law of the State of Delaware shall require that the laws of another state or jurisdiction be applied in any proceeding, such Delaware law shall be superseded by this paragraph, and the remaining laws of the State of Delaware shall nonetheless be applied in such proceeding. Each party agrees that in the event that any dispute arising from or relating to this Agreement becomes subject to any judicial proceeding, such party waives any right it may otherwise have to (a) seek punitive damages, or (b) request a jury trial.
12. Termination. This Agreement may be terminated (i) by Sponsor at any time upon 30 days’ prior written notice; or (ii) by either party upon discovery of acts of fraud or willful malfeasance of the other party in performing its duties hereunder. Any obligation or liability of either party resulting from actions or inactions occurring prior to termination shall not be affected by termination of this Agreement.
13. Assignment. This Agreement may be assigned by either party upon prior notice to the other party.
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14. Notices. All notices and other communications under this Agreement shall be in writing and shall be addressed to the parties at their respective addresses.
Sponsor shall comply with, and be entitled to act on, any instructions reasonably believed to be from an authorized representative of the Trust. Sponsor and its employees and agents shall be fully protected from all liability in acting upon such instructions, without being required to determine the authenticity of the authorization or authority of the persons providing such instructions.
15. Severability. In the event any provision of this Agreement is adjudicated to be void, illegal, invalid or unenforceable, the remaining terms and provisions of this Agreement shall not be affected thereby, and each of such remaining terms and provisions shall be valid and enforceable to the fullest extent permitted by law, unless a party demonstrates by a preponderance of the evidence that the invalidated provision was an essential economic term of this Agreement.
16. Integration; Amendment. This Agreement together with any other written agreements between the parties entered into concurrently with this Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereby and supersede all previous oral or written negotiations, commitments and understandings related thereto. This Agreement may not be amended or modified in any respect, nor may any provision be waived, without the written agreement of both parties. No waiver by one party of any obligation of the other hereunder shall be considered a waiver of any other obligation of such party.
17. Further Assurances. Each party hereto shall execute and deliver such other documents or agreements as may be necessary or desirable for the implementation of this Agreement and the consummation of the transactions contemplated hereby.
18. Headings. The headings of paragraphs herein are included solely for convenience and shall have no effect on the meaning of this Agreement.
19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to be one and the same instrument.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
| COtwo Advisors Physical European Carbon Allowance Trust | ||
| By: COtwo Advisors LLC, as Sponsor | ||
| By: | /s/ Ronald Gutstein | |
| Name: | Ronald Gutstein | |
| Title: | Chief Executive Officer | |
| COtwo Advisors LLC | ||
| By: | /s/ Ronald Gutstein | |
| Name: | Ronald Gutstein | |
| Title: | Chief Executive Officer | |
Signature Page –Sponsor Agreement
SCHEDULE A
to the
SPONSOR AGREEMENT
Dated December 21, 2023 between
COtwo Advisors Physical European Carbon Allowance Trust
and
COtwo Advisors LLC
The Trust will pay to the Sponsor as compensation for the Sponsor’s services rendered, a fee, computed daily at an annual rate 0.79% of the average daily net assets of the Trust.
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-1 of our report dated January 11, 2024, relating to the financial statement of COtwo Advisors Physical European Carbon Allowance Trust as of December 7, 2023, and to the reference to our firm under the heading “Experts” in the Registration Statement.
COHEN & COMPANY, LTD.
Philadelphia, Pennsylvania
January 11, 2024
