AGNC Management, LLC (“AGNC Manager”) is a Delaware limited liability company,
which is wholly owned by AGNC Mortgage Management, LLC (“AMM”), which is, in
turn, wholly owned by AGNC Investment Corp (“AGNC”). AGNC is a public real estate
investment trust (“REIT”) and is traded on The Nasdaq Global Select Market under the
symbol “AGNC.”
AGNC Manager was formed in 2008 to manage AGNC.
AGNC Manager provides investment management, administrative and other advisory
services to AGNC which commenced operations in May 2008 and invests primarily in a
leveraged portfolio of residential mortgage pass-through securities and collateralized
mortgage obligations for which the principal and interest payments are guaranteed by a
U.S. Government agency or a U.S. Government-sponsored enterprise (“GSE”)
(collectively, “agency securities”). AGNC may also invest in other types of mortgage
and mortgage-related residential and commercial mortgage-backed securities where
repayment of principal and interest is not guaranteed by a GSE or U.S. Government
agency or in other investments in, or related to, the housing, mortgage or real estate
markets. AGNC investments may also include the common stock of other publicly-traded
mortgage REITs that predominately invest in agency securities, non-agency securities
and other mortgage related instruments. As part of its management duties, AGNC
Manager may employ hedging techniques designed to reduce AGNC’s exposure to
market risks, including interest rate, prepayment and extension risks.
AGNC Manager manages the investments of AGNC according to its investment
management agreement with AGNC and consistent with AGNC’s investment objectives
and strategy. AGNC Manager has discretionary trading authorization. AGNC’s
investments are subject to certain restrictions and limitations set forth in AGNC’s
prospectus, such as prohibitions on investing in certain types of assets, prohibitions on
investments that would cause AGNC to fail to qualify as a REIT for federal income tax
purposes, and prohibitions on investments that would cause AGNC to be regulated as an
investment company under the Investment Company Act of 1940, as amended (the “1940
Act”), among others.
Investors and prospective investors in AGNC should refer to the prospectus and related
agreements, including subsequent periodic filings, and other governing documents for
AGNC for complete information. Prior performance is not necessarily indicative of
future results, and there is no assurance that AGNC’s investment objectives will be
achieved.
AGNC Manager does not participate in any wrap fee programs.
As of December 31, 2019, AGNC Manager managed approximately $113,082,000,000 of
assets of AGNC on a discretionary basis.
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Pursuant to the terms of its management agreement with AGNC, AGNC Manager earns a
base management fee equal to 1/12 of 1.25% of AGNC’s month-end stockholders’
equity, adjusted to exclude the effect of any unrealized gains or losses included in either
retained earnings or other comprehensive income (loss), each as computed in accordance
with U.S. generally accepted accounting principles (“GAAP”). The management fee is
payable monthly in arrears. AGNC Manager is an indirectly held, wholly owned
subsidiary of AGNC. The only client of AGNC Manager is its consolidated parent,
AGNC. Accordingly, any fees that may be paid to AGNC Manager pursuant to the
management agreement with AGNC are eliminated through consolidation with its parent.
Under the terms of the management agreement, AGNC Manager is entitled to a
termination fee in the event of the termination of the management agreement with AGNC
without cause or a material breach of the agreement by AGNC equal to three times the
average annual management fee earned by AGNC Manager during the prior 24-month
period immediately preceding the most recently completed month prior to the effective
date of termination.
Additionally, AGNC Manager is entitled to reimbursement from AGNC for all of its
operating expenses, including fees, costs and expenses directly related to the purchase
and sale of its investments, taxes, fees of auditors and counsel, insurance, litigation
expenses, custodial expenses and any extraordinary expenses but excluding employment-
related expenses. Pursuant to the terms of the management agreement, there are no limits
on such expense reimbursements. AGNC’s prospectus contains complete information on
the expenses payable by AGNC.
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AGNC Manager does not charge performance-based fees.
The value of some of AGNC’s investments may not be readily determinable. The fair
value of such investments is measured quarterly, in accordance with guidance set forth in
FASB Accounting Standards Codification, or ASC, Topic 820,
Fair Value Measurements
and Disclosures. The fair value at which AGNC’s assets may be recorded may not be an
indication of their realizable value. Ultimate realization of the value of an asset depends
on economic and other conditions that are beyond the control of AGNC Manager, AGNC
or their respective Boards. Further, fair value is only an estimate based on good faith
judgment of the price at which an investment can be sold since market prices of
investments can only be determined by negotiation between a willing buyer and seller. If
AGNC were to liquidate a particular asset, the realized value may be more than or less
than the amount at which such asset is valued. Accordingly, the value of AGNC’s
common stock could be adversely affected by the determinations regarding the fair value
of its investments, whether in the applicable period or in the future. Additionally, such
valuations may fluctuate over short periods of time.
In most cases, AGNC Manager’s determination of the fair value of AGNC’s investments
will include inputs provided by third-party dealers and pricing services. Valuations of
certain investments in which AGNC may invest are often difficult to obtain or unreliable.
In general, dealers and pricing services heavily disclaim their valuations. Dealers may
claim to furnish valuations only as an accommodation and without special compensation,
and so they may disclaim any and all liability for any direct, incidental, or consequential
damages arising out of any inaccuracy or incompleteness in valuations, including any act
of negligence or breach of any warranty. Depending on the complexity and illiquidity of
a security, valuations of the same security can vary substantially from one dealer or
pricing service to another. Therefore, AGNC’s results of operations for a given period
could be adversely affected if the determinations regarding the fair market value of these
investments are materially different than the values that AGNC ultimately realizes upon
their disposal.
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AGNC Manager provides investment advice to its parent, AGNC, a publicly traded
REIT. AGNC does not have suitability or net worth qualifications.
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[Item 8]
The following is a summary of the investment strategies and methods of analysis
employed by AGNC Manager with respect to its management of AGNC and the material
risks applicable to an investment in AGNC. Specific descriptions of such strategies,
methods and risks are included in AGNC’s prospectus and should be reviewed carefully.
Methods of Analysis and Investment Strategies
AGNC earns income primarily from investing on a leveraged basis in agency residential
mortgage-backed securities and assets reasonably related to agency securities, including
residential mortgage pass-through securities and collateralized mortgage obligations for
which the principal and interest payments are guaranteed by a GSE. We may also invest
in other types of mortgage and mortgage-related residential and commercial mortgage-
backed securities where repayment of principal and interest is not guaranteed by a GSE
or U.S. Government agency. Our investments may also include the common stock of
other publicly-traded mortgage REITs or in other investments in, or related to, the
housing, mortgage or real estate markets.
AGNC Manager employs an active management strategy to achieve AGNC’s principal
objective of providing our stockholders with attractive risk-adjusted returns through a
combination of regular monthly dividends and tangible net book value accretion. We
generate income from the interest earned on our investments, net of associated borrowing
and hedging costs, and net realized gains and losses on our investment and hedging
activities. AGNC funds its investments primarily through borrowings structured as
repurchase agreements. AGNC may also seek to obtain other sources of financing
depending on market conditions. For instance, AGNC may finance the acquisition of
agency securities through off-balance sheet to-be-announced, or “TBA,” dollar roll
transactions. In evaluating AGNC’s overall leverage at risk, AGNC Manager considers
both AGNC’s on-balance and off-balance sheet financing.
While managing an investment portfolio consisting primarily of agency securities and
assets reasonably related to agency securities (other than for hedging purposes) that seek
to generate attractive, risk-adjusted returns, AGNC Manager’s investment strategy is
designed to:
• seek to generate attractive risk-adjusted returns through monthly dividend
distributions on common stock and tangible net book value accretion;
• manage an investment portfolio consisting primarily of agency securities;
• invest a subset of its portfolio in credit risk-oriented mortgage assets;
• capitalize on discrepancies in the relative valuations in the agency and non-
agency securities market;
• manage financing, interest rate, prepayment, extension and credit risks;
• continue to qualify as a REIT; and
• remain exempt from the requirements of the 1940 Act.
Material Risks
AGNC may not be able to execute successfully its investment, financing and hedging
strategies as described in its prospectus, which could result in a loss of some or all of its
investments. The results of its operations will depend on many factors, including,
without limitation, the availability of attractively priced mortgage-related investments,
the level and volatility of interest rates, readily accessible financing for its proposed
investment portfolios, conditions in the financial markets and the economy in general.
AGNC may experience significant short-term gains or losses and, consequently, earnings
volatility as a result of its active portfolio management strategies. AGNC’s strategy
involves significant leverage, which increases the risk that it may incur substantial losses
if borrowing costs increase or the value of its securities decline.
Market conditions may disrupt the historical relationship between interest rate changes
and prepayment trends, which make it more difficult for AGNC Manager to analyze
AGNC’s investment portfolio. AGNC’s success depends on AGNC Manager’s ability to
analyze the relationship of changing interest rates on prepayments of the mortgage loans
that underlie AGNC’s agency securities. Changes in interest rates and prepayments
affect the market price of agency securities. As part of AGNC’s overall portfolio risk
management, AGNC Manager analyzes interest rate changes and prepayment trends
separately and collectively to assess their effects on AGNC’s investment portfolio. In
conducting its analysis, AGNC Manager depends on certain assumptions based upon
historical trends with respect to the relationship between interest rates and prepayments
under normal market conditions. There is risk that our assumptions are incorrect.
Dislocations in the residential mortgage market and other developments have disrupted
the relationship between the way that prepayment trends have historically responded to
interest rate changes and, consequently, may negatively impact AGNC Manager’s ability
to (i) assess the market value of AGNC’s investment portfolio, (ii) implement AGNC’s
hedging strategies and (iii) implement techniques to reduce AGNC’s prepayment rate
volatility, which could materially adversely affect its financial condition and results of
operations. Also, while AGNC’s hedging instruments attempt to protect its net book
value against moves in interest rates, such instruments are generally not designed to
protect AGNC’s net book value from "spread risk.”
AGNC invests predominantly in agency securities and relies on its agency securities as
collateral for its financings. Any decline in their value, or perceived market uncertainty
about their value, may make it difficult for AGNC to obtain financing on favorable terms
or at all, or maintain its compliance with terms of any financing arrangements already in
place. Investments in non-agency securities where repayment of principal and interest is
not guaranteed by a GSE subject AGNC to the potential risk of loss of principal and/or
interest due to delinquency, foreclosure and related losses on the underlying mortgage
loans.
Any credit ratings assigned to AGNC’s investments will be subject to ongoing
evaluations and revisions and there can be no assurance that those ratings will not be
downgraded.
AGNC Manager’s due diligence of potential investments may not reveal all of the
potential liabilities associated with such investments and may not reveal other
weaknesses in such investments, which could lead to investment losses.
The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along
with any changes in laws and regulations affecting the relationship between these
agencies and the U.S. Government, may adversely affect AGNC’s business.
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There are no legal or disciplinary events involving AGNC Manager or its management
persons required to be disclosed pursuant to this Item 9.
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Bethesda Securities, LLC and CT Collateral Funding, LLC, each a wholly-owned
subsidiary of AGNC, are each registered with FINRA as a broker-dealer, and certain
employees of AGNC Manager and its affiliates are registered representatives of Bethesda
Securities and CT Collateral.
Neither AGNC Manager nor any of its management persons is registered as a registered
futures commission merchant or commodity pool operator. AGNC Manager is exempt
from registration as a commodity trading advisor.
AGNC Manager permits its principals, officers, employees and supervised persons
(“Covered Persons”) to engage in personal securities transactions, subject to compliance
with AGNC Manager’s Code of Ethics, as described in Item 11.
AGNC Manager does not recommend or select other third-party investment advisers for
its clients. Except as described herein, AGNC Manager does not have other business
relationships with other advisers that create a material conflict of interest.
CODE OF ETHICS, PARTICIPATION OR INTEREST IN CLIENT TRANSACTIONS AND PERSONAL TRADING [Item 11] AGNC Manager has adopted a Code of Ethics and Conduct (the “Code”) pursuant to
Rule 204A-1 under the Advisers Act, which includes formal personal trading policies and
procedures generally requiring, among other things, all Covered Persons and certain
family members and other related persons to file with AGNC Manager’s Chief
Compliance Officer certain reports concerning their personal securities holdings and
transactions and, subject to certain exceptions, to obtain pre-clearance for purchasing and
selling “covered securities.” All Covered Persons are also required to report any
violations of the Code to AGNC Manager’s Chief Compliance Officer.
The Code provides that no Covered Person may, in breach of any fiduciary duty he or she
owes to AGNC, engage directly or indirectly in any business investment in a manner
detrimental to AGNC or use confidential information gained by reason of his or her
employment by or affiliation with AGNC Manager in a manner detrimental to AGNC.
AGNC Manager and the Covered Persons owe a fiduciary duty of care, loyalty, honesty
and good faith to AGNC. The Code further obligates each Covered Person to:
• Observe all laws and regulations
• Avoid conflicts of interest
• Maintain accurate and complete company records, and
• Protect confidential information
Any client or prospective client or investor or prospective investor in AGNC may obtain
a copy of the Code upon request.
The Code includes policies and procedures concerning “inside information” that are
designed to prevent the misuse of material, non-public information (“Inside
Information”). Covered Persons are required to comply with the Code, including these
policies, and may be asked to certify their compliance on a periodic basis. The Code
prohibits AGNC Manager and Covered Persons from trading for AGNC or themselves,
or recommending trading, in securities of AGNC while in possession of Inside
Information about AGNC, and from disclosing such information to any person not
entitled to receive it.
AGNC Manager permits its employees and other related persons to engage in personal
securities transactions, subject to compliance with its Code. No such person shall
purchase or sell, directly or indirectly, any covered security in which he or she has, or by
reason of such transaction acquires, any direct or indirect beneficial ownership and that
he or she knows or should have known at the time of such purchase or sale is being
considered for purchase or sale by AGNC Manager or is being purchased or sold by
AGNC Manager.
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Trades in agency securities are typically made through broker-dealers that, acting as
principal, charge markups, markdowns or other charges in connection with such
trades. These broker-dealers do not charge commissions. Thus, it is obtaining or selling
securities at the best price under the circumstances that defines AGNC Manager’s
objective in seeking best execution. AGNC Manager seeks best execution for AGNC’s
securities transactions by identifying appropriate broker-dealers through which to affect
such transactions. In seeking best execution, AGNC Manager evaluates, on an ongoing
basis, the prices that are available in the broker-dealer markets. AGNC Manager
generally considers the following factors, among others, in selecting and approving
broker-dealers that may compete for AGNC Manager’s business: (i) quality of
execution—accurate and timely execution, clearance and cooperation in resolving errors
and disputes; (ii) reputation; (iii) reliability, both historically and as an ongoing matter;
(iv) willingness to execute difficult transactions; (v) access to underwritten offerings of
fixed income securities; (vi) nature of the security and availability of market makers; (vii)
desired timing of transactions and size of trades; (viii) confidentiality of trading activity,
particularly in less liquid sectors; (ix) market intelligence and knowledge regarding
trading activity; (x) ability to settle trades; (xi) a salesperson’s ability to harness his or her
firm’s resources to the benefit of AGNC; and (xii) research capabilities.
AGNC Manager may also use electronic trading systems to execute trades. These
systems charge transaction fees that are included in the price of the security.
AGNC Manager does not participate in “soft dollar” arrangements under which AGNC
Manager “pays up” (in the form of higher markups, markdowns or commissions charged
for AGNC fixed income trades) for research in connection with fixed income trades.
AGNC Manager may, however, receive research (including proprietary research) from
various broker-dealers through which it may execute trades where AGNC Manager’s
receipt of the research does not result in additional cost to AGNC. Research so obtained
results in an economic benefit to AGNC Manager, and AGNC Manager does not account
for the value of this research. AGNC Manager generally uses the research to assist it in
its investment decision-making process, but this research may not be used for AGNC.
AGNC Manager may have an incentive to select or recommend a broker-dealer based on
AGNC Manager’s interest in receiving the research or other products or services, rather
than on AGNC’s interest in receiving most favorable execution.
AGNC Manager does not participate in directed brokerage arrangements.
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AGNC Manager monitors each investment of AGNC on an ongoing basis. In addition,
AGNC Manager conducts periodic reviews in order to assess trends that may impact an
individual investment’s ability to generate cash, profitability, asset values, financing
needs, potential liability and ability to service any debts.
AGNC Manager provides AGNC’s Board of Directors with quarterly reports, which
typically include, among other information, holdings and transaction information,
performance and risk analysis, accounting data, portfolio reviews and distribution
information. AGNC Manager also provides additional information or reports as
requested by the board. AGNC’s shareholders may obtain annual and quarterly reports as
filed with the SEC and attend an annual shareholder meeting.
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It is AGNC Manager’s general policy to not have physical custody of any client assets.
To the extent that AGNC Manager might otherwise be deemed to have custody, AGNC
Manager will operate on reliance upon the reporting requirement exemption in the
statements annually, prepared in accordance with GAAP, to shareholders no later than
120 days after the end of each fiscal year.
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Subject to the investment objectives, policies and restrictions of AGNC as set forth in its
prospectus, AGNC Manager has discretionary authority to determine the type, amount
and price of securities and investments to be bought and sold by AGNC, including the
selection of, and commissions paid to, broker-dealers, if applicable.
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To the extent AGNC holds voting securities, AGNC Manager has been delegated the
authority to vote proxies regarding AGNC portfolio securities. To the extent that AGNC
Manager does vote proxies, they will be voted in AGNC’s best interests and according to
AGNC Manager’s proxy voting policy.
AGNC Manager’s proxy voting policy sets forth general guidelines for reviewing proxy
issues and requires AGNC Manager’s officers to consult with each other and AGNC’s
investment team in determining how to vote a particular proxy. The proxy voting policy
also sets forth specific records retention requirements related to any proxies that are voted
on behalf of AGNC. If a potential conflict of interest in respect of a particular proxy
situation is identified, AGNC may elect to resolve it by following the recommendation of
a disinterested third party, by seeking the direction of AGNC’s disinterested directors or,
in extreme cases, by abstaining from voting. AGNC may not direct AGNC Manager’s
vote in a particular proxy solicitation.
A copy of the proxy voting policy and/or record of how proxies, if any, have been voted
are available to clients upon request.
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AGNC Manager does not require or solicit prepayment of more than $1,200 in fees per
client six months or more in advance and, thus, has not included a balance sheet of its
most recent fiscal year. AGNC Manager is not aware of any financial condition that is
reasonably likely to impair its ability to meet its contractual commitments to clients, nor
has AGNC Manager been the subject of a bankruptcy petition at any time during the past
ten years.
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