K2 FUND STRATEGY OUTLOOK

Q1 2021 Q1 2021 Outlook: Summary

Going into the new year, we are very Strategy Highlights optimistic about the opportunity set, Long/ With risk in the United States mitigated by the recent positive COVID-19 and we think that active management Equity— vaccine news and the 2020 presidential election results, domestic will be key to success in 2021 International equities have risen to record valuations. Uncertainty that once clouded as -driven momentum slows the United States is similarly presenting attractive dispersion opportunities given potentially stretched valuations. internationally, and we believe lower valuations should provide more We believe it is prudent to be growth- downside support. oriented in our portfolio positioning Macro— The strategy may be supported by positive tailwinds of rebounding while also holding hedged alternative Emerging growth and policy support, as well as increased dispersion at the region, that exhibit low correlations Markets country and asset class levels within emerging markets. to broader risk assets. - Higher-than-average insured losses due to COVID-19 and natural Linked catastrophe activity is lifting reinsurance pricing. The market offers Securities (ILS) attractive ILS spreads as we enter the lower-risk period prior to the next hurricane season.

Strategy Outlook Long/Short Equity Long/short equity managers have been resilient on a year-to-date basis. While stocks are trading at high valuations, we believe there are still asymmetric dispersion oppor- tunities that could lead to incremental alpha generation in particular areas of the market.

Relative Value Favorable outlook for volatility and strategies driven by persistent inefficiencies in pricing among various asset classes. Negative outlook for fixed income arbitrage based on depressed volatility due to excess central bank liquidity.

Event Driven Neutral outlook for merger arbitrage, as spreads for “safe” deals have been tightening. Attractive opportunity set remains in the more complex merger situations as well as special situations equity and credit investing where manager experience is more likely to produce superior outcomes.

Credit Long/short credit managers are increasingly focused on event-driven situations given low yields and tight spreads. Uncertainty in structured credit may lead to high levels of dispersion at the instrument, market and manager level.

Global Macro As the macro shocks of the last year appear to be normalizing, fundamental dispersion between regions, countries and asset classes may become an increasingly important driver of returns. Managers focused on this dispersion, particularly within emerging markets, may benefit from a rich opportunity set in the year ahead.

Commodities The global economic recovery is supportive of increased commodity demand across sub-strategies. As supply-demand tightens into 2021, volatility is expected to increase and favor relative value strategies.

Insurance-Linked Both insurance and reinsurance pricing trends are positive as higher-than-average Securities (ILS) natural catastrophe insured losses, broader industry COVID-19-related losses and low interest rates result in higher pricing across the sector including ILS strategies.

This outlook is provided to you for informational purposes and is not intended for redistribution. It shall not constitute an offer to sell or a solicitation of an offer to buy an interest in any product or fund. This outlook discusses strategies that are available through a variety of structures such as separate accounts, mutual funds and private funds. Not all structures are available for all strategies shown. Interests or shares of an investment fund are offered only through the fund’s offering documents, such as a Prospectus or Confidential Private Offering Memorandum.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 2 Strategy Outlook—Q1 2021 Macro Themes We Are Discussing

Will inflation expectations continue to rise given companies are disparately dependent on a speedy recovery. We vaccinations, global financial conditions and expected expect that the bigger, stronger companies will be very active in economic growth? strategic business dealings to further strengthen their advantages The start of 2021 offers a new beginning in the sense that the over weaker competitors. economic slowdown due to COVID-19 appears to be coming Will emerging markets recover faster than developed to an end. Individuals and corporations have been buoyed markets? by enormous stimulus from governments, and for the most If the global recovery is strong and fast, commodities should part, have weathered the storm of 2020. Structural trends of experience dispersion due to supply/demand dynamics, and e-commerce, deglobalization of supply chains, health care, emerging market (EM) risk assets could follow suit. That is , software and sustainability were accelerated due to the especially true in countries exporting commodities and those that economic environment and global lockdowns. have already dramatically devalued their currency. Additional Going forward, if economic growth, earnings and sentiment fuel to these dynamics would be a weakening US dollar. Finally, overreact to the upside in speed and magnitude, inflation will global yield hunters should be enticed by the developing inevitably surface. However, we could have a period of reflation market’s yield premium in fixed income. As a result, we find both without inflation, which would be very favorable for equities. EM equities and foreign exchange attractive on a relative- Conversely, there are many paths to a derailing of the recovery valuation basis. such as failed vaccination implementation, a mutated virus, a With that said, investors do have to be selective in EMs due to sustained second wave or even another global lockdown. challenges of operating in these countries. EM companies face Currently, the markets are quickly moving to price in perfection, challenges from foreign companies entering their markets, reflation with minimal inflation and a robust global economic ongoing global trade tensions, and vaccination distribution recovery. We expect challenges to this pricing to arise periodically challenges. In addition, fiscal and monetary stimulus has been led over the course of 2021, keeping volatility and dispersion elevated by developed markets relative to EM counterparts. and creating rich opportunities for active management. Summary for 2021 Will the global chase for yield continue but deemphasize As we enter 2021, we are very optimistic about the opportunity sovereign fixed income in favor of alternative yield products? set while recognizing that our views are based on a swift Many assets are priced to a flat forward curve, putting a high global recovery that is becoming consensus among allocators. premium on forward cash flows. If the forward curve were Our underlying hedge fund managers are identifying many to rise (steepen), a repricing downward of these duration assets opportunities, both on the long and short side, and think that would be expected in 2021. Given that real interest rates are active-management alpha will be key to success in 2021 historically low, we expect sovereign fixed income to be as beta-driven momentum slows. With data throughout the year, challenged and for interest rates to eventually rise. Investors that we will be constantly challenging our own thinking and making are yield- and income-centric will most likely have to rotate into adjustments as necessary. As a result, we believe it is prudent alternative yield products such as ILS that provide yield for to be growth-oriented in our portfolio positioning while also holding taking on insurance risks. hedged alternative investments that exhibit low correlations to Dispersion in credit markets coupled with the need for yield broader risk assets. should also provide a good opportunity for long/short credit managers and dispersion trading as many industries and

The above reflects the opinions of the K2 Investment & Research Management (IRM) group as of December 20, 2020, and may not reflect the views of other groups within K2 or Franklin Templeton. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager’s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund’s portfolio selection process.

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Hedge Fund Strategy Outlook—Q1 2021 3 Q1 2021 Outlook: Strategy Highlights

Long/Short Equity—International More importantly, EM countries are in a strong fundamental Given the impressive recovery of US equities since the first position given the creation of long-term wealth through a quarter, we believe that international long/short strategies are rising middle class and more recently, less reliance on fiscal poised to outperform. European and Asian markets have support during the pandemic. generally traded in tandem with the United States throughout the Macro—Emerging Markets COVID-19 pandemic, but foreign companies, as captured Emerging markets may benefit from a confluence of rebounding by the MSCI EAFE Index, have consistently underperformed their growth, sustained policy support, and improving fund flow US peers over the last decade. dynamics. Many investors reduced their exposure to growth- Moreover, non-US equity markets could be further buoyed by sensitive emerging market assets in the wake of the pandemic. their natural bias toward cyclical and value-type names in If recent momentum in the recovery persists while policy contrast to US market reliance on the overstretched technology remains accommodative, these regions may see a resurgence of sector and growth companies more broadly. In addition to interest. Macro specialists focused on emerging markets may non-US developed markets, we believe emerging markets may benefit from these tailwinds as well as wider dispersion in country outperform. The reopening of local economies should benefit their and asset-class performance in the wake of the last year’s respective economically sensitive industries, and any incremental crises and divergent policy responses. stimulus in the United States should weaken the US dollar.

Exhibit 1: International Equities Are Positioned to Outperform the Exhibit 2: Emerging Market Fund Flows US After a Decade of Underperformance January 2004–December 17, 2020 November 2010–November 2020 $ Billions % Returns 200 20.0% 18.4% 17.5% 18.0% 16.8% 150 16.0% 14.0% 14.0% 14.2% 14.0% 100 12.7% 12.0% 10.2% 10.7% 50 10.0% 9.4%

8.0% 6.4% 6.2% 5.9% 0 6.0% 3.6% 4.0% 3.0% -50 2.0% 0.0% -100 YTD 2020 1 Year Ann. 2 Year Ann. 5 Year Ann. 10 Year 2004 2006 2008 2010 2012 2014 2016 2018 2020

S&P 500 TR Index EM Bonds EM Equities MSCI Emerging Markets Net TR USD Index MSCI EAFE Net TR USD Index

Source: Bloomberg. Important data provide notices and terms available at Source: JPMorgan. Important data provide notices and terms available at www.franklintempletondatasources.com. Indexes are unmanaged and one cannot invest in www.franklintempletondatasources.com. them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

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Hedge Fund Strategy Outlook—Q1 2021 4 Q1 2021 Outlook: Strategy Highlights

Insurance-Linked Securities Willis Towers Watson estimates an additional $32 billion to $80 Swiss Re Institute estimates natural catastrophe events caused billion of insured losses from COVID-19, which is supporting $76 billion of global insured losses in 2020, 6.6% above higher pricing across the insurance industry. Cat bond spreads the previous 10-year average. While 2020 resulted in a record remain attractive versus US corporate high yield as we enter number of North Atlantic named storms (30), US hurricane- a lower risk part of the ILS calendar prior to the next US hurricane insured losses were much lower than 2005 and 2017 stress years season in June 2021. as 2020 landfalls were in lower-insured, less-populated areas.

Exhibit 3: Cat Spread vs. High-Yield BB Spread April 2014–November 2020 9%

8%

7%

6%

5%

4%

3%

2%

1%

0% Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 Dec-18 Jul-19 Feb-20 SepNov-20-20

Cat Bond Market Spread ML HY BB OAS

Source: Swiss Re, Aon Benfield, ICE BofAML, Bloomberg. Important data provide notices and terms available at www.franklintempletondatasources.com. Indexes are unmanaged and one cannot invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 5 Hedge Fund Strategy Outlook—Q1 2021 Q1 2021 Outlook by Strategy

Long/Short Long/short equity investing has proven its importance throughout this characteristically Equity unprecedented year. However, domestic markets are now at undisputedly elevated levels as indicated by the Rule of 20, a widely used valuation heuristic, following the strong efficacy of several COVID-19 vaccine candidates and the results of the US 2020 presidential elections. Though the extreme volatility experienced in March has likely abated, we still expect a reasonable level of uncertainty and dispersion to persist as companies, particularly outside of the technology sector, try to navigate through the next stage of the pandemic. Long/short equity managers continue to run at elevated gross and net exposures to reflect their constructive equity outlook and have started to shift their portfolios towards a “back-to-normalcy” theme while shorting those where the rebound may be more illusory, which we believe should result in additional alpha generation.

Relative Value Relative value strategies continue to benefit from greater dispersion in pricing of various instruments. Even as risk assets reach new all-time peaks, there are many asset classes that remain inefficiently priced. For example, a great disconnect exists between volatility markets in different asset classes and geographies—US equity volatility remains at historically high levels while fixed income volatility is near all-time lows. We expect certain strategies, such as convertible arbitrage and , to benefit from these dislocations and eventual convergence of such disparate pricing. One strategy that we are less excited about is fixed income arbitrage, where the opportunity set is significantly constrained by massive excess liquidity provided by the central banks to traditional fixed income markets. This serves as a great dampener for volatility and is likely to limit the opportunity set for the foreseeable future.

Event Driven We are hopeful that the recent pickup in merger and acquisition (M&A) activity will persist and will continue to offer a robust opportunity set for our managers. However, the strong risk-on tone across all markets means that spreads in traditional “safe” M&A deals are relatively tight due to continued inflows into the strategy and an excess of capital in the current sub-zero real rate environment. However, we are encouraged by the recent pickup in volume of more complex event situations, including cross-border activity, hostile approaches, and leveraged buyouts. With greater complexity comes perception of greater risk and correspondingly wider spreads, which experienced event- driven investors can exploit. Other types of event-driven investing, including opportunities in credit and special situations, are similarly more complex, with potential for greater differentiation between individual instruments and managers.

Understanding the Pendulum Graphic

Strongly Strongly Underweight Overweight

Underweight Overweight

Neutral Arrows represent any change since the last quarter-end.

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Hedge Fund Strategy Outlook—Q1 2021 6 Q1 2021 Outlook by Strategy

Credit Credit, like other risk assets, is characterized by an investor base willing to look through to the other side of the COVID-19 crisis and price in a return-to-normal scenario. In addition (and related), accommodative monetary policy across the globe means that interest rates are at rock-bottom levels. Put simply, spreads are tight and yields are low, which presents risks for a traditional credit portfolio. As a result, credit managers are increasingly looking toward events to capture alpha. In long/short credit, managers point to an improved outlook for M&A with companies eager to jettison non-core assets and sponsors with capital to deploy as supportive of this event-driven approach. Secular changes COVID-19 has triggered, and securities which are seemingly priced to perfection, could allow for opportunities to generate alpha on the short side. Structured credit in general has rebounded, but areas facing potential secular headwinds like commercial mortgage-backed securities and aviation require skilled in identifying the stronger structures and collateral from less attractive instruments. In distressed, defaults remain elevated but have slowed significantly recently as capital markets welcome new issuance across the quality spectrum, thereby reducing the opportunity set. Direct lending managers remain focused on their existing portfolios and are likely to amend and extend maturities for stressed borrowers.

Global Macro With several major political events and policy decisions seemingly behind us, we expect fundamental dispersion to be an increasingly important driver of returns going forward. Within discretionary macro, this environment may favor relative value approaches where discerning managers can seek out winners and losers emerging from the major shifts of the last year. Emerging market specialists can benefit from large differentiation at the region, country and asset class levels, as well as from the potential tailwinds of a rebounding growth and accommodative policy environment. Systematic strategies can benefit as markets continue to normalize following last year’s events, but, as always, remain susceptible to any non-modeled exogenous shocks that may occur.

Commodities In the fourth quarter, commodities experienced a broad-based rally supported by a weaker US dollar and a rebound in overall demand. In early 2021, fundamentals are expected to improve with the global economic recovery. Global fiscal and monetary policies are supportive of commodities, while investor flows are strengthening. The market is well-positioned for relative value strategies, as an improving beta environment is still at risk of COVID-19-related lockdowns and the Organization of the Petroleum Exporting Countries ramping up production too quickly. The appetite to increase renewable energy and electric vehicle sales along with governments’ tightening carbon emissions targets present an improving opportunity set for niche strategies as well.

Insurance- The combination of an active natural catastrophe year along with COVID-19-related Linked insured losses has resulted in a positive pricing environment across the property and Securities casualty insurance industry. At the same time, $22 billion of fresh capital raised through private and public equity markets supporting new reinsurance startups has mitigated the risk of a distressed market environment. Overall, the market remains healthy, and cat bonds should continue to draw more interest into 2021. Cat bonds will likely benefit from the transparent and liquid structure, lack of correlation and wider spread versus US high yield corporate bonds.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 7 Hedge Fund Strategy Outlook—Q1 2021 Outlook Trend for Strategies and Sub-Strategies Sub-Strategies Ranked by Z-Score Strategies Q4 2020 Q1 2021 Changes

Long/Short Equity — Rankings (Top Down) Z-Score

Long/Short Equity Emerging Markets 1.5

Equity Insurance Loss Warranties 1.2

Activist — Discretionary 0.9

Europe Catastrophe Bonds 0.9

Asia Europe 0.9

Technology Oil & Products 0.8

Healthcare — Agriculture 0.8

Relative Value — Asia 0.8

Convertible Arbitrage — Retrocessional 0.7

Volatility Arbitrage — Private Transactions 0.7

Fixed Income — Volatility Arbitrage 0.5

Event Driven Metals 0.5

Merger Arbitrage US Natural Gas 0.2

Special Situations Activist 0.1

Credit Convertible Arbitrage 0.1

Direct Lending Systematic 0.1

Distressed Merger Arbitrage 0.0

Long/Short Credit — Health Care -0.1

Structured Credit — Structured Credit -0.2

Global Macro — Special Situations -0.3

Discretionary Long/Short Credit -0.4 — Systematic Technology -0.8 — Emerging Markets Direct Lending -0.9

Commodities Distressed -1.0

Oil & Products Equity Market Neutral -1.1

Agriculture Long/Short Equity -1.6 — Metals Fixed Income -1.7 — US Natural Gas Life -2.8 Insurance-Linked Securities

Catastrophe Bonds —

Private Transactions > +1 Strongly Overweight +0.5 to +1 Overweight Life Securitization — -0.5 to +0.5 Neutral Retrocessional -1 to -0.5 Underweight Industry Loss Warranties — < -1 Strongly Underweight

The K2 Investment Research & Management (IRM) Outlook Scores are the opinions of the K2 IRM group as of the date indicated and may not reflect the views of other groups within K2 or Franklin Templeton. Scores are determined relative to other hedge fund strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or substrategy. Scores are determined by the K2 IRM group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or substrategy and may change from time to time in K2’s sole discretion. In certain sections of this presentation, outlook scores are rounded to the nearest whole number. These scores are only one of several factors that K2 uses in making investment recommendations, which may vary based on a client’s specific investment objectives, risk tolerance and other considerations. Therefore, underweightings and overweightings as shown are meant to indicate K2's view of relative attractiveness of hedge strategies and are not meant to indicate that a particular strategy or sub-strategy should be overweighted or underweighted, respectively, in any given portfolio. This information contains a general discussion of certain strategies pursued by underlying hedge strategies, which may be allocated across several K2 strategies. This discussion is not meant to represent a discussion of the overall performance of any K2 strategy. Specific performance information relating to K2 strategies is available from K2.

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Hedge Fund Strategy Outlook—Q1 2021 8 Glossary Alpha Retrocessional A mathematical value indicating an investment's excess return relative to A type of insurance contract that allows a re-insurer to transfer risks it has a benchmark. Measures a manager's value added relative to a passive re-insured to another re-insurer. strategy, independent of the market movement. Z-score Correlation A Z-score is a numerical measurement used in statistics of a value’s The degree of interaction between an investment’s return and that relationship to the mean (average) of a group of values, measured in of the comparison Index. The correlation coefficient, expressed as a terms of standard deviations from the mean. If a Z-score is 0, it indicates value between +1 and –1, indicates the strength and direction of the that the data point's score is identical to the mean score. linear relationship between the investment’s returns and the returns of the index.

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For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 10 Hedge Fund Strategy Outlook—Q1 2021 DISCLOSURE The K2 Investment Research & Management (IRM) Outlook Scores are the opinions of the K2 IRM group as of the date indicated and may not reflect the views of other groups within K2 or Franklin Templeton. Scores are determined relative to other hedge fund strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or substrategy. Scores are determined by the K2 IRM group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or substrategy and may change from time to time in K2's sole discretion. These scores are only one of several factors that K2 uses in making investment recommendations, which may vary based on a client's specific investment objectives, risk tolerance and other considerations. Therefore, a positive or negative score may not indicate that a particular strategy or substrategy should be overweighted or underweighted, respectively, in any given portfolio. This information contains a general discussion of certain strategies pursued by underlying hedge strategies, which may be allocated across several K2 strategies. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of the funds employing K2 strategies. Nothing in this document should be construed as investment advice. Specific performance information relating to K2 strategies is available from K2. This presentation should not be reproduced without the written consent of K2. Past performance is not an indicator or guarantee of future results. Certain information contained in this document represents or is based upon forward-looking statements or information, including descriptions of anticipated market changes and expectations of future activity. K2 believes that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, too much reliance should not be placed on such forward-looking statements and information. Professional care and diligence have been exercised in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton/K2 has not independently verified, validated or audited such data. Any research and analysis contained in this document has been procured by Franklin Templeton/K2 Investments for its own purposes and is provided to you only incidentally. Franklin Templeton/K2 shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.

WHAT ARE THE RISKS? All investments involve risks, including possible loss or principal. Investments in strategies and hedge funds (collectively, “Alternative Investments”) are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Financial instruments are often used in alternative investment strategies and involve costs and can create economic leverage in the fund's portfolio which may result in significant volatility and cause the fund to participate in losses (as well as gains) in an amount that significantly exceeds the fund's initial investment. Depending on the product invested in, an investment in Alternative Investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. There can be no assurance that the investment strategies employed by K2 or the managers of the investment entities selected by K2 will be successful. The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from Alternative Investments may not adequately compensate investors for the business and financial risks assumed. An investment in Alternative Investments is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by Alternative Investments, such as leverage and hedging, may increase the adverse impact to which an investment portfolio may be subject. Depending on the structure of the product invested, Alternative Investments may not be required to provide investors with periodic pricing or valuation and there may be a lack of transparency as to the underlying assets. Investing in Alternative Investments may also involve tax consequences and a prospective investor should consult with a tax advisor before investing. In addition to direct asset- based fees and expenses, certain Alternative Investments such as funds of hedge funds incur additional indirect fees, expenses and asset-based compensation of investment funds in which these Alternative Investments invest.

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Hedge Fund Strategy Outlook—Q1 2021 11 IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

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