As filed with the Securities and Exchange Commission on August 2, 1999
Investment Company Act File No. 811-7885
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4 [X]
(Check appropriate box
or boxes)
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Index Master Series Trust
(formerly, Merrill Lynch Index Trust)
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (609) 282-2800
TERRY K. GLENN
800 Scudders Mill Road,
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Counsel for the Fund: Michael J. Hennewinkel, Esq.
Joel H. Goldberg, Esq. FUND ASSET MANAGEMENT, L.P.
Swidler Berlin Shereff Friedman, LLP P.O. Box 9011
919 Third Avenue Princeton, New Jersey 08543-9011
New York, NY 10022
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended (the
"Investment Company Act"). However, beneficial interests in the Registrant are
not being registered under the Securities Act of 1933, as amended (the "1933
Act") because such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Registrant may be made only by
a limited number of institutional investors, including investment companies,
common or commingled trust funds, group trusts and certain other "accredited
investors" within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3, 5 and 9 have been omitted pursuant to
paragraph 2(b) of Instruction B of the General Instructions to Form N-1A.
Item 4. -- Investment Objectives, Principal Investment Strategies, and
Related Risks.
Index Master Series Trust (the "Trust") is a no-load, open-end
management investment company which was organized as a Delaware business trust
on August 28, 1996. Master S&P 500 Index Series ("S&P 500 Index Series"), Master
Small Cap Index Series ("Small Cap Index Series"), Master Aggregate Bond Index
Series ("Aggregate Bond Index Series"), Master International (GDP Weighted)
Index Series ("International (GDP Weighted) Index Series"), Master International
(Capitalization Weighted) Index Series ("International (Capitalization Weighted)
Index Series"), Master Enhanced S&P 500 Series ("Enhanced S&P 500 Series") and
Master Enhanced International Series ("Enhanced International Series")
(together, the "Series" and each, a "Series") are each separate series of the
Trust. Each Series is a non-diversified investment company with different
investment objectives and policies. There can, of course, be no assurance that
the respective investment objectives of the Series can be achieved.
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INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
Index Series: S&P 500 Index Series, Small Cap Index Series, Aggregate
Bond Index Series, International (GDP Weighted) Index Series and International
(Capitalization Weighted) Index Series
The S&P 500 Index Series, Small Cap Index Series, Aggregate Bond Index
Series, International (GDP Weighted) Index Series and International
(Capitalization Weighted) Index Series are Index Series. These Series will not
attempt to buy or sell securities based on the Investment Adviser's economic,
financial or market analysis, but will instead employ a "passive" investment
approach. This means that the Investment Adviser will attempt to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the respective index before deduction of expenses. An Index
Series will only buy or sell securities when the Investment Adviser believes it
is necessary to do so in order to match the performance of the respective index.
Accordingly, it is anticipated that an Index Series' portfolio turnover and
trading costs will be lower than "actively" managed funds. However, the Index
Series have operating and other expenses, while an index does not. Therefore,
each Index Series may tend to underperform its target index to some degree over
time.
Each Index Series will be substantially invested in securities in the
applicable index, and will invest at least 80% of its assets in securities or
other financial instruments which are contained in or correlated with securities
in the applicable index. A Series may change its target index if the Investment
Adviser believes a different index would better enable the Series to match the
performance of the market segment represented by the current index and,
accordingly, the investment objective of a Series may be changed without
shareholder approval. In addition to the investment strategies described below,
each Series may also invest in illiquid securities and repurchase agreements,
and may engage in securities lending.
Each Index Series will also invest in short term money market
instruments as cash reserves to maintain liquidity. These instruments may
include obligations of the U.S. Government, its agencies or instrumentalities,
highly rated bonds or comparable unrated bonds, commercial paper, bank
obligations and repurchase agreements. To the extent a Series invests in short
term money market instruments, it will generally also invest in options, futures
or other derivatives in order to maintain full exposure to the index. The Series
will not invest in options, futures, other derivative instruments or short term
money market instruments in order to lessen the Series' exposure to common
stocks as a defensive strategy, but will instead attempt to remain fully
invested at all times.
Enhanced Series: Enhanced S&P 500 Series and Enhanced International
Series
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The Enhanced S&P 500 Series and the Enhanced International Series seek
to provide a total return exceeding the respective index while actively seeking
to reduce downside risk as compared with the index. Each Enhanced Series invests
at least 80% of its assets in stocks of companies in its respective index, and
options, futures and other derivative instruments correlated with components of
that index. Each Enhanced Series will attempt to construct a portfolio of
securities and derivative instruments that will at least match approximately the
performance of its respective index before deduction of expenses, but will also
employ various strategies to seek to enhance performance relative to its
respective index. Such enhancement strategies may include (1) investment in
derivative instruments correlated with the index or components of the index
rather than securities represented in the index whenever the Investment Adviser
believes derivative instruments present price or return characteristics superior
to those of securities, (2) certain types of arbitrage (for example, arbitrage
between different share classes of a company or a single share class listed on
different exchanges), and (3) biasing the portfolio (relative to the index) in
order to emphasize securities which have quantitative characteristics the
Investment Adviser believes may enhance performance.
Each Enhanced Series will invest in short term money market
instruments as cash reserves to maintain liquidity. These instruments may
include obligations of the U.S. Government, its agencies or instrumentalities,
highly rated bonds or comparable unrated bonds, commercial paper, bank
obligations and repurchase agreements. To the extent an Enhanced Series
invests in short term money market instruments, it will generally also invest in
options, futures or other derivatives in order to maintain exposure to the
index.
All Series: A Series may change its target index if the Investment
Adviser believes a different index would better enable the Series to match the
performance of the market segment represented by the current index and,
accordingly, the investment objective of a Series may be changed without
shareholder approval. In addition to the investment strategies described below,
each Series may also invest in illiquid securities and repurchase agreements,
and may engage in securities lending.
Index Series
S&P 500 Index Series
The Standard & Poor's(R) 500 Composite Stock Price Index ("S&P 500") is
composed of 500 common stocks issued by large-capitalization U.S. companies in a
wide range of businesses. The stocks included in the index collectively
represent a substantial portion of all common stocks publicly traded in the U.S.
The S&P 500 is generally considered broadly representative of the performance of
publicly traded U.S. large capitalization stocks. The S&P 500 is a
market-weighted index, which means that the largest stocks
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represented in the index have the most effect on the index's performance.
Currently, the largest stocks in the S&P 500 have an effect on the performance
of the index that is many times greater than the effect of the other stocks in
the index. The stocks in the S&P 500 are chosen by the Standard & Poor's Rating
Group ("S&P"), a division of the McGraw-Hill Companies, Inc. S&P chooses stocks
for inclusion in the S&P 500 based on market capitalization, trading activity
and the overall mix of industries represented in the index, among other factors.
S&P's selection of a stock for the S&P 500 does not mean that S&P believes the
stock to be an attractive investment.
The Series may invest in all 500 stocks in the S&P 500 in roughly the
same proportions as their weightings in the S&P 500. For example, if 2% of the
S&P 500 is made up of the stock of a particular company, the Series may invest
approximately 2% of its assets in that company. This strategy is known as "full
replication." However, when the Investment Adviser believes it would be cost
efficient the Series may deviate from full replication and instead invest in a
sample of the 500 stocks in the S&P 500 based on the Investment Adviser's
optimization process, a statistical sampling technique that aims to create a
portfolio which has aggregate investment characteristics, such as average market
capitalization and industry weightings, similar to the S&P 500 as a whole, but
which involves fewer transactions costs than would be incurred through full
replication. The Investment Adviser may also purchase stocks not included in the
S&P 500 when it believes that it would be a cost efficient way of approximating
the S&P 500's performance to do so. If the Investment Adviser uses these
techniques, the Series may not track the S&P 500 as closely as it would if it
were fully replicating the S&P 500.
The Series may invest in derivative instruments, and will normally
invest a substantial portion of its assets in options and futures contracts
linked to the performance of the S&P 500. Derivatives allow the Series to
increase or decrease its exposure to the S&P 500 quickly and at less cost than
buying or selling stocks. The Series will invest in options, futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
Small Cap Index Series
The Russell 2000(R) Index ("Russell 2000") is composed of the common
stocks of the 1,001st through 3,000th largest U.S. companies by market
capitalization, as determined by the Frank Russell Company. The stocks
represented in the index are issued by small-capitalization (generally less than
$1.5 billion) U.S. companies in a wide range of businesses. The Russell 2000 is
a market-weighted index, which means that the largest stocks represented in the
index have the most effect on the index's performance. The Russell 2000 is
generally considered broadly representative of the performance of publicly
traded U.S. smaller-capitalization stocks. Frank Russell Company's selection of
a stock for the Russell 2000 does not mean that Frank Russell Company believes
the stock to be an attractive investment.
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The Frank Russell Company updates the Russell 2000 once each year, at
which time there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Series). Stocks of companies that
merge, are acquired or otherwise cease to exist during the year are not replaced
in the index.
The Series will not normally invest in all of the common stocks in the
Russell 2000, or in the same weightings as in the Russell 2000. Instead, the
Series will normally invest in a sample of the stocks included in the Russell
2000 based on the Investment Adviser's optimization process, a statistical
sampling technique that aims to create a portfolio that will match approximately
the performance of the index with fewer transaction costs than would be incurred
through full replication. The Series will choose investments so that the market
capitalizations, industry weightings and other fundamental characteristics of
the stocks and derivative instruments in its portfolio are similar to the
Russell 2000 as a whole. The Series may invest in derivative instruments, and
will normally invest a substantial portion of its assets in options and futures
contracts linked to the performance of the Russell 2000. Derivatives allow the
Series to increase or decrease its exposure to the Russell 2000 quickly and at
less cost than buying or selling stocks.
The Series will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
Aggregate Bond Index Series
The Lehman Brothers Aggregate Bond Index ("Aggregate Bond Index") is a
market-weighted index consisting of 6,500 dollar- denominated investment grade
bonds with maturities greater than one year. The Lehman Brothers Aggregate Bond
Index includes:
o U.S. government and government agency securities
o securities issued by supranational entities, such as the
World Bank
o securities issued by foreign governments and U.S. and foreign
corporations
o mortgage backed securities
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Series will not normally invest in all of the bonds in the
Aggregate Bond Index, or in the same weightings as in the Aggregate Bond Index.
Instead, the Series will normally invest in a sample of bonds
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included in the Aggregate Bond Index, or in a sample of bonds not included in
the index but closely correlated with bonds that are in the index, and in
derivative instruments correlated with the Aggregate Bond Index based on the
Investment Adviser's optimization process, a statistical sampling technique that
aims to create a portfolio that will match approximately the performance of the
index with fewer transaction costs than would be incurred through full
replication. The Series may occasionally invest in bonds not included in the
index, but which are selected to reflect characteristics such as maturity,
duration, and credit quality that are similar to bonds in the index. This may
result in somewhat different levels of interest rate, credit or other risks from
the levels of risks on the securities included in the Aggregate Bond Index. The
Aggregate Bond Index Series may trade securities to the extent necessary to
maintain the duration of certain segments of the portfolio close to the duration
of corresponding segments of the index, and, accordingly, the Aggregate Bond
Index Series may have a higher portfolio turnover rate than the other Index
Series.
Because the Aggregate Bond Index is composed of investment grade bonds,
the Series will invest in corporate bonds rated investment grade (rated at least
Baa3 by Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings
Group), or if unrated, of comparable quality. The Series may continue to hold a
security that is downgraded below investment grade.
The Series will usually invest a substantial portion of its assets in
mortgage backed securities. Mortgage backed securities may be either pass
through securities or collateralized mortgage obligations.
The Series may also purchase securities on a when-issued basis, and it
may purchase or sell securities for delayed delivery. This is when the Series
buys or sells securities with payment and delivery taking place in the future so
that the Series can lock in a favorable yield and price at the time of entering
into the transaction. The Series may also enter into dollar rolls in which the
Series sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar securities on a future date from
the same party. During the period between the Series' sale of one security and
purchase of a similar security, the Series does not receive principal and
interest on the securities sold. The Series may also enter into standby
commitment agreements in which the Series is committed, for a stated period of
time, to buy a stated amount of a fixed income security which may be issued and
sold to the Series at the option of the issuer. The price of the security is
fixed at the time of the commitment, and the Series is paid a commitment fee
whether the security is issued or not.
The Series may invest in derivative instruments, and will normally
invest a substantial portion of its assets in options and futures contracts
correlated with the performance of the Aggregate Bond Index. Derivatives may
allow the Fund to increase or decrease its exposure to the Aggregate Bond Index
quickly and at less cost than buying or selling bonds. The Series may invest in
options and futures and other derivative instruments in order to gain market
exposure quickly in the event of subscriptions, to maintain liquidity in the
event of redemptions and to keep trading costs low. In connection with the use
of derivative instruments, the Series may
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enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
International (GDP Weighted) Index Series
The MSCI GDP-Weighted Europe, Australasia and Far East Index ("EAFE
(GDP Weighted) Index") is composed of equity securities of companies from
various industrial sectors whose primary trading markets are located outside the
U.S. Companies included in the EAFE (GDP Weighted) Index are selected from among
the larger capitalization companies in these markets. The countries currently
included in the EAFE (GDP Weighted) Index are Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and United Kingdom. The weighting of the EAFE (GDP Weighted) Index
among these countries is based upon each country's gross domestic product,
rather than its market capitalization. The stocks in the EAFE (GDP Weighted)
Index are chosen by Morgan Stanley Capital International, Inc. ("Morgan
Stanley"). Morgan Stanley chooses stocks for inclusion in the EAFE (GDP
Weighted) Index based on market capitalization, trading activity and the overall
mix of industries represented in the index, among other factors. The EAFE (GDP
Weighted) Index is generally considered broadly representative of the
performance of stocks traded in the international markets. Morgan Stanley's
selection of a stock for the EAFE (GDP Weighted) Index does not mean that Morgan
Stanley believes the stock to be an attractive investment.
The Series may not invest in all of the countries, or all of the
companies within a country, represented in the EAFE (GDP Weighted) Index, or in
the same weightings as the EAFE (GDP Weighted) Index. Instead, the Series may
invest in a sample of equity securities included in the EAFE (GDP Weighted)
Index and in derivative instruments correlated with components of the EAFE (GDP
Weighted) Index based on the Investment Adviser's optimization process, a
statistical sampling technique that aims to create a portfolio that will match
approximately the performance of the index with fewer transaction costs than
would be incurred through full replication.
The Series may invest in derivative instruments, and will normally
invest a substantial portion of its assets in options and futures contracts
correlated with components of the EAFE (GDP Weighted) Index. Derivatives allow
the Series to increase or decrease its exposure to the EAFE (GDP Weighted) Index
quickly and at less cost than buying or selling stocks. The Series will invest
in options and futures and other derivative instruments in order to gain market
exposure quickly in the event of subscriptions, to maintain liquidity in the
event of redemptions and to keep trading costs low. In connection with the use
of derivative instruments, the Series may enter into short sales in order to
adjust the weightings of particular securities represented in a derivative to
more accurately reflect the securities' weightings in the target index.
International (Capitalization Weighted) Index Series
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The MSCI Capitalization Weighted Europe, Australasia and Far East Index
("EAFE (Capitalization Weighted) Index") is composed of equity securities of
companies from various industrial sectors whose primary trading markets are
located outside the U.S. Companies included in the EAFE (Capitalization
Weighted) Index are selected from among the larger capitalization companies in
these markets. The countries currently included in the EAFE (Capitalization
Weighted) Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and United Kingdom. The
weighting of the EAFE (Capitalization Weighted) Index among these countries is
based upon each country's relative market capitalizations, rather than its gross
domestic product. The stocks in the EAFE (Capitalization Weighted) Index are
chosen by Morgan Stanley. Morgan Stanley chooses stocks for inclusion in the
EAFE (Capitalization Weighted) Index based on market capitalization, trading
activity and the overall mix of industries represented in the index, among other
factors. The EAFE (Capitalization Weighted) Index is generally considered
broadly representative of the performance of stocks traded in the international
markets. Morgan Stanley's selection of a stock for the EAFE (Capitalization
Weighted) Index does not mean that Morgan Stanley believes the stock to be an
attractive investment.
The Series may not invest in all of the countries, or all of the
companies within a country, represented in the EAFE (Capitalization Weighted)
Index, or in the same weightings as the EAFE (Capitalization Weighted) Index.
Instead, the Series may invest in a sample of equity securities included in the
EAFE (Capitalization Weighted) Index and in derivative instruments correlated
with components of the EAFE (Capitalization Weighted) Index based on the
Investment Adviser's optimization process, a statistical sampling technique that
aims to create a portfolio that will match approximately the performance of the
index with fewer transaction costs than would be incurred through full
replication.
The Series may invest in derivative instruments, and will normally
invest a substantial portion of its assets in options and futures contracts
correlated with countries within the EAFE (Capitalization Weighted) Index.
Derivatives allow the Series to increase or decrease its exposure to the EAFE
(Capitalization Weighted) Index quickly and at less cost than buying or selling
stocks. The Series will invest in options, futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
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Enhanced Series
Enhanced S&P 500 Series
The S&P 500 is composed of 500 common stocks issued by
large-capitalization U.S. companies in a wide range of businesses. The stocks
included in the index collectively represent a substantial portion of all common
stocks publicly traded in the U.S. The S&P 500 is generally considered broadly
representative of the performance of publicly traded U.S. large capitalization
stocks. The S&P 500 is a market-weighted index, which means that the largest
stocks represented in the index have the most effect on the index's performance.
Currently, the largest stocks in the S&P 500 have an effect on the performance
of the index that is many times greater than the effect of the other stocks in
the index. The stocks in the S&P 500 are chosen by S&P, a division of the
McGraw-Hill Companies, Inc. S&P chooses stocks for inclusion in the S&P 500
based on market capitalization, trading activity and the overall mix of
industries represented in the index, among other factors. S&P's selection of a
stock for the S&P 500 does not mean that S&P believes the stock to be an
attractive investment.
The Enhanced S&P 500 Series invests at least 80% of its assets in
stocks of companies in the S&P 500 and options, futures and other derivative
instruments based on that index. The Enhanced S&P 500 Series will attempt to
construct a portfolio of securities and derivative instruments that will at
least match approximately the performance of the S&P 500 before deduction of
expenses, but will also employ various strategies to seek to enhance performance
relative to the S&P 500. Such enhancement strategies may include (1) investment
in derivative instruments correlated with the index or components of the index
rather than securities represented in the index whenever the Investment Adviser
believes derivative instruments present price or return characteristics superior
to those of securities, (2) certain types of arbitrage, and (3) biasing the
portfolio (relative to the S&P 500) in order to emphasize securities which have
quantitative characteristics the Investment Adviser believes are associated with
outperformance.
The Enhanced S&P 500 Series may invest in derivative instruments,
and will normally invest a substantial portion of its assets in options and
futures contracts correlated with the S&P 500. Derivatives allow the Series to
increase exposure to the S&P 500 quickly and at less cost than buying or selling
stocks. The Series will invest in options, futures and other derivative
instruments, in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities weightings in the S&P 500 or to bias the portfolio (relative to the
S&P 500) in order to seek to enhance performance. The Series will also invest in
derivatives whenever the Investment Adviser believes a derivative (including
futures, total return index swaps, options, warrants and convertible bonds)
presents price or return characteristics superior to those of stocks represented
in the index. The Series may also invest in derivatives in connection with
arbitrage transactions.
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The Series will engage in certain types of arbitrage when the
Investment Adviser sees opportunity to do so. The types of arbitrage the Series
may employ include stock index arbitrage (exploiting discrepancies between the
value of S&P 500 futures or other derivatives and the value of the index),
convertible bond arbitrage (exploiting discrepancies between the implied value
of an option embedded in a convertible bond and the actual value of the option)
and other forms of option arbitrage, and share arbitrage (exploiting
discrepancies in the value of different share classes of a company or in a
single share class listed on more than one exchange). The Series may enter into
short sales of various types of securities and financial instruments, including
securities and financial instruments not represented in the S&P 500, in
connection with arbitrage transactions.
While the Series expects the overall weighting of its investments to be
close to the capitalization weights of the S&P 500, the Series' investments may
not exactly replicate the portfolio weights of the index at all times. Instead,
the Investment Adviser may bias the portfolio (relative to the S&P 500) in order
to emphasize securities that have quantitative characteristics (such as
above-average yield or below-average valuation) the Investment Adviser believes
may enhance performance. By using a proprietary computer model to overweight or
underweight certain companies in the portfolio relative to the index, the
Series seeks to slightly outperform or reduce somewhat its volatility relative
to the index over time.
The Series may also invest in new issues, convertible securities,
foreign securities, and foreign currency exchange contracts, and sell covered
call options. For more information on these and other investments of the Series,
see the Statement of Additional Information.
Enhanced International Series
The EAFE (Capitalization Weighted) Index is composed of equity
securities of companies from various industrial sectors whose primary trading
markets are located outside the U.S. Companies included in the EAFE
(Capitalization Weighted) Index are selected from among the larger
capitalization companies in these markets. The countries currently included in
the EAFE (Capitalization Weighted) Index are Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and United Kingdom. The weighting of the EAFE (Capitalization
Weighted) Index among these countries is based upon each country's relative
market capitalizations, rather than its gross domestic product. The stocks in
the EAFE (Capitalization Weighted) Index are chosen by Morgan Stanley. Morgan
Stanley chooses stocks for inclusion in the EAFE (Capitalization Weighted) Index
based on market capitalization, trading activity and the overall mix of
industries represented in the index, among other factors. The EAFE
(Capitalization Weighted) Index is generally considered broadly representative
of the performance of stocks traded in the international markets. Morgan
Stanley's selection of a stock for the EAFE (Capitalization Weighted) Index does
not mean that Morgan Stanley believes the stock to be an attractive investment.
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The Enhanced International Series invests at least 80% of its assets in
stocks of companies in the EAFE (Capitalization Weighted) Index and options,
futures and other derivative instruments based on components of that index. The
Enhanced International Series will attempt to construct a portfolio of
securities and derivative instruments that will at least match approximately the
performance of the EAFE (Capitalization Weighted) Index before deduction of
expenses, but will also employ various strategies to seek to enhance performance
relative to the EAFE (Capitalization Weighted) Index. Such enhancement
strategies may include (1) investment in derivative instruments correlated with
the index or components of the index rather than securities represented in the
index whenever the Investment Adviser believes derivative instruments present
price or return characteristics superior to those of securities, (2) certain
types of arbitrage, and (3) biasing the portfolio (relative to the EAFE
(Capitalization Weighted) Index) in order to emphasize securities which have
quantitative characteristics the Investment Adviser believes are associated with
outperformance.
The Enhanced International Series may invest in derivative instruments,
and will normally invest a substantial portion of its assets in options and
futures contracts correlated with components of the EAFE (Capitalization
Weighted) Index. Derivatives allow the Series to increase exposure to the EAFE
(Capitalization Weighted) Index quickly and at less cost than buying or selling
stocks. The Series will invest in options, futures and other derivative
instruments, in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities weightings in the EAFE (Capitalization Weighted) Index or to bias the
portfolio (relative to the EAFE (Capitalization Weighted) Index) in order to
seek to enhance performance. The Series will also invest in derivatives whenever
the Investment Adviser believes a derivative (including futures, total return
index swaps, options, warrants and convertible bonds) presents price or return
characteristics superior to those of stocks represented in the index. The Series
may also invest in derivatives in connection with arbitrage transactions.
The Series will engage in certain types of arbitrage when the
Investment Adviser sees opportunity to do so. The types of arbitrage the Series
may employ include stock index arbitrage (exploiting discrepancies between the
value of futures or other derivatives and the value of the index), convertible
bond arbitrage (exploiting discrepancies between the implied value of an option
embedded in a convertible bond and the actual value of the option) and other
forms of option arbitrage, and share arbitrage (exploiting discrepancies in the
value of different share classes of a company or in a single share class listed
on more than one exchange). The Series may enter into short sales of various
types of securities and financial instruments, including securities and
financial instruments not represented in the EAFE (Capitalization Weighted)
Index, in connection with arbitrage transactions.
While the Series expects the overall weighting of its investments to be
close to the capitalization weights of the EAFE (Capitalization Weighted) Index,
the Series' investments may not exactly replicate the portfolio weights of the
index at all times. Instead, the Investment
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Adviser may bias the portfolio (relative to the EAFE (Capitalization Weighted)
Index) in order to emphasize securities which have quantitative characteristics
(such as above-average yield or below-average valuation) the Investment Adviser
believes may enhance performance. By using a proprietary computer model to
overweight or underweight certain companies in the portfolio relative to the
index, the Series seeks to slightly outperform or reduce somewhat its volatility
relative to the index over time.
The Series may also invest in new issues, convertible securities,
foreign securities, and foreign currency exchange contracts, and sell covered
call options. For more information on these and other investments of the Series,
see the Statement of Additional Information.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of
investing in a Series. As with any mutual fund, there can be no guarantee that a
Series will meet its goals or that a Series' performance will be positive for
any period of time.
S&P 500 Index Series, Small Cap Index Series, International (GDP
Weighted) Index Series, International (Capitalization Weighted) Index
Series, Enhanced S&P 500 Series and Enhanced International Series
Stock Market Risk -- Stock market risk is the risk that the stock
markets will go down in value, including the possibility that the markets will
go down sharply and unpredictably.
Aggregate Bond Index Series
Interest Rate Risk -- Interest rate risk is the risk that prices of
bonds generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term securities.
Credit Risk -- Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Event Risk -- Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
Mortgage Backed Securities -- When interest rates fall, borrowers may
refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage backed securities will
be paid off more quickly than originally anticipated and
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owners of these securities have to invest the proceeds in securities with lower
yields. This risk is known as "prepayment risk." When interest rates rise,
however, fewer borrowers refinance and certain types of mortgage backed
securities are paid off more slowly than originally anticipated, which causes
the value of these securities to fall. This risk is known as "extension risk."
Because of prepayment risk and extension risk, small movements in interest rates
(both increases and decreases) may significantly reduce the value of certain
mortgage backed securities.
Dollar Rolls -- Dollar Rolls involve the risk that the market value of
the securities that the Series is committed to buy may decline below the price
of the securities the Series has sold. These transactions may involve leverage.
The Series will engage in dollar rolls to enhance return and not for the purpose
of borrowing.
Standby Commitment Agreements -- Standby commitment agreements involve
the risk that the value of the security on the delivery date may be less than
its purchase price.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments -- When issued and delayed delivery securities and forward
commitments involve the risk that the security the Series buys will lose value
prior to its delivery. There also is the risk that the security will not be
issued or that the other party will not meet its obligation. If this occurs, the
Series loses both the investment opportunity for the assets it has set aside to
pay for the security and any gain in the security's price.
Foreign Government Debt -- The Aggregate Bond Index Series may invest
in debt securities issued or guaranteed by foreign governments or their
agencies. Investments in these securities subject the Series to the risk that a
government entity may delay or refuse to pay interest or repayment of principal
on its debt for various reasons, including cash flow problems, insufficient
foreign currency reserves, political considerations, the relative size of its
debt position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If a
government entity defaults, it may ask for more time in which to pay or for
further loans. There is no bankruptcy proceeding by which all or part of debt
securities that a government entity has not repaid may be collected.
Aggregate Bond Index Series, International (GDP Weighted) Index Series,
International (Capitalization Weighted) Index Series, and Enhanced
International Series
Foreign Market Risk -- Foreign security investment involves special
risks not present in U.S. investments that can increase the chances that a
Series will lose money. In particular, a Series is subject to the risk that
because there are generally fewer investors in foreign markets and a smaller
number of securities traded each day, it may make it difficult for a Series to
buy and sell certain securities. In addition, prices of foreign securities may
go up and down more than prices of securities traded in the U.S.
Foreign Economy Risk -- The economies of certain foreign markets often
do not compare favorably with that of the U.S. with respect to such issues as
growth of gross national product,
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reinvestment of capital, resources, and balance of payments position. Certain
such economies may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments, the imposition of economic
sanctions against a particular country or countries, changes in international
trading patterns, trade barriers, and other protectionist or retaliatory
measures. Investments in foreign markets may also be adversely affected by
governmental actions such as the imposition of capital controls, nationalization
of companies or industries, expropriation of assets, or the imposition of
punitive taxes. In addition, the governments of certain countries may prohibit
or impose substantial restrictions on foreign investing in their capital markets
or in certain industries. Any of these actions could severely affect security
prices, impair a Series' ability to purchase or sell foreign securities or
transfer a Series' assets or income back into the U.S., or otherwise adversely
affect a Series' operations. Other foreign market risks include foreign exchange
controls, difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in foreign
courts, and political and social instability. Legal remedies available to
investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries.
Governmental Supervision and Regulation/Accounting Standards -- Many
foreign governments supervise and regulate stock exchanges, brokers and the sale
of securities less than the U.S. does. Other countries may not have laws to
protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Accounting standards in
other countries are not necessarily the same as in the U.S. If the accounting
standards in another country do not require as much detail as U.S. accounting
standards, it may be harder for a Series' portfolio manager to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Series can earn on its investments.
International (GDP Weighted) Index Series, International
(Capitalization Weighted) Index Series and Enhanced International
Series
Currency Risk and Exchange Risk -- Securities in which the
International (GDP Weighted) Index Series, International (Capitalization
Weighted) Index Series and Enhanced International Series invest are usually
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Series. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that currency loses value
because the currency is worth fewer U.S. dollars. Conversely, when the U.S.
dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
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Certain Risks of Holding Series Assets Outside the U.S. -- The
International (GDP Weighted) Index Series, International (Capitalization
Weighted) Index Series and Enhanced International Series generally hold the
foreign securities and cash in which they invest outside the U.S. in foreign
banks and securities depositories. Certain of such foreign banks and securities
depositories may be recently organized or new to the foreign custody business
and/or may have operations subject to limited or no regulatory oversight. Also,
the laws of certain countries may put limits on the Series' ability to recover
its assets if a foreign bank or depository or issuer of a security or any of
their agents goes bankrupt. In addition, it can be expected that it will be more
expensive for the Series to buy, sell, and hold securities in certain foreign
markets than in the U.S. market due to higher brokerage, transaction, custody
and/or other costs. The increased expense to invest in foreign markets reduces
the amount the Series can earn on its investments and typically results in a
higher operating expense ratio for the Series than investment companies invested
only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Series to carry out transactions. If a
Series cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Series cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Series could be liable to that party for any
losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
European Economic and Monetary Union ("EMU") -- A number of European
countries have entered into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU has established a
single European currency (the euro),
which was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all initial EMU participants by July 1, 2002. Certain
securities (beginning with government and corporate bonds) were redenominated in
the euro. These securities trade and make dividend and other payments only in
euros. Like other investment companies and business organizations, including the
companies in which a Series invest, the Series could be adversely affected:
o If the transition to euro, or EMU as a whole, does not proceed as
planned.
o If a participating country withdraws from EMU.
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o If the computing, accounting and trading systems used by a Series'
service providers, or by other entities with which the Series or its
service providers do business, are not capable of recognizing the
euro as a distinct currency.
Small Cap Index Series
Small Cap -- Small cap companies may have limited product lines or
markets. They may be less financially secure than larger, more established
companies. They may depend on a small number of key personnel. If a product
fails, or if management changes, or there are other adverse developments, the
Series' investment in a small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject
to greater and more unpredictable price changes than larger cap securities or
the stock market as a whole. Investing in small caps securities requires a
long-term view.
All Series
Selection Risk -- Selection risk is the risk that a Series'
investments, which may not fully replicate the index, may perform differently
from the securities in the index. This risk is greater for the Enhanced Series,
because of their strategy of overweighting or underweighting companies relative
to their respective index.
Derivatives -- Derivatives allow a Series to increase or decrease its
risk exposure more quickly and efficiently than other types of instruments. A
Series may use the following types of derivative instruments including: futures,
forwards and options, options on futures, swaps and indexed securities.
Derivatives are volatile and involve significant risks, which may
include:
o Leverage risk -- the risk associated with certain types of
investments or trading strategies (such as borrowing money to
increase the amount of investments) that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount
originally invested.
o Credit risk -- the risk that the counterparty (the party on
the other side of the transaction) on a derivative transaction
will be unable to honor its financial obligation to a Series.
o Currency risk -- the risk that changes in the exchange rate
between currencies will adversely affect the value (in U.S.
dollar terms) of an investment.
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o Liquidity risk -- the risk that certain securities may be
difficult or impossible to sell at the time that the seller
would like or at the price that the seller believes the
security is currently worth.
The Series may use derivatives for anticipatory hedging and for
non-hedging purposes. Anticipatory hedging is a strategy in which a Series uses
a derivative to offset the risk that securities in which the Series intends to
invest will increase in value before the Series has an opportunity to purchase
the securities. The Series will use derivatives for anticipatory hedging in
order to gain exposure efficiently to their underlying indexes in the event the
Series receive cash inflows. Each Series, in particular the Enhanced
Series, may also use derivatives in connection with index arbitrage and other
arbitrage strategies.
Arbitrage/Correlation Risk -- Each Series may engage in index
arbitrage, and the Enhanced Series may engage in other types of arbitrage.
Arbitrage involves the purchase of an asset and the concurrent sale of that
asset in a different market, or the sale of a related asset, in order to capture
small price discrepancies between markets or related assets. Arbitrage
strategies involving related assets carry the risk that the value of the related
assets will not track or affect each other in the manner anticipated by the
Investment Adviser. Arbitrage strategies generally assume the price of related
assets will converge to some historic or quantitative relationship, and that
price discrepancies from this relationship will disappear. In the event the
price discrepancies do not disappear or widen, however, a Series could lose
money on an arbitrage trade.
Borrowing and Leverage -- The Series may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Series shares and in the yield on a Series' portfolio.
Borrowing will cost a Series interest expense and other fees. The cost of
borrowing may reduce a Series' return.
Certain securities that a Series buys may create leverage, including,
for example, when issued securities, forward commitments and options.
Illiquid Securities -- Each Series may invest up to 15% of its net
assets in illiquid securities that it cannot easily resell within seven days at
current value or that have contractual or legal restrictions on resale. If a
Series buys illiquid securities it may be unable to quickly resell them or may
be able to sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or
legal restrictions on their resale. They include private placement securities
that a Series buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no active
trading market.
Restricted securities may be illiquid. A Series may be unable to sell
them on short notice or may be able to sell them only at a price below current
value. A Series may get only limited information about the issuer, so may be
less able to predict a loss. In addition, if the Investment
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Adviser receives material adverse non-public information about the issuer, a
Series will not be able to sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities
that can be resold to qualified institutional buyers but not to the general
public. Rule 144A securities may have an active trading market but carry the
risk that the active trading market may not continue.
Securities Lending -- Each Series may lend securities to financial
institutions that provide cash or government securities as collateral.
Securities lending involves the risk that the borrower may fail to return the
securities in a timely manner or at all. As a result, a Series may lose money
and there may be a delay in recovering the loaned securities. A Series could
also lose money if it does not recover the securities and the value of the
collateral falls. These events could trigger adverse tax consequences to a
Series.
Short Sales -- A Series may borrow the security sold short to make
delivery to the buyer. The Series must then replace the security it has
borrowed. If the price of a security sold short goes up between the time of the
short sale and the time the Series must deliver the security to the lender, the
Series will incur a loss. The Series must also pay the lender any interest
accrued during the period of the loan.
PART B
If you would like further information about the Series, including how
they invest, please see Part B.
Investment Adviser
Item 6. Management, Organization, and Capital Structure.
Fund Asset Management is the Investment Adviser and manages the Series'
investments and their business operations under the overall supervision of the
Board of Trustees of Index Master Series Trust. The Investment Adviser has the
responsibility for making all investment decisions for the Series.
The table below shows the fee earned by the Investment Adviser:
<TABLE>
<CAPTION>
Series Contractual Fee Fee Rate for the fiscal year ended
Rate December 31, 1998 (reflects voluntary
waiver where applicable)
<S> <C> <C>
S&P 500 Index Series .05% .05%
Small Cap Index Series .08% .0%
</TABLE>
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Aggregate Bond Index Series .06% .06%
International (GDP Weighted)
Index Series .11% .04%
The Investment Adviser will earn the following fee on the International
(Capitalization Weighted) Index Series, Enhanced S&P 500 Series and the
Enhanced International Series, each of which commenced operations on
August 2, 1999:
Contractual Fee
Fee Rate
Series
International (Capitalization Weighted)
Index Series 0.01%
Enhanced S&P 500 Series 0.01%
Enhanced International Series 0.015%
Fund Asset Management and its affiliates manage portfolios with over
$516 billion in assets for individuals and institutions seeking investments
worldwide as of June 1999. This amount includes assets managed for Fund Asset
Management affiliates.
Eric S. Mitofsky is a Senior Vice President of the Series and the
Portfolio Manager of S&P 500 Index Series, Small Cap Index Series and the
International (GDP Weighted) Index Series. Mr. Mitofsky has been employed by the
Investment Adviser and its affiliate since 1992.
Gregory Mark Maunz is a Senior Vice President of the Series and
Co-Portfolio Manager of the Aggregate Bond Index Series. Mr. Maunz has been a
First Vice President of the Investment Adviser and its affiliates since 1997 and
was a Vice President from 1985 to 1997.
Christopher G. Ayoub is a Senior Vice President of the Series and
Co-Portfolio Manager of the Aggregate Bond Index Series. Mr. Ayoub has been a
First Vice President of the Investment Adviser and its affiliates since 1998 and
was a Vice President from 1985 to 1998.
Jeff Hewson is a Vice President of the Series and Co-Portfolio Manager
of the Aggregate Bond Index Series. Mr. Hewson has been a Director (Global Fixed
Income) of the Investment Adviser and its affiliates since 1998 and was a Vice
President from 1989 to 1998.
Richard Vella is a Senior Vice President of the Series and the
Portfolio Manager of the International (Capitalization Weighted) Index Series
and the Enhanced International Series. Mr. Vella joined the Investment
Adviser and its affiliates in 1999. Prior to joining the Investment Adviser and
its affiliates, Mr. Vella was a Senior Portfolio Manager for global quantitative
products and index funds and Head of the Global Index Fund group at Bankers
Trust Company. He joined Bankers Trust Company in 1985.
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Frank Salerno is a Senior Vice President of the Series and the
Portfolio Manager of the Enhanced S&P 500 Series. Mr. Salerno joined the
Investment Adviser and its affiliates in 1999. Prior to joining the Investment
Adviser and its affiliates, Mr. Salerno was a Senior Portfolio Manager for
quantitative products and index funds and Managing Director and Chief Investment
Officer of Structured Investments at Bankers Trust Company. He joined Bankers
Trust in 1981.
Capital Stock.
Investors in the Trust have no preemptive or conversion rights and
beneficial interests in the Trust are fully paid and non-assessable. The Trust
has no current intention to hold annual meetings of investors, except to the
extent required by the Investment Company Act, but will hold special meetings of
investors when in the judgment of the Trustees it is necessary or desirable to
submit matters for an investor vote. Upon liquidation ofthe Trust or any Series,
investors would be entitled to share, in proportion to their investment in the
Trust or Series (as the case may be), in the assets of the Trust or Series
available for distribution to investors.
The Trust is organized as a Delaware business trust and currently
consists of seven Series. Each investor is entitled to a vote in proportion to
its investment in the Trust or the Series (as the case may be). Investors in any
Series will participate equally in accordance with their pro rata interests in
the earnings, dividends and assets of the particular Series. The Trust reserves
the right to create and issue interests in additional Series.
Investments in the Trust may not be transferred except with the prior
written consent of all of the Trustees, but an investor may withdraw all or any
portion of its investment in any Series on any day on which the New York Stock
Exchange is open at net asset value. Additionally, an investor may transfer any
or all of its investment to another current shareholder without the express
prior written consent of the Trustees.
Item 7. Shareholder Information.
Pricing.
Each Series calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open ("Pricing Day"), after
the close of business on the Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in determining the price of an
interest in the Series is the next one calculated after the purchase or
redemption order is placed. The net asset value is determined by deducting the
amount of the Series' total liabilities from the value of its total assets. Net
asset value is generally calculated by valuing each security at its closing
price for the day. Many of the International (GDP Weighted) Index Series',
International (Capitalization Weighted) Index Series', Aggregate Bond Index
Series' and Enhanced International Series' investments are traded on non-U.S.
securities exchanges that close many hours before the New York Stock Exchange.
Events that could affect securities prices that occur between these times
normally are not reflected in a Series' net asset value. Non-U.S. securities
sometimes trade on days that the
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New York Stock Exchange is closed. As a result, a Series' net asset value may
change on days when an investor will not be able to purchase or redeem the
Series' shares. If an event occurs after the close of a foreign exchange that is
likely to significantly affect a Series net asset value, "fair value" pricing
may be used. This means that a Series' may value its foreign holdings at prices
other than their last closing prices, and the Series' net asset value will
reflect this.
Each investor in the Trust may add to or reduce its investment in a
Series on each Pricing Day. The value of each investor's beneficial interest in
a Series will be determined by multiplying the net asset value of the Series by
the percentage, effective for that day, that represents that investor's share of
the aggregate beneficial interests in such Series. Any additions or withdrawals,
which are to be effected on that day, will then be effected. The investor's
percentage of the aggregate beneficial interests in a Series will then be
re-computed as the percentage equal to the fraction (i) the numerator of which
is the value of such investor's investment in the Series as of the time of
determination on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in the Series
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Series as of such time on such day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the aggregate
investments in the Series by all investors in the Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in such Series as of 15 minutes after the close of business of the New
York Stock Exchange on the next Pricing Day of the Series.
Purchase of Securities.
Beneficial interests in the Trust are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in each Series of the Trust
may only be made by a limited number of institutional investors including
investment companies, common or commingled trust funds, group trusts, and
certain other "accredited investors" within the meaning of Regulation D under
the 1933 Act. This Registration Statement does not constitute an offer to sell,
or the solicitation of an offer to buy, any "security" within the meaning of the
1933 Act.
There is no minimum initial or subsequent investment in each Series.
However, because each Series intends to be as fully invested at all times as is
reasonably consistent with its investment objectives and policies in order to
enhance the yield on its assets, investments must be made in federal funds
(i.e., monies credited to the account of the respective Series' custodian bank
by a Federal Reserve Bank) or in marketable securities acceptable to the
Investment Adviser and consistent with the investment objective, policies and
restrictions of the respective Series.
Each Series reserves the right to cease accepting investments at any
time or to reject any investment order.
Redemption.
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An investor in the Trust may withdraw all or a portion of its
investment in any Series on any Pricing Day at the net asset value next
determined after a withdrawal request in proper form is furnished by the
investor to the Series. The proceeds of the withdrawal will be paid by the
Series normally on the business day on which the withdrawal is effected, but in
any event within seven days. Investments in any Series of the Trust may not be
transferred without the prior written consent of all of the Trustees except that
an investor may transfer any or all of its investment to another current
shareholder with such consent.
Tax Consequences.
Under the anticipated method of operation of the Series, each Series
will be treated as a separate taxable entity for federal income tax purposes
which will have the status of partnership pursuant to Treasury Regulation
Section 301.7701-3(b)(1). Thus, each Series will not be subject to any income
tax. Based upon the status of each Series as a partnership, each investor in a
Series will be taxed on its share (as determined in accordance with the
governing instruments of the Series) of such Series' ordinary income and capital
gain in determining its income tax liability. The determination of such share
will be made in accordance with the Code and Treasury Regulations promulgated
thereunder.
It is intended that each Series' assets, income and distributions will
be managed in such a way that an investor in any Series will be able to satisfy
the requirements of Subchapter M of the Code assuming that the investor invested
all of its assets in the Series.
A Note About Year 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900 (commonly known as the "Year 2000 Problem"). The Series could be adversely
affected if the computer systems used by the Investment Adviser or other Series
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Series' other service providers have told the Investment Adviser that they
also expect to resolve the year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the year 2000 approaches. However, if the
problem has not been fully addressed, the Series could be negatively affected.
The Year 2000 Problem could also have a negative impact on the companies in
which the Series invest. This negative impact may be greater for companies in
foreign markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Series invest have
Year 2000 Problems, the Series could be adversely affected.
Item 8.--Distribution Arrangements.
Investments in a Series will be made without a sales load. All
investments are made at net asset value next determined after an order is
received by the Series. The net asset value of each Series is determined on each
Pricing Day. The Trust's placement agent is Princeton Funds Distributor,
Inc.
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PART B
Except as otherwise indicated herein, all capitalized terms shall have
the meaning assigned to them in Part A hereof.
Item 10.
Index Master Series Trust (the "Trust") currently consists of seven
series: Master S&P 500 Index Series ("S&P 500 Index Series"), Master Small Cap
Index Series ("Small Cap Index Series"), Master Aggregate Bond Index Series
("Aggregate Bond Index Series"), Master International (GDP Weighted) Index
Series ("International (GDP Weighted) Index Series"), Master International
(Capitalization Weighted) Index Series ("International (Capitalization Weighted)
Index Series"), Master Enhanced S&P 500 Series ("Enhanced S&P 500 Series") and
Master Enhanced International Series ("Enhanced International Series") (each, a
"Series" and together, the "Series"). This Statement of Additional Information
is not a prospectus and should be read in conjunction with the Prospectus of the
Series, dated August 2, 1999 (the "Prospectus"), which has been filed with the
Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling the Trust at (800) 637-3863, or by writing to Index
Master Series Trust, P.O. Box 9011, Princeton, New Jersey 08543-9011. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information has been incorporated
by reference into the Prospectus. The Series' audited financial statements are
incorporated in this Statement of Additional Information by reference to their
1998 annual reports to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
The date of this Statement of Additional Information is August 2, 1999.
1
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TABLE OF CONTENTS
Trust History .............................................................. 3
Description of the Series and Their Investments and Risks .................. 3
Management of the Registrant ............................................... 33
Control Persons and Principal Holders of Securities ........................ 36
Investment Advisory And Other Services ..................................... 38
Brokerage Allocation and Other Practices ................................... 41
Capital Stock and Other Securities ......................................... 44
Purchase, Redemption and Pricing of Securities ............................. 45
Taxation of the Trust ...................................................... 47
Underwriters ............................................................... 49
Calculation of Performance Data ............................................ 49
Financial Statements ....................................................... 50
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Trust History
The Trust is a Delaware business trust organized on August 28, 1996.
S&P 500 Index Series, Small Cap Index Series, Aggregate Bond Index Series,
International (GDP Weighted) Index Series, International (Capitalization
Weighted) Index Series, Enhanced S&P 500 Series and Enhanced International
Series are each separate series of the Trust. Prior to August 2, 1999, the Trust
was named Merrill Lynch Index Trust and the International (GDP Weighted) Index
Series was named the International Index Series.
Description of the Series and Their Investments and Risks
S&P 500 Index Series.
The investment objective of the S&P 500 Index Series is to match the
performance of the Standard & Poor's(R) 500 Composite Stock Price Index (the
"S&P 500") as closely as possible before the deduction of Series expenses. There
can be no assurance that the investment objective of the Series will be
achieved.
In seeking to replicate the total return of the S&P 500, Fund Asset
Management, L.P. (the "Investment Adviser") may allocate the S&P 500 Index
Series' investments among common stocks in approximately the same weightings as
the S&P 500. In addition, the Investment Adviser may use options and futures
contracts and other types of financial instruments relating to all or a portion
of the S&P 500. At times the Series may not invest in all of the common stocks
in the S&P 500, or in the same weightings as in the S&P 500. At those times, the
Series chooses investments so that the market capitalizations, industry
weighting and other fundamental characteristics of the stocks and derivative
instruments chosen are similar to the S&P 500 as a whole. The S&P 500 Index
Series may also engage in securities lending. See "Other Investment Policies,
Practices and Risk Factors."
The S&P 500 is composed of the common stocks of 500 large
capitalization companies from various industrial sectors, most of which are
listed on the New York Stock Exchange Inc. A company's stock market
capitalization is the total market value of its outstanding shares. The
S&P 500 represents a significant portion of the market value of all common
stocks publicly traded in the United States.
Small Cap Index Series.
The investment objective of the Small Cap Index Series is to match the
performance of the Russell 2000(R) Index (the "Russell 2000") as closely as
possible before the deduction of Series expenses. There can be no assurance that
the investment objective of the Series will be achieved.
In seeking to replicate the total return of the Russell 2000, the
Investment Adviser will not normally allocate the Small Cap Index Series'
investments among all of the common stocks in the
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Russell 2000, or in the same weightings as the Russell 2000. Instead, the Small
Cap Index Series will normally invest in a sample of the stocks included in the
Russell 2000 and other types of financial instruments based on the Investment
Adviser's optimization process, a statistical sampling technique that aims to
create a portfolio that will match approximately the performance of the index
with less transaction costs than would be incurred through full replication. The
Investment Adviser may use options and futures contracts and other types of
financial instruments relating to all or a portion of the Russell 2000. The
investments to be included in the Small Cap Index Series will be selected so
that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks, and of the stocks underlying or otherwise related
to the foregoing financial instruments, closely approximate those same factors
in the Russell 2000, with the objective of reducing the selected investment
portfolio's deviation from the performance of the Russell 2000 (this deviation
is referred to as "tracking error"). The Small Cap Index Series may also engage
in securities lending. See "Other Investment Policies, Practices and Risk
Factors."
The Russell 2000 is composed of approximately 2,000
smaller-capitalization common stocks from various industrial sectors. A
company's stock market capitalization is the total market value of its
outstanding shares.
Aggregate Bond Index Series.
The investment objective of the Aggregate Bond Index Series is to match
the performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond
Index") as closely as possible before the deduction of Series expenses. There
can be no assurance that the investment objective of the Series will be
achieved.
In seeking to replicate the total return of the Aggregate Bond Index,
the Investment Adviser will not normally allocate the Aggregate Bond Index
Series' investments among all of the bonds in the Aggregate Bond Index, or in
the same weightings as the Aggregate Bond Index. Instead, the Aggregate Bond
Index Series will normally invest in a sample of the bonds included in the
Aggregate Bond Index, or in a sample of bonds not included in the index but
correlated with bonds that are in the index, and in derivative instruments
linked to the Aggregate Bond Index based on the Investment Adviser's
optimization process, a statistical sampling technique that aims to create a
portfolio that will match approximately the performance of the index with less
transaction costs than would be incurred through full replication. The
Investment Adviser may use options and futures contracts and other types of
financial instruments relating to all or a portion of the Aggregate Bond Index.
The Series may invest in bonds not included in the index, but which are selected
to reflect characteristics such as maturity, duration or credit quality similar
to bonds in the index. The investments to be included in the Aggregate Bond
Index Series will be selected with the objective of reducing the selected
investment portfolio's deviation from the performance of the Aggregate Bond
Index (tracking error). Selection of bonds other than those included in the
Aggregate Bond Index, or in different weightings from the Index, may result in
levels of interest rate, credit or prepayment risks that differ from the levels
of risks on the securities composing the Aggregate Bond Index. See "Other
Investments Policies, Practices and Risk
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Factors -- Investment in Fixed-Income Securities." The Aggregate Bond Index
Series may also engage in securities lending. See "Other Investment Policies,
Practices and Risk Factors."
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by entities,
such as the World Bank, constituted by the governments of several countries to
promote economic development) and mortgage-backed securities with maturities
greater than one year. Corporate bonds contained in the Aggregate Bond Index
represent issuers from various industrial sectors. The Aggregate Bond Index
Series may invest in U.S. Treasury bills, notes and bonds and other "full faith
and credit" obligations of the U.S. Government.
The Aggregate Bond Index Series may also invest in U.S. Government
agency securities, which are debt obligations issued or guaranteed by agencies
or instrumentalities of the U.S. Government. "Agency" securities may not be
backed by the "full faith and credit" of the U.S. Government. U.S. Government
agencies may include the Federal Farm Credit Bank, the Resolution Trust
Corporation and the Government National Mortgage Association. "Agency"
obligations are not explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury bonds.
Because the Aggregate Bond Index is composed of investment grade bonds,
the Aggregate Bond Index Series will invest in corporate bonds rated investment
grade--i.e., those rated at least Baa3 by Moody's Investors Service, Inc.
("Moody's") or BBB-- by Standard & Poor's Ratings Group ("S&P"), the equivalent
by another nationally recognized statistical rating organization ("NRSRO") or,
if unrated, of equal quality in the opinion of the Investment Adviser. Corporate
bonds ranked in the fourth highest rating category, while considered "investment
grade," have more speculative characteristics and are more likely to be
downgraded than securities rated in the three highest ratings categories. In the
event that the rating of a security in the Aggregate Bond Index Series is
lowered below Baa or BBB, the Aggregate Bond Index Series may continue to hold
the security. Such securities rated below investment grade are considered to be
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Descriptions of the
ratings of bonds are contained in the Appendix.
The Aggregate Bond Index Series may also invest in other instruments
that "pass through" payments on such obligations, such as collateralized
mortgage obligations ("CMOs").
International (GDP Weighted) Index Series
The investment objective of the International (GDP Weighted) Index
Series is to match the performance of the MSCI GDP - Weighted Europe,
Australasia and Far East Index (the "EAFE (GDP Weighted) Index") as closely as
possible before the deduction of Series expenses. There can be no assurance that
the investment objective of the Series will be achieved. In seeking to
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replicate the total return of the EAFE (GDP Weighted) Index, the Investment
Adviser may not allocate the Series' investments among all of the countries, or
all of the companies within a country, represented in the EAFE (GDP Weighted)
Index, or in the same weightings as the EAFE (GDP Weighted) Index. Instead, the
Series may invest in a sample of the equity securities included in the EAFE (GDP
Weighted) Index and other types of financial instruments based on the Investment
Adviser's optimization process, a statistical sampling technique that aims to
create a portfolio that will match approximately the performance of the index
with less transaction costs than would be incurred through full replication. In
addition, the Investment Adviser may use options and futures contracts and other
types of financial instruments relating to all or a portion of the EAFE (GDP
Weighted) Index. The investments to be included in the Series will be selected
so that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks, and of the stocks underlying or otherwise related
to the foregoing financial instruments, closely approximate those same factors
in the EAFE (GDP Weighted) Index, with the objective of reducing the selected
investment portfolio's deviation from the performance of the EAFE (GDP Weighted)
Index (tracking error). The Series may also engage in securities lending. See
"Other Investment Policies, Practices and Risk Factors."
The EAFE (GDP Weighted) Index is composed of equity securities of
companies from various industrial sectors whose primary trading markets are
located outside the United States and which are selected from among the larger
capitalization companies in such markets. A company's stock market
capitalization is the total market value of its outstanding shares. The
countries currently included in the EAFE (GDP Weighted) Index are Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and United Kingdom. The weighting of the EAFE (GDP Weighted) Index
among these countries is based upon gross domestic product (GDP),
rather than its market capitalization. Using the GDP weighting tends to decrease
the relative weighting of Japan and the United Kingdom while increasing the
weighting of certain European countries, generally resulting in a more
diversified index.
International (Capitalization Weighted) Index Series
The investment objective of the International (Capitalization Weighted)
Index Series is to match the performance of the MSCI Capitalization - Weighted
Europe, Australasia and Far East Index (the "EAFE (Capitalization Weighted)
Index") as closely as possible before the deduction of Series expenses. There
can be no assurance that the investment objective of the Series will be
achieved. In seeking to replicate the total return of the EAFE (Capitalization
Weighted) Index, the Investment Adviser may not allocate the Series' investments
among all of the countries, or all of the companies within a country,
represented in the EAFE (Capitalization Weighted) Index, or in the same
weightings as the EAFE (Capitalization Weighted) Index. Instead, the Series may
invest in a sample of the equity securities included in the EAFE (Capitalization
Weighted) Index and in derivative instruments correlated with components of the
EAFE (Capitalization Weighted) Index based on the Investment Adviser's
optimization process, a statistical sampling technique that aims to create a
portfolio that will match approximately the performance of the index with
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less transaction costs than would be incurred through full replication. In
addition, the Investment Adviser may use options and futures contracts and other
types of financial instruments relating to all or a portion of the EAFE
(Capitalization Weighted) Index. The investments to be included in the
International (Capitalization Weighted) Index Series will be selected so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks, and of the stocks underlying or otherwise related
to the foregoing financial instruments, closely approximate those same factors
in the EAFE (Capitalization Weighted) Index, with the objective of reducing the
selected investment portfolio's deviation from the performance of the EAFE
(Capitalization Weighted) Index (tracking error). The Series may also engage in
securities lending. See "Other Investment Policies, Practices and Risk Factors."
The EAFE (Capitalization Weighted) Index is composed of equity
securities of companies from various industrial sectors whose primary trading
markets are located outside the United States and which are selected from among
the larger capitalization companies in such markets. A company's stock market
capitalization is the total market value of its outstanding shares. The
countries currently included in the EAFE (Capitalization Weighted) Index are
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, The Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland and United Kingdom. The weighting of the
EAFE (Capitalization Weighted) Index among these countries is based upon market
capitalization, rather than its gross domestic product. Using the capitalization
weighting tends to increase the relative weighting of Japan and the United
Kingdom while decreasing the weighting of certain European countries, generally
resulting in an index composed of securities of fewer issuers.
Enhanced S&P 500 Series.
The investment objective of the Enhanced S&P 500 Series is to
provide a total return exceeding the performance of the S&P 500 while actively
seeking to reduce downside risk as compared with the index. There can be no
assurance that the investment objective of the Series will be achieved.
In seeking to provide a total return exceeding the performance of the
S&P 500, under normal circumstances, the Series will invest at least 80% of its
assets in stocks of companies in the S&P 500 and options, futures and other
derivative instruments based on that index. The Enhanced S&P 500 Series
will attempt to construct a portfolio of securities and derivative instruments
that will at least match approximately the performance of the S&P 500 before
deduction of expenses, but will also employ various strategies to seek to
enhance performance relative to the S&P 500. Such enhancement strategies may
include (1) investment in derivative instruments correlated with the index or
components of the index rather than securities represented in the index whenever
the Investment Adviser believes derivative instruments present price or return
characteristics superior to those of securities, (2) certain types of arbitrage,
and (3) biasing the portfolio (relative to the S&P 500) in order to emphasize
securities which have quantitative characteristics the Investment Adviser
believes are associated with outperformance.
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The Enhanced S&P 500 Series may invest in derivative instruments, and
will normally invest a substantial portion of its assets in options and futures
contracts correlated with the S&P 500. Derivatives allow the Series to increase
exposure to the S&P 500 quickly and at less cost than buying or selling stocks.
The Series will invest in options, futures and other derivative instruments, in
order to gain market exposure quickly in the event of subscriptions, to maintain
liquidity in the event of redemptions and to keep trading costs low. In
connection with the use of derivative instruments, the Series may enter into
short sales in order to adjust the weightings of particular securities
represented in a derivative to more accurately reflect the securities weightings
in the S&P 500 or to bias the portfolio (relative to the S&P 500) in order to
seek to enhance performance. The Series will also invest in derivatives whenever
the Investment Adviser believes a derivative (including futures, total return
index swaps, options, warrants and convertible bonds) presents price or return
characteristics superior to those of stocks represented in the index. The Series
may also invest in derivatives in connection with arbitrage transactions.
The Series will engage in certain types of arbitrage when the
Investment Adviser sees opportunity to do so. The types of arbitrage the Series
may employ include stock index arbitrage (exploiting discrepancies between the
value of S&P 500 futures or other derivatives and the value of the index),
convertible bond arbitrage (exploiting discrepancies between the implied value
of an option embedded in a convertible bond and the actual value of the option)
and other forms of option arbitrage, and share arbitrage (exploiting
discrepancies in the value of different share classes of a company or in a
single share class listed on more than one exchange). The Series may enter into
short sales of various types of securities and financial instruments, including
securities and financial instruments not represented in the S&P 500, in
connection with arbitrage transactions.
While the Series expects the overall weighting of its investments to be
close to the capitalization weights of the S&P 500, the Series' investments may
not exactly replicate the portfolio weights of the index at all times. Instead,
the Investment Adviser may bias the portfolio (relative to the S&P 500) in order
to emphasize securities which have quantitative characteristics (such as
above-average yield or below-average valuation) the Investment Adviser believes
may enhance performance. By using a proprietary computer model to overweight or
underweight certain companies in the portfolio relative to the index, the Series
seeks to slightly outperform, or reduce somewhat its volatility relative to, the
index over time.
The Series may also invest in new issues, convertible securities,
foreign securities, foreign currency exchange contracts and sell covered call
options. For more information on these and other investments of the Series, see
"Other Investment Policies, Practices and Risk Factors."
The S&P 500 is composed of the common stocks of 500 large
capitalization companies from various industrial sectors, most of which are
listed on the New York Stock Exchange Inc. A company's stock market
capitalization is the total market value of its outstanding shares. The S&P 500
represents a significant portion of the market value of all common stocks
publicly traded in the United States.
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Enhanced International Series
The investment objective of the Enhanced International Series is
to provide a total return exceeding the performance of the EAFE (Capitalization
Weighted) Index while actively seeking to reduce downside risk as compared with
the index. There can be no assurance that the investment objective of the Series
will be achieved.
In seeking to provide a total return exceeding the performance of the
EAFE (Capitalization Weighted) Index, under normal circumstances, the Series
will invest at least 80% of its assets in stocks of companies in the EAFE
(Capitalization Weighted) Index and options, futures and other derivative
instruments based on that index. The Enhanced International Series will attempt
to construct a portfolio of securities and derivative instruments that will at
least match approximately the performance of the EAFE (Capitalization Weighted)
Index before deduction of expenses, but will also employ various strategies to
seek to enhance performance relative to the EAFE (Capitalization Weighted)
Index. Such enhancement strategies may include (1) investment in derivative
instruments correlated with the index or components of the index rather than
securities represented in the index whenever the Investment Adviser believes
derivative instruments present price or return characteristics superior to those
of securities, (2) certain types of arbitrage, and (3) biasing the portfolio
(relative to the EAFE (Capitalization Weighted) Index) in order to emphasize
securities which have quantitative characteristics the Investment Adviser
believes are associated with outperformance.
The Enhanced International Series may invest in derivative
instruments, and will normally invest a substantial portion of its assets in
options and futures contracts correlated with components of the EAFE
(Capitalization Weighted) Index. Derivatives allow the Series to increase
exposure to the EAFE (Capitalization Weighted) Index quickly and at less cost
than buying or selling stocks. The Series will invest in options, futures and
other derivative instruments, in order to gain market exposure quickly in the
event of subscriptions, to maintain liquidity in the event of redemptions and to
keep trading costs low. In connection with the use of derivative instruments,
the Series may enter into short sales in order to adjust the weightings of
particular securities represented in a derivative to more accurately reflect the
securities weightings in the EAFE (Capitalization Weighted) Index or to bias the
portfolio (relative to the EAFE (Capitalization Weighted) Index) in order to
seek to enhance performance. The Series will also invest in derivatives whenever
the Investment Adviser believes a derivative (including futures, total return
index swaps, options, warrants and convertible bonds) presents price or return
characteristics superior to those of stocks represented in the index. The Series
may also invest in derivatives in connection with arbitrage transactions.
The Series will engage in certain types of arbitrage when the
Investment Adviser sees opportunity to do so. The types of arbitrage the Series
may employ include stock index arbitrage (exploiting discrepancies between the
value of futures or other derivatives and the value of the index), convertible
bond arbitrage (exploiting discrepancies between the implied value of an option
embedded in a convertible bond and the actual value of the option) and other
forms of option arbitrage, and share arbitrage (exploiting discrepancies in the
value of different share
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classes of a company or in a single share class listed on more than one
exchange). The Series may enter into short sales of various types of securities
and financial instruments, including securities and financial instruments not
represented in the EAFE (Capitalization Weighted) Index, in connection with
arbitrage transactions.
While the Series expects the overall weighting of its investments to be
close to the capitalization weights of the EAFE (Capitalization Weighted) Index,
the Series' investments may not exactly replicate the portfolio weights of the
index at all times. Instead, the Investment Adviser may bias the portfolio
(relative to the EAFE (Capitalization Weighted) Index) in order to emphasize
securities which have quantitative characteristics (such as above-average yield
or below-average valuation) the Investment Adviser believes may enhance
performance. By using a proprietary computer model to overweight or underweight
certain companies in the portfolio relative to the index, the Series seeks to
slightly outperform, or reduce somewhat its volatility relative to, the index
over time.
The Series may also invest in new issues, convertible securities and
sell covered call options. For more information on these and other investments
of the Series, see "Other Investment Policies, Practices and Risk Factors."
The EAFE (Capitalization Weighted) Index is composed of equity
securities of companies from various industrial sectors whose primary trading
markets are located outside the United States and which are selected from among
the larger capitalization companies in such markets. A company's stock market
capitalization is the total market value of its outstanding shares. The
countries currently included in the EAFE (Capitalization Weighted) Index are
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, The Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland and United Kingdom. The weighting of the
EAFE (Capitalization Weighted) Index among these countries is based upon market
capitalization, rather than its gross domestic product. Using the capitalization
weighting tends to increase the relative weighting of Japan and the United
Kingdom while decreasing the weighting of certain European countries, generally
resulting in an index composed of securities of fewer issuers.
About Indexing and Management of the Index Series
About Indexing. The Series are not "actively" managed, which would
involve the buying and selling of securities based upon economic, financial, and
market analyses and investment judgment. Instead, each Index Series, utilizing
essentially a "passive" or "indexing" investment approach, seeks to replicate,
before each Series' expenses (which can be expected to reduce the total return
of the Series), the total return of its respective index.
Indexing and Managing the Series. Each Series will be substantially
invested in securities in the applicable index, and will invest at least 80% of
its assets in securities or other financial instruments which are contained in
or correlate with securities in the applicable index (equity securities, in the
case of the S&P 500 Index Series, Small Cap Index Series, International
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(GDP Weighted) Index Series, International (Capitalization Weighted) Index
Series (the "Equity Series"), and fixed-income securities in the case of the
Aggregate Bond Index Series (the "Fixed-Income Series")).
Because each Series seeks to replicate the total return of its
respective index, generally the Investment Adviser will not attempt to judge the
merits of any particular security as an investment but will seek only to
replicate the total return of the securities in the relevant index. However, the
Investment Adviser may omit or remove a security which is included in an index
from the portfolio of a Series if, following objective criteria, the Investment
Adviser judges the security to be insufficiently liquid or believes the merit of
the investment has been substantially impaired by extraordinary events or
financial conditions.
The Investment Adviser may acquire certain financial instruments based
upon individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets. Others may provide for the payment to a Series or by a Series of
amounts based upon the performance (positive, negative or both) of a particular
security or basket. The Investment Adviser will select such instruments when it
believes that the use of the instrument will correlate substantially with the
expected total return of a target security or index. In connection with the use
of such instruments, the Investment Adviser may enter into short sales in an
effort to adjust the weightings of particular securities represented in the
basket to more accurately reflect such securities' weightings in the target
index.
Each Series' ability to replicate the total return of its respective
index may be affected by, among other things, transaction costs, administration
and other expenses incurred by the Series, taxes (including foreign withholding
taxes, which will affect the International (GDP Weighted) Index Series,
International (Capitalization Weighted) Index Series and the Aggregate Bond
Index Series due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Series, and the timing and amount of
Series investor contributions and withdrawals, if any. Under normal
circumstances, it is anticipated that each Series' total return over periods of
one year and longer will, on a gross basis and before taking into account
expenses (incurred at either the Series or the Series level) be within 10 basis
points (a basis point is one one-hundredth of one percent (0.01%)) for the S&P
500 Index Series, 100 basis points for the Small Cap Index Series, 150 basis
points for the International (GDP Weighted) Index Series and International
(Capitalization Weighted) Index Series, and 50 basis points for the Aggregate
Bond Index Series, of the total return of the applicable indices. There can be
no assurance, however, that these levels of correlation will be achieved. In the
event that this correlation is not achieved over time, the Trustees will
consider alternative strategies for the Series. Information regarding
correlation of a Series' performance to that of a target index may be found in
the Series' annual report.
About Enhanced Indexing and Management of the Enhanced Series
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About Enhanced Indexing. In seeking to provide a total return exceeding
the respective index, the Enhanced Series utilize essentially a "passive" or
"indexing" investment approach which for the most part does not involve the
buying and selling of securities based upon economic, financial, and market
analyses and investment judgment. However, each Enhanced Series does perform
some analysis by screening the companies in its index to identify those that, on
an overall basis, exhibit statistical characteristics the Investment Adviser
believes are associated with outperformance over time.
Each Series' ability to exceed the total return of its respective index
may be affected by, among other things, transaction costs, administration and
other expenses incurred by the Series, taxes (including foreign withholding
taxes, which will affect the Enhanced International Series due to foreign tax
withholding practices), changes in either the composition of the index or the
assets of a Series, and the timing and amount of Series investor contributions
and withdrawals, if any. There can be no assurance that a Series will exceed
the total return of its respective index. In the event that a Series, over
time, does not exceed the total return of its index, the Trustees will consider
alternative strategies for the Series. Information regarding a Series'
performance relative to that of a target index may be found in the Series'
annual report.
Each Series' investment objectives and policies are described in Part
A. Certain types of securities in which a Series may invest and certain
investment practices that the Series may employ are discussed more fully below.
Other Investment Policies, Practices and Risk Factors
Cash Management. Generally, the Investment Adviser will employ futures
and options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the Investment Adviser, a portion of a Series'
assets may be invested in certain types of instruments with remaining maturities
of 397 days or less for liquidity purposes. Such instruments would consist of:
(i) obligations of the U.S. Government, its agencies, instrumentalities,
authorities or political subdivisions ("U.S. Government Securities"); (ii) other
fixed-income securities rated Aa or higher by Moody's or AA or higher by S&P or,
if unrated, of comparable quality in the opinion of the Investment Adviser;
(iii) commercial paper; (iv) bank obligations, including negotiable certificates
of deposit, time deposits and bankers' acceptances; and (v) repurchase
agreements. At the time the Series invests in commercial paper, bank obligations
or repurchase agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or
outstanding commercial paper, bank obligations or other short-term obligations
rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are available,
the instrument must be of comparable quality in the opinion of the Investment
Adviser.
Dollar Rolls. The Aggregate Bond Index Series may enter into dollar
rolls, in which the Aggregate Bond Index Series will sell securities for
delivery in the current month and simultaneously contract to repurchase
substantially similar (the same type and coupon) securities on a specified
future date from the same party. During the roll period, the Aggregate Bond
Index
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Series forgoes principal and interest paid on the securities sold. The Aggregate
Bond Index Series is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.
Dollar rolls involve the risk that the market value of the securities
subject to the Aggregate Bond Index Series' forward purchase commitment may
decline below the price of the securities the Aggregate Bond Index Series has
sold. In the event the buyer of the securities files for bankruptcy or becomes
insolvent, the Aggregate Bond Index Series' use of the proceeds of the current
sale portion of the transaction may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Aggregate Bond
Index Series' obligation to purchase the similar securities in the forward
transaction. Dollar rolls are speculative techniques which can be deemed to
involve leverage. The Aggregate Bond Index Series will establish a segregated
account with its custodian in which it will maintain liquid securities in an
aggregate amount equal to the amount of the forward commitment. The Aggregate
Bond Index Series will engage in dollar roll transactions to enhance return and
not for the purpose of borrowing. Each dollar roll transaction is accounted for
as a sale of a portfolio security and a subsequent purchase of a substantially
similar security in the forward market.
Short Sales. In connection with the use of certain instruments based
upon or consisting of one or more baskets of securities, the Investment Adviser
may sell a security a Series does not own, or in an amount greater than the
Series owns (i.e., make short sales). Such transactions will be used only in an
effort to adjust the weightings of particular securities represented in the
basket to reflect such securities' weightings in the target index. Additionally,
the Enhanced Series may use short sales to bias the portfolio to enhance
performance or in connection with arbitrage transactions. Generally, to complete
a short sale transaction, a Series will borrow the security to make delivery to
the buyer. The Series is then obligated to replace the security borrowed. The
price at the time of replacement may be more or less than the price at which the
security was sold by the Series. Until the security is replaced, the Series is
required to pay to the lender any interest which accrues during the period of
the loan. To borrow the security, the Series may be required to pay a premium
which would increase the cost of the security sold. The proceeds of the short
sale will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out. Until the Series replaces
the borrowed security, it will (a) maintain in a segregated account with its
custodian cash or liquid securities at such a level that the amount deposited in
the account plus the amount deposited with the broker as collateral will equal
the current market value of the security sold short or (b) otherwise cover its
short position.
Cash Flows; Expenses. The ability of each Series to satisfy its
investment objective depends to some extent on the Investment Adviser's ability
to manage cash flow (primarily from purchases and redemptions and distributions
from the Series' investments). The Investment Adviser will make investment
changes to a Series' portfolio to accommodate cash flow while continuing to seek
to replicate or exceed, as the case may be, the total return of the Series'
target index. Investors should also be aware that the investment performance of
each index is a hypothetical number which does not take into account brokerage
commissions and other
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transaction costs, custody and other costs of investing, that will be borne by
the Series. Since each Index Series seeks to replicate the total return of its
target index, the Investment Adviser generally will not attempt to judge the
merits of any particular security as an investment. With respect to the Enhanced
Series, the Investment Adviser does perform some analysis by screening the
companies in its index to identify those that exhibit statistical
characteristics the Investment Advisor believes are associated with
outperformance over time.
Investment in Fixed-Income Securities. Because the Aggregate Bond Index
Series will invest in fixed-income securities, it will be subject to the general
risks inherent in such securities, primarily interest rate risk, credit risk and
prepayment risk.
Interest rate risk is the potential for fluctuations in bond prices due
to changing interest rates. As a rule bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline; if interest rates
fall, bond prices generally rise. In addition, for a given change in interest
rates, longer-maturity bonds generally fluctuate more in price than
shorter-maturity bonds. To compensate investors for these larger fluctuations,
longer-maturity bonds usually offer higher yields than shorter-maturity bonds,
other factors, including credit quality, being equal. These basic principles of
bond prices also apply to U.S. Government Securities. A security backed by the
"full faith and credit" of the U.S. Government is guaranteed only as to its
stated interest rate and face value at maturity, not its current market price.
Just like other fixed-income securities, government-guaranteed securities will
fluctuate in value when interest rates change.
Credit risk is the possibility that an issuer of securities held by the
Aggregate Bond Index Series will be unable to make payments of either interest
or principal or will be perceived to have a diminished capacity to make such
payments in the future. The credit risk of the Aggregate Bond Index Series is a
function of the diversification and credit quality of its underlying securities.
The Aggregate Bond Index Series may also be exposed to event risk,
which includes the possibility that fixed-income securities held by the
Aggregate Bond Index Series may suffer a substantial decline in credit quality
and market value due to issuer restructurings. Certain restructurings such as
mergers, leveraged buyouts, takeovers or similar events, are often financed by a
significant expansion of corporate debt. As a result of the added debt burden,
the credit quality and market value of a firm's existing debt securities may
decline significantly. Other types of restructurings (such as corporate spinoffs
or privatizations of governmental or agency borrowers or the termination of
express or implied governmental credit support) may also result in decreased
credit quality of a particular issuer.
Prepayment risk is the possibility that the principal of the mortgage
loans underlying mortgage-backed securities may be prepaid at any time. As a
general rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates the Aggregate Bond Index Series may be
required to reinvest its assets in securities with lower interest rates. In
periods of increasing
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interest rates, prepayments generally may decline, with the effect that the
mortgage-backed securities held by the Aggregate Bond Index Series may exhibit
price characteristics of longer-term debt securities.
The corporate substitution strategy used by the Aggregate Bond Index
Series (discussed above) may increase or decrease the Aggregate Bond Index
Series' exposure to the foregoing risks relative to those of the Aggregate Bond
Index.
Foreign Investment Risks
Foreign Market Risk. Foreign security investment involves special risks
not present in U.S. investments that can increase the chances that the Series
will lose money. In particular, the Series are subject to the risk that because
there are generally fewer investors on foreign exchanges and a smaller number of
shares traded each day, it may be difficult for the Series to buy and sell
securities on those exchanges. In addition, prices of foreign securities may
fluctuate more than prices of securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do
not compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Series' ability to
purchase or sell foreign securities or transfer a Series' assets or income back
into the United States, or otherwise adversely affect a Series' operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Currency Risk and Exchange Risk. Securities in which the International
(GDP Weighted) Index Series, International (Capitalization Weighted) Index
Series and Enhanced International Series invest may be denominated or quoted in
currencies other than the U.S. dollar. Changes in foreign currency exchange
rates will affect the value of the securities of the Series. Generally, when the
U.S. dollar rises in value against a foreign currency, your investment in a
security denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Similarly when the U.S. dollar decreases in value against a
foreign currency, your investment in a security denominated in that currency
gains value because the currency is worth
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more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
Governmental Supervision and Regulation/Accounting Standards. Many
foreign governments supervise and regulate stock exchanges, brokers and the sale
of securities less than the United States does. Other countries may not have
laws to protect investors the way that the United States' securities laws do.
For example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Also, brokerage commissions
and other costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount the Series
can earn on its investments.
Certain Risks of Holding Series Assets Outside the United States. The
Series generally hold the foreign securities and cash in which they invest
outside the United States in foreign banks and securities depositories. Certain
of such foreign banks and securities depositories may be recently organized or
new to the foreign custody business and/or may have operations subject to
limited or no regulatory oversight. Also, the laws of certain countries may put
limits on a Series' ability to recover its assets if a foreign bank or
depository or issuer of a security or any or their agents goes bankrupt. In
addition, it can be expected that it will be more expensive for a Series to buy,
sell, and hold securities in certain foreign markets than in the U.S. market due
to higher brokerage, transaction, custody and/or other costs. The increased
expense to invest in foreign market reduces the amount a Series can earn on its
investments and typically results in a higher operating expense ratio for the
Series than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for a Series to carry out transactions. If a
Series cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If a Series cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Series could be liable to that party for any
losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
European Economic and Monetary Union ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government
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subsidies in certain industries, and reduce or eliminate currency fluctuations
among these European countries. The Treaty on European Union (the "Maastricht
Treaty") seeks to set out a framework for the European Economic and Monetary
Union ("EMU") among the countries that comprise the European Union ("EU"). Among
other things, EMU establishes a single common European currency (the "euro")
that was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. EMU took effect for
the initial EMU participants as of January 1, 1999, and was implemented over the
weekend January 1, 1999 through January 3, 1999. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and thereafter,
were listed, traded, and made dividend and other payments only in euros.
Because any participating country may opt out of EMU within the first
three years, it is also possible that a significant participant could choose to
abandon EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of the
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU by an initial
participant could cause disruption of the financial markets as securities that
have been redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Series' investments
in Europe generally or in specific countries participating in EMU. Gains or
losses resulting from the euro conversion may be taxable to Series shareholders
under foreign or, in certain limited circumstances, U.S. tax laws.
When-issued Securities and Forward Commitments. The Aggregate Bond
Index Series may purchase or sell securities that it is entitled to receive on a
when-issued basis. The Aggregate Bond Index Series may also purchase or sell
securities through a forward commitment. These transactions involve the purchase
or sale of securities by the Series at an established price with payment and
delivery taking place in the future. The Aggregate Bond Index Series enters into
these transactions to obtain what is considered an advantageous price to the
Series at the time of entering into the transaction. The Aggregate Bond Index
Series has not established any limit on the percentage of its assets that may be
committed in connection with these transactions. When the Aggregate Bond Index
Series is purchasing securities in these transactions, the Series maintains a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities in an amount equal to the amount of its
purchase commitments.
There can be no assurance that a security purchased on a when-issued
basis will be issued, or a security purchased or sold through a forward
commitment will be delivered. The value of securities in these transactions on
the delivery date may be more or less than the Series'
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purchase price. The Aggregate Bond Index Series may bear the risk of a decline
in the value of the security in these transactions and may not benefit from an
appreciation in the value of the security during the commitment period.
Illiquid or Restricted Securities. Each Series may invest up to 15% of
its net assets in securities that lack an established secondary trading market
or otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of a Series' assets in
illiquid securities may restrict the ability of a Series to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where a Series' operations require cash, such as when
the Series redeems shares or pays dividends, and could result in the Series
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
Each Series may invest in securities that are not registered
("restricted securities") under the Securities Act of 1933, as amended (the
"Securities Act"). Restricted securities may be sold in private placement
transactions between the issuers and their purchasers and may be neither listed
on an exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity,
could be less than those originally paid by a Series or less than their fair
market value.
In addition, issuers whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately placed
securities held by a Series are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Series may be
required to bear the expenses of registration. Certain of a Series' investments
in private placements may consist of direct investments and may include
investments in smaller, less-seasoned issuers, which may involve greater risks.
These issuers may have limited product lines, markets or financial resources, or
they may be dependent on a limited management group. In making investments in
such securities, a Series may obtain access to material nonpublic information
which may restrict the Series' ability to conduct portfolio transactions in such
securities.
144A Securities. Each Series may purchase restricted securities that
can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act. The Board of Trustees has determined to treat as
liquid Rule 144A securities that are either (i) freely tradable in their primary
markets offshore or (ii) non-investment grade debt securities that the
Investment Adviser determines are as liquid as publicly registered
non-investment grade debt securities. The
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Board of Trustees has adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will continue to develop, the Board of Trustees will
carefully monitor the Series' investments in these securities. This investment
practice could have the effect of increasing the level of illiquidity in the
Series to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
Standby Commitment Agreements. The Aggregate Bond Index Series may
enter into standby commitment agreements. These agreements commit the Aggregate
Bond Index Series, for a stated period of time, to purchase a stated amount of
fixed-income securities that may be issued and sold to the Series at the option
of the issuer. The price and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement the Aggregate Bond Index
Series is paid a commitment fee, regardless of whether or not the security is
ultimately issued. The Aggregate Bond Index Series will enter into such
agreements for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Series.
The Aggregate Bond Index Series will not enter into a standby commitment with a
remaining term in excess of 90 days and will limit its investment in such
commitments so that the aggregate purchase price of securities subject to such
commitments, together with the value of all other illiquid securities, will not
exceed 15% of its net assets taken at the time of the commitment. The Aggregate
Bond Index Series will maintain a segregated account with its custodian of cash,
cash equivalents, U.S. Government securities or other liquid securities in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the
Aggregate Bond Index Series may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will thereafter be reflected in the calculation of the Aggregate Bond Index
Series' net asset value. The cost basis of the security will be adjusted by the
amount of the commitment fee. In the event the security is not issued, the
commitment fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements. Each Series may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the Investment
Adviser otherwise deems to be creditworthy. Under
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such agreements, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This insulates the
Series from fluctuations in the market value of the underlying security during
such period. A Series may not invest more than 15% of its net assets in
repurchase agreements maturing in more than seven days (together with other
illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. A Series will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by a Series but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, a Series may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default by the seller under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to a Series shall be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Series would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform.
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Convertible Securities. Convertible securities include convertible
bonds, notes and debentures, convertible preferred stocks, and other securities
that give the holder the right to exchange the security for a specific number of
shares of common stock. Convertible securities entail less credit risk than the
issuer's common stock because they are considered to be "senior" to common
stock. Convertible securities generally offer lower interest or dividend yields
than non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Warrants. A warrant gives a Series the right to buy a quantity of
stock. The warrant specifies the amount of underlying stock, the purchase (or
"exercise") price, and the date the warrant expires. A Series has no obligation
to exercise the warrant and buy the stock.
A warrant has value only if the Series exercises it before it expires.
If the price of the underlying stock does not rise above the exercise price
before the warrant expires, the warrant generally expires without any value and
the Series loses any amount it paid for the warrant. Thus, investments in
warrants may involve substantially more risk than investments in common stock.
Warrants may trade in the same markets as their underlying stock; however, the
price of the warrant does not necessarily move with the price of the underlying
stock.
Buying a warrant does not make the Series a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason investments in warrants may be more speculative than other
equity-based investments.
New Issues. Each Series may purchase newly issued securities. Newly
issued securities lack established trading histories and may be issued by
companies with limited operating histories. The Enhanced Series may seek to
purchase "hot issues" - that is, newly issues securities for which demand is
high and that are expected to trade at a premium to the offering price when
secondary market trading commences. There can be no assurance that the Enhanced
Series will be able to obtain hot issues or that the Enhanced Series will be
able to sell hot issues at a premium to the offering price.
Securities Lending. Each Series may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, a Series receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government. If
cash collateral is received by a Series, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Series. Alternatively, if securities are delivered
to a Series as collateral, the Series and the borrower negotiate a rate for the
loan premium to be received by the Series for lending its portfolio securities.
In either event, the total yield on a Series' portfolio is increased by loans of
its portfolio securities. A Series may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. A Series may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
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borrowed securities because of insolvency or for any other reason, a Series
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Borrowing and Leverage. The use of leverage by a Series creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Series shares and in the yield on the Series' portfolio. Although the principal
of such borrowings will be fixed, a Series' assets may change in value during
the time the borrowings are outstanding. Borrowings will create interest
expenses for a Series which can exceed the income from the assets purchased with
the borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest a Series will have
to pay on the borrowings, the Series' return will be greater than if leverage
had not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to a Series will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may determine to maintain a
Series' leveraged position if it expects that the benefits to the Series'
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by a Series may result in the Series being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing a
Series' portfolio in accordance with the Series' investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require a
Series to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
A Series at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
Small Cap. An investment in the Small Cap Index Series involves greater
risk than is customarily associated with Series that invest in more established
companies. The securities of smaller companies may be subject to more abrupt or
erratic market movements than larger, more established companies or the market
average in general. These companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
Because of these factors, the Small Cap Index Series believes that its shares
may be suitable for investment by persons who can invest without concern for
current income and who are in a financial position to assume above-average
investment risk in search of above-average long-term reward. It is not intended
as a complete investment program but is designed for those long-term investors
who are prepared to experience above-average fluctuations in net asset value.
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While the issuers in which the Small Cap Index Series will primarily
invest may offer greater opportunities for capital appreciation than large cap
issuers, investments in smaller companies may involve greater risks and thus may
be considered speculative. Full development of these companies and trends
frequently takes time and, for this reason, the Small Cap Index Series should be
considered as a long-term investment and not as a vehicle for seeking short-term
profits.
The securities in which the Small Cap Index Series invests will often
be traded only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume typical of trading on
a national securities exchange. As a result, the disposition by the Small Cap
Index Series of portfolio securities, to meet redemptions or otherwise, may
require the Small Cap Index Series to sell these securities at a discount from
market prices.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of their
business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they
serve, may be less susceptible than large companies to intervention from the
Federal government by means of price controls, regulations or litigation.
Mortgage Backed Securities. The Aggregate Bond Index Series may invest
in mortgage backed securities. The value of mortgage backed securities, like
that of traditional fixed income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage backed
securities differ from traditional fixed income securities because of their
potential for prepayment without penalty. The price paid by the Aggregate Bond
Index Series for its mortgage backed securities, the yield the Aggregate Bond
Index Series expects to receive from such securities and the average life of the
securities are based on a number of factors, including the anticipated rate of
prepayment of the underlying mortgages. In a period of declining interest rates,
borrowers may prepay the underlying mortgages more quickly than anticipated,
thereby reducing the yield to maturity and the average life of the
mortgage backed securities. Moreover, when the Aggregate Bond Index Series
reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was
prepaid. To the extent that the Aggregate Bond Index Series purchases
mortgage backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If the
Aggregate Bond Index Series buys such securities at a discount, both scheduled
payments of principal and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income. In a period of
rising interest rates, prepayments of the underlying mortgages may occur at a
slower than expected rate, creating maturity extension risk. This particular
risk may effectively change a security that was considered short or
intermediate term at the time of purchase into a long term security. Since
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long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Aggregate Bond Index Series. See
"Investment in Fixed-Income Securities" and "Illiquid or Restricted Securities"
above.
Series Strategies Involving Options, Futures, Swaps, Indexed
Instruments and Foreign Exchange Transactions.
Each Series will also utilize options, futures, options on futures,
swaps and other indexed instruments. Futures, options on futures, swaps and
other indexed instruments may be employed as a proxy for a direct investment in
securities underlying the Series' index. Options, futures and options on
futures, swaps and other indexed instruments may also be employed to provide
liquidity, to invest uncommitted cash balances, for non-hedging purposes and in
connection with arbitrage strategies. In addition, the International (GDP
Weighted) Index Series, International (Capitalization Weighted) Index Series and
Enhanced International Series may engage in futures contracts and forward
contracts on foreign currencies in connection with certain foreign securities
transactions.
The Investment Adviser will choose among the foregoing instruments
based on its judgment of how best to meet each Series' goal. In connection
therewith, the Investment Adviser will assess such factors as current and
anticipated securities prices, relative liquidity and price levels in the
options, futures and swap markets compared to the securities markets, and the
Series' cash flow and cash management needs.
Indexed Securities
The Series may invest in securities the potential return of which is
based on the change in particular measurements of value or rate (an "index"). As
an illustration, a Series may invest in a debt security or total return swap
that pays interest and returns principal based on the change in the value of a
securities index or a basket of securities. If a Series invests in such
securities, it may be subject, in the case of a debt security to reduced or
eliminated interest payments or loss of principal, or, in the case of a total
return swap, substantial payments to the counterparty in the event of an adverse
movement in the relevant index.
Options on Securities and Securities Indices.
Purchasing Options. Each Series is authorized to purchase put options
on securities held in its portfolio or securities indices the performance of
which is substantially correlated with securities held in its portfolio. When a
Series purchases a put option, in consideration for an upfront payment (the
"option premium") the Series acquires a right to sell to another party specified
securities owned by the Series at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
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of a put option limits the Series' risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Series will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.
Each Series is also authorized to purchase call options on securities
it intends to purchase or securities indices. When a Series purchases a call
option, in consideration for the option premium the Series acquires the right to
purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The purchase of a call option may
protect the Series from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the Series
is contemplating its purchase, in the case of an option on a security, or
attempting to maintain exposure to an index prior to purchasing the underlying
securities, in the case of an option on an index (an "anticipatory hedge"). In
the event a Series determines not to purchase a security underlying a call
option, however, the Series may lose the entire option premium.
Each Series is also authorized to purchase put or call options in
connection with closing out put or call options it has previously sold.
Writing Options. Each Series is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices, the
performance of which is substantially correlated to securities held in its
portfolio. When a Series writes a call option, in return for an option premium
the Series gives another party the right to buy specified securities owned by
the Series at the exercise price on or before the expiration date, in the case
of an option on securities, or agrees to pay to another party an amount based on
any gain in a specified securities index beyond a specified level on or before
the expiration date, in the case of an option on a securities index. In the
event the party to which a Series has written an option fails to exercise its
rights under the option because the value of the underlying securities is less
than the exercise price, the Series will partially offset any decline in the
value of the underlying securities through the receipt of the option premium. By
writing a call option, however, a Series limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.
Each Series may also write put options on securities or securities
indices. When a Series writes a put option, in return for an option premium the
Series gives another party the right to sell to the Series a specified security
at the exercise price on or before the expiration date, in the case of an option
on a security, or agrees to pay to another party an amount based on any decline
in a specified securities index below a specified level on or before the
expiration date, in the case of an option on a securities index. In the event
the party to which the Series has written an option fails to exercise its rights
under the option because the value of the underlying securities is
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greater than the exercise price, the Series will profit by the amount of the
option premium. By writing a put option, however, a Series will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Series writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Series for writing the put option. A Series will write a
put option on a security or a securities index only if the Series would be
willing to purchase the security at the exercise price for investment purposes
(in the case of an option on a security) or is writing the put in connection
with trading strategies involving combinations of options - for example, the
sale and purchase of options on the same security or index but different
expiration dates or exercise prices (a technique called a "spread").
Each Series is also authorized to sell call or put options in
connection with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Series will only
write call or put options that are "covered." A put option will be considered
covered if a Series has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will be
considered covered if a Series owns the securities it would be required to
deliver upon exercise of the option (or, in the case of option on a securities
index, securities which substantially replicate the performance of such index)
or owns a call option, warrant or convertible instrument which is immediately
exercisable for, or convertible into, such security.
Types of Options. Each Series may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and seller,
but generally do not require the parties to post margin and are subject to
greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives" below.
Futures
Each Series may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser to
take delivery, and a seller to make delivery, of a specific amount of an asset
at a specified future date at a specified price. An index futures contract is a
contract to buy or sell units of a particular index of securities at a specified
future date at a price agreed upon when the contract is made. Index futures
contracts typically specify that no delivery of the actual securities making up
the index takes place. Instead, upon termination of the contract, final
settlement is made in cash based on the difference
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between the contract price and the actual price on the termination date of the
units of the index. No price is paid upon entering into a futures contract.
Rather, upon purchasing or selling a futures contract the Series is required to
deposit collateral ("margin") equal to a percentage (generally less than 10%) of
the contract value. Each day thereafter until the futures position is closed,
the Series will pay additional margin representing any loss experienced as a
result of the futures position the prior day or be entitled to a payment
representing any profit experienced as a result of the futures position the
prior day.
A Series will further limit transactions in futures and options on
futures to the extent necessary to prevent the Series from being deemed a
"commodity pool operator" under regulations of the Commodity Futures Trading
Commission.
Swaps.
The Series are authorized to enter into equity swap agreements, which
are OTC contracts in which one party agrees to make periodic payments based on
the change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which a swap has more attractive risk
or return characterisitcs than direct investment or in which direct investment
is restricted by local law or is otherwise impractical.
Foreign Exchange Transactions. The International (GDP Weighted) Index
Series, International (Capitalization Weighted) Index Series and Enhanced
International Series may engage in futures contracts on foreign currencies and
foreign currency forward and spot transactions in connection with transactions
or anticipated transactions in securities denominated in foreign currencies.
Specifically, the Series may purchase or sell a currency to settle a security
transaction or sell a currency in which the Series has received or anticipates
receiving a dividend or distribution.
Risk Factors in Derivatives
The Series intend to enter into transactions involving derivatives only
if there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; "Limitations on the Use of OTC Derivatives," below. However, there
can be no assurance that, at any specific time, either a liquid secondary market
will exist for a derivative or a Series will otherwise be able to sell such
instrument at an ceptable price. It may therefore not be possible to close a
position in a derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (e.g., futures transactions, sales
of put options) may expose a Series to potential losses which exceed the amount
originally invested by the Series in
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such instruments. When a Series engages in such a transaction, the Series will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Series' exposure, on a market-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Series has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Series' exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Derivatives
Certain derivatives traded in OTC markets, including indexed
securities, swaps and OTC options may be substantially less liquid than other
instruments in which a Series may invest. The absence of liquidity may make it
difficult or impossible for a Series to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for a
Series to ascertain a market value for such instruments. A Series will therefore
acquire illiquid OTC instruments (i) if the agreement pursuant to which the
instrument is purchased contains a formula price at which the instrument may be
terminated or sold, or (ii) for which the Manager anticipates the Series can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
The staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets underlying written OTC
options are illiquid securities. The Series have therefore adopted an investment
policy pursuant to which they will not purchase or sell OTC options (including
OTC options on futures contracts) if, as a result of such transactions, the sum
of the market value of OTC options currently outstanding which are held by a
Series, the market value of the securities underlying OTC call options currently
outstanding which have been sold by a Series, and margin deposits on the Series'
outstanding OTC options exceeds 15% of the total assets of the Series, taken at
market value, together with all other assets of the Series which are deemed to
be illiquid or are otherwise not readily marketable. However, if an OTC option
is sold by a Series to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Series has the
unconditional contractual right to repurchase such OTC option at a predetermined
price, then the Series will treat as illiquid such amount of the underlying
securities as is equal to the repurchase price less the amount by which the
option is "in-the-money" (i.e., current market value of the underlying security
minus the option's exercise price).
Because derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of margin,
to the extent that a Series has unrealized gains in such instruments or has
deposited collateral with its counterparty, the Series is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Series will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in derivatives traded in OTC
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markets only with financial institutions which have substantial capital or which
have provided the Series with a third-party guaranty or other credit
enhancement.
Additional Limitations on the Use of Derivatives
The Series may not use any derivative to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from
purchasing directly, except that the Enhanced Series may use derivatives
relating to assets not included in the relevant index in connection with
arbitrage transactions or other permitted enhancement strategies.
Additional Information Concerning the Indices
S&P 500. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard &
Poor's 500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by the Corporation and the Trust. The S&P 500 Index
Series is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of the McGraw Hill Companies, Inc. ("Standard & Poor's"). Standard &
Poor's makes no representation regarding the advisability of investing in the
Series. Standard & Poor's makes no representation or warranty, express or
implied, to the owners of shares of the Series or any member of the public
regarding the advisability of investing in securities generally or in the Series
particularly or the ability of the S&P 500 to track general stock market
performance. Standard & Poor's only relationship to the Series is the licensing
of certain trademarks and trade names of Standard & Poor's and of the S&P 500
which is determined, composed and calculated by Standard & Poor's without regard
to the Series. Standard & Poor's has no obligation to take the needs of the
Series or the owners of shares of the Series into consideration in determining,
composing or calculating the S&P 500. Standard & Poor's is not responsible for
and has not participated in the determination of the prices and amount of the
Series or the timing of the issuance of sale of shares of the Series and the
Series or in the determination or calculation of the equation by which the
Series is to be converted into cash. Standard & Poor's has no obligation or
liability in connection with the administration, marketing or trading of the
Series.
Standard & Poor's does not guarantee the accuracy and/or the
completeness or the S&P 500 Index or any data included therein, and Standard &
Poor's shall have no liability for any errors, omissions, or interruptions
therein. Standard & Poor's makes no warranty, express or implied, as to results
to be obtained by the Series, owners of shares of the Series, or any other
person or entity from the use of the S&P 500 Index or any data included therein.
Standard & Poor's makes no express or implied warranties and expressly disclaims
all warranties of merchantability or fitness for a particular purpose or use
with respect to the S&P 500 Index or any data included therein. Without limiting
any of the foregoing, in no event shall Standard & Poor's have any liability for
any special, punitive, indirect, or consequential damages (including lost
profits), even if notified of the possibility of such damages.
Russell 2000. The Small Cap Index Series is not promoted, sponsored or
endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell
Company is not
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responsible for and has not reviewed the Small Cap Index Series nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without
notice, to alter, amend, terminate or in any way change the Russell 2000(R)
Index. Frank Russell Company has no obligation to take the needs of any
particular Series or its participants or any other product or person into
consideration in determining, composing or calculating the Index.
Frank Russell Company's publication of the Russell 2000(R) Index in no
way suggests or implies an opinion by Frank Russell Company as to the
attractiveness or appropriateness of investment in any or all securities upon
which the Russell 2000 is based. Frank Russell Company makes no representation,
warranty, or guarantee as to the accuracy, completeness, reliability, or
otherwise of the Russell 2000 or any data included in the Russell 2000. Frank
Russell Company makes no representation or warranty regarding the use, or the
results of use, of the Russell 2000 or any data included therein, or any
security (or combination thereof) comprising the Russell 2000. Frank Russell
Company makes no other express or implied warranty, and expressly disclaims any
warranty, of any kind, including, without means of limitation, any warranty of
merchantability or fitness for a particular purpose with respect to the Russell
2000 or any data or any security (or combination thereof) included therein.
EAFE Indices. Both the EAFE (GDP Weighted) Index and the EAFE
(Capitalization Weighted) Index (the "EAFE Indices") are the exclusive property
of Morgan Stanley Capital International, Inc. ("Morgan Stanley"). The EAFE
Indices are service marks of Morgan Stanley Group Inc. and have been licensed
for use by the Investment Adviser and its affiliates.
None of Series are sponsored, endorsed, sold or promoted by Morgan
Stanley. Morgan Stanley makes no representation or warranty, express or implied,
to the owners of shares of any Series or any member of the public regarding the
advisability of investing in securities generally or in any Series particularly
or the ability of the EAFE Indices to track general stock market performance.
Morgan Stanley is the licensor of certain trademarks, service marks and trade
names of Morgan Stanley and of the EAFE Indices. Morgan Stanley has no
obligation to take the needs of any Series or the owners of shares of the any
Series into consideration in determining, composing or calculating the
respective EAFE Index. Morgan Stanley is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
shares of any Series to be issued or in the determination or calculation of the
equation by which the shares of any Series are redeemable for cash. Morgan
Stanley has no obligation or liability to owners of shares of any Series in
connection with the administration, marketing or trading of any Series.
Although Morgan Stanley shall obtain information for inclusion in or
for use in the calculation of the EAFE Indices from sources which Morgan Stanley
considers reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the EAFE Indices or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be
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obtained by licensee, licensee's customers and counterparties, owners of shares
of any Series, or any other person or entity from the use of the EAFE Indices or
any data included therein in connection with the rights licensed hereunder or
for any other use. Morgan Stanley makes no express or implied warranties, and
hereby expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the EAFE Indices or any data included
therein. Without limiting any of the foregoing, in no event shall Morgan Stanley
have any liability for any direct, indirect, special, punitive, consequential or
any other damages (including lost profits) even if notified of the possibility
of such damages.
Investment Restrictions
The Trust has adopted the following restrictions and policies relating
to the investment of each Series' assets and activities, which are fundamental
policies and may not be changed with respect to a Series without the approval of
the holders of a majority of the Series' outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares). Each may not:
1. Make any investment inconsistent with the Series'
classification as a non-diversified company under the
Investment Company Act.
2. Invest more than 25% of its total assets, taken at market
value, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and
instrumentalities); provided, that in replicating the
weighting of a particular industry in its target index, a
Series may invest more than 25% of its total assets in
securities of issuers in that industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent
permitted by law, a Series may invest in securities directly
or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests
therein.
5. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and
investment in government obligations, commercial paper,
pass-through instruments, certificates of deposit, bankers
acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except
further that a Series may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Series'
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Prospectus and Statement of Additional Information, as they
may be amended from time to time.
6. Issue senior securities to the extent such issuance would
violate applicable law.
7. Borrow money, except that (i) a Series may borrow from banks
(as defined in the Investment Company Act) in amounts up to 33
1/3% of its total assets (including the amount borrowed), (ii)
a Series may borrow up to an additional 5% of its total assets
for temporary purposes, (iii) a Series may obtain such short
term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and (iv) a Series may
purchase securities on margin to the extent permitted by
applicable law. A Series may not pledge its assets other than
to secure such borrowings or, to the extent permitted by the
Series' investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions,
short sales, when issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a
Series technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities,
except to the extent that a Series may do so in accordance
with applicable law and the Series' Prospectus and Statement
of Additional Information, as they may be amended from time to
time, and without registering as a commodity pool operator
under the Commodity Exchange Act.
In addition, although each Series is classified as a non-diversified
Series under the Investment Company Act and is not subject to the
diversification requirements of the Investment Company Act, each Series is
required to comply with certain requirements under the Internal Revenue Code of
1986, as amended (the "Code"). To ensure that the Series satisfy these
requirements, the Declaration of Trust requires that each Series be managed in
compliance with the Code requirements as though such requirements were
applicable to the Series. These requirements include limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the market value of a Series' total assets are invested in the securities of a
single issuer, or any two or more issuers which are controlled by the Series and
engaged in the same, similar or related businesses, and (ii) with respect to 50%
of the market value of its total assets, not more that 5% of the market value of
its total assets are invested in securities of a single issuer, and the Series
does not own more than 10% of the outstanding voting securities of a single
issuer. The U.S. Government, its agencies and instrumentalities are not included
within the definition of "issuer" for purposes of the diversification
requirements of the Code.
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In addition, the Trust has adopted as an operating policy, which may be
changed by the Trustees without shareholder approval, that no Series, will make
any additional investments if the amount of its borrowings exceeds 5% of its
total assets. Borrowings do not include the use of investment techniques that
may be deemed to create leverage, including, but not limited to, such techniques
as dollar rolls, when-issued securities, options and futures.
Portfolio securities of a Series generally may not be purchased from,
sold or loaned to the Investment Adviser or its affiliates or any of their
directors, general partners, officers or employees, acting as principal, unless
pursuant to a rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, a Series is
prohibited from engaging in certain transactions involving Merrill Lynch, or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Brokerage
Allocation and Other Practices." Without such an exemptive order, a Series is
prohibited from engaging in portfolio transactions with Merrill Lynch or its
affiliates acting as principal.
Portfolio Turnover
Although each Series will use an approach to investing that is largely
a passive, indexing approach, each Series may engage in a substantial number of
portfolio transactions. The rate of portfolio turnover will be a limiting factor
when the Investment Adviser considers whether to purchase or sell securities for
a Series only to the extent that the Investment Adviser will consider the impact
of transaction costs on a Series' tracking error. Changes in the securities
comprising a Series' index will tend to increase that Series' portfolio turnover
rate, as the Investment Adviser restructures the Series' holdings to reflect the
changes in the index. The portfolio turnover rate is, in summary, the percentage
computed by dividing the lesser of a Series' purchases or sales of securities by
the average net asset value of the Series. High portfolio turnover involves
correspondingly greater brokerage commissions for a Series investing in equity
securities and other transaction costs which are borne directly by a Series. A
high portfolio turnover rate may also result in the realization of taxable
capital gains, including short-term capital gains taxable at ordinary income
rates.
Item 13. Management of the Registrant
Trustees and Officers
Information about the Trustees, executive officers and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Trustee is P.O. Box
9011, Princeton, New Jersey 08543-9011.
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Terry K. Glenn (58) - President and Trustee(1)(2) - Executive Vice
President of the Investment Adviser and certain of its affiliates (which terms
as used herein include their corporate predecessors) since 1983; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Jack B. Sunderland (70) - Trustee(2) - P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (energy company) since 1987; Member of Council on Foreign Relations since
1971.
Stephen B. Swensrud (66) - Trustee(2) - 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman, Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
J. Thomas Touchton (60) - Trustee(2) - Suite 3405, One Tampa City
Center, Tampa, Florida, 33602. Managing Partner of The Witt-Touchton Company and
its predecessor The Witt Co. (private investment partnership) since 1972;
Trustee Emeritus of Washington and Lee University; Director of TECO Energy Inc.
(electric utility holding company).
Joseph T. Monagle, Jr. (51) - Senior Vice President(1)(2) - Senior Vice
President of the Investment Adviser and certain of its affiliates since 1990;
Department Head of the Global Fixed Income Division of the Investment Adviser
and certain of its affiliates since 1997; Senior Vice President of Princeton
Services since 1993.
Gregory Mark Maunz (46) - Senior Vice President and Co-Portfolio
Manager of the Aggregate Bond Index Series(1)(2) - First Vice President of the
Investment Adviser and certain of its affiliates since 1997; Vice President of
the Investment Adviser and certain of its affiliates from 1985 to 1997;
Portfolio Manager of the Investment Adviser and certain of its affiliates since
1984.
Jeffrey B. Hewson (48) - Vice President and Co-Portfolio Manager of the
Aggregate Bond Index Series(1)(2) Director (Global Fixed Income) since 1998;
Vice President of the Investment Adviser and certain of its affiliates from 1989
to 1998; Portfolio Manager of the Investment Adviser and certain of its
affiliates since 1985.
Eric S. Mitofsky (43) - Senior Vice President and Portfolio Manager of
the S&P 500 Index Series, Small Cap Index Series and the International Index
Series(1)(2) - First Vice President of the Investment Adviser and certain of its
affiliates since 1997; Vice President of the Investment Adviser and certain of
its affiliates from 1992 to 1998.
Christopher G. Ayoub (43) - Senior Vice President and Co-Portfolio
Manager of the Aggregate Bond Index Series(1)(2) - First Vice President of the
Investment Adviser and certain of its affiliates since 1998; Vice President of
the Investment Adviser and certain of its affiliates from 1985 to 1998.
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Richard Vella (42) - Senior Vice President and Portfolio Manager of the
International (Capitalization Weighted) Index Series and the Enhanced
International Series(1)(2) - First Vice President of the Investment Adviser and
its affiliate since 1999; Managing Director of Bankers Trust Company from 1995
to 1999; Senior Portfolio Manager for global quantitative products and index
funds and Head of the Global Index fund group at Bankers Trust Company from 1985
to 1999.
Frank Salerno (39) - Senior Vice President and Portfolio Manager of the
Enhanced S&P 500 Series (1)(2) - First Vice President of the Investment Adviser
and its affiliate sincee 1999; Managing Director of Bankers Trust Company from
1992 to 1999; Senior Portfolio Manager for quantitative products and index funds
and Chief Investment Officer of Structured Investments at Bankers Trust Company
from 1989 to 1999.
Dean D'Onofrio (40) - Managing Director and Head of Quantitative
Advisors since 1999; Managing Director in Corporate Institutional Client Group
from 1997 through 1999; Managing Director of Bankers Trust Company from 1981 to
1996; Analyst, Quantitative Investments group of Bankers Trust Company from 1981
to 1982, Portfolio Manager of Quantitative Investments group of Bankers Trust
Company from 1983 to 1984, Head of Quantitative Investments group of Bankers
Trust Company from 1985 to 1989, Head of U.S. Equity Derivatives Marketing group
of Bankers Trust Company from 1990 to 1993, Head of Hedge Funds and Arbitrage
Trading Group of Bankers Trust Company from 1994 to 1996.
Donald C. Burke (39) - Vice President and Treasurer(1)(2) - Senior Vice
President and Treasurer of the Investment Adviser and its affiliate since 1999;
Senior Vice President and Treasurer of Princeton Services since 1999; Vice
President of PFD since 1999; First Vice President of its affiliate from 1997 to
1999; Director of Taxation of its affiliate since 1990; Vice President of its
affiliate from 1990 to 1997.
Ira P. Shapiro (36) - Secretary(1)(2) - First Vice President of its
affiliate since 1998; Director (Legal Advisory) of its affiliate from 1997 to
1998; Vice President of its affiliate from 1996 to 1997. Attorney with the
Investment Adviser and its affiliate from 1993 to 1997.
(1) Interested person, as defined in the Investment Company Act, of the
Trust.
(2) Such Trustee or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or its affiliate acts as
investment adviser.
As of July 15, 1999, the officers and Trustees of the Trust as a group
(fourteen persons) owned an aggregate of less than 1% of the outstanding shares
of Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of any of the Series.
Compensation of Directors/Trustees.
Merrill Lynch Index Fund, Inc. (the "Corporation") and the Trust pay
each individual who serves as a Director/Trustee not affiliated with the
Investment Adviser (each a "non-affiliated Director/Trustee") a fee of $4,000
per year plus $250 per Board meeting attended, together with such individual's
actual out-of-pocket expenses relating to attendance at meetings. The
Corporation and the Trust also compensate members of the Audit and Nominating
Committee (the "Committee"), which consists of all of the non-affiliated
Directors/Trustees of the Funds and the Series, with a fee of $1,000 per year.
35
<PAGE>
The following table sets forth the aggregate compensation earned by the
non-affiliated Directors/Trustees from the Corporation and Trust for the fiscal
year ended December 31, 1998 and the total compensation paid to non-affiliated
Directors/Trustees from all registered investment companies advised by the
Investment Adviser and its affiliate, Merrill Lynch Asset Management, L.P.
("MLAM") ("FAM/MLAM-Advised Funds") for the calendar year ended December 31,
1998.
<TABLE>
<CAPTION>
Name of Director/Trustee Aggregate Compensation Pension or Retirement Benefits Total Compensation From
From Corporation/Trust Accrued as Part of Corporation/Trust and
Corporation/Trust Expenses FAM/MLAM Advised Funds Paid
to Directors/Trustees(1)
<S> <C> <C> <C>
Jack B. Sunderland $4,500 None 133,600
Stephen B. Swensrud $4,500 None 195,583
J. Thomas Touchton $4,500 None 133,600
</TABLE>
- ------------------------
(1) The Directors/Trustees serve on the boards of FAM/MLAM Advised Funds as
follows: Mr. Sunderland (19 registered investment companies consisting
of 31 portfolios); Mr. Swensrud (25 registered investment companies
consisting of 58 portfolios); Mr. Touchton (19 registered investment
companies consisting of 31 portfolios).
Item 14. Control Persons and Principal Holders of Securities.
Merrill Lynch S&P 500 Index Fund ("S&P 500 Index Fund") of Merrill
Lynch Index Funds, Inc. (the "Corporation"), a Maryland corporation, controls
S&P 500 Index Series. As of April 1, 1999, S&P 500 Index Fund owns 100% of the
currently outstanding interests of S&P 500 Index Series. As of April 1, 1999,
no person owned of record or was known by the Corporation to be deemed to
control any Class of S&P 500 Index Fund's outstanding securities.
As of April 1, 1999, S&P 500 Index Fund's holdings of S&P 500 Index
Series represent 69% of the Trust as a whole.
Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund") of the
Corporation, and Merrill Lynch Small Cap Index Trust ("Small Cap Index Trust")
control Small Cap Index Series. As of April 1, 1999, Small Cap Index Fund owns
63% of the currently outstanding interests of Small Cap Index Series, and
Small Cap Index Trust owns 37% of the currently outstanding interests of Small
Cap Index Series. As of April 1, 1999, no person owned of record or was known
by the Corporation to be deemed to control any Class of outstanding securities
of either Small Cap Index Fund or Small Cap Index Trust.
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<PAGE>
As of April 1, 1999, Small Cap Index Fund's holdings of Small Cap Index
Series represent 2.9% of the Trust as a whole. As of April 1, 1999, Small Cap
Index Trust's holdings of Small Cap Index Series represent 1.7% of the Trust as
a whole.
Merrill Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund")
of the Corporation, controls Aggregate Bond Index Series. As of April 1, 1999
Aggregate Bond Index Fund owns 99.6% of the currently outstanding interests of
Aggregate Bond Index Series, and Merrill Lynch Aggregate Bond Index Trust ("
Aggregate Bond Index Trust") owns 0.4% of the currently outstanding interests of
the Aggregate Bond Index Series. As of April 1, 1999, no person owned of record
or was known by the Corporation to be deemed to control any Class of outstanding
securities of either Aggregate Bond Index Fund or Aggregate Bond Index Trust.
As of April 1, 1999, Aggregate Bond Index Fund's holdings of Aggregate
Bond Index Series represent 20.5% of the Trust as a whole. As of April 1, 1999,
Aggregate Bond Index Trust's holdings of Aggregate Bond Index Series represent
0.08% of the Trust as a whole.
Merrill Lynch International Index Fund ("International Index Fund") of
the Corporation, controls International (GDP Weighted) Index Series. As of April
1, 1999 International Index Fund owns 79.6% of the currently outstanding
interests of International (GDP Weighted) Index Series, and Merrill Lynch
International (GDP Weighted) Index Trust ("International (GDP Weighted) Index
Trust") owns 20.4% of the currently outstanding interests of the International
(GDP Weighted) Index Series. As of April 1, 1999, no person owned of record or
was known by the Corporation to be deemed to control any Class of outstanding
securities of either International Index Fund or International (GDP Weighted)
Index Trust.
As of April 1, 1999, International Index Fund's holdings of
International (GDP Weighted) Index Series represent 4.7% of the Trust as a
whole. As of April 1, 1999, International (GDP Weighted) Index Trust's
holdings of International (GDP Weighted) Index Series represent 1.2% of the
Trust as a whole.
Princeton Funds Distributor, Inc. ("PFD"), controls International
(Capitalization Weighted) Index Series. As of the date of this Statement of
Additional Information, PFD owns 100% of the currently outstanding interests of
International (Capitalization Weighted) Index Series. PFD is a wholly-owned
indirect subsidiary of Merrill Lynch & Co., Inc..
As of the date of this Statement of Additional Information, PFD's
holdings of International (Capitalization Weighted) Index Series represent less
than 1% of the Trust as a whole.
PFD controls Enhanced S&P 500 Series. As of the date of this Statement
of Additional Information, PFD owns 100% of the currently outstanding interests
of Enhanced S&P 500 Series. PFD is a wholly-owned indirect subsidiary of Merrill
Lynch & Co., Inc.
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<PAGE>
As of the date of this Statement of Additional Information, PFD's
holdings of Enhanced S&P 500 Series represent less than 1% of the Trust as
a whole.
PFD controls Enhanced International Series. As of the date of
this Statement of Additional Information, PFD owns 100% of the currently
outstanding interests of Enhanced International Series. PFD is a
wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc.
As of the date of this Statement of Additional Information, PFD's
holdings of Enhanced International Series represent less than 1% of the
Trust as a whole.
All holders of interests ("Holders") are entitled to vote in proportion
to the amount of their interest in a Series or in the Trust, as the case may be.
There is no cumulative voting. Accordingly, the Holder or Holders of more than
50% of the aggregate beneficial interests of the Trust would be able to elect
all the Trustees. With respect to the election of Trustees and ratification of
accountants the shareholders of separate Series vote together; they generally
vote separately by Series on other matters.
Item 15. Investment Advisory And Other Services.
The Trust has entered into a management agreement with the Investment
Adviser (the "Management Agreement"). The Investment Adviser provides the Trust
with investment advisory and management services. Subject to the supervision of
the Board of Trustees, the Investment Adviser is responsible for the actual
management of each Series' portfolio and constantly reviews the Series' holdings
in light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Series.
Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Series or
other funds for which it acts as investment adviser or for its advisory clients
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliates
during the same period may increase the demand for securities being purchased or
the supply of securities being sold there may be an adverse effect on price.
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<PAGE>
As discussed in Part A, the Investment Adviser receives for its
services to the Series monthly compensation at the annual rates of the average
daily net assets of each Series as follows:
Name of Series Management Fee
- -------------- --------------
S&P 500 Index Series .......................................... 0.05%
Small Cap Index Series ........................................ 0.08%
Aggregate Bond Index Series ................................... 0.06%
International (GDP Weighted) Index Series ..................... 0.11%
International (Capitalization Weighted) Index Series .......... 0.01%
Enhanced S&P 500 Series ....................................... 0.01%
Enhanced International Series ................................. 0.015%
The table below sets forth information about the total investment
advisory fees paid by the Series to the Investment Adviser, and any amount
voluntarily waived by the Investment Adviser.*
<TABLE>
<CAPTION>
Aggregate International
S&P 500 Index Small Cap Bond Index (GDP Weighted)
Period Ending Series Index Series Series Index Series
- ------------- ------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
December 31, 1997** ............................................ $148,645 $36,425 $88,609 $100,102
Contractual amount
Amount Waived (if applicable) .................................. $148,645 $36,425 $37,562 $ 35,546
December 31, 1998 .............................................. $454,138 $61,476 $238,378 $142,489
Contractual Amount
Amount Waived (if applicable) .................................. $ 0 $61,476 $ 2,537 $ 87,182
</TABLE>
- -------------------
* Until August 2, 1999, Merrill Lynch Asset Management, L.P. served as
investment adviser to each Series, when the management responsibilities were
assumed by the Investment Adviser on the same terms and conditions and utilizing
the same personnel.
** Period is from commencement of operations (April 3,1997 for the S&P 500 Index
Series and the Aggregate Bond Index Series, and April 9, 1997 for the Small Cap
Index Series and the International (GDP Weighted) Index Series).
Payment of Series Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Trust
connected with investment and economic research, trading and investment
management of the Trust, as well as the fees of all Trustees who are affiliated
persons of the Investment Adviser or any of their affiliates. Each Series pays
all other expenses incurred in the operation of the Series, (except to the
extent paid by the Placement Agent), including, among other things, taxes,
expenses for legal and auditing services, costs of
39
<PAGE>
printing proxies, stock certificates, shareholder reports, copies of the
Registration Statements, charges of the Custodian, any Sub-custodian and
Transfer Agent, expenses of portfolio transactions, expenses of redemption of
shares, Securities and Exchange Commission fees, expenses of registering the
shares under federal, state or foreign laws, fees and out-of-pocket expenses of
unaffiliated Trustees, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Trust or the Series. The Placement Agent will pay
certain of the expenses of the Trust incurred in connection with the offering of
its shares of beneficial interest of each of the Series. Accounting services are
provided to the Trust by the Investment Adviser or an affiliate of the
Investment Adviser, and the Trust reimburses the Investment Adviser or an
affiliate of the Investment Adviser for its costs in connection with such
services.
Organization of the Investment Adviser. Fund Asset Management is
located at P.O. Box 9011, Princeton, New Jersey 08543-9011. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons" of
the Investment Adviser as defined under the Investment Company Act because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management Agreement will remain in effect for two years from the date of
its commencement. Thereafter, it will remain in effect from year to year with
respect to each Series if approved annually (a) by the Board of Trustees or by a
majority of the outstanding shares of the Series and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Series.
Code of Ethics
The Board of Trustees of the Trust have adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act which incorporates the Code of Ethics
of the Trust and of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser
pre-clear any personal securities investment (with limited exceptions, such as
government securities). The pre-clearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities in
a "hot" initial public offering and a prohibition from profiting on short-term
trading in securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or to
the knowledge of the employee is being considered
40
<PAGE>
for purchase or sale, by any fund advised by the Investment Adviser.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Trust within periods of trading by the
Series in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
Independent Accountants.
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540
has been selected as the independent auditors of the Trust. The independent
auditors are responsible for auditing the annual financial statements of the
Series.
Custodian.
Merrill Lynch Trust Company, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, acts as the custodian of the assets of the S&P 500 Index Series,
Small Cap Index Series and Aggregate Bond Index Series. State Street Bank and
Trust Company ("State Street"), One Heritage Drive P2N, North Quincy,
Massachusetts 02171, acts as the custodian of the assets of International (GDP
Weighted) Index Series. The Chase Manhattan Bank, 4 Chase MetroTech, 18th floor,
Brooklyn, New York 11245, acts as the custodian of the assets of the
International (Capitalization Weighted) Index Series, Enhanced S&P 500 Series
and Enhanced International Series. Under the respective contract with the Trust,
State Street and The Chase Manhattan Bank are authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Series to be held in their respective offices outside the United States and with
certain foreign banks and securities depositors. Each Custodian is responsible
for safeguarding and controlling the Series' cash and securities, handling the
receipt and delivery of securities and collecting interests and dividends on the
Series' investments.
Legal Counsel.
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Trust.
Item 16. Brokerage Allocation and Other Practices.
Subject to policies established by the Board of Trustees, the
Investment Adviser is primarily responsible for the execution of the Series'
portfolio transactions and the allocation of brokerage. The Trust has no
obligation to deal with any dealer or group of dealers in the execution of
transactions in portfolio securities of the Series. Where possible, the Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best results in
conducting portfolio transactions for the Series, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The portfolio securities of the
41
<PAGE>
Series generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Series primarily consists of dealer or underwriter spreads.
While reasonable competitive spreads or commissions are sought, the Trust will
not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging growth
companies in which the Series may invest may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely trading
securities.
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a company,
industry or economic sector) to the Investment Adviser may receive orders for
transactions by the Trust. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under its Management Agreement and the expense of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the Trust will be
benefitted by supplemental research services, the Investment Adviser is
authorized to pay brokerage commissions to a broker-dealer furnishing such
services which are in excess of commissions which another broker-dealer may have
charged for effecting the same transaction. Supplemental investment research
obtained from such broker-dealers might be used by the Investment Adviser in
servicing all of its accounts and all such research might not be used by the
Investment Adviser in connection with the Trust. Consistent with the Conduct
Rules of the National Association of Securities Dealers, Inc. and policies
established by the Trustees, the Investment Adviser may consider sales of shares
of the Funds as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Trust.
For the fiscal period April 3, 1997 (commencement of operations) to
December 31, 1997, the Series paid brokerage commissions of $118,903 and $0 for
the S&P 500 Index Series and the Aggregate Bond Index Series, respectively. For
the fiscal period April 9, 1997 (commencement of operations) to December 31,
1997, the Series paid brokerage commissions of $60,361 and $146,336 for the
Small Cap Index Series and the International (GDP Weighted) Index Series,
respectively. The Series paid no commissions to Merrill Lynch. For the fiscal
year ended December 31, 1998, the following table shows the amount of brokerage
commissions paid by each Series to Merrill Lynch, the percentage of each Series'
brokerage commissions paid to Merrill Lynch, the percentage of each Series'
aggregate dollar amount of transactions involving the payment of commissions
effected through Merrill Lynch and aggregate brokerage commissions paid by each
Series:
<TABLE>
<CAPTION>
Aggregate International
S&P 500 Index Small Cap Bond Index (GDP Weighted)
Series Index Series Series Index Series
------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Aggregate brokerage commissions ............................... $ 0 $ 0 $ 0 $ 1,299
paid to Merrill Lynch
% of Series' aggregate brokerage commissions .................. 0.00% 0.00% 0.00% 1.75%
paid to Merrill Lynch
% of Series' aggregate dollar amount of ....................... 0.00% 0.00% 1.11% 0.20%
transactions effected through the broker
Aggregate brokerage commissions paid .......................... $105,046 $50,264 $ 0 $74,373
</TABLE>
42
<PAGE>
Under the Investment Company Act, persons affiliated with the Trust and
persons who are affiliated with such persons are prohibited from dealing with
the Trust as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Trust,
including Merrill Lynch and any of its affiliates, will not serve as the Trust's
dealer in such transactions. However, affiliated persons of the Trust may serve
as its broker in listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Trust may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures adopted by the Board of Trustees of the Trust that either
comply with rules adopted by the Commission or with interpretations of the
Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Trustees have considered all factors deemed relevant and have made
a determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the
U.S. national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Trust in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Trust and annual statements as to aggregate compensation will be provided to
the Trust. Securities may be held by, or be appropriate investments for, the
Series as well as other funds or investment advisory clients of the Investment
Advisor or MLAM.
43
<PAGE>
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Trust or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all to the extent that transactions
on behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
Item 17. Capital Stock and Other Securities.
Under the Declaration of Trust that establishes the Trust, a Delaware
business trust, the Trustees are authorized to issue beneficial interests in
each Series of the Trust. Investors are entitled to participate, in proportion
to their investment, in distributions of taxable income, loss, gain and
deduction with respect to the Series in which they have invested. Upon
liquidation or dissolution of a Series, investors are entitled to share in
proportion to their investment in such Series' net assets available for
distribution to its investors. Interests in a Series have no preference,
preemptive, conversion or similar rights and are fully paid and nonassessable,
except as set forth below. Investments in a Series generally may not be
transferred.
Each investor is entitled to a vote in proportion to the amount of its
interest in a Series or in the Trust, as the case may be. Investors in the
Trust, or in any Series, do not have cumulative voting rights, and investors
holding more than 50% of the aggregate beneficial interests in the Trust may
elect all of the Trustees of the Trust if they choose to do so and in such event
the other investors in the Trust would not be able to elect any Trustee. The
Trust is not required and has no current intention to hold annual meetings of
investors but the Trust will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote.
A Series shall be dissolved (i) by the affirmative vote of the Holders
holding not less than two-thirds of the beneficial interests in the Series, at
any meeting of such Holders or by an instrument in writing, without a meeting
signed by a majority of the Trustees and consented to by the Holders holding not
less than two-thirds of the beneficial interests in such Series, or (ii) by
unanimous consent of the Trustees by written notice of such dissolution to the
Holders in such Series. The Trust shall be dissolved upon the dissolution of the
last remaining Series.
The Declaration of Trust provides that obligations of the Trust and the
Series are not binding upon the Trustees individually but only upon the property
of the Series and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust
44
<PAGE>
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. The Declaration
of Trust provides that the Trust may maintain appropriate insurance (for
example, fidelity bond and errors and omissions insurance) for the protection of
the Series, their Holders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Pursuant to Section 3804 of the Delaware
Business Trust Act, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a particular Series of the
Trust shall be enforceable against the assets of such Series only and not
against the assets of the Trust generally or any other Series thereof, and none
of the debts, liabilities, obligations and expenses incurred, contracted for or
otherwise existing with respect to the Trust generally or any other Series
thereof shall be enforceable against the assets of such Series.
The Trust currently consists of seven Series. The Trust reserves the
right to create and issue interests in a number of additional Series. As
indicated above, Holders of each Series participate equally in the earnings and
assets of the particular series. Holders of each series are entitled to vote
separately to approve advisory agreements or changes in investment policy, but
Holders of all Series vote together in the election or selection of Trustees and
accountants for the Trust. Upon liquidation or dissolution of a Series, the
Holders of such Series are entitled to share in proportion to their investment
in the net assets of such Series available for distribution to Holders.
Item 18. Purchase, Redemption and Pricing of Securities.
Beneficial interests in the Trust are not offered to the public and are
issued solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the
Trust may be made only by a limited number of institutional investors, including
investment companies, common or commingled trust funds, group trusts and certain
other entities that are "accredited investors" within the meaning of Regulation
D under the 1933 Act. The number of Holders of any Series shall be limited to
fewer than 100. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
The net asset value of the shares of each Series is determined once
daily Monday through Friday after the close of business on the NYSE on each day
the NYSE is open for trading (a "Pricing Day"). The NYSE generally closes at
4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms
of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The net asset value is computed by deducting the amount of the Series'
total liabilities from the value of its total assets, dividing the market value
of the securities held by a Series plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
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A Series' securities which are traded on stock exchanges are valued at
the last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and at
the last available ask price for short positions. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market. Long
positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short positions
in securities traded in the OTC market are valued at the last available ask
price in the OTC market prior to the time of valuation. When the Series writes
an option, the amount of the premium received is recorded on the books of the
Series as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Series are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other investments, including financial futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees of the Trust,
including valuations furnished by a pricing service retained by the Trust. Such
valuations and procedures will be reviewed periodically by the Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of a Series' shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of a Series' net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Trustees.
Each investor in the Trust may add to or reduce its investment in any
Series on each Pricing Day. The value of each investor's interest in a Series
will be determined after the close of business on the NYSE (generally 4:00 p.m.,
New York Time) by multiplying the net asset value of the Series by the
percentage, effective for that day, that represents that investor's share of the
aggregate interests in such Series. Any additions or withdrawals, which are to
be effected on that day, will then be effected. The investor's percentage of the
aggregate beneficial interests in a Series will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Series as of the time or determination on such day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Series effected on such day, and (ii) the
46
<PAGE>
denominator of which is the aggregate net asset value of the Series as of such
time on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in the Series by all
investors in the Series. The percentage so determined will then be applied to
determine the value of the investor's interest in such Series as of 15 minutes
after the close of business of the NYSE on the next Pricing Day of the Series.
For further information concerning the Series' net asset value, and the
valuation of the Series' assets, see Part A.
Redemptions.
An investor in the Trust may withdraw all or a portion of its
investment in any Series on any Pricing Day at the net asset value next
determined after a withdrawal request in proper form is furnished by the
investor to the Series. The proceeds of the withdrawal will be paid by the
Series normally on the business day on which the withdrawal is effected, but in
any event within seven days. Investments in any Series of the Trust may not be
transferred.
Item 19. Taxation of the Trust
The Trust is organized as a Delaware business trust. Each Series is
treated as a separate taxable entity under the Internal Revenue Code of 1986
(the "Code") which will have the status of partnership pursuant to Treasury
Regulation Section 301.7701-3(b)(1) and, thus, is not subject to income tax.
Based upon the status of each Series as a partnership, each investor in a Series
will be taxable on its share (as determined in accordance with the governing
instruments of such Series) of such Series' ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code and regulations promulgated thereunder.
Although, as described above, the Series will not be subject to federal
income tax, they will file appropriate income tax returns. Each prospective
Investor Fund which is a regulated investment company ("RIC") will be required
to agree, in its subscription agreement, that, for purposes of determining its
required distribution under Code Section 4982(a), it will account for its share
of its items of income, gain, loss and deduction of a Series as they are taken
into account by the Series.
All of the Series may invest in futures contracts or options, certain
options, futures contracts and options on futures contracts are "section 1256
contracts." Any gains or losses on section 1256 contracts are generally
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by a Series at the end of each taxable year
are treated for federal income tax purposes as being sold on such date for their
fair market value. The resultant paper gains or losses are also treated as 60/40
gains or losses. When the section 1256 contract is subsequently disposed of, the
actual gain or loss will be adjusted by the amount of any preceding year-end
gain or loss.
47
<PAGE>
Foreign currency gains or losses on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not Section 1256
contracts generally will be treated as ordinary income or loss.
Certain hedging transactions undertaken by a Series may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Series. In addition, losses
realized by the Series on positions that are part of a straddle may be deferred,
rather than being taken into account in calculating taxable income for the
taxable year in which such losses are realized. The Series may make one or more
of the elections available under the Code which are applicable to straddles. If
the Series makes any of the elections, the amount, character and timing of the
recognition of gains or losses from the affected straddle positions will be
determined under rules that vary according to the elections made. The rules
applicable under certain of the elections operate to accelerate the recognition
of gains or losses from the affected straddle positions. Additionally, the
conversion transaction or constructive sale rules may apply to certain
transactions (including straddles) to change the character of capital gains to
ordinary income or require the recognition of income prior to the economic
recognition of such income.
The Series may be subject to a tax on dividend or interest income
received from securities of a non-U.S. issuer withheld by a foreign country at
the source. The United States has entered into tax treaties with many foreign
countries which entitle the Series to a reduced rate of tax or exemption from
tax on such income. It is impossible to determine the effective rate of foreign
tax in advance since the amount of each Series' assets to be invested within
various countries is not known.
The Series may make investments that produce income that is not matched
by a corresponding cash receipt by the Series, such as investments in
obligations having original issue discount or market discount (if a Series
elects to accrue the market discount on a current basis with respect to such
instruments). Because such income may not be matched by a corresponding cash
receipt, the Series may be required to borrow money or dispose of other
securities to be able to make distributions to investors.
Each Series' taxable income will in most cases be determined on the
basis of reports made to such Series by the issuers of the securities in which
such Series invests. The tax treatment of certain securities in which a Series
may invest is not free from doubt, and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of such Series could
result in adjustments to the income of the Series.
Under the Trust, each Series is to be managed in compliance with the
provisions of the Code applicable to RICs as though such requirements were
applied at the Series level. Thus, consistent with its investment objectives,
each Series will meet the income and diversification of assets tests of the Code
applicable to RICs. Before accepting investments by RICs, the Series will have
received rulings from the Internal Revenue Service that Holders of interests in
the Series that are RICs will be treated as owners of their proportionate shares
of the Series' assets and income for purposes of the Code's requirements
applicable thereto.
48
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Item 20. Underwriters.
The exclusive placement agent for each Series of the Trust is Princeton
Funds Distributor, Inc., which receives no compensation for serving in this
capacity. The Placement Agent is located at P.O. Box 9081, Princeton, New Jersey
08543-9081. Investment companies, common and commingled trust funds and similar
organizations and entities may continuously invest in the Series.
Item 21. Calculation of Performance Data.
Beneficial interests in the Trust are not offered to the public and are
issued solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, the
Trust will not advertise the Series' performance. However, certain of the
Trust's Holders may from time to time advertise their performance, which will be
based upon the Trust's performance.
Total return figures are based on historical performance and are not
intended to indicate future performance. Average annual total return is
determined in accordance with a formula specified by the Securities and Exchange
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses.
Annual, average annual and annualized total return and aggregate total
return performance data, both as a percentage and as a dollar amount, are based
on a hypothetical $1,000 investment and computed as described above, except that
as required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the period
by (b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
49
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Item 22. Financial Statements.
The Series' audited financial statements are incorporated in this Statement of
Additional Information by reference to their 1998 annual reports to
shareholders. You may request a copy of the annual reports at no charge by
calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
50
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APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issue.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
A-1
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C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note. Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier I indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended. Moody's commercial paper ratings are
opinions of the ability of issuers to repay punctually promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representation that such obligations are exempt from registration under the
Securities Act of 1933, nor does it represent that any specific note is a valid
obligation of a rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries
- High rates of return on funds employed
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
- Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-2
<PAGE>
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is being used in the quality
ranking of preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a particular
capital structure and that these securities are rated within the universe of
preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great
length of time.
A-3
<PAGE>
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the
A-4
<PAGE>
obligation in the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories. Debt rated BB, B, CCC, CC and C are regarded
as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the least
degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
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C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
A-6
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Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-l This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher
A-7
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than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment -- capacity and willingness of the
issuer to meet the timely payment of preferred stock dividends
and any applicable sinking fund requirements in accordance
with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors'
rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly
B, B, speculative with respect to the issuer's capacity to CCC pay
preferred stock
CCC obligations. "BB" indicates the lowest degree of speculation and "CCC"
the highest degree of speculation. While such issues will likely have
some quality and protection characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
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NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of
preferred stock quality, the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The preferred stock ratings are not a recommendation to purchase or
sell a security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard Poor's earnings
and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard &
Poor's by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A-9
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PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23.
Exhibit Description
Number
<S> <C>
1(a) Declaration of Trust of Registrant.(1)
1(b) Certificate of Trust.(1)
1(c) Amendment to Declaration of Trust.(2)
1(d) Amendment No. 2 to Declaration of Trust
1(e) Certificate of Amendment to Certificate of Trust
2 By-Laws of Registrant.(1)
3 Instrument of defining Rights of shareholders. Incorporated by reference to Exhibits 1 and 2
above.(3)
4 Amended and Restated Management Agreement between Registrant and Fund Asset Management, L.P.
5 Amended and Restated Placement Agent Agreement with Princeton Funds Distributor, Inc.
6 Not applicable.
7(a) Form of Custody Agreement with Merrill Lynch Trust Company.(3)
7(b) Form of Custody Agreement with State Street Bank and Trust.(3)
7(c) Form of Custody Agreement with The Chase Manhattan Bank.
8 Licensing Agreement.(3)
9 Not applicable.
10(a) Accountant's consent.
10(b) Consent of Swidler Berlin Shereff Friedman, LLP, Counsel for Registrant.
11 Not applicable.
12 Not applicable.
13 Not applicable.
15(a) Not applicable.
15(b) Power of Attorneys.(3)
</TABLE>
(1) Incorporated by reference to identically numbered Exhibit to
Registrant's initial Registration Statement on Form N-1A (File No.
811-7885).
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<PAGE>
(2) Incorporated by reference to identically numbered Exhibit to Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A (File No.
811-7885).
(3) Incorporated by reference to the corresponding exhibit number in
Amendment No.1 to Registrant's Registration Statement on Form N-1A
(File No. 811-7885) as set forth below:
Exhibit Number Incorporated by Reference to Exhibit Number
- -------------- -------------------------------------------
3 4
4 5
5 6
7(a) 8(a)
7(b) 8(b)
15(b) 17(b)
Item 24. Persons Controlled by or under Common Control with Registrant.
Merrill Lynch S&P 500 Index Fund ("S&P 500 Index Fund") of Merrill
Lynch Index Funds, Inc. controls Master S&P 500 Index Series ("S&P 500 Index
Series"). As of April 1, 1999, S&P 500 Index Fund owns 100% of the currently
outstanding interests of S&P 500 Index Series, which constitutes 69% of the S&P
500 Index Fund's ownership of Index Master Series Trust (the "Trust"). Merrill
Lynch Index Funds, Inc. is a Maryland corporation.
Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund") of Merrill
Lynch Index Funds, Inc. and Merrill Lynch Small Cap Index Trust control Master
Small Cap Index Series ("Small Cap Index Series"). As of April 1, 1999, Small
Cap Index Fund owns 63% of the currently outstanding interests of Small Cap
Index Series, and Small Cap Index Trust owns 37% of the currently outstanding
interests of Small Cap Index Series. As of April 1, 1999, Small Cap Index Fund's
holdings of Small Cap Index Series represent 2.9% of the Trust as a whole.
Merrill Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund")
of Merrill Lynch Index Funds, Inc. controls Master Aggregate Bond Index Series
("Aggregate Bond Index Series"). As of April 1, 1999, Aggregate Bond Index Fund
owns 99.6% of the currently outstanding interests of Aggregate Bond Index
Series, and Merrill Lynch Aggregate Bond Index Trust owns 0.4% of the currently
outstanding interests of Aggregate Bond Index Series. As of April 1, 1999,
Aggregate Bond Index Fund's holdings of Aggregate Bond Index Series represent
20.5% of the Trust as a whole.
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<PAGE>
Merrill Lynch International Index Fund ("International Index Fund") of
Merrill Lynch Index Funds, Inc. controls Master International Index Series
("International (GDP Weighted) Index Series"). As of April 1, 1999,
International Index Fund owns 79.6% of the currently outstanding interests of
International (GDP Weighted) Index Series, and Merrill Lynch International Index
Trust owns 20.4% of the currently outstanding interests of International (GDP
Weighted) Index Series. As of April 1, 1999, International Index Fund's holdings
of International (GDP Weighted) Index Series represent 4.7% of the Trust as a
whole.
Prior to the effective date of this Registration Statement, the
Registrant will sell shares of each of the Master International (Capitalization
Weighted) Index Series, Master Enhanced S&P 500 Series and Master Enhanced
International Series to Fund Asset Management, L.P.
Item 25. Indemnification.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended (the "1940 Act"), and pursuant to Sections 8.2, 8.3 and 8.4, of
Article VIII of the Registrant's Declaration of Trust (Exhibit 1 to this
Registrant Statement), Trustees, officers, employees and agents of the Trust
will be indemnified to the maximum extent permitted by Delaware law and the 1940
Act.
Article VIII, Section 8.2 provides, inter alia, that no Trustee,
officer, employee or agent of the Registrant shall be liable to the Registrant,
its holders, or to any other Trustee, officer, employee or agent for any action
or omission except for his own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties.
Article VIII, Section 8.3 of the Registrant's Declaration of Trust
provides:
Section 8.3 Indemnification. The Trust shall indemnify each of its
Trustees, officers, employees, and agents (including persons who serve
at its request as directors, officers or trustees of another
organization in which it has any interest, as a shareholder, creditor
or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and
penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while in office or thereafter, by
reason of his being or having been such a Trustee, officer, employee or
agent, except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties, such liabilities and
expenses being liabilities belonging to the Series out of which such
claim for indemnification arises; provided, however, that as to any
matter disposed of by a compromise payment by such Person, pursuant to
a consent decree or otherwise, no indemnification either for said
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<PAGE>
payment of for any other expenses shall be provided unless there has
been a determination that such Person did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office by the court or other body
approving the settlement or other disposition or, in the absence of a
judicial determination, by a reasonable determination, based upon a
review of readily available facts (as opposed to a full trial-type
inquiry), that he did not engage in such conduct, which determination
shall be made by a majority of a quorum of Trustees who are neither
interested persons of the Registrant (within the meaning of the 1940
Act) nor parties to the action, suit or proceeding, or by written
opinion from independent legal counsel approved by the Trustees. The
rights accruing to any Person under these provisions shall not exclude
any other right to which he may be lawfully entitled; provided that no
Person may satisfy any right of indemnity or reimbursement granted
herein or to which he may be otherwise entitled except out of the Trust
Property. The Trustees may make advance payments in connection with
indemnification under this Section 8.3; Provided that any advance
payment of expenses by the Trust to any Trustee, officer, employee or
agent shall be made only upon the undertaking by such Trustee, officer,
employee or agent to repay the advance unless it is ultimately
determined that he is entitled to indemnification as above provided,
and only if one of the following conditions is met:
(a) the Trustee, officer, employee or agent to be
indemnified provided a security for an undertaking; or
(b) the Trust shall be insured against losses arising by
reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reasons to believe that the Trustee,
officer, employee or agent to be indemnified ultimately will be
entitled to indemnification, which determination shall be made by:
(i) a majority of a quorum of Trustees who are
neither Interested Persons of the Trust nor parties to the
Proceedings; or
(ii) an independent legal counsel in a written
opinion.
Article VIII, Section 8.4 of the Registrants Declaration of Trust
further provides:
Section 8.4 No Protection Against Certain 1940 Act Liabilities. Nothing
contained in Sections 8.1, 8.2 or 8.3 hereof shall protect any Trustee or
officer of the Trust from any liability to the Trust or its Holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Nothing contained in Sections 8.1, 8.2 or 8.3 hereof or in any agreement
of the character described in Section 4.1 or 4.2 hereof shall protect any
Investment Manager or Asset Manager to the Trust or any Series against any
liability to the Trust or any Series to which
C-4
<PAGE>
he would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance of his or its duties to the Trust or Series,
or by reason of his or its reckless disregard to his or its obligations and
duties under the agreement pursuant to which he serves as Investment Manager or
Asset Manager to the Trust or any Series.
As permitted by Article VIII, Section 8.7, the Registrant may insure
its Trustees and officers against certain liabilities, and certain costs of
defending claims against such Trustees and officers, to the extent such Trustees
and officers are not found to have committed conduct constituting conflict of
interest, intentional non-compliance with statutes or regulations or dishonest,
fraudulent or criminal acts or omissions. The Registrant will purchase an
insurance policy to cover such indemnification obligation. The insurance policy
also will insure the Registrant against the cost of indemnification payments to
Trustees and officers under certain circumstances. Insurance will not be
purchased that protects, or purports to protect, any Trustee or officer from
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its Declaration of Trust and Bylaws in a manner consistent with
Release No. 11330 of the Securities and Exchange Commission under the 1940 Act
so long as the interpretation of Section 17(h) and 17(i) of such Act remain in
effect and are consistently applied.
Item 26. Business and Other Connections of Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM"), also
acts as the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi- State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Funds, Inc., MuniEnhanced Fund,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings California Insured Fund IV, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings
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<PAGE>
Insured Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings
New Jersey Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New
York Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., Muniholdings Pennsylvania Insured
Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM,
acts as the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global Small Cap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., and Merrill Lynch Senior Floating Rate
Fund, Inc. MLAM also acts as a sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for
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<PAGE>
Institutions Series and Merrill Lynch Intermediate Government Bond Fund is One
Financial Center, 23rd Floor, Boston, Massachusetts 02111- 2665. The address of
the Investment Adviser, MLAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. is P.O. Box 9081, Princeton, New Jersey 08543-9081. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10281-1201.
The address of the Fund's transfer agent Financial Data Services, Inc. ("FDS")
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and Director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
December 31, 1996 for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Burke is Vice
President and Treasurer and Mr. Glenn is President of all or substantially all
of the investment companies advised by the Investment Adviser or MLAM and Mr.
Glenn is a director of substantially all of such companies. Messrs. Giordano and
Monagle are directors or officers of one or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
Position with the Investment Other Substantial Business, Profession,
Name Adviser Vocation or Employment
- ---- ---------------------------- ----------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services General Partner General Partner of MLAM
Jeffrey M. Peek President President of MLAM; President and Director of
Princeton Services, Executive Vice President
of ML & Co.
Terry K. Glenn Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of Princeton
Funds Distributor, Inc.; Director of FDS;
President of Princeton Administrators
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Donald C. Burke Senior Vice President, Senior Vice President and Treasurer of MLAM;
Treasurer and Director of Senior Vice President and Treasurer of
Taxation Princeton Services; Vice President of
Princeton Funds Distributor, Inc; First
Vice President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to 1997
Michael G. Clark Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director and
Treasurer of Princeton Funds Distributor,
Inc.; First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from 1996 to
1997
Linda L. Federici Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel Senior Vice President, Senior Vice President of MLAM, General Counsel
General Counsel and Secretary and Secretary of MLAM; Senior Vice President
of Princeton Services
Philip L. Kirstein Senior Vice President Senior Vice President of MLAM; Senior Vice
President, General Counsel, Director and
Secretary of Princeton Services
Ronald A. Kloss Senior Vice President Senior Vice President of MLAM; Senior Vice
President or Princeton Services
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Position with the Investment Other Substantial Business, Profession,
Name Adviser Vocation or Employment
- ---- ---------------------------- ----------------------------------------
<S> <C> <C>
Debra Landsman-Yaros Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of Princeton Funds Distributor,
Inc.
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Brian A. Murdock Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gregory D. Upah Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
Item 27. Principal Underwriters.
(a) Princeton Funds Distributor, Inc. ("PFD"), acts as the placement
agent for the Registrant, principal underwriter for Merrill Lynch Index Funds,
Inc. and its affiliates act as principal underwriter for each of the open-end
registered investment companies referred to in the first two paragraphs of Item
26 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and The Municipal Fund Accumulation
Program, Inc. PFD or its affiliates also act as principal underwriter for the
following closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. Affiliates of PFD also act as the
principal underwriter of a number of other investment companies.
(b) Set forth below is information concerning each director and officer
of PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
C-9
<PAGE>
<TABLE>
<CAPTION>
Positions and Office Positions and Offices
Name with PFD with Registrant
- ---- --------- ---------------
<S> <C> <C>
Terry K. Glenn President and Director President and Director
Michael G. Clark Director and Treasurer None
Thomas J. Verage Director None
Robert W. Crook Senior Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Donald C. Burke Vice President None
Salvatore Venezia Vice President Treasurer and Vice President
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Trust" in
Part A of the Registration Statement and under "Management of the Trust" in Part
B of the Registration Statement, the Registrant is not party to any management-
related service contract.
Item 30. Undertakings.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 2nd day of August, 1999.
Index Master Series Trust
(Registrant)
By: /s/ Terry K. Glenn
------------------
(Terry K. Glenn, President)
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<PAGE>
EXHIBIT INDEX
Exhibits Description
- -------- -----------
1(d) Amendement No. 2 to Declaration of Trust
1(e) Certificate of Amendment to Certificate of Trust
4 Amended and Restated Management Agreement between Registrant and
Fund Asset Management, L.P.
5 Amended and Restated Placement Agent Agreement with Princeton
Funds Distributor, Inc.
7(c) Form of Custody Agreement with The Chase Manhattan Bank
10(a) Accountant's consent
10(b) Consent of Swidler Berlin Shereff Friedman, LLP. Counsel for
Registrant
C-12
AMENDMENT NO. 2 TO DECLARATION OF TRUST
OF INDEX MASTER SERIES TRUST
(formerly Merrill Lynch Index Trust)
The undersigned Secretary of Index Master Series Trust (the
"Trust"), a Delaware business trust, DOES HEREBY CERTIFY, pursuant to the
authority conferred on the Secretary of the Trust by Section 10.4(c) of the
Trust's Declaration of Trust dated August 28, 1996 (the "Declaration of Trust"),
as amended from time to time, that the following amendments were duly adopted by
the unanimous vote of the Trustees on August 2, 1999.
1. The Declaration of Trust is hereby amended to change
the name of the Trust from Merrill Lynch Index Trust
to Index Master Series Trust in each place where such
name appears.
2. Section 5.2 of the Declaration of Trust is hereby
amended to delete the names of the series of the
Trust, and to substitute the names Master S&P 500
Index Series, Master Small Cap Index Series, Master
Aggregate Bond Index Series, Master International
(GDP Weighted) Index Series.
3. Section 5.2 of the Declaration of Trust is hereby
further amended to add the names of the following
series of the Trust: Master Enhanced S&P 500 Series,
Master Enhanced International Series and Master
International (Capitalization Weighted) Index Series.
4. Section 10.2 of the Declaration of Trust is hereby
amended and restated as follows:
Any Series shall be dissolved (i) by the
affirmative vote of the Holders of not less
than two-thirds of the total outstanding
Interests of the Series, at any meeting of
the Holders or by an instrument in writing,
without a meeting, signed by a majority of
the trustees and consented to by the Holders
of not less than two-thirds of such
Interests, or (ii) by unanimous consent of
the Trustees by written notice of
dissolution to the Holders of the Interests
of the Series. The Trust shall be dissolved
upon the dissolution of the last remaining
Series.
IN WITNESS WHEREOF, the undersigned has executed this
Amendment to the Declaration of Trust on August 2, 1999.
/s/ Ira P. Shapiro
------------------
Ira P. Shapiro
Secretary
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF TRUST
OF
MERRILL LYNCH INDEX TRUST
MERRILL LYNCH INDEX TRUST, a business trust organized and
existing under the Delaware Business Trust Act (12 Del. C. ss. 3801, et seq.),
does hereby certify that:
1. Name of Trust. The name of the business trust
(hereinafter called the "Trust") is changed to INDEX MASTER SERIES TRUST.
2. Effective Date. This Certificate of Amendment shall be
effective on August 2, 1999.
IN WITNESS WHEREOF, the undersigned, being a trustee of the
Trust, has executed this Certificate of Amendment on August 2, 1999.
/s/ Terry K. Glenn
---------------------------------
Terry K. Glenn, Trustee, as
Trustee and not individually
AMENDED AND RESTATED MANAGEMENT AGREEMENT
AGREEMENT made as of August 2, 1999, by and between INDEX MASTER SERIES
TRUST, a Delaware business trust (hereinafter referred to as the "Trust") on
behalf of each of its series named in the one or more Addenda hereto, as it may
be amended from time to time (each, a "Series") and FUND ASSET MANAGEMENT, L.P.,
a Delaware limited partnership (hereinafter referred to as the "Manager"). This
Agreement and the Addendum or Addenda pertaining to a Series shall constitute
the "investment advisory contract" for such Series for purposes of Section 15(a)
of the Investment Company Act of 1940, as amended (hereinafter referred to as
the "Investment Company Act").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Series as
series of the Trust; and
WHEREAS, the Manager is engaged principally in rendering management and
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Trust desires to retain the Manager to provide management
and investment advisory services to each Series in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to each Series on the terms and conditions hereafter set
forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Manager hereby agree as follows:
<PAGE>
ARTICLE I
Duties of the Manager
The Trust hereby employs the Manager to act as a manager and investment
adviser of each Series and to furnish, or arrange for affiliates to furnish, the
management and investment advisory services described below, subject to the
policies of, review by and overall control of the Trustees, for the period and
on the terms and conditions set forth in this Agreement. The Manager hereby
accepts such employment and agrees during such period, at its own expense, to
render, or arrange for the rendering of, such services and to assume the
obligations herein set forth for the compensation provided for herein. The
Manager and its affiliates shall for all purposes herein be deemed to be
independent contractors and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust or any Series in
any way or otherwise be deemed agents of the Trust or any Series.
(a) Management Services. The Manager shall perform (or arrange for the
performance by affiliates of) the management and administrative services
necessary for the operation of the Trust and each Series including administering
shareholder accounts and handling shareholder relations. The Manager shall
provide the Trust and each Series with office space, facilities, equipment and
necessary personnel and such other services as the Manager, subject to review by
the Trustees, shall from time to time determine to be necessary or useful to
perform its obligations under this Agreement. The Manager shall also, on behalf
of the Trust and each Series, conduct relations with custodians, depositories,
transfer agents, dividend disbursing agents, other shareholder servicing agents,
accountants, attorneys, underwriters, brokers and dealers, corporate
fiduciaries, insurers, banks and such other persons in any such other capacity
deemed to be necessary or desirable. The Manager shall generally monitor the
Trust's and each Series= compliance with investment policies and restrictions as
set forth in the Registration Statement of the Trust filed with the Securities
and Exchange Commission under the Investment Company Act, as amended from time
to time (the "Registration Statement"). The Manager shall make reports to the
Trustees of its performance of obligations hereunder and furnish advice and
recommendations with respect to such other aspects of the business and affairs
of each Series as it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall provide (or arrange
for affiliates to provide) the Trust with such investment research, advice and
supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of each Series, shall furnish continuously an
investment program for each Series and shall determine from time to time which
securities shall be purchased, sold or exchanged and what portion of the assets
of each Series shall be held in the various securities and other financial
instruments in which such Series invests or cash, subject always to the
restrictions of the Declaration of Trust and By-Laws of the Trust, as amended
from time to time, the provisions of the Investment Company Act and the
statements relating to the applicable Series= investment objectives, investment
policies and investment restrictions as the same are set forth in the Trust's
current Registration Statement. The Manager shall make decisions for the Trust
as to the manner in which voting rights, rights to
2
<PAGE>
consent to corporate action and any other rights pertaining to a Series=
portfolio securities shall be exercised. Should the Trustees at any time,
however, make any definite determination as to investment policy and notify the
Manager thereof in writing, the Manager shall be bound by such determination for
the period, if any, specified in such notice or until similarly notified that
such determination has been revoked. The Manager shall take, on behalf of each
Series, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders for
the purchase or sale of portfolio securities for each Series= account with
brokers or dealers selected by it, and to that end, the Manager is authorized as
the agent of the Trust to give instructions to the custodian of the Series as to
deliveries of securities and payments of cash for the account of the applicable
Series. In connection with the selection of such brokers or dealers and the
placing of such orders with respect to assets of a Series, the Manager is
directed at all times to seek to obtain execution and price within the policy
guidelines determined by the Trustees and set forth in the then current
Registration Statement. Subject to this requirement and the provisions of the
Investment Company Act, the Securities Exchange Act of 1934, as amended, and
other applicable provisions of law, the Manager may select brokers or dealers
with which it or the Trust is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Manager. The Manager assumes and shall pay for maintaining the
staff and personnel necessary to perform its obligations under this Agreement,
and shall, at its own expense, provide the office space, facilities and
necessary personnel which it is obligated to provide under Article I hereof, and
shall pay compensation of all Officers of the Trust and all Trustees of the
Trust who are affiliated persons of the Manager.
(b) The Trust. The Trust assumes and shall pay or cause to be paid all
other expenses of the Trust and each Series (except for the expenses paid by
Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc. (the
"Distributor")), including, without limitation: taxes, expenses for legal and
auditing services, costs of printing proxies, stock certificates (if any),
shareholder reports, copies of the Registration Statement, charges of the
custodian, any sub-custodian and transfer agent, expenses of portfolio
transactions, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal, state and
foreign laws, fees and actual out-of-pocket expenses of Trustees who are not
affiliated persons of the Manager, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Trust or a Series. It is also understood that the Trust
shall reimburse the Manager for its costs in providing accounting services to
the Trust and each Series. The Distributor will pay certain of the expenses of
the Series incurred in connection with the continuous offering of shares of
beneficial interest of each Series.
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ARTICLE III
Compensation of the Manager
(a) Management and Investment Advisory Fee. For the services rendered,
the facilities furnished and expenses assumed by the Manager, each Series shall
pay to the Manager at the end of each calendar month a fee based upon the
average daily value of the net assets of such Series, as determined and computed
in accordance with the description of the determination of net asset value
contained in the Registration Statement, at the annual rate set forth on the
Addendum or Addenda pertaining to such Series, commencing on the day following
effectiveness hereof. If this Agreement becomes effective subsequent to the
first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fee as set forth
above. Payment of the Manager's compensation for the preceding month shall be
made as promptly as possible after completion of the computations contemplated
above. During any period when the determination of net asset value is suspended
by the Trustees, the net asset value of a share as of the last business day
prior to such suspension shall for this purpose be deemed to be the net asset
value at the close of each succeeding business day until it is again determined.
ARTICLE IV
Limitation of Liability of the Manager
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the management of the Trust and any Series, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Manager" shall include any affiliates of the Manager
performing services for the Trust or a Series contemplated hereby and partners,
shareholders, directors, officers and employees of the Manager and such
affiliates.
ARTICLE V
Activities of the Manager
The services of the Manager to the Trust and the Series are not to be
deemed to be exclusive, and the Manager and each affiliate is free to render
services to others. It is understood that Trustees, officers, employees and
shareholders of the Trust and any Series are or may become interested in the
Manager and its affiliates, as directors, officers, employees, partners,
shareholders or otherwise, and that the Manager and directors, officers,
employees, partners and shareholders of the Manager and its affiliates are or
may become similarly interested in the Trust or a Series as shareholders or
otherwise.
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ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective with respect to a Series as of
the date such Series commences investment operations, and shall remain in force
with respect to such Series for two years thereafter or, if sooner, until such
date as may be set forth in the Addendum pertaining to such Series, and
thereafter continue from year to year, but only so long as such continuance is
specifically approved at least annually by (i) the Trustees, or with respect to
any Series by the vote of a majority of the outstanding voting securities of
such Series, and (ii) a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Trustees or with respect to a Series by the vote of a
majority of the outstanding voting securities of such Series, or by the Manager,
on sixty days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) (a) with respect to all Series, by the vote of a
majority of outstanding voting securities of each Series, and (b) with respect
to any one Series, by the vote of a majority of outstanding voting securities of
such Series; and (ii) a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws
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of the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the Investment Company Act, the latter shall control.
ARTICLE X
Limitation of Obligations of the Series
The obligations of each Series hereunder shall be limited to the assets
of that Series, shall be separate from the obligations of each other series of
the Trust, and no Series shall be liable for the obligations of any other series
of the Trust.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed by
the parties hereto on any number of counterparts, all of which shall constitute
one and the same instrument.
INDEX MASTER SERIES TRUST,
on behalf of each Series
By: /s/ TERRY K. GLENN
--------------------------
Name: Terry K. Glenn
Title: President and Trustee
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
ITS GENERAL PARTNER
By: /s/ DONALD C. BURKE
--------------------------
Name: Donald C. Burke
Title: Senior Vice President
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ADDENDUM A TO MANAGEMENT AGREEMENT
Name of Series Management Fee
Master S&P 500 Index Series............................................ 0.05%
Master Small Cap Index Series.......................................... 0.08%
Master Aggregate Bond Index Series..................................... 0.06%
Master International (GDP Weighted) Index Series....................... 0.11%
Master International (Capitalization Weighted) Index Series............ 0.01%
Master Enhanced S&P 500 Series ........................................ 0.01%
Master Enhanced International Series ..................................0.015%
AMENDED AND RESTATED PLACEMENT AGENT AGREEMENT
AGREEMENT made as of August 2, 1999, between INDEX MASTER SERIES
TRUST, a Delaware business trust (the "Trust"), on behalf of its series listed
on Appendix A hereto, as amended from time to time, (the "Series"), and
PRINCETON FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Placement
Agent"). The obligations of each Series hereunder shall be limited to the assets
of that Series, shall be separate from the obligations of each other Series, and
no Series shall be liable for the obligations of any other Series.
W I T N E S S E T H :
WHEREAS, the Trust has filed a registration statement (the
"Registration Statement") pursuant to Section 8(b) of the Investment Company Act
of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Trustees (the "Trustees") are authorized to establish
separate series relating to separate portfolios of securities, each of which may
offer beneficial interests in the Series ("Interests"); and
WHEREAS, the Trustees have established and designated the Series as
series of the Trust; and
WHEREAS, the Trust and the Placement Agent wish to enter into an
agreement with each other with respect to the distribution of Interests in the
Series.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Placement Agent; Private Offering.
(a) The Trust hereby appoints the Placement Agent as placement agent in
connection with the distribution of the Interests.
(b) The Placement Agent understands that: (i) The Interests are not
being registered under the Securities Act of 1933, as amended (the "Securities
Act"); (ii) Such Interests are to be issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act; (iii) Investments in the Series may be made
only by a limited number of institutional investors, including investment
companies, common or commingled trust funds, group trusts and certain other
"accredited investors" within the meaning of Regulation D under the Securities
Act; and (iv) The Registration Statement is not intended to constitute an offer
to sell, or the solicitation of an offer to buy, any beneficial interests in the
Series.
<PAGE>
(c) In carrying out its duties hereunder, the Placement Agent agrees
that it will act in a manner consistent with the foregoing and, unless otherwise
instructed by the Trust in writing, will not take any actions which would cause
the Trust to make a "public offering" within the meaning of Section 4(2) of the
Securities Act.
Section 2. Exclusive Nature of Duties. The Placement Agent shall be
the exclusive representative of the Series to act as placement agent in respect
of the distribution of the Interests, except that:
(a) The Trust may, with respect to any Series, upon written notice to
the Placement Agent, from time to time designate other placement agents with
respect to areas other than the United States as to which the Placement Agent
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Placement Agent under this
Agreement in respect of such areas so designated shall terminate, but this
Agreement shall remain otherwise in full effect until terminated in accordance
with the other provisions hereof.
(b) The exclusive right granted to the Placement Agent hereunder shall
not apply to Interests issued in connection with the merger or consolidation of
any other investment company or personal holding company with a Series or the
acquisition by purchase or otherwise of all (or substantially all) the assets or
the outstanding shares of any such company by a Series.
(c) Such exclusive right also shall not apply to Interests issued by a
Series pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Interests issued by a
Series pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Interests as shall be agreed between the
Trust and the Placement Agent from time to time.
Section 3. Duties of the Trust.
(a) The Trust shall furnish to the Placement Agent copies of all
information, financial statements and other papers which the Placement Agent may
reasonably request for use in connection with its duties hereunder, and this
shall include, upon request by the Placement Agent, one certified copy of all
financial statements prepared for the Trust by independent public accountants.
(b) Consistent with Section 1 hereof, the Trust shall use its best
efforts to qualify and maintain the qualification of the Interests for sale
under the securities laws of such jurisdictions as the Placement Agent and the
Trust may approve. Any such qualification may be withheld, terminated or
withdrawn by the Trust at any time in its discretion. The expense of
qualification and maintenance of qualification shall be borne by the Trust. The
Placement Agent shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust in connection with
such qualification.
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(c) The Trust will furnish, in reasonable quantities upon request by
the Placement Agent, copies of annual and interim reports of each Series.
Section 4. Duties of the Placement Agent.
(a) The Placement Agent shall devote reasonable time and effort to its
duties hereunder. The services of the Placement Agent to the Trust hereunder are
not to be deemed exclusive and nothing herein contained shall prevent the
Placement Agent from entering into like arrangements with other investment
companies so long as the performance of its obligations hereunder is not
impaired thereby.
(b) In performing its duties hereunder, the Placement Agent shall use
its best efforts in all respects duly to conform with the requirements of all
applicable laws relating to the sale of securities. Neither the Placement Agent
nor any other person is authorized by Trust to give any information or to make
any representations, other than those contained in the Trust's registration
statement or any supplemental literature specifically approved by the Trust.
Section 5. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the Series,
including fees and disbursements of its counsel and auditors, in connection with
the preparation and filing of any required registration statements under the
Investment Company Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such registration statements, or interim reports or proxy materials).
(b) The Trust shall bear any cost and expenses of qualification of the
Shares for sale pursuant to this Agreement and, if necessary or advisable in
connection therewith, of qualifying the Trust as a broker or dealer in such
states of the United States or other jurisdictions as shall be selected by the
Trust and the Placement Agent pursuant to Section 3 hereof and the cost and
expenses payable to each such state for continuing qualification therein until
the Trust decides to discontinue such qualification pursuant to Section 3
hereof.
Section 6. Indemnification.
(a) The Trust shall indemnify and hold harmless the Placement Agent and
each person, if any, who controls the Placement Agent against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or expense
and reasonable counsel fees incurred in connection therewith), as incurred,
arising by reason of any person acquiring any Interests, which may be based upon
the Securities Act, or on any other statute or at common law, on the ground that
any registration statement or other offering materials, as from time to time
amended and supplemented, or an annual or interim report to interestholders of
the Series, includes an untrue statement of a material fact or
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omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Trust in connection therewith by or on behalf of the Placement
Agent; provided, however, that in no case (i) is the indemnity of the Trust in
favor of the Placement Agent and any such controlling persons to be deemed to
protect such Placement Agent or any such controlling persons thereof against any
liability to the Trust or its interestholders to which the Placement Agent or
any such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the Placement
Agent or any such controlling persons, unless the Placement Agent or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Placement Agent or such controlling persons (or after the Placement Agent or
such controlling persons shall have received notice of such service on any
designated agent), but failure to notify the Trust of any such claim shall not
relieve it from any liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity agreement contained
in this paragraph. The Trust will 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 such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Placement Agent or such controlling person or persons, defendant or defendants
in the suit. In the event the Trust elects to assume the defense of any such
suit and retain such counsel, the Placement Agent or such controlling person or
persons, defendant or defendants in the suit shall bear the fees and expenses,
as incurred, of any additional counsel retained by them, but in case the Trust
does not elect to assume the defense of any such suit, it will reimburse the
Placement Agent or such controlling person or persons, defendant or defendants
in the suit, for the reasonable fees and expenses, as incurred, of any counsel
retained by them. The Trust shall promptly notify the Placement Agent of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Interests.
(b) The Placement Agent shall indemnify and hold harmless the Trust and
each of its Trustees and officers and each person, if any, who controls the
Trust against any loss, liability, claim, damage or expense, as incurred,
described in the foregoing indemnity contained in subsection (a) of this
Section, but only with respect to statements or omissions made in reliance upon,
and in conformity with, information furnished to the Trust in writing by or on
behalf of the Placement Agent for use in connection with the registration
statement or other offering materials, as from time to time amended, or the
annual or interim reports to shareholders. In case any action shall be brought
against the Trust or any person so indemnified, in respect of which indemnity
may be sought against the Placement Agent, the Placement Agent shall have the
rights and duties given to the Trust, and the Trust and each person so
indemnified shall have the rights and duties given to the Placement Agent by the
provisions of subsection (a) of this Section 6.
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Section 7. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force for two years thereafter and thereafter continue from year to year, but
only so long as such continuance is specifically approved at least annually by
(i) the Trustees or by the vote of a majority of the outstanding voting
securities of the Trust and (ii) by the vote of a majority of those Trustees who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Trustees or by vote of a majority of the outstanding voting
securities of the Trust, or by the Placement Agent, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 8. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees or by the vote of a majority of outstanding voting securities of the
Trust and (ii) by the vote of a majority of those Trustees who are not parties
to this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
Section 9. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written. This Agreement may be
executed by the parties hereto in any number of counterparts, all of which shall
constitute one and the same instrument.
INDEX MASTER SERIES TRUST
By /s/ TERRY K. GLENN
-----------------------------
Name: Terry K. Glenn
Title: President and Trustee
PRINCETON FUNDS DISTRIBUTOR, INC.
By /s/ DONALD C. BURKE
-----------------------------
Name: Donald C. Burke
Title: Vice President
6
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Appendix A
Series of Index Master Series Trust
Master S&P 500 Index Series
Master Small Cap Index Series
Master Aggregate Bond Index Series
Master International (GDP Weighted) Index Series
Master Enhanced International Series
Master Enhanced S&P 500 Series
Master International (Capitalization Weighted) Index Series
As of August 2, 1999
[LOGO] CHASE
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 1999, and is between
THE CHASE MANHATTAN BANK ("Bank") and Master Cap Weighted International Series
of Index Master Series Trust ("Customer").
1. Customer Accounts.
Bank, acting as "Securities Intermediary" (as defined in Section 15(g)
hereof) shall establish and maintain the following accounts ("Accounts"): (a) a
Custody Account (as defined in Section 15(b) hereof) in the name of Customer for
Financial Assets, which shall, except as modified by Section 15(d) hereof, mean
stocks, shares, bonds, debentures, notes, mortgages or other obligations for the
payment of money, bullion, coin and any certificates, receipts, warrants or
other instruments representing rights to receive, purchase or subscribe for the
same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3 hereof) for the account of
Customer, including as an "Entitlement Holder" as defined in Section 15(c)
hereof); and
(b) an account in the name of Customer ("Deposit Account") for any and
all cash in any currency received by Bank or its Subcustodian for the account of
Customer, which cash shall not be subject to withdrawal by draft or check.
Customer warrants its authority to: 1) deposit the cash and Financial
Assets (collectively "Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11 hereof) concerning the Accounts. Bank may deliver
Financial Assets of the same class in place of those deposited in the Custody
Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Financial Assets and Cash at Bank and Subcustodian
Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Financial Assets shall be held in the country or other jurisdiction
in which the principal trading market for such Financial Assets is located,
where such Financial Assets are to be presented for payment or where such
Financial Assets are acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
<PAGE>
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of Financial
Assets in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of customers
of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Financial Assets held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration, or, in the case of
cash deposits, except for liens or rights in favor of creditors of the
Subcustodian arising under bankruptcy, insolvency or similar laws. Where
Securities are deposited by a Subcustodian with a securities depository, Bank
shall cause the Subcustodian to identify on its books as belonging to Bank, as
agent, the Securities shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Customer with any particular
Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
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(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. Custody Account Transactions.
(a) Financial Assets shall be transferred, exchanged or delivered by
Bank or its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Financial Assets
received for, and delivery of Financial Assets out of, the Custody Account may
be made in accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivery of
Financial Assets to a purchaser, dealer or their agents against a receipt with
the expectation of receiving later payment and free delivery. Delivery of
Financial Assets out of the Custody Account may also be made in any manner
specifically required by Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Financial Assets with respect to any
sale, exchange or purchase of Financial Assets. Otherwise, such transactions
shall be credited or debited to the Accounts on the date cash or Financial
Assets are actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Financial Assets delivered pursuant to this
Section 6 are returned by the recipient thereof, Bank may reverse the
credits and debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Financial Assets which are called, redeemed
or retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
(b) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of Financial
Assets.
(c) Exchange interim receipts or temporary Financial Assets for
definitive Financial Assets.
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(d) Appoint brokers and agents for any transaction involving the
Financial Assets, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Financial Assets in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Financial Assets in the Custody
Account in respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning
the Financial Assets which requires discretionary action by the beneficial owner
of the Financial Assets (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate Actions"),
Bank shall give Customer notice of such Corporate Actions to the extent that
Bank's central corporate actions department has actual knowledge of a Corporate
Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person (as defined in Section 10
hereof), but if Instructions are not received in time for Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
Instructions, Bank is authorized to sell such rights entitlement or fractional
interest and to credit the Deposit Account with the proceeds or take any other
action it deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax
credits which apply in each applicable market in respect of income
payments on Financial Assets for the benefit of Customer which Bank
believes may be available to such Customer.
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(ii) The provision of tax reclaim services by Bank is
conditional upon Bank receiving from the beneficial owner of Financial
Assets (A) a declaration of its identity and place of residence and (B)
certain other documentation (pro forma copies of which are available
from Bank). Customer acknowledges that, if Bank does not receive such
declarations, documentation and information, additional United Kingdom
taxation shall be deducted from all income received in respect of
Financial Assets issued outside the United Kingdom and that U.S.
non-resident alien tax or U.S. backup withholding tax shall be deducted
from U.S. source income. Customer shall provide to Bank such
documentation and information as it may require in connection with
taxation, and warrants that, when given, this information shall be true
and correct in every respect, not misleading in any way, and contain
all material information. Customer undertakes to notify Bank
immediately if any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party
for any taxes, fines or penalties payable by Bank or Customer, and
shall be indemnified accordingly, whether these result from the
inaccurate completion of documents by Customer or any third party
acting as agent for Customer, or as a result of the provision to Bank
or any third party of inaccurate or misleading information or the
withholding of material information by Customer or any other third
party, or as a result of any delay of any revenue authority or any
other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or
levies required by any revenue or governmental authority for whatever
reason in respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect
to taxation levied by the revenue authorities of the countries notified
to Customer from time to time and Bank may, by notification in writing,
at its absolute discretion, supplement or amend the markets in which
the tax reclaim services are offered. Other than as expressly provided
in this sub-clause, Bank shall have no responsibility with regard to
Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Financial Assets and/or Cash held for
Customer.
(vii) Tax reclaim services may be provided by Bank or, in
whole or in part, by one or more third parties appointed by Bank (which
may be Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. Nominees.
Financial Assets which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer cause any such Financial
Assets to cease to be registered in the name of any such nominee and to be
registered in the name of Customer. In the event that any Financial Assets
registered in a nominee name are called for partial redemption by the issuer,
Bank may allot the called portion to the respective beneficial holders of such
class of security in any manner Bank deems to be fair and equitable. Customer
shall hold Bank, Subcustodians, and their respective nominees harmless from any
liability arising directly or indirectly from their status as a mere record
holder of Financial Assets in the Custody Account.
10. Authorized Persons.
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As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded. The term "Instructions" includes, without
limitation, instructions to sell, assign, transfer, deliver, purchase or receive
for the Custody Account, any and all stocks, bonds and other Financial Assets or
to transfer funds in the Cash Account.)
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties
as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. The Bank shall be
liable to the Customer for any loss which shall occur as the result of
the failure of a Subcustodian to exercise reasonable care with respect
to the safekeeping of such Assets to the same extent that the Bank
would be liable to the Customer if the Bank were holding such Assets in
New York. In the event of any loss to Customer by reason of the failure
of Bank or its Subcustodian to utilize reasonable care, Bank shall be
liable to Customer only to the extent of Customer's direct damages, to
be determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have
no liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if
Bank has been advised as to the possibility of the same and regardless
of the form of the action.
(ii) Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank. Bank shall not
be responsible for any act, omission, default or the solvency of any
broker or agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith.
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<PAGE>
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations hereunder, Bank may rely on the genuineness of any document
which it believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for Customer) on all matters and
shall be without liability for any action reasonably taken or omitted
pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable
for any loss which results from: 1) the general risk of investing, or
2) investing or holding Assets in a particular country including, but
not limited to, losses resulting from malfunction, interruption of or
error in the transmission of information caused by any machines or
system or interruption of communication facilities, abnormal operating
conditions, nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the
value of Assets.
(viii) Neither party shall be liable to the other for any loss
due to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war (whether declared or undeclared)
or terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Financial Assets;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other
than as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party
to which Financial Assets are delivered or payments are made pursuant
hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons issuing Instructions shall
bear any responsibility to review such confirmations against
Instructions issued to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank
or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to
7
<PAGE>
other customers, act as financial advisor to the issuer of Financial Assets, act
as a lender to the issuer of Financial Assets, act in the same transaction as
agent for more than one customer, have a material interest in the issue of
Financial Assets, or earn profits from any of the activities listed herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth
in Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions. THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either
party, but shall bind the successors in interest of Customer and Bank. The
captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
__Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
__Other (specify)
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This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s)
[Check applicable rider(s)]:
__INVESTMENT COMPANY
__PROXY VOTING
__SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Financial Assets and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
full power and authority to perform its obligations hereunder, (B) this
Agreement constitutes its legal, valid and binding obligation; enforceable in
accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention:
Global Investor Services, Investment Management Group; and (b) Customer: ______.
(j) Termination. This Agreement may be terminated by Customer or Bank
by giving sixty (60) days written notice to the other, provided that such notice
to Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to
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<PAGE>
the provisions hereof, or to Authorized Persons, or may continue to hold the
Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a "Chinese Wall" arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting it.
15. Definitions.
As used herein, the following terms shall have the meaning hereinafter
stated:
a) "Certificated Security" shall mean a security that is represented by a
certificate.
b) "Custody Account" means each Securities custody account on Bank's
records to which Financial Assets are or may be credited pursuant hereto.
c) "Entitlement Holder" shall mean the person on the records of a
Securities Intermediary as the person having a Securities Entitlement
against the Securities Intermediary.
d) "Financial Asset" shall mean, as the context requires, either the asset
itself or the means by which a person's claim to it is evidenced, including
a Certificated Security or Uncertificated Security, a security certificate,
or a Securities Entitlement.
e) "Securities" means stocks, bonds, rights, warrants and other negotiable and
non-negotiable paper whether issued as Certificated Securities or
Uncertificated Securities and commonly traded or dealt in on securities
exchanges or financial markets, and other obligations of an issuer, or
shares, participations and interests in an issuer recognized in an area in
which it is issued or dealt in as a medium for investment and any other
property as shall be acceptable to Bank for the Custody Account.
f) "Securities Entitlement" shall mean the rights and property interest of an
Entitlement Holder with respect to a Financial Asset as set forth in Part 5
of the Uniform Commercial Code.
g) "Securities Intermediary" shall mean Bank, a Subcustodian, a securities
depository, and any other financial institution which in the ordinary
course of business maintains custody accounts for others and acts in that
capacity.
h) "Uncertificated Security" shall mean a security that is not represented by
a certificate.
i) "Uniform Commercial Code" means Article 8 of the Uniform Commercial Code of
the State of New York, as the same may be amended from time to time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
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CUSTOMER
By:----------------------------------------
Title:
Date:
THE CHASE MANHATTAN BANK
By:----------------------------------------
Title:
Date:
11
<PAGE>
STATE OF )
: ss.
COUNTY OF )
On this ______ day of , ________ 199__, before me personally came _________
, to me known, who being by me duly sworn, did depose and say that he/she
resides in _________at __________ , that he/she is of , the entity described in
and which executed the foregoing instrument; that he/she knows the seal of said
entity, that the seal affixed to said instrument is such seal, that it was so
affixed by order of said entity, and that he/she signed his/her name thereto by
like order.
Sworn to before me this_______
day of ___________, 199__.
Notary
<PAGE>
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this __________ day of __________ , 199__ , before me personally came
__________ , to me known, who being by me duly sworn, did depose and say that
he/she resides in _________ at __________ ; that he/she is a Vice President of
THE CHASE MANHATTAN BANK, the corporation described in and which executed the
foregoing instrument; that he/she knows the seal of said corporation, that the
seal affixed to said instrument is such corporate seal, that it was so affixed
by order of the Board of Directors of said corporation, and that he/she signed
his/her name thereto by like order.
Sworn to before me this______
day of , 199__.
Notary
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
-----------------------------------------
effective -------------------
The following modifications are made to the Agreement:
A. Add a new Section 16 to the Agreement as follows:
"16. Compliance with SEC rule 17f-5.
(a) Customer's board of directors (or equivalent body) (hereinafter
`Board') hereby delegates to Bank, and, except as to the country or countries as
to which Bank may, from time to time, advise Customer that it does not accept
such delegation, Bank hereby accepts the delegation to it, of the obligation to
perform as Customer's `Foreign Custody Manager' (as that term is defined in SEC
rule 17f-5(a)(2) s promulgated under the Investment Company Act of 1940, as
amended ("1940 Act")), both for the purpose of selecting Eligible Foreign
Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may
be amended from time to time, or that have otherwise been made exempt pursuant
to an SEC exemptive order) to hold Financial Assets and Cash and of evaluating
the contractual arrangements with such Eligible Foreign Custodians (as set forth
in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign Custodian
shall not include any `Eligible Securities Depository.' An Eligible Securities
Depository for purposes hereof shall have the same meaning as in SEC rule 17f-7
as proposed on April 29, 1999. (Eligible Securities Depositories used by Bank as
of the date hereof are set forth in Appendix 1-A hereto, and as the same may be
amended on notice to Customer from time to time.)
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Customer's Board of the placement
of Financial Assets and Cash with particular Eligible Foreign
Custodians and of any material change in the arrangements with such
Eligible Foreign Custodians, with such reports to be provided to
Customer's Board at such times as the Board deems reasonable and
appropriate based on the circumstances of Customer's foreign custody
arrangements (and until further notice from Customer such reports shall
be provided not less than quarterly with respect to the placement of
Financial Assets and Cash with particular Eligible Foreign Custodians
and with reasonable promptness upon the occurrence of any material
change in the arrangements with such Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in
performing as Customer's Foreign Custody Manager as a person having
responsibility for the safekeeping of Financial Assets and Cash would
exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Financial Assets and Cash placed and maintained in the safekeeping
of such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Financial Assets and Cash, including, without limitation, those factors
set forth in SEC rule 17f-5(c)(1)(i)-(iv);
<PAGE>
(iv) determine that the written contract with the Eligible Foreign
Custodian requires that the Eligible Foreign Custodian will provide
reasonable care for Financial Assets and Cash based on the standards
applicable to custodians in the relevant market.
(v) have established a system to monitor the continued appropriateness
of maintaining Financial Assets and Cash with particular Eligible
Foreign Custodians and of the governing contractual arrangements; it
being understood, however, that in the event that Bank shall have
determined that the existing Eligible Foreign Custodian in a given
country would no longer afford Financial Assets and Cash reasonable
care and that no other Eligible Foreign Custodian in that country would
afford reasonable care, Bank shall promptly so advise Customer and
shall then act in accordance with the Instructions of Customer with
respect to the disposition of the affected Financial Assets and Cash.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Financial Assets and Cash on behalf of Customer with Eligible Foreign Custodians
pursuant to a written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer shall be solely
responsible to assure that the maintenance of Financial Assets and Cash
hereunder complies with the rules, regulations, interpretations and exemptive
orders promulgated by or under the authority of the SEC.
(d) Bank represents to Customer that it is a U.S. Bank as defined in
Rule 17f-5(a)(7). Customer represents to Bank that: (1) the Financial Assets and
Cash being placed and maintained in Bank's custody are subject to the 1940 Act,
as the same may be amended from time to time; (2) its Board: (i) has determined
that it is reasonable to rely on Bank to perform as Customer's Foreign Custody
Manager (ii) or its investment adviser shall have determined that Customer may
maintain Financial Assets and Cash in each country in which Customer's Financial
Assets and Cash shall be held hereunder and determined to accept the risks
arising therefrom (including, but not limited to, a country's financial
infrastructure), prevailing custody and settlement practices, laws applicable to
the safekeeping and recovery of Financial Assets and Cash held in custody, and
the likelihood of nationalization, currency controls and the like) (collectively
("Country Risk")). Nothing contained herein shall require Bank to make any
selection or to engage in any monitoring on behalf of Customer that would entail
consideration of Country Risk.
(e) Bank shall provide to Customer such information relating to Country
Risk as is specified in Appendix 1-B hereto. Customer hereby acknowledges that:
(i) such information is solely designed to inform Customer of market conditions
and procedures and is not intended as a recommendation to invest or not invest
in particular markets; and (ii) Bank has gathered the information from sources
it considers reliable, but that Bank shall have no responsibility for
inaccuracies or incomplete information.
B. Add the following after the first sentence of Section 3 of the
Agreement: "At the request of Customer, Bank may, but need not, add to Schedule
A an Eligible Foreign Custodian where Bank has not acted as Foreign Custody
Manager with respect to the selection thereof. Bank shall notify Customer in the
event that it elects to add any such entity."
C. Add the following language to the end of Section 3 of the Agreement:
"The term Subcustodian as used herein shall mean the following:
(a) a 'U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7);
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(b) an 'Eligible Foreign Custodian,' which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such by
that country's government or an agency thereof, (ii) a majority-owned
direct or indirect subsidiary of a U.S. bank or bank holding company
which subsidiary is incorporated or organized under the laws of a
country other than the United States; and (iii) any other entity (other
than an Elibible Securities Depository) that shall have been so
qualified by exemptive order, rule or other appropriate action of the
SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall not include any Eligible Foreign Custodian as to which Bank
has not acted as Foreign Custody Manager or any Eligible Securities Depository."
3
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Appendix 1-A
ELIGIBLE SECURITIES DEPOSITORIES
<PAGE>
Appendix 1-B
Information Regarding Country Risk
1. To aid Customer in its determinations regarding Country Risk, Bank
shall furnish annually and upon the initial placing of Financial Assets and Cash
into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access afforded
Customer's independent public accountants to books and records
kept by an eligible foreign custodian located in that country.
ii. Whether applicable foreign law would restrict the Customer's
ability to recover its Financial Assets and Cash in the event of
the bankruptcy of an Eligible Foreign Custodian located in that
country.
___ iii. Whether applicable foreign law would restrict the Customer's
ability to recover Financial Assets that are lost while under the
control of an Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The foreseeability of expropriation, nationalization, freezes, or
confiscation of Customer's Financial Assets and Cash.
___ ii. Whether difficulties in converting Customer's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.]
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Customer in monitoring Country Risk, Bank shall furnish board
the following additional information:
Market flashes, including with respect to changes in the information in
market reports.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
------------------------------------
dated ________ 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received
by Bank or provided to Bank by its Subcustodians or third parties, and
(b) voting by Bank of proxies based on Customer Instructions. Original
proxy materials or copies thereof shall not be provided. Notifications
shall generally be in English and, where necessary, shall be
summarized and translated from such non-English materials as have been
made available to Bank or its Subcustodian. In this respect Bank's
only obligation is to provide information from sources it believes to
be reliable and/or to provide materials summarized and/or translated
in good faith. Bank reserves the right to provide Notifications, or
parts thereof, in the language received. Upon reasonable advance
request by Customer, backup information relative to Notifications,
such as annual reports, explanatory material concerning resolutions,
management recommendations or other material relevant to the exercise
of proxy voting rights shall be provided as available, but without
translation.
3. While Bank shall attempt to provide accurate and complete
Notifications, whether or not translated, Bank shall not be liable for
any losses or other consequences that may result from reliance by
Customer upon Notifications where Bank prepared the same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as
the agent of Customer, and shall not exercise any discretion with
regard to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Financial Assets are: (i) on loan; (ii) at registrar for registration
or reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations
or practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6 Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions
received from all customers).
<PAGE>
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not
directly or indirectly compete with Bank or diminish the market for
Proxy Services by provision of such information, in whole or in part,
for compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished
to Bank in accordance with ss.10 of the Agreement. Proxy Services fees
shall be as set forth in ss.13 of the Agreement or as separately
agreed.
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<PAGE>
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH ----------------------------------------
DATE ----------------------------------------
<PAGE>
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets in
the Accounts.
<PAGE>
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the pertinent
provisions of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
<PAGE>
[LOGO] CHASE
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 1999, and is between
THE CHASE MANHATTAN BANK ("Bank") and Master Enhanced International Series of
Index Master Series Trust ("Customer").
1. Customer Accounts.
Bank, acting as "Securities Intermediary" (as defined in Section 15(g)
hereof) shall establish and maintain the following accounts ("Accounts"): (a) a
Custody Account (as defined in Section 15(b) hereof) in the name of Customer for
Financial Assets, which shall, except as modified by Section 15(d) hereof, mean
stocks, shares, bonds, debentures, notes, mortgages or other obligations for the
payment of money, bullion, coin and any certificates, receipts, warrants or
other instruments representing rights to receive, purchase or subscribe for the
same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3 hereof) for the account of
Customer, including as an "Entitlement Holder" as defined in Section 15(c)
hereof); and
(b) an account in the name of Customer ("Deposit Account") for any and
all cash in any currency received by Bank or its Subcustodian for the account of
Customer, which cash shall not be subject to withdrawal by draft or check.
Customer warrants its authority to: 1) deposit the cash and Financial
Assets (collectively "Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11 hereof) concerning the Accounts. Bank may deliver
Financial Assets of the same class in place of those deposited in the Custody
Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Financial Assets and Cash at Bank and Subcustodian
Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Financial Assets shall be held in the country or other jurisdiction
in which the principal trading market for such Financial Assets is located,
where such Financial Assets are to be presented for payment or where such
Financial Assets are acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
<PAGE>
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of Financial
Assets in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of customers
of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Financial Assets held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration, or, in the case of
cash deposits, except for liens or rights in favor of creditors of the
Subcustodian arising under bankruptcy, insolvency or similar laws. Where
Securities are deposited by a Subcustodian with a securities depository, Bank
shall cause the Subcustodian to identify on its books as belonging to Bank, as
agent, the Securities shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Customer with any particular
Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
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<PAGE>
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. Custody Account Transactions.
(a) Financial Assets shall be transferred, exchanged or delivered by
Bank or its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Financial Assets
received for, and delivery of Financial Assets out of, the Custody Account may
be made in accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivery of
Financial Assets to a purchaser, dealer or their agents against a receipt with
the expectation of receiving later payment and free delivery. Delivery of
Financial Assets out of the Custody Account may also be made in any manner
specifically required by Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Financial Assets with respect to any
sale, exchange or purchase of Financial Assets. Otherwise, such transactions
shall be credited or debited to the Accounts on the date cash or Financial
Assets are actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Financial Assets delivered pursuant to this
Section 6 are returned by the recipient thereof, Bank may reverse the
credits and debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Financial Assets which are called, redeemed
or retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
(b) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of Financial
Assets.
(c) Exchange interim receipts or temporary Financial Assets for
definitive Financial Assets.
3
<PAGE>
(d) Appoint brokers and agents for any transaction involving the
Financial Assets, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Financial Assets in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Financial Assets in the Custody
Account in respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning
the Financial Assets which requires discretionary action by the beneficial owner
of the Financial Assets (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate Actions"),
Bank shall give Customer notice of such Corporate Actions to the extent that
Bank's central corporate actions department has actual knowledge of a Corporate
Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person (as defined in Section 10
hereof), but if Instructions are not received in time for Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
Instructions, Bank is authorized to sell such rights entitlement or fractional
interest and to credit the Deposit Account with the proceeds or take any other
action it deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax
credits which apply in each applicable market in respect of income
payments on Financial Assets for the benefit of Customer which Bank
believes may be available to such Customer.
4
<PAGE>
(ii) The provision of tax reclaim services by Bank is
conditional upon Bank receiving from the beneficial owner of Financial
Assets (A) a declaration of its identity and place of residence and (B)
certain other documentation (pro forma copies of which are available
from Bank). Customer acknowledges that, if Bank does not receive such
declarations, documentation and information, additional United Kingdom
taxation shall be deducted from all income received in respect of
Financial Assets issued outside the United Kingdom and that U.S.
non-resident alien tax or U.S. backup withholding tax shall be deducted
from U.S. source income. Customer shall provide to Bank such
documentation and information as it may require in connection with
taxation, and warrants that, when given, this information shall be true
and correct in every respect, not misleading in any way, and contain
all material information. Customer undertakes to notify Bank
immediately if any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party
for any taxes, fines or penalties payable by Bank or Customer, and
shall be indemnified accordingly, whether these result from the
inaccurate completion of documents by Customer or any third party
acting as agent for Customer, or as a result of the provision to Bank
or any third party of inaccurate or misleading information or the
withholding of material information by Customer or any other third
party, or as a result of any delay of any revenue authority or any
other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or
levies required by any revenue or governmental authority for whatever
reason in respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect
to taxation levied by the revenue authorities of the countries notified
to Customer from time to time and Bank may, by notification in writing,
at its absolute discretion, supplement or amend the markets in which
the tax reclaim services are offered. Other than as expressly provided
in this sub-clause, Bank shall have no responsibility with regard to
Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Financial Assets and/or Cash held for
Customer.
(vii) Tax reclaim services may be provided by Bank or, in
whole or in part, by one or more third parties appointed by Bank (which
may be Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. Nominees.
Financial Assets which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer cause any such Financial
Assets to cease to be registered in the name of any such nominee and to be
registered in the name of Customer. In the event that any Financial Assets
registered in a nominee name are called for partial redemption by the issuer,
Bank may allot the called portion to the respective beneficial holders of such
class of security in any manner Bank deems to be fair and equitable. Customer
shall hold Bank, Subcustodians, and their respective nominees harmless from any
liability arising directly or indirectly from their status as a mere record
holder of Financial Assets in the Custody Account.
10. Authorized Persons.
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<PAGE>
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded. The term "Instructions" includes, without
limitation, instructions to sell, assign, transfer, deliver, purchase or receive
for the Custody Account, any and all stocks, bonds and other Financial Assets or
to transfer funds in the Cash Account.)
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties
as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. The Bank shall be
liable to the Customer for any loss which shall occur as the result of
the failure of a Subcustodian to exercise reasonable care with respect
to the safekeeping of such Assets to the same extent that the Bank
would be liable to the Customer if the Bank were holding such Assets in
New York. In the event of any loss to Customer by reason of the failure
of Bank or its Subcustodian to utilize reasonable care, Bank shall be
liable to Customer only to the extent of Customer's direct damages, to
be determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have
no liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if
Bank has been advised as to the possibility of the same and regardless
of the form of the action.
(ii) Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank. Bank shall not
be responsible for any act, omission, default or the solvency of any
broker or agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith.
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<PAGE>
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations hereunder, Bank may rely on the genuineness of any document
which it believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for Customer) on all matters and
shall be without liability for any action reasonably taken or omitted
pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable
for any loss which results from: 1) the general risk of investing, or
2) investing or holding Assets in a particular country including, but
not limited to, losses resulting from malfunction, interruption of or
error in the transmission of information caused by any machines or
system or interruption of communication facilities, abnormal operating
conditions, nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the
value of Assets.
(viii) Neither party shall be liable to the other for any loss
due to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war (whether declared or undeclared)
or terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Financial Assets;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other
than as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party
to which Financial Assets are delivered or payments are made pursuant
hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons issuing Instructions shall
bear any responsibility to review such confirmations against
Instructions issued to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank
or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to
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<PAGE>
other customers, act as financial advisor to the issuer of Financial Assets, act
as a lender to the issuer of Financial Assets, act in the same transaction as
agent for more than one customer, have a material interest in the issue of
Financial Assets, or earn profits from any of the activities listed herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth
in Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions. THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either
party, but shall bind the successors in interest of Customer and Bank. The
captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
__Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
__Other (specify)
8
<PAGE>
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s)
[Check applicable rider(s)]:
__INVESTMENT COMPANY
__PROXY VOTING
__SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Financial Assets and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
full power and authority to perform its obligations hereunder, (B) this
Agreement constitutes its legal, valid and binding obligation; enforceable in
accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention:
Global Investor Services, Investment Management Group; and (b) Customer:______ .
(j) Termination. This Agreement may be terminated by Customer or Bank
by giving sixty (60) days written notice to the other, provided that such notice
to Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to
9
<PAGE>
the provisions hereof, or to Authorized Persons, or may continue to hold the
Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a "Chinese Wall" arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting it.
15. Definitions.
As used herein, the following terms shall have the meaning hereinafter
stated:
a) "Certificated Security" shall mean a security that is represented by a
certificate.
b) "Custody Account" means each Securities custody account on Bank's records
to which Financial Assets are or may be credited pursuant hereto.
c) "Entitlement Holder" shall mean the person on the records of a Securities
Intermediary as the person having a Securities Entitlement against the
Securities Intermediary.
d) "Financial Asset" shall mean, as the context requires, either the asset
itself or the means by which a person's claim to it is evidenced, including
a Certificated Security or Uncertificated Security, a security certificate,
or a Securities Entitlement.
e) "Securities" means stocks, bonds, rights, warrants and other negotiable and
non-negotiable paper whether issued as Certificated Securities or
Uncertificated Securities and commonly traded or dealt in on securities
exchanges or financial markets, and other obligations of an issuer, or
shares, participations and interests in an issuer recognized in an area in
which it is issued or dealt in as a medium for investment and any other
property as shall be acceptable to Bank for the Custody Account.
f) "Securities Entitlement" shall mean the rights and property interest of an
Entitlement Holder with respect to a Financial Asset as set forth in Part 5
of the Uniform Commercial Code.
g) "Securities Intermediary" shall mean Bank, a Subcustodian, a securities
depository, and any other financial institution which in the ordinary
course of business maintains custody accounts for others and acts in that
capacity.
h) "Uncertificated Security" shall mean a security that is not represented by
a certificate.
i) "Uniform Commercial Code" means Article 8 of the Uniform Commercial Code of
the State of New York, as the same may be amended from time to time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
10
<PAGE>
CUSTOMER
By:-----------------------------------------
Title:
Date:
THE CHASE MANHATTAN BANK
By:-----------------------------------------
Title:
Date:
11
<PAGE>
STATE OF )
: ss.
COUNTY OF )
On this __________ day of __________ , 199__ , before me personally came
__________ , to me known, who being by me duly sworn, did depose and say that
he/she resides in ___________ at _________, that he/she is of , the entity
described in and which executed the foregoing instrument; that he/she knows the
seal of said entity, that the seal affixed to said instrument is such seal, that
it was so affixed by order of said entity, and that he/she signed his/her name
thereto by like order.
Sworn to before me this______
day of __________ , 199__.
Notary
<PAGE>
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
` On this ________ day of ________ , 199 __, before me personally came ,
_________to me known, who being by me duly sworn, did depose and say that he/she
resides in __________at_______; that he/she is a Vice President of THE CHASE
MANHATTAN BANK, the corporation described in and which executed the foregoing
instrument; that he/she knows the seal of said corporation, that the seal
affixed to said instrument is such corporate seal, that it was so affixed by
order of the Board of Directors of said corporation, and that he/she signed
his/her name thereto by like order.
Sworn to before me this_______
day of __________, 199__.
Notary
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
-----------------------------------------
effective ----------------
The following modifications are made to the Agreement:
A. Add a new Section 16 to the Agreement as follows:
"16. Compliance with SEC rule 17f-5.
(a) Customer's board of directors (or equivalent body) (hereinafter
`Board') hereby delegates to Bank, and, except as to the country or countries as
to which Bank may, from time to time, advise Customer that it does not accept
such delegation, Bank hereby accepts the delegation to it, of the obligation to
perform as Customer's `Foreign Custody Manager' (as that term is defined in SEC
rule 17f-5(a)(2) s promulgated under the Investment Company Act of 1940, as
amended ("1940 Act")), both for the purpose of selecting Eligible Foreign
Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may
be amended from time to time, or that have otherwise been made exempt pursuant
to an SEC exemptive order) to hold Financial Assets and Cash and of evaluating
the contractual arrangements with such Eligible Foreign Custodians (as set forth
in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign Custodian
shall not include any `Eligible Securities Depository.' An Eligible Securities
Depository for purposes hereof shall have the same meaning as in SEC rule 17f-7
as proposed on April 29, 1999. (Eligible Securities Depositories used by Bank as
of the date hereof are set forth in Appendix 1-A hereto, and as the same may be
amended on notice to Customer from time to time.)
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Customer's Board of the placement
of Financial Assets and Cash with particular Eligible Foreign
Custodians and of any material change in the arrangements with such
Eligible Foreign Custodians, with such reports to be provided to
Customer's Board at such times as the Board deems reasonable and
appropriate based on the circumstances of Customer's foreign custody
arrangements (and until further notice from Customer such reports shall
be provided not less than quarterly with respect to the placement of
Financial Assets and Cash with particular Eligible Foreign Custodians
and with reasonable promptness upon the occurrence of any material
change in the arrangements with such Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in
performing as Customer's Foreign Custody Manager as a person having
responsibility for the safekeeping of Financial Assets and Cash would
exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Financial Assets and Cash placed and maintained in the safekeeping
of such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Financial Assets and Cash, including, without limitation, those factors
set forth in SEC rule 17f-5(c)(1)(i)-(iv);
<PAGE>
(iv) determine that the written contract with the Eligible Foreign
Custodian requires that the Eligible Foreign Custodian will provide
reasonable care for Financial Assets and Cash based on the standards
applicable to custodians in the relevant market.
(v) have established a system to monitor the continued appropriateness
of maintaining Financial Assets and Cash with particular Eligible
Foreign Custodians and of the governing contractual arrangements; it
being understood, however, that in the event that Bank shall have
determined that the existing Eligible Foreign Custodian in a given
country would no longer afford Financial Assets and Cash reasonable
care and that no other Eligible Foreign Custodian in that country would
afford reasonable care, Bank shall promptly so advise Customer and
shall then act in accordance with the Instructions of Customer with
respect to the disposition of the affected Financial Assets and Cash.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Financial Assets and Cash on behalf of Customer with Eligible Foreign Custodians
pursuant to a written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer shall be solely
responsible to assure that the maintenance of Financial Assets and Cash
hereunder complies with the rules, regulations, interpretations and exemptive
orders promulgated by or under the authority of the SEC.
(d) Bank represents to Customer that it is a U.S. Bank as defined in
Rule 17f-5(a)(7). Customer represents to Bank that: (1) the Financial Assets and
Cash being placed and maintained in Bank's custody are subject to the 1940 Act,
as the same may be amended from time to time; (2) its Board: (i) has determined
that it is reasonable to rely on Bank to perform as Customer's Foreign Custody
Manager (ii) or its investment adviser shall have determined that Customer may
maintain Financial Assets and Cash in each country in which Customer's Financial
Assets and Cash shall be held hereunder and determined to accept the risks
arising therefrom (including, but not limited to, a country's financial
infrastructure), prevailing custody and settlement practices, laws applicable to
the safekeeping and recovery of Financial Assets and Cash held in custody, and
the likelihood of nationalization, currency controls and the like) (collectively
("Country Risk")). Nothing contained herein shall require Bank to make any
selection or to engage in any monitoring on behalf of Customer that would entail
consideration of Country Risk.
(e) Bank shall provide to Customer such information relating to Country
Risk as is specified in Appendix 1-B hereto. Customer hereby acknowledges that:
(i) such information is solely designed to inform Customer of market conditions
and procedures and is not intended as a recommendation to invest or not invest
in particular markets; and (ii) Bank has gathered the information from sources
it considers reliable, but that Bank shall have no responsibility for
inaccuracies or incomplete information.
B. Add the following after the first sentence of Section 3 of the
Agreement: "At the request of Customer, Bank may, but need not, add to Schedule
A an Eligible Foreign Custodian where Bank has not acted as Foreign Custody
Manager with respect to the selection thereof. Bank shall notify Customer in the
event that it elects to add any such entity."
C. Add the following language to the end of Section 3 of the Agreement:
"The term Subcustodian as used herein shall mean the following:
(a) a 'U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7);
13
<PAGE>
(b) an 'Eligible Foreign Custodian,' which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such by
that country's government or an agency thereof, (ii) a majority-owned
direct or indirect subsidiary of a U.S. bank or bank holding company
which subsidiary is incorporated or organized under the laws of a
country other than the United States; and (iii) any other entity (other
than an Elibible Securities Depository) that shall have been so
qualified by exemptive order, rule or other appropriate action of the
SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall not include any Eligible Foreign Custodian as to which Bank
has not acted as Foreign Custody Manager or any Eligible Securities Depository."
<PAGE>
Appendix 1-A
ELIGIBLE SECURITIES DEPOSITORIES
<PAGE>
Appendix 1-B
Information Regarding Country Risk
1. To aid Customer in its determinations regarding Country Risk, Bank
shall furnish annually and upon the initial placing of Financial Assets and Cash
into a country the following information (check items applicable):
A Opinions of local counsel concerning:
__ i. Whether applicable foreign law would restrict the access afforded
Customer's independent public accountants to books and records kept by
an eligible foreign custodian located in that country.
___ ii. Whether applicable foreign law would restrict the Customer's ability
to recover its Financial Assets and Cash in the event of the
bankruptcy of an Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Customer's ability
to recover Financial Assets that are lost while under the control of
an Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The foreseeability of expropriation, nationalization, freezes, or
confiscation of Customer's Financial Assets and Cash.
___ ii. Whether difficulties in converting Customer's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.]
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Customer in monitoring Country Risk, Bank shall furnish board
the following additional information:
Market flashes, including with respect to changes in the information in
market reports.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
------------------------------------
dated_____199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received
by Bank or provided to Bank by its Subcustodians or third parties, and
(b) voting by Bank of proxies based on Customer Instructions. Original
proxy materials or copies thereof shall not be provided. Notifications
shall generally be in English and, where necessary, shall be
summarized and translated from such non-English materials as have been
made available to Bank or its Subcustodian. In this respect Bank's
only obligation is to provide information from sources it believes to
be reliable and/or to provide materials summarized and/or translated
in good faith. Bank reserves the right to provide Notifications, or
parts thereof, in the language received. Upon reasonable advance
request by Customer, backup information relative to Notifications,
such as annual reports, explanatory material concerning resolutions,
management recommendations or other material relevant to the exercise
of proxy voting rights shall be provided as available, but without
translation.
3. While Bank shall attempt to provide accurate and complete
Notifications, whether or not translated, Bank shall not be liable for
any losses or other consequences that may result from reliance by
Customer upon Notifications where Bank prepared the same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as
the agent of Customer, and shall not exercise any discretion with
regard to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Financial Assets are: (i) on loan; (ii) at registrar for registration
or reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations
or practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6 Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions
received from all customers).
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<PAGE>
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not
directly or indirectly compete with Bank or diminish the market for
Proxy Services by provision of such information, in whole or in part,
for compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished
to Bank in accordance with ss.10 of the Agreement. Proxy Services fees
shall be as set forth in ss.13 of the Agreement or as separately
agreed.
2
<PAGE>
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH -----------------------------------
DATE -----------------------------------
<PAGE>
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets in
the Accounts.
<PAGE>
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the pertinent
provisions of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
<PAGE>
[LOGO] CHASE
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 1999, and is between
THE CHASE MANHATTAN BANK ("Bank") and Master Enhanced S&P 500 Series of Index
Master Series Trust ("Customer").
1. Customer Accounts.
Bank, acting as "Securities Intermediary" (as defined in Section 15(g)
hereof) shall establish and maintain the following accounts ("Accounts"): (a) a
Custody Account (as defined in Section 15(b) hereof) in the name of Customer for
Financial Assets, which shall, except as modified by Section 15(d) hereof, mean
stocks, shares, bonds, debentures, notes, mortgages or other obligations for the
payment of money, bullion, coin and any certificates, receipts, warrants or
other instruments representing rights to receive, purchase or subscribe for the
same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3 hereof) for the account of
Customer, including as an "Entitlement Holder" as defined in Section 15(c)
hereof); and
(b) an account in the name of Customer ("Deposit Account") for any and
all cash in any currency received by Bank or its Subcustodian for the account of
Customer, which cash shall not be subject to withdrawal by draft or check.
Customer warrants its authority to: 1) deposit the cash and Financial
Assets (collectively "Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11 hereof) concerning the Accounts. Bank may deliver
Financial Assets of the same class in place of those deposited in the Custody
Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Financial Assets and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Financial Assets shall be held in the country or other jurisdiction
in which the principal trading market for such Financial Assets is located,
where such Financial Assets are to be presented for payment or where such
Financial Assets are acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
<PAGE>
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of Financial
Assets in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of customers
of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Financial Assets held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration, or, in the case of
cash deposits, except for liens or rights in favor of creditors of the
Subcustodian arising under bankruptcy, insolvency or similar laws. Where
Securities are deposited by a Subcustodian with a securities depository, Bank
shall cause the Subcustodian to identify on its books as belonging to Bank, as
agent, the Securities shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Customer with any particular
Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
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<PAGE>
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. Custody Account Transactions.
(a) Financial Assets shall be transferred, exchanged or delivered by
Bank or its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Financial Assets
received for, and delivery of Financial Assets out of, the Custody Account may
be made in accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivery of
Financial Assets to a purchaser, dealer or their agents against a receipt with
the expectation of receiving later payment and free delivery. Delivery of
Financial Assets out of the Custody Account may also be made in any manner
specifically required by Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Financial Assets with respect to any
sale, exchange or purchase of Financial Assets. Otherwise, such transactions
shall be credited or debited to the Accounts on the date cash or Financial
Assets are actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Financial Assets delivered pursuant to this
Section 6 are returned by the recipient thereof, Bank may reverse the
credits and debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Financial Assets which are called, redeemed
or retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
(b) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of Financial
Assets.
(c) Exchange interim receipts or temporary Financial Assets for
definitive Financial Assets.
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(d) Appoint brokers and agents for any transaction involving the
Financial Assets, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Financial Assets in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Financial Assets in the Custody
Account in respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning
the Financial Assets which requires discretionary action by the beneficial owner
of the Financial Assets (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate Actions"),
Bank shall give Customer notice of such Corporate Actions to the extent that
Bank's central corporate actions department has actual knowledge of a Corporate
Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person (as defined in Section 10
hereof), but if Instructions are not received in time for Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
Instructions, Bank is authorized to sell such rights entitlement or fractional
interest and to credit the Deposit Account with the proceeds or take any other
action it deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax
credits which apply in each applicable market in respect of income
payments on Financial Assets for the benefit of Customer which Bank
believes may be available to such Customer.
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(ii) The provision of tax reclaim services by Bank is
conditional upon Bank receiving from the beneficial owner of Financial
Assets (A) a declaration of its identity and place of residence and (B)
certain other documentation (pro forma copies of which are available
from Bank). Customer acknowledges that, if Bank does not receive such
declarations, documentation and information, additional United Kingdom
taxation shall be deducted from all income received in respect of
Financial Assets issued outside the United Kingdom and that U.S.
non-resident alien tax or U.S. backup withholding tax shall be deducted
from U.S. source income. Customer shall provide to Bank such
documentation and information as it may require in connection with
taxation, and warrants that, when given, this information shall be true
and correct in every respect, not misleading in any way, and contain
all material information. Customer undertakes to notify Bank
immediately if any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party
for any taxes, fines or penalties payable by Bank or Customer, and
shall be indemnified accordingly, whether these result from the
inaccurate completion of documents by Customer or any third party
acting as agent for Customer, or as a result of the provision to Bank
or any third party of inaccurate or misleading information or the
withholding of material information by Customer or any other third
party, or as a result of any delay of any revenue authority or any
other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or
levies required by any revenue or governmental authority for whatever
reason in respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect
to taxation levied by the revenue authorities of the countries notified
to Customer from time to time and Bank may, by notification in writing,
at its absolute discretion, supplement or amend the markets in which
the tax reclaim services are offered. Other than as expressly provided
in this sub-clause, Bank shall have no responsibility with regard to
Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Financial Assets and/or Cash held for
Customer.
(vii) Tax reclaim services may be provided by Bank or, in
whole or in part, by one or more third parties appointed by Bank (which
may be Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. Nominees.
Financial Assets which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer cause any such Financial
Assets to cease to be registered in the name of any such nominee and to be
registered in the name of Customer. In the event that any Financial Assets
registered in a nominee name are called for partial redemption by the issuer,
Bank may allot the called portion to the respective beneficial holders of such
class of security in any manner Bank deems to be fair and equitable. Customer
shall hold Bank, Subcustodians, and their respective nominees harmless from any
liability arising directly or indirectly from their status as a mere record
holder of Financial Assets in the Custody Account.
10. Authorized Persons.
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As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded. The term "Instructions" includes, without
limitation, instructions to sell, assign, transfer, deliver, purchase or receive
for the Custody Account, any and all stocks, bonds and other Financial Assets or
to transfer funds in the Cash Account.)
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties
as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. The Bank shall be
liable to the Customer for any loss which shall occur as the result of
the failure of a Subcustodian to exercise reasonable care with respect
to the safekeeping of such Assets to the same extent that the Bank
would be liable to the Customer if the Bank were holding such Assets in
New York. In the event of any loss to Customer by reason of the failure
of Bank or its Subcustodian to utilize reasonable care, Bank shall be
liable to Customer only to the extent of Customer's direct damages, to
be determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have
no liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if
Bank has been advised as to the possibility of the same and regardless
of the form of the action.
(ii) Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank. Bank shall not
be responsible for any act, omission, default or the solvency of any
broker or agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith.
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<PAGE>
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations hereunder, Bank may rely on the genuineness of any document
which it believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for Customer) on all matters and
shall be without liability for any action reasonably taken or omitted
pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable
for any loss which results from: 1) the general risk of investing, or
2) investing or holding Assets in a particular country including, but
not limited to, losses resulting from malfunction, interruption of or
error in the transmission of information caused by any machines or
system or interruption of communication facilities, abnormal operating
conditions, nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the
value of Assets.
(viii) Neither party shall be liable to the other for any loss
due to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war (whether declared or undeclared)
or terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Financial Assets;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other
than as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party
to which Financial Assets are delivered or payments are made pursuant
hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons issuing Instructions shall
bear any responsibility to review such confirmations against
Instructions issued to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank
or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to
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<PAGE>
other customers, act as financial advisor to the issuer of Financial Assets, act
as a lender to the issuer of Financial Assets, act in the same transaction as
agent for more than one customer, have a material interest in the issue of
Financial Assets, or earn profits from any of the activities listed herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth
in Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions. THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either
party, but shall bind the successors in interest of Customer and Bank. The
captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
__Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
__Other (specify)
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This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s)
[Check applicable rider(s)]:
__INVESTMENT COMPANY
__PROXY VOTING
__SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Financial Assets and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
full power and authority to perform its obligations hereunder, (B) this
Agreement constitutes its legal, valid and binding obligation; enforceable in
accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention:
Global Investor Services, Investment Management Group; and (b) Customer:______ .
(j) Termination. This Agreement may be terminated by Customer or Bank
by giving sixty (60) days written notice to the other, provided that such notice
to Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to
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<PAGE>
the provisions hereof, or to Authorized Persons, or may continue to hold the
Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a "Chinese Wall" arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting it.
15. Definitions.
As used herein, the following terms shall have the meaning hereinafter
stated:
a) "Certificated Security" shall mean a security that is represented by a
certificate.
b) "Custody Account" means each Securities custody account on Bank's records
to which Financial Assets are or may be credited pursuant hereto.
c) "Entitlement Holder" shall mean the person on the records of a Securities
Intermediary as the person having a Securities Entitlement against the
Securities Intermediary.
d) "Financial Asset" shall mean, as the context requires, either the asset
itself or the means by which a person's claim to it is evidenced, including
a Certificated Security or Uncertificated Security, a security certificate,
or a Securities Entitlement.
e) "Securities" means stocks, bonds, rights, warrants and other negotiable and
non-negotiable paper whether issued as Certificated Securities or
Uncertificated Securities and commonly traded or dealt in on securities
exchanges or financial markets, and other obligations of an issuer, or
shares, participations and interests in an issuer recognized in an area in
which it is issued or dealt in as a medium for investment and any other
property as shall be acceptable to Bank for the Custody Account.
f) "Securities Entitlement" shall mean the rights and property interest of an
Entitlement Holder with respect to a Financial Asset as set forth in Part 5
of the Uniform Commercial Code.
g) "Securities Intermediary" shall mean Bank, a Subcustodian, a securities
depository, and any other financial institution which in the ordinary
course of business maintains custody accounts for others and acts in that
capacity.
h) "Uncertificated Security" shall mean a security that is not represented by
a certificate.
i) "Uniform Commercial Code" means Article 8 of the Uniform Commercial Code of
the State of New York, as the same may be amended from time to time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
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CUSTOMER
By:-----------------------------------------
Title:
Date:
THE CHASE MANHATTAN BANK
By:-----------------------------------------
Title:
Date:
11
<PAGE>
STATE OF )
: ss.
COUNTY OF )
On this _________ day _________ of , 199 __, before me personally came
_________ , to me known, who being by me duly sworn, did depose and say that
he/she resides in___________at _________ , that he/she is of the entity
described in and which executed the foregoing instrument; that he/she knows the
seal of said entity, that the seal affixed to said instrument is such seal, that
it was so affixed by order of said entity, and that he/she signed his/her name
thereto by like order.
Sworn to before me this______
day of____________, 199__.
Notary
<PAGE>
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this _________ day of _________ , 199__, before me personally came
_________ , to me known, who being by me duly sworn, did depose and say that
he/she resides in ________at ________; that he/she is a Vice President of THE
CHASE MANHATTAN BANK, the corporation described in and which executed the
foregoing instrument; that he/she knows the seal of said corporation, that the
seal affixed to said instrument is such corporate seal, that it was so affixed
by order of the Board of Directors of said corporation, and that he/she signed
his/her name thereto by like order.
Sworn to before me this_____
day of ___________, 199__.
Notary
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
-----------------------------------------
effective ---------------
The following modifications are made to the Agreement:
A. Add a new Section 16 to the Agreement as follows:
"16. Compliance with SEC rule 17f-5.
(a) Customer's board of directors (or equivalent body) (hereinafter
`Board') hereby delegates to Bank, and, except as to the country or countries as
to which Bank may, from time to time, advise Customer that it does not accept
such delegation, Bank hereby accepts the delegation to it, of the obligation to
perform as Customer's `Foreign Custody Manager' (as that term is defined in SEC
rule 17f-5(a)(2) s promulgated under the Investment Company Act of 1940, as
amended ("1940 Act")), both for the purpose of selecting Eligible Foreign
Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may
be amended from time to time, or that have otherwise been made exempt pursuant
to an SEC exemptive order) to hold Financial Assets and Cash and of evaluating
the contractual arrangements with such Eligible Foreign Custodians (as set forth
in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign Custodian
shall not include any `Eligible Securities Depository.' An Eligible Securities
Depository for purposes hereof shall have the same meaning as in SEC rule 17f-7
as proposed on April 29, 1999. (Eligible Securities Depositories used by Bank as
of the date hereof are set forth in Appendix 1-A hereto, and as the same may be
amended on notice to Customer from time to time.)
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Customer's Board of the placement
of Financial Assets and Cash with particular Eligible Foreign
Custodians and of any material change in the arrangements with such
Eligible Foreign Custodians, with such reports to be provided to
Customer's Board at such times as the Board deems reasonable and
appropriate based on the circumstances of Customer's foreign custody
arrangements (and until further notice from Customer such reports shall
be provided not less than quarterly with respect to the placement of
Financial Assets and Cash with particular Eligible Foreign Custodians
and with reasonable promptness upon the occurrence of any material
change in the arrangements with such Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in
performing as Customer's Foreign Custody Manager as a person having
responsibility for the safekeeping of Financial Assets and Cash would
exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Financial Assets and Cash placed and maintained in the safekeeping
of such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Financial Assets and Cash, including, without limitation, those factors
set forth in SEC rule 17f-5(c)(1)(i)-(iv);
<PAGE>
(iv) determine that the written contract with the Eligible Foreign
Custodian requires that the Eligible Foreign Custodian will provide
reasonable care for Financial Assets and Cash based on the standards
applicable to custodians in the relevant market.
(v) have established a system to monitor the continued appropriateness
of maintaining Financial Assets and Cash with particular Eligible
Foreign Custodians and of the governing contractual arrangements; it
being understood, however, that in the event that Bank shall have
determined that the existing Eligible Foreign Custodian in a given
country would no longer afford Financial Assets and Cash reasonable
care and that no other Eligible Foreign Custodian in that country would
afford reasonable care, Bank shall promptly so advise Customer and
shall then act in accordance with the Instructions of Customer with
respect to the disposition of the affected Financial Assets and Cash.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Financial Assets and Cash on behalf of Customer with Eligible Foreign Custodians
pursuant to a written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer shall be solely
responsible to assure that the maintenance of Financial Assets and Cash
hereunder complies with the rules, regulations, interpretations and exemptive
orders promulgated by or under the authority of the SEC.
(d) Bank represents to Customer that it is a U.S. Bank as defined in
Rule 17f-5(a)(7). Customer represents to Bank that: (1) the Financial Assets and
Cash being placed and maintained in Bank's custody are subject to the 1940 Act,
as the same may be amended from time to time; (2) its Board: (i) has determined
that it is reasonable to rely on Bank to perform as Customer's Foreign Custody
Manager (ii) or its investment adviser shall have determined that Customer may
maintain Financial Assets and Cash in each country in which Customer's Financial
Assets and Cash shall be held hereunder and determined to accept the risks
arising therefrom (including, but not limited to, a country's financial
infrastructure), prevailing custody and settlement practices, laws applicable to
the safekeeping and recovery of Financial Assets and Cash held in custody, and
the likelihood of nationalization, currency controls and the like) (collectively
("Country Risk")). Nothing contained herein shall require Bank to make any
selection or to engage in any monitoring on behalf of Customer that would entail
consideration of Country Risk.
(e) Bank shall provide to Customer such information relating to Country
Risk as is specified in Appendix 1-B hereto. Customer hereby acknowledges that:
(i) such information is solely designed to inform Customer of market conditions
and procedures and is not intended as a recommendation to invest or not invest
in particular markets; and (ii) Bank has gathered the information from sources
it considers reliable, but that Bank shall have no responsibility for
inaccuracies or incomplete information.
B. Add the following after the first sentence of Section 3 of the
Agreement: "At the request of Customer, Bank may, but need not, add to Schedule
A an Eligible Foreign Custodian where Bank has not acted as Foreign Custody
Manager with respect to the selection thereof. Bank shall notify Customer in the
event that it elects to add any such entity."
C. Add the following language to the end of Section 3 of the Agreement:
"The term Subcustodian as used herein shall mean the following:
(a) a 'U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7);
<PAGE>
(b) an 'Eligible Foreign Custodian,' which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such by
that country's government or an agency thereof, (ii) a majority-owned
direct or indirect subsidiary of a U.S. bank or bank holding company
which subsidiary is incorporated or organized under the laws of a
country other than the United States; and (iii) any other entity (other
than an Elibible Securities Depository) that shall have been so
qualified by exemptive order, rule or other appropriate action of the
SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall not include any Eligible Foreign Custodian as to which Bank
has not acted as Foreign Custody Manager or any Eligible Securities Depository."
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Appendix 1-A
ELIGIBLE SECURITIES DEPOSITORIES
<PAGE>
Appendix 1-B
Information Regarding Country Risk
1. To aid Customer in its determinations regarding Country Risk, Bank
shall furnish annually and upon the initial placing of Financial Assets and Cash
into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access afforded
Customer's independent public accountants to books and records kept by
an eligible foreign custodian located in that country.
___ ii. Whether applicable foreign law would restrict the Customer's ability
to recover its Financial Assets and Cash in the event of the
bankruptcy of an Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Customer's ability
to recover Financial Assets that are lost while under the control of
an Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The foreseeability of expropriation, nationalization, freezes, or
confiscation of Customer's Financial Assets and Cash.
___ ii. Whether difficulties in converting Customer's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.]
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Customer in monitoring Country Risk, Bank shall furnish board
the following additional information:
Market flashes, including with respect to changes in the information in
market reports.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
------------------------------------
dated _____ 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received by
Bank or provided to Bank by its Subcustodians or third parties, and (b)
voting by Bank of proxies based on Customer Instructions. Original
proxy materials or copies thereof shall not be provided. Notifications
shall generally be in English and, where necessary, shall be summarized
and translated from such non-English materials as have been made
available to Bank or its Subcustodian. In this respect Bank's only
obligation is to provide information from sources it believes to be
reliable and/or to provide materials summarized and/or translated in
good faith. Bank reserves the right to provide Notifications, or parts
thereof, in the language received. Upon reasonable advance request by
Customer, backup information relative to Notifications, such as annual
reports, explanatory material concerning resolutions, management
recommendations or other material relevant to the exercise of proxy
voting rights shall be provided as available, but without translation.
3. While Bank shall attempt to provide accurate and complete
Notifications, whether or not translated, Bank shall not be liable for
any losses or other consequences that may result from reliance by
Customer upon Notifications where Bank prepared the same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as
the agent of Customer, and shall not exercise any discretion with
regard to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Financial Assets are: (i) on loan; (ii) at registrar for registration
or reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations
or practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6 Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions
received from all customers).
<PAGE>
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not
directly or indirectly compete with Bank or diminish the market for
Proxy Services by provision of such information, in whole or in part,
for compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished
to Bank in accordance with ss.10 of the Agreement. Proxy Services fees
shall be as set forth in ss.13 of the Agreement or as separately
agreed.
2
<PAGE>
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH -----------------------------------
DATE -----------------------------------
<PAGE>
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets in
the Accounts.
<PAGE>
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Financial Assets (the latter if held
in DTC), the following provisions shall apply rather than the pertinent
provisions of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Financial Assets in the Custody Account as call for voting
or relate to legal proceedings within a reasonable time after
sufficient copies are received by Bank for forwarding to its customers.
In addition, Bank shall follow coupon payments, redemptions, exchanges
or similar matters with respect to Financial Assets in the Custody
Account and advise Customer or the Authorized Person for such Account
of rights issued, tender offers or any other discretionary rights with
respect to such Financial Assets, in each case, of which Bank has
received notice from the issuer of the Financial Assets, or as to which
notice is published in publications routinely utilized by Bank for this
purpose.
INDEPENDENT AUDITORS' CONSENT
Index Master Series Trust
(formerly Merrill Lynch Index Trust):
We consent to the incorporation by reference in this Amendment No. 4 to
Registration Statement No. 811-7885 of our reports dated as follows:
February 16, 1999 S&P 500 Index Series
February 17, 1999 Aggregate Bond Index Series
February 18, 1999 Small Cap Index Series
February 18, 1999 International Index Series
appearing in the annual reports to shareholders for the year ended December 31,
1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
July 30, 1999
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in Part A and Part B of
Index Master Series Trust, filed as part of Registration Statement No. 811-7885.
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP
New York, New York
August 2, 1999
