Registration Nos. __________
__________
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. ___ / /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. ___ / /
(Check appropriate box or boxes)
E*TRADE FUNDS
(Exact name of Registrant as specified in charter)
2400 Geng Road
Palo Alto, CA 94303
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (650) 842-2500
Kathy Levinson
E*TRADE Securities, Inc.
2400 Geng Road
Palo Alto, CA 94303
(Name and address of agent for service)
Please send copies of all communications to:
David A. Vaughan, Esq. Kathy Levinson
Dechert Price & Rhoads E*TRADE Securities, Inc.
1775 Eye Street, NW 2400 Geng Road
Washington, DC 20006 Palo Alto, CA 94303
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
It is proposed that this filing will become effective (check appropriate box):
Immediately upon filing pursuant to paragraph (b)
- ------------
on (date) pursuant to paragraph (b)
- ------------
60 days after filing pursuant to paragraph (a)(1)
- ------------
75 days after filing pursuant to paragraph (a)(2) of Rule 485
- ------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
- -------------
<PAGE>
E*TRADE FUNDS
E*TRADE S&P 500 INDEX FUND
Prospectus dated ____________, 1999
E*TRADE Group, Inc. ("E*TRADE"), is a leader in providing secure online
investing services. E*TRADE's focus on technology has enabled it to eliminate
traditional barriers, creating one of the most powerful and economical investing
systems for the self-directed investor. To give you ultimate convenience and
control, E*TRADE offers electronic access to your account virtually anywhere, at
any time.
This Prospectus concisely sets forth information about the E*TRADE S&P 500 Index
Fund (the "Fund") that an investor needs to know before investing. Please read
this Prospectus carefully before investing, and keep it for future reference.
The Fund is a series of the E*TRADE Funds.
The Fund's investment objective is long-term capital appreciation. The Fund
seeks to achieve its objective by matching the total return of the stocks making
up the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
The Fund is designed for long-term investors and the value of the Fund's shares
will fluctuate over time. Only investors consenting to receive all information
about the Fund electronically will be permitted to become and remain
shareholders. The Fund is a true no-load fund, which means investors pay no
sales charges or 12b-1 fees.
Additional information about the Fund's investments is available in the Fund's
Statement of Additional Information and the annual and semi-annual reports (when
available). Each of these documents and periodic updates to this Prospectus are
available at our Website (www.etrade.com).
Please read this Prospectus carefully before you invest for important
information about the goals, risks, expenses and investment strategy applicable
to the Fund.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", and "Standard & Poor's 500(R)"
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by E*TRADE Funds. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the Fund.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated ____________, 1999
TABLE OF CONTENTS
RISK/RETURN SUMMARY...........................................................
FEES AND EXPENSES.............................................................
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS..................................................
FUND MANAGEMENT...............................................................
PRICING OF FUND SHARES........................................................
HOW TO BUY AND SELL SHARES....................................................
DIVIDENDS AND OTHER DISTRIBUTIONS.............................................
TAX CONSEQUENCES..............................................................
THE FUND'S STRUCTURE..........................................................
<PAGE>
RISK/RETURN SUMMARY
This is a summary. It should be read along with the rest of this Prospectus.
Investment Objectives/Goals
The Fund's investment objective is long-term capital appreciation. The Fund
seeks to achieve its objective by matching the total return of the stocks making
up the S&P 500 Index. The S&P 500 Index, a widely recognized benchmark for U.S.
stocks, currently represents about 75% of the value of all publicly traded
common stocks in the United States. The S&P 500 Index includes 500 established
companies representing different sectors of the U.S. economy (including
industrial, utilities, financial, and transportation). There can be no assurance
that the Fund will achieve its investment objective.
Principal Strategies
Currently, the Fund intends to match the performance of the S&P 500 Index by
investing substantially all of its assets in the same stocks and in
substantially the same percentages as the S&P 500 Index. To do so, the Fund
currently intends to invest all of its assets in the S&P 500 Index Master
Portfolio (the "Master Portfolio") of Master Investment Portfolio ("MIP"), an
open-end investment management company, rather than directly in a portfolio of
securities. The Master Portfolio, a series of MIP, has substantially the same
investment objectives as the Fund.
Generally, the Master Portfolio attempts to be fully invested at all times in
securities comprising the S&P 500 Index and in futures and options on stock
index futures. The Master Portfolio also may invest up to 10% of its total
assets in high-quality money market instruments to provide liquidity.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
Principal Risks
The stock market rises and falls daily. The S&P 500 Index represents a
significant segment of the U.S. stock market. The S&P Index also rises and falls
daily. As with any stock investment, the value of your investment in the Fund
will fluctuate, meaning you could lose money.
There is no assurance that the Fund will achieve its investment objective by
matching the S&P 500 Index. The Fund cannot as a practical matter own all the
stocks that make up the Index in perfect correlation to the S&P 500 Index
itself. The use of futures and options on futures is intended to help the Fund
match the S&P 500 Index but that may not be the result. The value of an
investment in the Fund depends to a great extent upon changes in market
conditions. The Fund seeks to track the S&P 500 Index down markets as well as up
markets.
FEES AND EXPENSES
This table describes the fees and expenses that you, as an investor in the Fund,
may pay if you buy and hold shares of the Fund. The Fund is new, therefore,
these are estimates.
<TABLE>
<S> <C>
Shareholder Fees*
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed in Reinvested Dividends and other
distributions None
Redemption Fee
(as a percentage of amount redeemed) ____%**
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees []%
Distribution (12b-1) Fees None
Other Expenses []%***
Total Operating Expenses []%
<FN>
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** The Fund charges a redemption fee for shares held less than 90 days.
*** Other expenses are based on estimated amounts for the current fiscal year.
</FN>
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year*. 3 years*
$------. $-------
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
The Fund's investment objective is long-term capital appreciation, which it
seeks to achieve by matching the total return of the stocks making up the S&P
500 Index. To do so, it will invest most of its assets in the same stocks and in
substantially the same percentages as the S&P 500 Index. There can be no
assurance that the Fund will achieve its investment objective. The weightings of
stocks in the S&P 500 Index are based on each stock's relative total market
capitalization; that is, its market price multiplied by the number of shares
outstanding. Standard & Poor's may change the stocks that make up the S&P 500
from time to time. The Fund will invest in whatever stocks are in the S&P 500
Index.
The Fund currently intends to invest all of its assets in the S&P 500 Index
Master Portfolio (the "Master Portfolio") of Master Investment Portfolio
("MIP"), an open-end investment management company, rather than directly in a
portfolio of securities. The Master Portfolio, a series of MIP, has
substantially the same investment objectives as the Fund.
Under normal market conditions, the Master Portfolio invests at least 90% of its
assets in the stocks making up the S&P 500 Index. That portion of its assets is
not actively managed but simply tries to mimic the S&P 500 Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the total return of its assets before expenses and the
S&P 500 Index. 100% correlation would mean the total return of the Master
Portfolio's assets would increase and decrease exactly the same as the S&P 500
Index. The Master Portfolio also invests in futures and options on stock index
futures. The Master Portfolio also may invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity.
The Fund is not managed according to traditional methods of "active" investment
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgment. Instead, the
Master Portfolio is managed by utilizing a "indexing" investment approach to
determine which securities are to be purchased or sold to replicate, to the
extent feasible, the investment characteristics of the S&P 500 Index through
computerized, quantitative techniques.
Many factors can affect stock market performance. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
The S&P 500 Index primarily reflects large-cap stocks. As a result, whenever
these stocks perform worse than mid- or small-cap stocks, the Fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever large-cap U.S. stocks fall behind other types of
investments--bonds or foreign stocks, for instance--the Fund's performance also
will lag those investments.
Like all stock funds, the Net Asset Value ("NAV") of the Fund will fluctuate
with the value of its assets. The assets held by the Fund will fluctuate based
on market and economic conditions, or other factors that affect particular
companies or industries. Since the investment characteristics and therefore, the
investment risks of the Fund, correspond to those of the Master Portfolio, the
following also includes discussion of the risks associated with the investments
of the Master Portfolio. The Fund's performance will correspond directly to the
performance of the Master Portfolio.
The Fund's ability to match its investment performance to the investment
performance of the S&P 500 Index may be affected by, among other things, the
Fund and the Master Portfolio's expenses, the amount of cash and cash
equivalents held by the Master Portfolio's investment portfolio, the manner in
which the total return of the S&P 500 Index is calculated and the timing,
frequency and size of shareholder purchases and redemptions of both the Fund and
the Master Portfolio. The Master Portfolio uses cash flows from shareholder
purchase and redemption activity to maintain, to the extent feasible, the
similarity of its portfolio to the securities comprising the S&P 500 Index.
The Fund uses futures contracts to gain exposure to the S&P 500 Index for its
cash balances, which could cause the Fund to track the S&P 500 Index less
closely if the futures contracts do not perform as expected. Similar to many
index funds, the Master Portfolio also may invest in futures and options
transactions and other derivative securities transactions to minimize the gap in
performance that naturally exists between any index fund and its index. This gap
will occur mainly because, unlike the index, the Master Portfolio and the Fund
incur expenses and must keep a portion of their assets in cash for paying
expenses and processing shareholders orders. By using futures, the Master
Portfolio and Fund potentially can offset the portion of the gap attributable to
their cash holdings. However, because some of the effect of expenses remains,
the Master Portfolio and the Fund's performance normally will be below that of
the S&P 500 Index. Additionally, if the futures contracts did not perform as
expected, the result could cause Master Portfolio and the Fund to track the S&P
500 Index less closely than expected.
The Master Portfolio also may invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity. Among other
purposes, the Master Portfolio needs liquidity to pay redemptions and fees.
The Fund may also lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the Fund's performance could be reduced.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the fund involve investment risks, including the possible loss
of principal.
FUND MANAGEMENT
Investment Advisors. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor") provides investment
advisory services to the Fund. The Investment Advisor is a wholly owned
subsidiary of E*TRADE and is located at 2400 Geng Road, Palo Alto, CA 94303.
E*TRADE is a leader in providing secure online investing services to the
self-directed investor and offers electronic access to an investor's account
virtually anywhere, at any time. The Investment Advisor is newly formed and
therefore has no prior experience as an investment adviser.
Subject to general supervision of the E*TRADE Funds' Board of Directors and in
accordance with the investment objective, policies and restrictions of the Fund,
the Investment Advisor has the authority to manage the Fund, to make decisions
with respect to, and place orders for, all purchases and sales of the Fund's
securities. It also provides the Fund with ongoing investment guidance and
policy direction. The Investment Advisor has not previously had responsibility
for managing a mutual fund; however, daily investment decisions will be made by
the Sub-Adviser to each Fund, whose investment experience is described below.
For its advisory services, the Fund pays the Investment Advisor an annual rate
of 0.05% of the Fund's average daily net assets.
Pursuant to a sub-advisory agreement with the Investment Advisor, Barclays
Global Fund Advisors ("BGFA" or "Sub-advisor"), also the Master Portfolio's
investment advisor, serves as the Sub-advisor to the Fund. BGFA provides
investment guidance and policy direction in connection with the management of
the Fund's assets, subject to the overall authority of the Board of Trustees and
the Investment Advisor's instruction and supervision. BGFA is a direct
subsidiary of Barclays Global Investors, N.A. (which, in turn, is an indirect
subsidiary of Barclays Bank PLC ("Barclays")) and is located at 45 Fremont
Street, San Francisco, California 94105. As of April 30, 1998, BGFA and its
affiliates provided investment advisory services for over $575 billion of
assets. The Sub-advisor is paid an annual rate of 0.05% of the Fund's average
daily net assets. This sub-advisory fee is not a separate expense of the Fund
but is paid by the Investment Advisor.
The Fund bears a pro rata portion of the investment advisory fees paid by the
Master Portfolio, as well as certain other fees paid by the Master Portfolio,
such as accounting, legal, and SEC registration fees. The Fund is also
responsible for its own expenses relating to, among other things, custodial and
fund accounting services, and transfer and dividend-disbursing agent services.
PRICING OF FUND SHARES
The Fund is a true no-load fund, which means you may buy or sell shares directly
at the net asset value ("NAV") determined after E*TRADE receives your request in
proper form. If E*TRADE receives such request prior to the close of the New York
Stock Exchange, Inc. ("NYSE") on a day on which the NYSE is open, your share
price will be the NAV determined that day.
The Fund's investment in the Master Portfolio is valued at the NAV of the Master
Portfolio's shares held by the Fund. The Master Portfolio calculates the NAV of
its shares on the same day and at the same time as the Fund. The Master
Portfolio's other assets are valued generally by using available market
quotations or at fair value as determined in good faith by the Board of Trustees
of MIP.
The Fund's NAV per share is calculated by taking the value of the Fund's assets
and dividing by the number of shares outstanding. Expenses are accrued daily and
applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (currently 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases and redemptions
are priced if the NYSE closes at a time other than 4:00 p.m. Eastern time or if
an emergency exists.
HOW TO BUY SHARES
Only E*Trade Securities, Inc. ("E*TRADE Securities"') customers may invest in
the Fund. Further, only E*TRADE Securities customers consenting to receive all
information about the Fund electronically will be permitted to become and remain
shareholders, unless a new class of shares of the Fund has been formed for those
shareholders reflecting the higher costs of paper-based information delivery.
Shareholders required to redeem their shares because they revoked their consent
to receive Fund information electronically may experience adverse tax
consequences.
How to Open an E*TRADE Securities Account
To open an E*TRADE Securities account, you must complete the application
available through our Website. E*TRADE Securities may impose various account and
transaction charges.
Electronically. You can access E*TRADE Securities' online application through
multiple electronic gateways, including the internet, WebTV, Prodigy, AT&T
Worldnet, Microsoft Investor, by GO ETRADE on CompuServe, with the keyword
ETRADE on America Online and via personal digital assistant. For more
information on how to access E*TRADE Securities electronically, please refer to
our online assistant E*STATION [at www.etrade.com] available 24 hours or call
1-800-786-2575 between 8:00 a.m. and midnight (eastern time), Monday - Friday.
By Mail. Complete and sign the application. Make your check or money order
payable to E*TRADE Securities, Inc. Mail to E*TRADE Securities, Inc., 2400 Geng
Road, Palo Alto, CA 94303.
Wire. Send wired funds to:
The Bank of New York
48 Wall Street
New York, NY 10286
ABA #021000018
FBO: E*TRADE Securities, Inc.
A/C #8900346256 for further credit to (your name and account number).
After your account is opened, E*TRADE will contact you with an account number so
that you can immediately wire funds.
Telephone. Request a new account kit by calling 1-800-786-2575 between 8:00 a.m.
and midnight, Monday - Friday (eastern time).
In Person. Stop by customer service in Palo Alto, California between 8:00 a.m.
and 5:00 p.m. Pacific time. Customer service will only accept checks or money
orders made payable to E*TRADE Securities, Inc.
HOW TO BUY AND SELL SHARES
Whether you are investing in the Fund for the first time or adding to an
existing investment, the Fund provides you with several methods to buy its
shares. Because the Fund's net asset value changes daily, your purchase price
will be the next net asset value determined after the Fund receives and accepts
your purchase order.
Minimum Investment Requirements:
For your initial investment in the Fund $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $ 250
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* If the value of your Fund investment falls below $250 because you have
redeemed shares, the Fund reserves the right to redeem your Fund shares. Before
taking such action, the Fund will provide you with written notice and at least
60 days to buy more shares to bring your investment up to $250.
To buy or sell shares, you may use any of the methods described below. You will
need the Fund symbol, which is []. You can only sell funds that are held in your
E*TRADE Securities account; that means you cannot "short" shares of the Fund.
You can access the money you have invested in the Fund at any time by selling
some or all of your shares back to the Fund. Please note that the Fund assesses
a []% fee on redemptions of Fund shares held for less than 90 days. As soon as
E*TRADE Securities receives the shares or the proceeds from the Fund, the
transaction will appear in your account. This usually occurs the business day
following the transaction, but in any event, no later than [seven] days
thereafter.
Electronically. You will be prompted to enter your trading password whenever you
perform a transaction so that we can be sure each buy or sell is secure. It is
for your own protection to make sure you or our co-account holder(s) are the
only people who can place orders in your E*TRADE account.
Telephone. You can use TELE*MASTER to place orders. TELE*MASTER is E*TRADE's
24-hour automated speech recognition system. It allows you to place stock or
options orders, get quotes, and receive trade confirmations through your
touch-tone phone.
Our built in verification system lets you double-check orders before they are
sent to the markets, and you can change or cancel any unfilled order subject to
prior execution.
You may also call 1-800-786-2575 to sell shares by phone through an E*TRADE
Securities broker for an additional $15.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-786-2571.
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1. If you transfer the ownership of your account to another individual or
organization.
2. When you submit a written redemption for more than $25,000.
3. When you request that redemption proceeds be sent to a different name or
address than is registered on your account.
4. If you add or change your name or add or remove an owner on your account.
5. If you add or change the beneficiary on your transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, including banks, savings associations, credit unions and
brokerage firms.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
Redemption Fee
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
The Fund can experience substantial price fluctuations and is intended for
long-term investors. Short-term "market timers" who engage in frequent purchases
and redemptions can disrupt the Fund's investment program and create additional
transaction costs that are borne by all shareholders. For these reasons, the
Fund assesses a []% fee on redemptions of fund shares held for less than 90
days.
Redemption fees will be paid to the Fund to help offset transaction costs. The
Fund will use the "first-in, first-out" (FIFO) method to determine the 90-day
holding period. Under this method, the date of the redemption will be compared
with the earliest purchase date of shares held in the account. If this holding
period is less than 90 days, the fee will be assessed. The fee may apply to
shares held through omnibus accounts or certain retirement plans.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date. Unless you choose
otherwise, all your dividends and capital gain distributions will be
automatically reinvested in additional Fund shares.
TAX CONSEQUENCES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely your own tax adviser for advice about the particular tax
consequences to you of investing in the Fund.
The Fund intends that each year it will meet certain tax law requirements that
will enable it to qualify as a "regulated investment company" under the Internal
Revenue Code. As a regulated investment company, the Fund generally will not
have to pay income tax on amounts it distributes to shareholders, although
shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. These distributions will typically be paid to
shareholders in December. If the Fund declares a dividend in October, November
or December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If a Fund designates a dividend as a capital gain distribution, you will
pay tax on that dividend at the long-term capital gains tax rate, no matter how
long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them.
The Fund will send you a tax report each year before January 31. The report will
tell you which dividends and redemptions must be treated as taxable ordinary
income and which (if any) are short-term or long-term capital gain.
THE FUND'S STRUCTURE
The Fund is a separate series of the E*TRADE Funds. The Fund is a feeder fund in
a master/feeder structure. Accordingly, the Fund invests all of its assets in
the Master Portfolio which has substantially the same investment objective as
the Fund. In addition to selling its shares to the Fund, the Master Portfolio
has and may continue to sell its shares to certain other mutual funds or other
accredited investors. The expenses and, correspondingly, the returns of other
investment options in the Master Portfolio may differ from those of the Fund.
The Fund's Board of Trustees (the "Board") believes that, as other investors
invest their assets in the Master Portfolio, certain economic efficiencies may
be realized with respect to the Master Portfolio. For example, fixed expenses
that otherwise would have been borne solely by the Fund (and the other existing
interestholders in the Master Portfolio) would be spread across a larger asset
base as more funds invest in the Master Portfolio. The Fund is liable for its
proportionate share of the obligations of the Master Portfolio. However, the
risk of the Fund incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists and the
Master Portfolio itself is unable to meet its obligations. Accordingly, the
Board believes that the Fund and its shareholders will not be adversely affected
by reason of investing all of the Fund's assets in the Master Portfolio.
However, if a mutual fund or other investor withdraws its investment from the
Master Portfolio, the economic efficiencies (e.g., spreading fixed expenses
across a larger asset base) that the Fund's Board believes should be available
through investment in the Master Portfolio may not be fully achieved or
maintained. In addition, given the relatively novel nature of the master/feeder
structure, accounting and operational difficulties could occur.
Fund shareholders may be asked to vote on matters concerning the Master
Portfolio.
The Fund may withdraw its investments in the Master Portfolio if the Board of
Trustees of the Fund determines that is in the best interests of the Fund and
its shareholders to do so. Upon any such withdrawal, the Board of Trustees of
the Fund would consider what action might be taken, including the investment of
all the assets of the Fund in another pooled investment entity having the same
investment objective as the Fund, direct management of a portfolio by the
Adviser or the hiring of another sub-advisor to manage the Fund's assets.
Investment of the Fund's assets in the Master Portfolio is not a fundamental
policy of the Fund and a shareholder vote is not required for the Fund to
withdraw its investment from the Master Portfolio.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated ___________, 1999
("SAI"), contains further information about the Fund. The SAI is incorporated
into this Prospectus by reference (that means it is legally considered part of
this Prospectus). Additional information about the Fund's investments will be
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its fiscal year. The first semi-annual report over the period of ________ to
_________ will be published about ________, 1999. The first annual report will
be published about _________. The SAI and the most recent annual and semi-annual
reports of the Fund are available, without charge, upon request by contacting
the Fund through our Website, e-mail ([email protected]) or by calling one of
the numbers listed below.
Further information about the Fund (including the SAI) can also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may call
1-800-SEC-0330 for information about the operations of the public reference
room. Reports and other information about the Fund are also available on the
SEC's Website (http://www.sec.gov) or copies can be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
E*TRADE Securities, Inc.
2400 Geng Road
Palo Alto, CA 94303
Telephone: (650) 842-2500
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act file no.:_____________
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
E*TRADE Funds
E*TRADE S&P 500 Index Fund
______________, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the prospectus for the E*TRADE S&P 500 Index Fund
(the "Fund"), as a separate series of the E*TRADE Funds, dated _________, 1999
(as amended from time to time).
The Funds' audited or unaudited financial statements are available in the
Fund's most recent annual shareholders report (when available) and are
incorporated by reference into this SAI.
To obtain a copy of the Fund's prospectus and the Fund's most recent shareholder
report free of charge, please access our Website online (www.etrade.com),
request it by e-mail ([email protected]) or by calling one of the numbers
listed below.
Only investors consenting to receive all information about the Fund
electronically will be permitted to become and remain shareholders.
TABLE OF CONTENTS
Page
FUND HISTORY..................................................................2
THE FUND......................................................................2
THE FUND'S INVESTMENT STRATEGIES AND RISKS....................................2
FUND POLICIES.................................................................8
TRUSTEES AND OFFICERS........................................................13
INVESTMENT MANAGEMENT........................................................14
SERVICE PROVIDERS............................................................15
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION...............................17
ORGANIZATION, DIVIDEND AND VOTING RIGHTS.....................................18
SHAREHOLDER INFORMATION......................................................19
TAXATION.....................................................................19
UNDERWRITER..................................................................23
MASTER PORTFOLIO ORGANIZATION................................................23
PERFORMANCE INFORMATION................................................... ..24
FINANCIAL STATEMENTS....................................................... .31
<PAGE>
FUND HISTORY
The E*TRADE S&P 500 Index Fund (the "Fund") is a diversified series of E*TRADE
Funds (the "Trust"). The Trust is organized as a Delaware business trust and was
formed on __________, 1998.
THE FUND
The Fund is classified as an open-end, management investment company. The Fund
investment objective is to seek investment results that match the total return
performance of the publicly traded common stocks in the aggregate, as
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index"). This investment objective is fundamental and therefore, cannot be
changed without approval of a majority (as defined in the 1940 Act, as amended
of the Fund's outstanding voting interests.
The Fund seeks to achieve its investment objective by investing all of its
assets in the same stocks in substantially the same percentage as the S&P 500
Index. To do so, the Fund currently intends to invest all of its assets in the
S&P 500 Index Master Portfolio (the "Master Portfolio"), which is a series of
Master Investment Portfolio ("MIP"), an open-end, management investment company.
However, this policy is not a fundamental policy of the Fund and a shareholder
vote is not required for the Fund to withdraw its investment from the Master
Portfolio.
THE FUND'S INVESTMENT STRATEGIES AND RISKS
The following investment strategies and risks supplement the discussion of the
Fund's investment objectives, policies, and techniques described in the
Prospectus and may be changed without shareholder approval unless otherwise
noted.
Futures contracts and options transactions. The Fund may enter into futures
contracts and may purchase and write options. A futures contract is an agreement
between two parties, a buyer and a seller, to exchange a particular commodity or
financial statement at a specific price on a specific date in the future. An
option transaction generally involves a right, which may or may not be
exercised, to buy or sell a commodity or financial instrument at a particular
price on a specified future date. The primary credit risk on futures contracts
is the creditworthiness of the exchange on which the futures contract is
traded.. Futures contracts are subject to market risk (i.e., exposure to adverse
price changes).
Upon exercise of an option on a futures contract, the writer of the option
delivers to the holder of the option the futures position and the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of options on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Fund.
In order to comply with undertakings made by the Fund pursuant to Commodity
Futures Trading Commission ("CFTC") Regulation 4.5, the Fund will use futures
and option contracts solely for bona fide hedging purposes within the meaning
and intent of CFTC Reg. 1.3(z); provided, however, that in addition, with
respect to positions in commodity futures or commodity option contracts which do
not come within the meaning and intent of CFTC Reg. 1.3(z), the aggregate
initial margin and premiums required to establish such positions will not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contract it has entered
into; and provided further, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount as defined in CFTC Reg.
190.01(x) may be excluded in computing such 5%.
The Fund's futures transactions must constitute permissible transactions
pursuant to regulations promulgated by the CFTC. In addition, the Fund may not
engage in futures transactions if the sum of the amount of initial margin
deposits and premiums paid for unexpired options on futures contracts, other
than those contracts entered into for bona fide hedging purposes, would exceed
5% of the liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on such contracts; provided, however,
that in the case of an option on a futures contract that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
liquidation limit. Pursuant to regulations and/or published positions of the
SEC, the Fund may be required to segregate cash or high quality money market
instruments in connection with its futures transactions in an amount generally
equal to the entire value of the underlying security.
Future Developments. The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and any
other derivative investments which are not presently contemplated for use by the
Fund or which are not currently available but which may be developed, to the
extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund. Before entering into such
transactions or making any such investment, the Fund will provide appropriate
disclosure in its prospectus.
Stock Index Futures and Options on Stock Index Futures. The Fund may invest in
stock index futures and options on stock index futures as a substitute for a
comparable market position in the underlying securities. A stock index future
obligates the seller to deliver (and the purchaser to take), effectively, an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. With respect to stock indices that
are permitted investments, the Fund intends to purchase and sell futures
contracts on the stock index for which it can obtain the best price with
consideration also given to liquidity. There can be no assurance that a liquid
market will exist at the time when the Fund seeks to close out a futures
contract or a futures option position. Lack of a liquid market may prevent
liquidation of an unfavorable position.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of loss
if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although the Fund
will generally purchase securities with the intention of acquiring them, the
Fund may dispose of securities purchased on a when-issued, delayed-delivery or a
forward commitment basis before settlement when deemed appropriate by the
adviser.
Certain of the securities in which the Fund may invest will be purchased on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of the commitment to purchase. The Fund only will make
commitments to purchase securities on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date
if it is deemed advisable. When-issued securities are subject to market
fluctuation, and no income accrues to the purchaser during the period prior to
issuance. The purchase price and the interest rate that will be received on debt
securities are fixed at the time the purchaser enters into the commitment.
Purchasing a security on a when-issued basis can involve a risk that the market
price at the time of delivery may be lower than the agreed-upon purchase price,
in which case there could be an unrealized loss at the time of delivery. The
Fund currently does not intend on investing more than 5% of its assets in
when-issued securities during the coming year. The Fund will establish a
segregated account in which it will maintain cash or liquid securities in an
amount at least equal in value to the Fund's commitments to purchase when-issued
securities. If the value of these assets declines, the Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
Short-term instruments and temporary investments -- The Funds may invest in
high-quality money market instruments on an ongoing basis to provide liquidity,
for temporary purposes when there is an unexpected level of shareholder
purchases or redemptions or when "defensive" strategies are appropriate. The
instruments in which the Fund may invest include: (i) short-term obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(including government-sponsored enterprises); (ii) negotiable certificates of
deposit ("CDs"), bankers' acceptances, fixed time deposits and other obligations
of domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and that are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC; (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by BGFA or Wells Fargo Bank; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of BGFA
or Wells Fargo Bank are of comparable quality to obligations of U.S. banks which
may be purchased by the Fund.
Bank Obligations. The Fund may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Fund will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay the
face amount of the instrument upon maturity. The other short-term obligations
may include uninsured, direct obligations, bearing fixed, floating- or
variable-interest rates.
Commercial Paper and Short-Term Corporate Debt Instruments. The Fund
may invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. The investment adviser
and/or sub-adviser to the Fund monitors on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.
The Fund also may invest in non-convertible corporate debt securities (e.g.,
bonds and debentures) with not more than one year remaining to maturity at the
date of settlement. The Fund will invest only in such corporate bonds and
debentures that are rated at the time of purchase at least "Aa" by Moody's or
"AA" by S&P. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The investment adviser and/or sub-adviser to the Fund
will consider such an event in determining whether the Fund should continue to
hold the obligation. To the extent the Fund continues to hold such obligations,
it may be subject to additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P and other nationally recognized statistical rating organizations
are more fully described in the attached Appendix on page ____.
Repurchase Agreements. The Fund may enter into a repurchase agreement wherein
the seller of a security to the Fund agrees to repurchase that security from the
Fund at a mutually-agreed upon time and price. The period of maturity is usually
quite short, often overnight or a few days, although it may extend over a number
of months. The Fund may enter into repurchase agreements only with respect to
securities that could otherwise be purchased by the Fund, including government
securities and mortgage-related securities, regardless of their remaining
maturities, and requires that additional securities be deposited with the
custodian if the value of the securities purchased should decrease below the
repurchase price.
The Fund may incur a loss on a repurchase transaction if the seller defaults and
the value of the underlying collateral declines or is otherwise limited or if
receipt of the security or collateral is delayed. The Fund's custodian has
custody of, and holds in a segregated account, securities acquired as collateral
by the Fund under a repurchase agreement. Repurchase agreements are considered
loans by the Fund. All repurchase transactions must be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
the Fund limits investments in repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Fund's advisor monitors on an ongoing basis the value of the collateral to
assure that it always equals or exceeds the repurchase price.
Letters of Credit. Certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper and other short-term
obligations) which the Fund may purchase may be backed by an unconditional and
irrevocable letter of credit of a bank, savings and loan association or
insurance company which assumes the obligation for payment of principal and
interest in the event of default by the issuer. Only banks, savings and loan
associations and insurance companies which, in the opinion the investment
advisor are of comparable quality to issuers of other permitted investments of
the Fund may be used for letter of credit-backed investments
Floating- and variable-rate obligations. The Fund may purchase debt instruments
with interest rates that are periodically adjusted at specified intervals or
whenever a benchmark rate or index changes. These adjustments generally limit
the increase or decrease in the amount of interest received on the debt
instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
Loans of portfolio securities. The Fund may lend securities from its portfolios
to brokers, dealers and financial institutions (but not individuals) in order to
increase the return on its portfolio. The value of the loaned securities may not
exceed one-third of the Fund's total assets and loans of portfolio securities
are fully collateralized based on values that are market-to-market daily. The
Fund will not enter into any portfolio security lending arrangement having a
duration of longer than one year. The principal risk of portfolio lending is
potential default or insolvency of the borrower. In either of these cases, the
Fund could experience delays in recovering securities or collateral or could
lose all or part of the value of the loaned securities. The Fund may pay
reasonable administrative and custodial fees in connection with loans of
portfolio securities and may pay a portion of the interest or fee earned thereon
the borrower or a placing broker.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Fund's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized and marked to market daily. The Fund will not enter
into any portfolio security lending arrangement having a duration of longer than
one year. Any securities that the Fund may receive as collateral will not become
part of the Fund's investment portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Fund is permitted to invest. During the time securities are on loan, the
borrower will pay the Fund any accrued income on those securities, and the Fund
may invest the cash collateral and earn income or receive an agreed-upon fee
from a borrower that has delivered cash-equivalent collateral.
Investment company securities. The Fund may invest in securities issued by other
open-end management investment companies which principally invest in securities
of the type in which such Fund invests. Under the 1940 Act, a Fund's investment
in such securities currently is limited to, subject to certain exceptions, (i)
3% of the total voting stock of any one investment company, (ii) 5% of the
Fund's net assets with respect to any one investment company and (iii) 10% of
the Fund's net assets in the aggregate. Investments in the securities of other
investment companies generally will involve duplication of advisory fees and
certain other expenses. The Funds may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. The Fund may invest up to 15% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Fund cannot exercise a demand feature on not more
than seven days' notice and as to which there is no secondary market and
repurchase agreements providing for settlement more than seven days after
notice.
Obligations of Foreign Governments, Banks and Corporations. The Fund may invest
in U.S. dollar-denominated short-term obligations issued or guaranteed by one or
more foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the investment adviser to be of
comparable quality to the other obligations in which the Fund may invest.
The Fund may also invest in debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Fund's assets invested in obligations of foreign governments and supranational
entities will vary depending on the relative yields of such securities, the
economic and financial markets of the countries in which the investments are
made and the interest rate climate of such countries.
The Fund may also invest a portion of its total assets in high quality,
short-term (one year or less) debt obligations of foreign branches of U.S. banks
or U.S. branches of foreign banks that are denominated in and pay interest in
U.S. dollars.
U.S. Government Obligations. The Fund may invest in various types of U.S.
Government obligations. U.S. Government obligations include securities issued or
guaranteed as to principal and interest by the U.S. Government and supported by
the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ
mainly in the length of their maturity. Treasury bills, the most frequently
issued marketable government securities, have a maturity of up to one year and
are issued on a discount basis. U.S. Government obligations also include
securities issued or guaranteed by federal agencies or instrumentalities,
including government-sponsored enterprises. Some obligations of such agencies or
instrumentalities of the U.S. Government are supported by the full faith and
credit of the United States or U.S. Treasury guarantees. Other obligation of
such agencies or instrumentalities of the U.S. Government are supported by the
right of the issuer or guarantor to borrow from the U.S. Treasury. Others by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality or only by the credit of the agency or
instrumentality issuing the obligation.
In the case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
government would provide financial support to its agencies or instrumentalities
(including government-sponsored enterprises) where it is not obligated to do so.
In addition, U.S. government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
Warrants. The Fund may invest up to 5% of its net assets in warrants. Warrants
represent rights to purchase securities at a specific price valid for a specific
period of time. The prices of warrants do not necessarily correlate with the
prices of the underlying securities. The Fund may only purchase warrants on
securities in which the Fund may invest directly.
Portfolio Turnover Rate. The portfolio turnover rate for the Fund generally is
not expected to exceed 50%. This portfolio turnover rate will not be a limiting
factor when the investment advisor deems portfolio changes appropriate.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e. due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction.
Unless indicated otherwise below, the Fund:
1. may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. may not with respect to 75% of its total assets, invest in a security if, as
a result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding securities of any one issuer;
3. may not issue senior securities, except as permitted under the 1940 Act;
4. may (1) borrow money from banks and (2) make other investments or engage in
other transactions permissible under the 1940 Act which may involve a borrowing,
provided that the combination of (1) and (2) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed), less the
Fund's liabilities (other than borrowings), except that the Fund may borrow up
to an additional 5% of its total assets (not including the amount borrowed) from
a bank for temporary or emergency purposes (but not for leverage or the purchase
of investments). The Fund may also borrow money from other persons to the extent
permitted by applicable law;
5. may not act as an underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the disposition of portfolio
securities;
6. may not purchase the securities of any issuer if, as a result, more than 25%
of the Fund's total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any particular
industry, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (or
repurchase agreement thereto);
7. may not purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
8. may not purchase or sell physical commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the Fund,
subject to restrictions described in the Prospectus and elsewhere in this
Statement of Additional Information , from purchasing, selling or entering into
futures contracts, options on futures contracts and other derivative
instruments, subject to compliance with any applicable provisions of the federal
securities or commodities laws;
9. may not lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in certain short-term or
temporary debt obligations, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and (c)
lend its portfolio securities in an amount not to exceed 33 1/3% of the Fund's
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the
directors of the Fund.
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. invest in the securities of a company for the purpose of exercising
management or control, but the Fund will vote the securities it owns in its
portfolio as a shareholder in accordance with its views;
2. pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the purchase of
securities on a when-issued or forward commitment basis and the deposit of
assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes;
3. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act;
4. purchase or retain securities of any issuer if the officers or trustees of
the Fund or officers or trustees of any affiliated investment companies or the
investment advisor owning beneficially more than one-half of one percent (0.5%)
of the securities of the issuer together owned beneficially more than 5% of such
securities;
5. invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities, or such other
amounts as may be permitted under the 1940 Act; and
6. may, notwithstanding any other fundamental investment policy or restriction,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment objective,
policies, and restrictions as the Fund.
Master Portfolio: Fundamental Investment Restrictions
The Master Portfolio is subject to the following fundamental investment
restrictions which cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Master Portfolio's outstanding
voting securities. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets except with respect to compliance with fundamental investment restriction
number 5, will not constitute a violation of such restriction
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested, and
securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. hold more than 10% of the outstanding voting securities of any single issuer.
This investment restriction applies only with respect to 75% of its total
assets;
3. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
Portfolio's fundamental policies (4) and (8) and non-fundamental policies (2)
and (3), may be deemed to give rise to a senior security; and
4. borrow money, except to the extent permitted under the 1940 Act, provided
that the Master Portfolio may borrow up to 20% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 20% of the current value of its
net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists). For purposes of this
investment restriction, the Master Portfolio's entry into options, forward
contracts, futures contracts, including those relating to indexes, and options
on futures contracts or indexes shall not constitute borrowing to the extent
certain segregated accounts are established and maintained by the Master
Portfolio;
5. act as an underwriter of securities of other issuers, except to the extent
that the Master Portfolio may be deemed an underwriter under the Securities Act
of 1933, as amended, by virtue of disposing of portfolio securities;
6. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that there
shall be no limitation with respect to investments in (i) obligations of the
U.S. government, its agencies or instrumentalities; or (ii) any industry in
which the S&P 500 Index becomes concentrated to the same degree during the same
period, the Master Portfolio will be concentrated as specified above only to the
extent the percentage of its assets invested in those categories of investments
is sufficiently larger than 25% or more of its total assets would be invested in
a single industry;
7. purchase, hold or deal in real estate, or oil, gas or other mineral leases or
exploration or development programs, but the Master Portfolio may purchase and
sell securities that are secured by real estate or issued by companies that
invest or deal in real estate;
8. invest in commodities, except that the Master Portfolio may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes;
9. make loans to others, except through the purchase of debt obligations and the
entry into repurchase agreements. However, the Master Portfolio may lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the Master Portfolio's Board of Trustees;
and
10. purchase securities on margin, but each Master Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those related to indexes, and options on futures contracts
or indexes;
Non-Fundamental Operating Policies
The Master Portfolio is subject to the following non-fundamental operating
policies which may be changed by the Board of Trustees of the Master Portfolio
without the approval of the holders of the Master Portfolio's outstanding
securities.
The Master Portfolio may not:
1. invest in the securities of a company for the purpose of exercising
management or control, but the Master Portfolio will vote the securities it owns
in its portfolio as a shareholder in accordance with its views;
2. pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the purchase of
securities on a when-issued or forward commitment basis and the deposit of
assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes;
3. purchase, sell or write puts, calls or combinations thereof, except as may be
described in the Master Portfolio's offering documents;
4. purchase securities of any company having less than three years' continuous
operations (including operations of any predecessors) unless the securities are
fully guaranteed or insured by the U.S. government, a state, commonwealth,
possession, territory, the District of Columbia or by an entity in existence at
least three years, or the securities are backed by the assets and revenues of
any of the foregoing if such purchase would cause the value of its investments
in all such companies to exceed 5% of the value of its total assets;
5. enter into repurchase agreements providing for settlement in more than seven
days after notice or purchase securities which are illiquid, if, in the
aggregate, more than 15% of the value of the Master Portfolio's net assets would
be so invested;
6. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act; and
7. purchase or retain securities of any issuer if the officers or trustees of
the Master Portfolio or officers or Trustees of any affiliated investment
companies or the investment advisor owning beneficially more than one-half of
one percent (0.5%) of the securities of the issuer together owned beneficially
more than 5% of such securities;
TRUSTEES AND OFFICERS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities and the
conformity with Delaware Law and the stated policies of the Fund. The Board
elects the officers of the Trust who are responsible for administering the
Fund's day-to-day operations. Trustees and officers of the Fund, together with
information as to their principal business occupations during the last five
years, and other information are shown below. Each "interested person," as
defined in the 1940 Act ("affiliated") is indicated by an asterisk (*).
The Trust pay each nonaffiliated Trustee an annual fee of [], plus $[] per Board
meeting for the Fund. In addition, the Trust reimburses each nonaffiliated
trustee for travel and other expenses incurred in connection with attendance at
such meetings. Other officers and trustees of the Trust receive no compensation
or expense reimbursement.
<TABLE>
<CAPTION>
Name, Address, and Age Position(s) Held with the Fund Principal Occupation(s) During the
Past 5 Years
<S> <C> <C>
*Kathy Levinson Trustee Ms. Levinson is executive vice president of E*TRADE Group,
2400 Geng Road Inc. and president and chief operating officer of E*TRADE
Palo Alto, CA 94303 Securities, Inc. She joined the company in January 1996
after serving as a consultant to E*TRADE during 1995. Prior
to that, Ms. Levinson was senior vice president of custody
services at Charles Schwab. She is also a former senior vice
president of credit services for Schwab. Ms. Levinson
received a BA in economics from Stanford University, a
Masters of Human Resources and Organization Development from
the University of San Francisco, and completed the Program
for Management Development at Harvard University.
*Leonard C. Purkis Trustee Mr. Purkis is chief financial officer and executive vice
2400 Geng Road Executive Vice President, president of finance and administration. He previously
Palo Alto, CA 94303 Finance and Admistration, served as chief financial officer for Iomega Corporation
and Chief Financial Officer from 1995 to 1998. Prior to joining Iomega, he served in
numerous senior level domestic and international finance
positions for General Electric Co. and its subsidiaries,
culminating his career there as senior vice president,
finance, for GE Capital Fleet Services. A native of Cardiff,
Wales, he is a graduate of the Institute of Chartered
Accountants in England and Wales, and began his career as an
audit manager at Coopers & Lybrand.
</TABLE>
Compensation Table
[Provide table]
Control Persons and Principal Holders of Securities
A shareholder that owns 25% or more of the Fund's voting securities is in
control of the Fund on matters submitted to a vote of shareholders.
INVESTMENT MANAGEMENT
E*TRADE Asset Management, Inc., the Fund's investment advisor, is a wholly owned
subsidiary of E*TRADE Group, Inc. ("E*TRADE").
The Master Portfolio's Investment Advisor. The advisor to the Master Portfolio
is Barclays Global Fund Advisors ("BGFA"). BGFA is an indirect subsidiary of
Barclays Bank PLC. Pursuant to an Investment Advisory Contract dated January 1,
1996 (the "Advisory Contract") with the Master Portfolio, BGFA provides
investment guidance and policy direction in connection with the management of
the Master Portfolio's assets. Pursuant to the Advisory Contract, BGFA furnishes
to the Master Portfolio's Boards of Trustees periodic reports on the investment
strategy and performance of the Master Portfolio.
BGFA is entitled to receive monthly fees at the annual rate of 0.05% of the
average daily net assets of the Master Portfolio as compensation for its
advisory services to the Master Portfolio. The Advisory Contract provides that
the advisory fee is accrued daily and paid monthly. This advisory fee is an
expense of the Master Portfolio borne proportionately by its interestholders,
such as the Fund.
The Advisory Contract for the Master Portfolio provides that if, in any fiscal
year, the total expenses of the Master Portfolio (excluding taxes, interest,
brokerage commissions and its extraordinary expenses but including the fees
provided for in the Advisory Contract) exceed the most restrictive expense
limitation applicable to the Master Portfolio imposed by the securities laws or
regulations of the states having jurisdiction over the Master Portfolio, BGFA
shall waive its fees under the Advisory Contract for the fiscal year to the
extent of the excess or reimburse the excess, but only to the extent of its
fees.
BGFA has agreed to provide to the Master Portfolio, among other things, money
market security and fixed-income research, analysis and statistical and economic
data and information concerning interest rate and security market trends,
portfolio composition, credit conditions and average maturities of the Master
Portfolio's investment portfolio.
The Advisory Contract will continue in effect for more than two years provided
the continuance is approved annually (i) by the holders of a majority of the
Master Portfolio's outstanding voting securities or by the Master Portfolio's
Boards of Trustees and (ii) by a majority of the Trustees of the Master
Portfolio who are not parties to the Advisory Contract or affiliated of any such
party. The Advisory Contract may be terminated on 60 days' written notice by
either party and will terminate automatically if assigned.
Asset allocation and modeling strategies are employed by BGFA for other
investment companies and accounts advised or sub-advised by BGFA. If these
strategies indicate particular securities should be purchased or sold at the
same time by the Master Portfolio and one or more of these investment companies
or accounts, available investments or opportunities for sales will be allocated
equitably to each by BGFA. In some cases, these procedures may adversely affect
the size of the position obtained for or disposed of by the Master Portfolio or
the price paid or received by the Master Portfolio.
SERVICE PROVIDERS
Principal Underwriter. E*TRADE Securities, Inc., 2400 Geng Road, Palo Alto, CA
94303, is the Funds principal underwriter.
Administrator and Placement Agent of the Master Portfolio. Stephens, Inc.
("Stephens"), and Barclays Global Investors, N.A. ("BGI") serve as
co-administrators on behalf of the Master Portfolio. Under the Co-Administration
Agreement between Stephens, BGI and the Master Portfolio, Stephens and BGI
provide as administrative services, among other things: (i) general supervision
of the operation of the Master Portfolio, including coordination of the services
performed by the investment advisor, transfer and dividend disbursing agent,
custodian, shareholder servicing agent(s), independent auditors and legal
counsel; (ii) general supervision of regulatory compliance matters, including
the compilation of information for documents such as reports to, and filings
with, the SEC and state securities commissions; and preparation of proxy
statements and shareholder reports for the Master Portfolio; and (iii) general
supervision relative to the compilation of data required for the preparation of
periodic reports distributed to the Master Portfolio's officers and Board.
Stephens also furnishes office space and certain facilities required for
conducting the business of the Master Portfolio together with those ordinary
clerical and bookkeeping services that are not furnished by BGFA. Stephens also
pays the compensation of the Master Portfolio's trustees, officers and employees
who are affiliated with Stephens. Furthermore, except as provided in the
advisory contract, Stephens and BGI bears substantially all costs of the Master
Portfolio and the Master Portfolio's operations. However, Stephens and BGI are
not required to bear any cost or expense which a majority of the nonaffiliated
trustees of the Master Portfolio deem to be an extraordinary expense.
Stephens also acts as the placement agent of Master Portfolio's shares pursuant
to a Placement Agency Agreement (the "Placement Agency Agreement") with the
Master Portfolio.
Custodian and Fund Accounting Services Agent. Investors Bank & Trust Company
("IBT"), 200 Clarendon Street, Boston, MA 02111, serves as custodian of the
assets of the Fund and Master Portfolio. As a result, IBT has custody of all
securities and cash of the Fund and the Master Portfolio, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments, and performs other duties, all as directed by
the officers of the Fund and the Master Portfolio. The custodian has no
responsibility for any of the investment policies or decisions of the Fund and
the Master Portfolio. IBT also acts as the Fund's Accounting Services Agent.
Transfer Agent and Dividend Disbursing Agent. PFPC, Inc., 406 Bellevue Parkway,
Wilmington, DE 19809, acts as transfer agent and dividend-disbursing agent for
the Fund. PFPC is compensated based on an annual fee per open account of [],
plus out-of-pocket expenses, such as postage and printing expenses in connection
with shareholder communications.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement with
the Fund dated [], 1998, E*TRADE Securities, Inc., 2400 Geng Road, Palo Alto, CA
94303, acts as shareholder servicing agent for the Fund. As shareholder
servicing agent, E*TRADE Securities, Inc. provides personal services to the
Fund's shareholders and maintains the Fund's shareholder accounts. Such services
include, (i) answering shareholder inquiries regarding account status and
history, the manner in which purchases and redemptions of the Fund's shares may
be effected, and certain other matters pertaining to the Fund; (ii) assisting
shareholders in designating and changing dividend options, account designations
and addresses; (iii) providing necessary personnel and facilities to coordinate
the establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; (iv) transmitting shareholders' purchase and redemption
orders to the Fund's transfer agent; (v) arranging for the wiring or other
transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem shares of the Fund; (vi) verifying
purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (vii) informing the distributor of the Fund of
the gross amount of purchase and redemption orders for the Fund's shares; (viii)
provide certain printing and mailing services, such as printing and mailing of
shareholder account statements, checks, and tax forms; (ix) monitoring the
activities of the Fund's transfer agent related to shareholders' accounts; and
(x) providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law.
Independent Accountants. [], has been selected as the independent accountants
for the Fund and the Master Portfolio, providing audit services and assistance
with respect to the preparation of filings with the SEC.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, DC
20006-2401, acts as legal counsel for the Fund
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
The Master Portfolio has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Master Portfolio's Board of Trustees, BGFA as
advisor, is responsible for the Master Portfolio's investment portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Master Portfolio to obtain the best results taking into
account the broker/dealer's general execution and operational facilities, the
type of transaction involved and other factors such as the broker/dealer's risk
in positioning the securities involved. While BGFA generally seek reasonably
competitive spreads or commissions, the Master Portfolio will not necessarily be
paying the lowest spread or commission available.
Purchase and sale orders of the securities held by the Master Portfolio may be
combined with those of other accounts that BGFA manages, and for which it has
brokerage placement authority, in the interest of seeking the most favorable
overall net results. When BGFA determines that a particular security should be
bought or sold for the Master Portfolio and other accounts managed by BGFA, BGFA
undertakes to allocate those transactions among the participants equitably
Under the 1940 Act, persons affiliated with the Master Portfolio such as
Stephens, BGFA and their affiliates are prohibited from dealing with the Master
Portfolio as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC or an
exemption is otherwise available.
Except in the case of equity securities purchased by the Master Portfolio,
purchases and sales of securities usually will be principal transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. The Master Portfolio
also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, money market
securities, adjustable rate mortgage securities ("ARMS"), municipal obligations,
and collateralized mortgage obligations ("CMOs") are traded on a net basis and
do not involve brokerage commissions. The cost of executing the Master
Portfolio's investment portfolio securities transactions will consist primarily
of dealer spreads and underwriting commissions.
Purchases and sales of equity securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or BGI. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount
In placing orders for portfolio securities of the Master Portfolio, BGFA is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that BGFA seeks to execute each transaction at a
price and commission, if any, that provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. While BGFA generally seeks
reasonably competitive spreads or commissions, the Master Portfolio will not
necessarily be paying the lowest spread or commission available. In executing
portfolio transactions and selecting brokers or dealers, BGFA seeks to obtain
the best overall terms available for the Master Portfolio. In assessing the best
overall terms available for any transaction, BGFA considers factors deemed
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. Rates are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Master Portfolio's Board of Trustees.
Certain of the brokers or dealers with whom the Master Portfolio may transact
business offers commission rebates to the Master Portfolio. BGFA considers such
rebates in assessing the best overall terms available for any transaction. The
overall reasonableness of brokerage commissions paid is evaluated by BGFA based
upon its knowledge of available information as to the general level of
commission paid by other institutional investors for comparable services.
ORGANIZATION, DIVIDEND AND VOTING RIGHTS
The Fund is a diversified series of E*TRADE Funds (the "Trust"), an open-end
investment company, organized as a Delaware business Trust on [DATE]. The Trust
may issue additional series and classes.
All shareholders may vote on each matter presented to shareholders. Fractional
shares have the same rights proportionately as do full shares. Shares of the
Trust have no preemptive, conversion, or subscription rights. If the Trust
issues additional series, each series of shares will be held separately by the
custodian, and in effect each series will be a separate fund.
All shares of the Trust have equal voting rights. Approval by the shareholders
of a fund is effective as to that fund whether or not sufficient votes are
received from the shareholders of the other investment portfolios to approve the
proposal as to those investment portfolios.
Generally, the Trust will not hold an annual meeting of shareholders unless
required by the 1940 Act. The Trust has undertaken to hold a special meeting of
its shareholders for the purpose of voting on the question of removal of a
Trustee or Trustees if requested in writing by the holders of at least 10% of
the Trust's outstanding voting securities, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of the Fund represents an equal proportional interest in the Fund and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to the Fund as are declared in the discretion of the Trustees.
In the event of the liquidation or dissolution of the Trust, shareholders of a
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular investment portfolio that are available for
distribution in such manner and on such basis as the Trustees in their sole
discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid and non-assessable by the Trust.
SHAREHOLDER INFORMATION
Pricing of Fund Shares. The net asset value of the Fund will be determined as of
the close of trading on each day the New York Stock Exchange ("NYSE") is open
for trading. The NYSE is open for trading Monday through Friday except, New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE by accessing our Web site. You may fill out an IRA application online or
request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated
investment company under Subchapter M of the Code. Accordingly, the Fund must,
among other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's total assets is represented by cash and cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. Government securities and the securities of other
regulated investment companies).
As a regulated investment company, the Fund generally is not subject to
U.S. federal income tax on income and gains that it distributes to shareholders,
if at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income
(including net short-term capital gains) are taxable to a U.S. shareholder as
ordinary income, whether paid in cash or shares. Dividends paid by the Fund to a
corporate shareholder, to the extent such dividends are attributable to
dividends received by the Fund from U.S. corporations, may, subject to
limitation, be eligible for the dividends received deduction. However, the
alternative minimum tax applicable to corporations may reduce the value of the
dividends received deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) designated by
the Fund as capital gain dividends, whether paid in cash or reinvested in Fund
shares, will generally be taxable to shareholders as long-term capital gain,
regardless of how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form of
newly issued shares will receive a report as to the net asset value of the
shares received. A distribution will be treated as paid on December 31 of a
calendar year if it is declared by the Fund in October, November or December of
that year with a record date in such a month and paid by the Fund during January
of the following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost
as a result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions. Upon a redemption, sale or exchange of shares of the
Fund, a shareholder will realize a taxable gain or loss depending upon his or
her basis in the shares. A gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for not more than one
year. Any loss realized on a redemption, sale or exchange will be disallowed to
the extent the shares disposed of are replaced (including through reinvestment
of dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. If a shareholder holds
Fund shares for six months or less and during that period receives a
distribution taxable to the shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term loss to the extent of such distribution.
Backup Withholding. The Fund generally will be required to withhold
federal income tax at a rate of 31% ("backup withholding") from dividends paid,
capital gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
Other Taxation. Distributions may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Market Discount. If the Fund purchases a debt security at a price lower
than the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund
may be treated as debt securities that were originally issued at a discount.
Very generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Fund may invest may be "section 1256 contracts." Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by
the Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have
been promulgated, the consequences of such transactions to the Fund are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
UNDERWRITER
Distribution of Securities. Under a Distribution Agreement with the Fund
("Distribution Agreement"), E*TRADE Securities Inc., 2400 Geng Road, Palo Alto,
CA 94303, acts as underwriter of the Fund's shares. The Fund pays no
compensation to E*TRADE Securities, Inc. for its distribution services. The
Distribution Agreement provides that the Distributor will use its best efforts
to distribute the Fund's shares.
The Fund is a no-load fund, therefore investors pay no sales charges when buying
or selling shares of the Fund. The Distribution Agreement further provides that
the Distributor will bear the additional costs of printing prospectuses and
shareholder reports which are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of the Fund's shares. The
Distributor is a wholly-owned subsidiary of E*TRADE Group, Inc. The Distribution
Agreement is subject to the same termination and renewal provisions as are
described above with respect to the Advisory Agreement.
MASTER PORTFOLIO ORGANIZATION
The Master Portfolio is a series of Master Investment Portfolio ("MIP"), an
open-end, series management investment company organized as Delaware business
trust. MIP was organized on October 21 1993. In accordance with Delaware law and
in connection with the tax treatment sought by MIP, the Declaration of Trust
provides that its investors are personally responsible for Trust liabilities and
obligations, but only to the extent the Trust property is insufficient to
satisfy such liabilities and obligations. The Declaration of Trust also provides
that MIP must maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its investors,
trustees, officers, employees and agents covering possible tort and other
liabilities, and that investors will be indemnified to the extent they are held
liable for a disproportionate share of MIP's obligations. Thus, the risk of an
investor incurring financial loss on account of investor liability is limited to
circumstances in which both inadequate insurance existed and MIP itself was
unable to meet its obligations.
The Declaration of Trust further provides that obligations of MIP are not
binding upon its trustees individually but only upon the property of MIP and
that the trustees will not be liable for any action or failure to act, but
nothing in the Declarations of Trust protects a trustee against any liability to
which the trustee would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of the trustee's office.
The interests in the Master Portfolio have substantially identical voting and
other rights as those rights enumerated above for shares of the Fund. MIP is
generally not required to hold annual meetings, but is required by Section 16(c)
of the 1940 Act to hold a special meeting and assist investor communications
under certain circumstances. Whenever the Fund is requested to vote on a matter
with respect to the Master Portfolio, the Fund will hold a meeting of Fund
shareholders and will cast its votes as instructed by such shareholders.
In a situation where the Fund does not receive instruction from certain of its
shareholders on how to vote the corresponding shares of the Master Portfolio,
such Fund will vote such shares in the same proportion as the shares for which
the Fund does receive voting instructions.
PERFORMANCE INFORMATION
The Fund may advertise a variety of types of performance information as more
fully described below. The Fund's performance is historical and past performance
does not guarantee the future performance of the Fund. From time to time,
E*TRADE may agree to waive or reduce its management fee and/or to reimburse
certain operating expenses of the Fund. Waivers of management fees and
reimbursement of other expenses will have the effect of increasing the Fund's
performance.
Average Annual Total Return. The Fund's average annual total return quotation is
computed in accordance with a standardized method prescribed by rules of the
SEC. The average annual total return for the Fund for a specific period is
calculated as follows:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the applicable period at the end of the period.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value on the reinvestment dates during
the period and all recurring fees charges to all shareholder accounts are
included.
Total Return. Calculation of the Fund's total return is not subject to a
standardized formula. Total return performance for a specific period is
calculated by first taking an investment (assumed below to be $1,000) ("initial
investment") in the Fund's shares on the first day of the period and computing
the "ending value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net asset value of the
Fund on the reinvestment dates during the period. Total return may also be shown
as the increased dollar value of the hypothetical investment over the period.
Cumulative Total Return. Cumulative total return represents the simple change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount. Total returns and cumulative total returns may be broken
down into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
Distribution Rate. The distribution rate for the Fund is computed, according to
a non-standardized formula by dividing the total amount of actual distributions
per share paid by the Fund over a twelve month period by the Fund's net asset
value on the last day of the period. The distribution rate differs from the
Fund's yield because the distribution rate includes distributions to
shareholders from sources other than dividends and interest, such as short-term
capital gains. Therefore, the Fund's distribution rate may be substantially
different than its yield. Both the Fund's yield and distribution rate will
fluctuate.
Yield. The yield will be calculated based on a 30-day (or one-month) period,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period and
annualizing the result, according to the following formula:
YIELD = 2[(a-b+1)6-1],
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
The net investment income of a Fund includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in a Fund's net investment income.
Performance Comparisons:
U.S. Treasury Bills, Notes, or Bonds. Investors may want to compare the
performance of the Fund to that of U.S. Treasury bills, notes, or bonds, which
are issued by the U.S. Government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
Certificates of Deposit. Investors may want to compare the Fund's performance to
that of certificates of deposit offered by banks and other depositary
institutions. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by the
issuing institution
Money Market Funds. Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other Independent Ranking
Organizations. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value, with
all income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Fund will be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. The Fund's performance may also be compared to the average
performance of its Lipper category.
Morningstar, Inc. The Fund's performance may also be compared to the performance
of other mutual funds by Morningstar, Inc., which rates funds on the basis of
historical risk and total return. Morningstar's ratings range from five stars
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average for 3, 5,
and 10 year periods. Ratings are not absolute and do not represent future
results.
Independent Sources. Evaluations of fund performance made by independent sources
may also be used in advertisements concerning the Fund, including reprints of,
or selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for fund performance and articles about the Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money, Financial
World, Business Week, U.S. News and World Report, The Wall Street Journal,
Barron's, and a variety of investment newsletters
Indices. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
Historical Asset Class Returns. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond prices
generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
Chart 1, below, illustrates the long-term performance of stocks invested in the
S&P 500, with dividends reinvested, compared to the long-term performance of
government bonds.
CHART 1-Growth of Stocks, Bonds & Inflation
Long-Term
Year S&P 500 Govt. Bonds Inflation
Dec-25 1.00 1.00 1.00
Dec-26 1.12 1.08 0.99
Dec-27 1.53 1.17 0.96
Dec-28 2.20 1.18 0.96
Dec-29 2.02 1.22 0.96
Dec-30 1.52 1.27 0.90
Dec-31 0.86 1.20 0.81
Dec-32 0.79 1.41 0.73
Dec-33 1.21 1.41 0.73
Dec-34 1.20 1.55 0.75
Dec-35 1.77 1.62 0.77
Dec-36 2.37 1.75 0.78
Dec-37 1.54 1.75 0.80
Dec-38 2.02 1.85 0.78
Dec-39 2.01 1.96 0.78
Dec-40 1.81 2.08 0.79
Dec-41 1.60 2.10 0.86
Dec-42 1.93 2.16 0.94
Dec-43 2.43 2.21 0.97
Dec-44 2.91 2.27 0.99
Dec-45 3.96 2.51 1.01
Dec-46 3.64 2.51 1.20
Dec-47 3.85 2.45 1.31
Dec-48 4.06 2.53 1.34
Dec-49 4.83 2.69 1.32
Dec-50 6.36 2.69 1.39
Dec-51 7.89 2.59 1.48
Dec-52 9.34 2.62 1.49
Dec-53 9.24 2.71 1.50
Dec-54 14.11 2.91 1.49
Dec-55 18.56 2.87 1.50
Dec-56 19.78 2.71 1.54
Dec-57 17.65 2.91 1.59
Dec-58 25.30 2.73 1.61
Dec-59 28.32 2.67 1.64
Dec-60 28.45 3.04 1.66
Dec-61 36.11 3.07 1.67
Dec-62 32.95 3.28 1.69
Dec-63 40.47 3.32 1.72
Dec-64 47.14 3.44 1.74
Dec-65 53.01 3.46 1.78
Dec-66 47.67 3.59 1.84
Dec-67 59.10 3.26 1.89
Dec-68 65.64 3.25 1.98
Dec-69 60.06 3.09 2.10
Dec-70 62.47 3.46 2.22
Dec-71 71.41 3.92 2.29
Dec-72 84.96 4.14 2.37
Dec-73 72.50 4.09 2.58
Dec-74 53.31 4.27 2.89
Dec-75 73.14 4.67 3.10
Dec-76 90.58 5.45 3.24
Dec-77 84.08 5.41 3.46
Dec-78 89.59 5.35 3.78
Dec-79 106.11 5.28 4.28
Dec-80 140.51 5.07 4.81
Dec-81 133.62 5.17 5.24
Dec-82 162.22 7.25 5.44
Dec-83 198.75 7.30 5.65
Dec-84 211.20 8.43 5.87
Dec-85 279.12 11.04 6.10
Dec-86 330.67 13.74 6.16
Dec-87 347.97 13.37 6.44
Dec-88 406.46 14.67 6.72
Dec-89 534.46 17.32 7.03
Dec-90 517.50 18.39 7.46
Dec-91 675.59 21.94 7.69
Dec-92 727.41 23.71 7.91
Dec-93 800.08 28.03 8.13
Dec-94 810.54 25.86 8.35
Dec-95 1,113.92 34.04 8.56
Dec-96 1,370.90 33.73 8.85
Dec-97 1828.33 39.07 9.00
Source: Ibbotson Associates, Stocks, Bonds, Bills
and Inflation.
In contrast to bond investors, common stock investors forego the certainty of
coupon interest payments. However, they enjoy the potential for increased
dividend income if the issuing company prospers. As indicated below, Chart 2
compares the growth of dividends from S&P 500 stocks with the rate of inflation
over a 50-year period.
CHART 2-Growth of Dividends vs. Inflation
Inflation S&P 500 Dividends
Dec-48 1.12 1.31
Dec-49 1.10 1.61
Dec-50 1.16 2.07
Dec-51 1.23 1.99
Dec-52 1.24 1.99
Dec-53 1.25 2.04
Dec-54 1.24 2.17
Dec-55 1.25 2.31
Dec-56 1.28 2.45
Dec-57 1.32 2.52
Dec-58 1.35 2.46
Dec-59 1.37 2.58
Dec-60 1.39 2.75
Dec-61 1.40 2.85
Dec-62 1.41 3.00
Dec-63 1.44 3.21
Dec-64 1.45 3.52
Dec-65 1.48 3.83
Dec-66 1.53 4.04
Dec-67 1.58 4.11
Dec-68 1.65 4.32
Dec-69 1.75 4.45
Dec-70 1.85 4.42
Dec-71 1.91 4.32
Dec-72 1.98 4.44
Dec-73 2.15 4.76
Dec-74 2.41 5.07
Dec-75 2.58 5.18
Dec-76 2.71 5.70
Dec-77 2.89 6.58
Dec-78 3.15 7.14
Dec-79 3.57 7.96
Dec-80 4.01 8.68
Dec-81 4.37 9.34
Dec-82 4.54 9.68
Dec-83 4.71 9.99
Dec-84 4.90 10.61
Dec-85 5.08 11.13
Dec-86 5.14 11.66
Dec-87 5.37 12.41
Dec-88 5.60 13.70
Dec-89 5.86 15.56
Dec-90 6.22 17.04
Dec-91 6.41 17.18
Dec-92 6.60 17.44
Dec-93 6.78 17.72
Dec-94 6.96 18.56
Dec-95 7.14 19.42
Dec-96 7.38 20.99
Dec-97 [] []
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation and Standard and
Poor's Security Price Index Record
Risk charts. Historical equity index returns suggest that stocks provide
superior investment returns over the long term. Over short periods of time,
however, the prices of individual stocks and the stock market as a whole can be
very volatile. The table below shows best and worst average annual total
returns, including reinvested dividends, for the S&P 500 over time spans of one,
five, 10 and 20 years between 1926 and 1997.
VARIABILITY OF S&P 500 RETURNS
- ------------------------------------------------------------------------
1 YR 5 YRS 10 YRS 20 YRS
Best 53.99% 23.92% 20.06% 16.86%
Worst -43.34% -12.47% -0.89% 3.11%
- ------------------------------------------------------------------------
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation. This analysis
is based on historical annual total return figures for the S&P 500.
As you can see the difference between the best and worst return decreases as the
measure of time increases. Stock market investing may not make sense for you
unless you are prepared to ride out the markets' ups and downs.
To illustrate volatility, the following table compares the historical risk vs.
reward characteristics of stocks (represented by the S&P 500 with dividends
reinvested), bonds (represented by a 20-year U.S. Treasury bond), and Treasury
bills. As you can see, historically, stocks have provided higher returns at
greater risk than Treasury bonds and bills over the long term.
[bullet chart - data below]
Table: Risk vs. Reward (1926-1997)
Long-Term
T-Bills Govt. Bonds S&P 500
Average Annual Total Return 3.8% 5.2% 11.0%
Standard Deviation 3.2% 9.2% 20.3%
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation.
The historical S&P 500 data presented here are not intended to suggest that an
investor would have achieved comparable results by investing in any one equity
security or in managed portfolios of equity securities, such as the Funds,
during the periods shown. The S&P 500 is an unmanaged index representing the
performance of 500 major companies, most of which are listed on the New York
Stock Exchange. Investors cannot invest directly in the S&P 500 Index.
Portfolio Characteristics. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics may be
used to specify fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare the Fund's net asset value
or performance relative to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average performance
during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi - xm)2
n-1
Where: S = "the sum of",
xi = each individual return during the time period, xm = the average return
over the time period, and n = the number of individual returns during the
time period.
statistics may also be used to discuss the Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the Fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost. Other
measures of volatility and relative performance may be used as appropriate.
However, all such measures will fluctuate and do not represent future results
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
FINANCIAL STATEMENTS
<PAGE>
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating assigned
by S&P. Commercial paper rated A-1 by S&P has the following characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of borrowing;
o basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances;
o typically, the issuer's industry is well established and the issuer has a
strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas;
o evaluation of the issuer's products in relation to competition and customer
acceptance;
o liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships which exist with
the issuer; and
o recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top four
ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
o Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher rated categories.
o Debt rated BB, B, CCC, CC or C is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse debt
conditions.
o The rating C1 is reserved for income bonds on which no interest is being
paid.
o Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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.
Moody's ratings are as follows:
o Bonds which 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-edged." 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
issues.
o Bonds which 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.
o Bonds which are rated A possess many favorably 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 some time in the
future.
o Bonds which 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.
o Bonds which 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 thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
o Bonds which 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.
o Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its 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 rating category.
E*TRADE Funds
2400 Geng Road
Palo Alto, CA 94303
Telephone: (650) 842-2500
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
PART C:
OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation:
(i) Certificate of Trust
(ii) Trust Instrument
(b) By-laws1
(c) Instruments Defining Rights of Security Holders:
(d) Investment Advisory Contracts:
(i) Form of Investment Advisory Contract1
(ii) Form of Sub-Advisory Agreement1
(e) Underwriting Contracts:1
(f) Bonus or Profit Sharing Contracts:1
(g) Custodian Agreements:1
(h) Other Material Contracts:
(i) Form of Amended and Restated Administration Agreement1 (ii) Form of
Transfer Agency Agreement1 (iii) Form of License Agreement1
(i) Legal Opinion: Form of Opinion1 and Consent of Dechert Price & Rhoads
(j) Other Opinions:
(k) Omitted Financial Statements:
(l) Initial Capital Agreements:1
(m) Rule 12b-1 Plan: Not applicable
(n) Financial Data Schedules1
(o) Rule 18f-3 Plan:1
(p) Powers of Attorney and Secretary's Certificate: 1
1 To be filed by amendment.
Item 24. Persons Controlled by or Under Common Control With Registrant
No person is controlled by or under common control with the Registrant.
Item 25. Indemnification
Reference is made to Article X of the Registrant's Trust Instrument.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, public policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by trustees, officers or controlling persons of the Registrant in
connection with the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
Item 26. Business and Other Connections of Investment Adviser
The directors and officers of E*TRADE Asset Management, Inc. and their business
and other connections are as follows:
Name Business and Other Connections
The address of ___________ is ___________________________.
The address of ___________ is ___________________________.
The address of ___________ is ___________________________.
Item 27. Principal Underwriters
(a) E*TRADE Securities, Inc. (the "Distributor") serves as Distributor of
Shares of the Trust. The Distributor is a wholly owned subsidiary of
E*TRADE Group, Inc.
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ----------------------
* The business address of all officers of the Distributor is _________________.
Item 28. Location of Accounts and Records
The account books and other documents required to be maintained by Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at ____________________________________________.
Item 29. Management Services
Not applicable
Item 30. Undertakings: Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in the
City of Palo Alto in the State of California on the 4th day of November, 1998.
E*TRADE FUNDS
(Registrant)
By: /s/ Kathy Levinson
Title: Trustee and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Kathy Levinson Trustee and President November 4, 1998
(Principal Executive
Officer)
/s/ Leonard C. Purkis Trustee and Treasurer November 4, 1998
(Principal Financial and
Accounting Officer)
<PAGE>
E*TRADE Funds
EXHIBIT INDEX
(a)(i) Certificate of Trust
(a)(ii) Trust Instrument
(i) Consent of Dechert Price & Rhoads
STATE OF DELAWARE
CERTIFICATE OF TRUST
This Certificate of Trust is filed in accordance with the provisions of the
Delaware Business Trust Act (12 Del. C. Section 3801 et seq.) and sets forth the
following:
FIRST: The name of the trust is E*TRADE Funds.
SECOND: The business address of the Registered Agent and Registered Office is
located at 1209 Orange Street, Wilmington, Delaware 19801. The name of the
registered agent of the Trust for service of process at such location is The
Corporation Trust Company.
THIRD: This Certificate shall be effective immediately upon filing.
FOURTH: The business trust intends to become a registered investment company
under the Investment Company Act of 1940, as amended, within 180 days following
the first issuance of beneficial interests.
FIFTH: Notice of Limitation of Liabilities of Series. Notice is hereby given
that the Trust is or may hereafter be constituted a series trust. The debts,
liabilities, obligations, and expenses incurred, contracted for or otherwise
existing with respect to any particular series of the Trust shall be enforceable
against the assets of such series only, and not against the assets of the Trust
generally.
SIXTH: The trustees of the Trust, as set forth in its governing instrument,
reserve the right to amend, alter, change, or repeal any provisions contained in
this Certificate of Trust, in the manner now or hereafter prescribed by statute.
IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have duly
executed this Certificate of Trust as of this 3rd day of November, 1998.
TRUSTEE(S):
/s/ Kathy Levinson
- -----------------------------
Kathy Levinson, as Trustee and not individually
/s/ Leonard C. Purkis
- -----------------------------
Leonard C. Purkis, as Trustee and not individually
E*TRADE FUNDS
TRUST INSTRUMENT
Dated as of November 3,1998
<PAGE>
E*TRADE FUNDS
TABLE OF CONTENTS
Page
ARTICLE I NAME AND DEFINITIONS...................................1
Section 1.01 Name..........................................1
Section 1.02 Definitions...................................1
ARTICLE II BENEFICIAL INTEREST...................................2
Section 2.01 Shares of Beneficial Interest.................2
Section 2.02 Issuance of Shares............................2
Section 2.03 Register of Shares and Share Certificates.....3
Section 2.04 Transfer of Shares............................3
Section 2.05 Treasury Shares...............................3
Section 2.06 Establishment of Series.......................3
Section 2.07 Investment in the Trust.......................4
Section 2.08 Assets and Liabilities of Series..............4
Section 2.09 No Preemptive Rights..........................5
Section 2.10 No Personal Liability of Shareholder..........5
Section 2.11 Assent to Trust Instrument....................5
ARTICLE III THE TRUSTEES.........................................5
Section 3.01 Management of the Trust.......................5
Section 3.02 Initial Trustees..............................6
Section 3.03 Term of Office................................6
Section 3.04 Vacancies and Appointments....................6
Section 3.06 Number of Trustees............................7
Section 3.07 Effect of Ending of a Trustee's Service.......7
Section 3.08 Ownership of Assets of the Trust..............7
ARTICLE IV POWER OF THE TRUSTEES.................................7
Section 4.01 Powers........................................7
Section 4.02 Issuance and Repurchase of Shares............10
Section 4.03 Trustees and Officers as Shareholders........10
Section 4.04 Action by the Trustees.......................10
Section 4.05 Chairman of the Trustees.....................11
Section 4.06 Principal Transactions.......................11
ARTICLE V EXPENSES OF THE TRUST.................................11
ARTICLE VI INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT...........................12
Section 6.01 Investment Adviser...........................12
Section 6.02 Principal Underwriter........................12
Section 6.03 Administration...............................12
Section 6.04 Transfer Agent...............................12
Section 6.05 Parties to Contract..........................13
Section 6.06 Provisions and Amendments....................13
ARTICLE VII SHAREHOLDER VOTING POWERS AND MEETINGS...............13
Section 7.01 Voting Powers................................13
Section 7.02 Meetings.....................................14
Section 7.03 Quorum and Required Vote.....................14
ARTICLE VIII CUSTODIAN..........................................14
Section 8.01 Appointment and Duties.......................14
Section 8.02 Central Certificate System...................15
ARTICLE IX DISTRIBUTIONS AND REDEMPTIONS........................15
Section 9.01 Distributions.................................15
Section 9.02 Redemptions..................................16
Section 9.03 Determination of Net Asset Value and Valuation
of Portfolio Assets........................................16
Section 9.04 Suspension of the Right of Redemption........17
ARTICLE X LIMITATION OF LIABILITY AND INDEMNIFICATION...........17
Section 10.01 Limitation of Liability.....................17
Section 10.02 Indemnification.............................17
Section 10.03 Shareholders................................18
ARTICLE XI MISCELLANEOUS........................................19
Section 11.01 Trust Not A Partnership.....................19
Section 11.02 Trustee's Good Faith Action, Expert Advice,
No Bond or Surety..........................................19
Section 11.03 Establishment of Record Dates...............19
Section 11.04 Termination of Trust........................20
Section 11.05 Reorganization..............................20
Section 11.06 Filing of Copies, References, Headings......21
Section 11.07 Applicable Law..............................21
Section 11.08 Amendments..................................22
Section 11.09 Fiscal Year.................................22
Section 11.10 Provisions in Conflict With Law..............22
<PAGE>
E*TRADE FUNDS
_______, 1998
TRUST INSTRUMENT, made by Kathy Levinson and Leonard C. Purkis (the
"Trustees").
WHEREAS, the Trustees desire to establish a business trust for the
investment and reinvestment of funds contributed thereto;
NOW THEREFORE, the Trustees declare that all money and property
contributed to the Trust hereunder shall be held and managed in trust under this
Trust Instrument as herein set forth below.
ARTICLE I
NAME AND DEFINITIONS
Section 1.01 Name. The name of the Trust created hereby is E*TRADE
Funds.
Section 1.02 Definitions. Wherever used herein, unless otherwise
required by the context or specifically provided:
(a) "Bylaws" means the Bylaws of the Trust as adopted by the Trustees,
as amended from time to time.
(b) "Commission" has the meaning given it in the 1940 Act. "Affiliated
Person," "Assignment," "Interested Person" and "Principal Underwriter" shall
have the respective meanings given them in the 1940 Act, as modified by or
interpreted by any applicable order or orders of the Commission or any rules or
regulations adopted by or interpretive releases of the Commission thereunder.
"Majority Shareholder Vote" shall have the same meaning as the term "vote of a
majority of the outstanding voting securities" is given in the 1940 Act, as
modified by or interpreted by any applicable order or orders of the Commission
or any rules or regulations adopted by or interpretive releases of the
Commission thereunder.
(c) "Delaware Act" refers to Chapter 38 of Title 12 of the Delaware Code
entitled "Treatment of Delaware Business Trusts," as amended from time to time.
(d) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 9.03 hereof.
(e) "Outstanding Shares" means those Shares shown from time to time in
the books of the Trust or its transfer agent as then issued and outstanding, but
shall not include Shares which have been redeemed or repurchased by the Trust
and which are at the time held in the treasury of the Trust.
(f) "Principal Underwriter" means a party, other than the Trust, to a
contract described in Article VI, Section 6.02 hereof.
(g) "Series" means a series of Shares of the Trust established in
accordance with the provisions of Article II, Section 2.06 hereof.
(h) "Shareholder" means a record owner of Outstanding Shares of the
Trust.
(i) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust or class thereof shall be divided and may include fractions of Shares as
well as whole Shares.
(j) The "Trust" means the E*TRADE Funds and reference to the Trust, when
applicable to one or more Series of the Trust, shall refer to any such Series.
(k) The "Trustees" means the person or persons who has or have signed
this Trust Instrument, so long as he or they shall continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly qualified and serving as Trustees in accordance with the provisions
of Article III hereof and reference herein to a Trustee or to the Trustees shall
refer to the individual Trustees in their capacity as Trustees hereunder.
(l) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one or
more of the Trust or any Series, or the Trustees on behalf of the Trust or any
Series.
(m) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
ARTICLE II
BENEFICIAL INTEREST
Section 2.01 Shares of Beneficial Interest. The beneficial interest in
the Trust shall be divided into such transferable Shares of one or more separate
and distinct Series or classes of a Series as the Trustees shall from time to
time create and establish. The number of Shares of each Series, and class
thereof, authorized hereunder is unlimited and each Share shall have a par value
of $0.01. All Shares issued hereunder, including without limitation, Shares
issued in connection with a dividend in Shares or a split or reverse split of
Shares, shall be fully paid and nonassessable.
Section 2.02 Issuance of Shares. The Trustees in their discretion may,
from time to time, without vote of the Shareholders, issue Shares, in addition
to the then issued and Outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, subject to
applicable law, including cash or securities, at such time or times and on such
terms as the Trustees may deem appropriate, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in connection with,
the assumption of liabilities) and businesses. In connection with any issuance
of Shares, the Trustees may issue fractional Shares and Shares held in the
treasury. The Trustees may from time to time divide or combine the Shares into a
greater or lesser number without thereby changing the proportionate beneficial
interests in the Trust. Contributions to the Trust may be accepted for, and
Shares shall be redeemed as, whole Shares and/or 1/1,000th of a Share or
integral multiples thereof. The Trustees, the Principal Underwriter or any other
person the Trustees may authorize for the purpose may, in their discretion,
reject any application for the issuance of Shares.
Section 2.03 Register of Shares and Share Certificates. A register shall
be kept at the principal office of the Trust or at the office of the Trust's
transfer agent which shall contain the names and addresses of the Shareholders
of each Series, the number of Shares of that Series (or any class or classes
thereof) held by them respectively and a record of all transfers thereof. As to
Shares for which no certificate has been issued, such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or other distributions or otherwise to exercise or enjoy the
rights of Shareholders. No Shareholder shall be entitled to receive payment of
any dividend or other distribution, nor to have notice given to him as herein or
in the Bylaws provided, until he has given his address to the transfer agent or
such officer or other agent of the Trustees as shall keep the said register for
entry thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
Section 2.04 Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing, upon
delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer and such evidence of the genuineness of such execution
and authorization and of such other matters as may be required. Upon such
delivery, the transfer shall be recorded on the register of the Trust, after
which the transferee of Shares will be regarded as a Shareholder. Until such
record is made, the Shareholder of record shall be deemed to be the holder of
such Shares for all purposes hereunder and neither the Trustees nor the Trust,
nor any transfer agent or registrar nor any officer, employee or agent of the
Trust shall be affected by any notice of the proposed transfer.
Section 2.05 Treasury Shares. Shares held in the treasury shall not,
until reissued pursuant to Section 2.02 hereof, confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 2.06 Establishment of Series. The Trust created hereby shall
consist of one or more Series and separate and distinct records shall be
maintained by the Trust for each Series and the assets associated with any such
Series shall be held and accounted for separately from the assets of the Trust
or any other Series. The Trustees shall have full power and authority, in their
sole discretion, and without obtaining any prior authorization or vote of the
Shareholders of any Series of the Trust, to establish and designate and to
change in any manner any such Series of Shares or any classes of initial or
additional Series and to fix such preferences, voting powers, rights and
privileges of such Series or classes thereof as the Trustees may from time to
time determine, to divide or combine the Shares or any Series or classes thereof
into a greater or lesser number, to classify or reclassify any issued Shares or
any Series or classes thereof into one or more Series or classes of Shares, and
to take such other action with respect to the Shares as the Trustees may deem
desirable. The establishment and designation of any Series shall be effective
upon the adoption of a resolution by a majority of the Trustees setting forth
such establishment and designation and the relative rights and preferences of
the Shares of such Series. A Series may issue any number of Shares and need not
issue certificates. At any time that there are no Shares outstanding of any
particular Series previously established and designated, the Trustees may by a
majority vote abolish that Series and the establishment and designation thereof.
All references to Shares in this Trust Instrument shall be deemed to be
Shares of any or all Series, or classes thereof, as the context may require. All
provisions herein relating to the Trust shall apply equally to each Series of
the Trust, and each class thereof, except as the context otherwise requires.
Each Share of a Series of the Trust shall represent an equal beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
shall be entitled to receive his pro rata share of all distributions made with
respect to such Series. Upon redemption of his Shares, such Shareholder shall be
paid solely out of the funds and property of such Series of the Trust.
Section 2.07 Investment in the Trust. The Trustees shall accept
investments in any Series of the Trust from such persons and on such terms as
they may from time to time authorize. At the Trustees' discretion, such
investments, subject to applicable law, may be in the form of cash or securities
in which the affected Series is authorized to invest, valued as provided in
Article IX, Section 9.03 hereof. Investments in a Series shall be credited to
each Shareholder's account in the form of full Shares at the Net Asset Value per
Share next determined after the investment is received or accepted as may be
determined by the Trustees; provided, however, that the Trustees may, in their
sole discretion, (a) fix the Net Asset Value per Share of the initial capital
contribution, (b) impose a sales charge upon investments in the Trust in such
manner and at such time determined by the Trustees, or (c) issue fractional
Shares.
Section 2.08 Assets and Liabilities of Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall be held and accounted for separately from the other assets of
the Trust and of every other Series and may be referred to herein as "assets
belonging to" that Series. The assets belonging to a particular Series shall
belong to that Series for all purposes, and to no other Series, subject only to
the rights of creditors of that Series. In addition, any assets, income,
earnings, profits or funds, or payments and proceeds with respect thereto, which
are not readily identifiable as belonging to any particular Series shall be
allocated by the Trustees between and among one or more of the Series in such
manner as the Trustees, in their sole discretion, deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series for all purposes, and such assets, income, earnings, profits or funds, or
payments and proceeds with respect thereto, shall be assets belonging to that
Series. The assets belonging to a particular Series shall be so recorded upon
the books of the Trust, and shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Series. The assets belonging to each
particular Series shall be charged with the liabilities of that Series and all
expenses, costs, charges and reserves attributable to that Series. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees between or among any one or more of the Series in
such manner as the Trustees in their sole discretion deem fair and equitable.
Each such allocation shall be conclusive and binding upon the Shareholders of
all Series for all purposes. Without limitation of the foregoing provisions of
this Section 2.08, but subject to the right of the Trustees in their discretion
to allocate general liabilities, expenses, costs, charges or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally. Notice of this contractual limitation on inter-Series
liabilities may, in the Trustees' sole discretion, be set forth in the
Certificate of Trust of the Trust (whether originally or by amendment) as filed
or to be filed in the Office of the Secretary of State of the State of Delaware
pursuant to the Delaware Act, and upon the giving of such notice in the
certificate of trust, the statutory provisions of Section 3804 of the Delaware
Act relating to limitations on inter-Series liabilities (and the statutory
effect under Section 3804 of setting forth such notice in the certificate of
trust) shall become applicable to the Trust and each Series. Any person
extending credit to, contracting with or having any claim against any Series may
look only to the assets of that Series to satisfy or enforce any debt,
liability, obligation or expense incurred, contracted for or otherwise existing
with respect to that Series. No Shareholder or former Shareholder of any Series
shall have a claim on or any right to any assets allocated or belonging to any
other Series.
Section 2.09 No Preemptive Rights. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities issued
by the Trust or the Trustees, whether of the same or other Series.
Section 2.10 No Personal Liability of Shareholder. Each Shareholder of
the Trust and of each Series shall not be personally liable for the debts,
liabilities, obligations and expenses incurred by, contracted for, or otherwise
existing with respect to, the Trust or by or on behalf of any Series. The
Trustees shall have no power to bind any Shareholder personally or to call upon
any Shareholder for the payment of any sum of money or assessment whatsoever
other than such as the Shareholder may at any time personally agree to pay by
way of subscription for any Shares or otherwise. Every note, bond, contract or
other undertaking issued by or on behalf of the Trust or the Trustees relating
to the Trust or to a Series shall include a recitation limiting the obligation
represented thereby to the Trust or to one or more Series and its or their
assets (but the omission of such a recitation shall not operate to bind any
Shareholder or Trustee of the Trust).
Section 2.11 Assent to Trust Instrument. Every Shareholder, by virtue of
having purchased a Share, shall become a Shareholder and shall be held to have
expressly assented and agreed to be bound by the terms hereof.
ARTICLE III
THE TRUSTEES
Section 3.01 Management of the Trust. The Trustees shall have exclusive
and absolute control over the Trust Property and over the business of the Trust
to the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Trust Instrument. The Trustees shall have power to conduct the
business of the Trust and to carry on its operations in any and all of its
branches and maintain offices both within and without the State of Delaware, in
any and all states of the United States of America, in the District of Columbia,
in any and all commonwealths, territories, dependencies, colonies, or
possessions of the United States of America, and in any foreign jurisdiction and
to do all such other things and execute all such instruments as they deem
necessary, proper or desirable in order to promote the interests of the Trust
although such things are not herein specifically mentioned. Any determination as
to what is in the interests of the Trust made by the Trustees in good faith
shall be conclusive. In construing the provisions of this Trust Instrument, the
presumption shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power in this Trust Instrument shall not
be construed as limiting the aforesaid power. The powers of the Trustees may be
exercised without order of or resort to any court.
Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 3.04 of this Article III, the Trustees shall be elected by
the Shareholders owning of record a plurality of the Shares voting at a meeting
of Shareholders. Such a meeting shall be held on a date fixed by the Trustees.
In the event that less than a majority of the Trustees holding office have been
elected by Shareholders, the Trustees then in office will call a Shareholders'
meeting for the election of Trustees.
Section 3.02 Initial Trustees. The initial Trustees shall be the persons
named herein. On a date fixed by the Trustees, the Shareholders shall elect at
least one (1) but not more than fifteen (15) Trustees, as specified by the
Trustees pursuant to Section 3.05 of this Article III.
Section 3.03 Term of Office. The Trustees shall hold office during the
lifetime of this Trust, and until its termination as herein provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee may be
removed at any time by written instrument, signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or who has died, become physically or mentally incapacitated by reason
of disease or otherwise, or is otherwise unable to serve, may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) that a Trustee may be removed at any meeting of
the Shareholders of the Trust by a vote of Shareholders owning at least
two-thirds of the Outstanding Shares.
Section 3.04 Vacancies and Appointments. In case of the declination to
serve, death, resignation, retirement, removal, physical or mental incapacity by
reason of disease or otherwise, other inability of a Trustee to serve, or an
increase in the number of Trustees, a vacancy shall occur. Whenever a vacancy in
the Board of Trustees shall occur, until such vacancy is filled, the other
Trustees shall have all the powers hereunder and the certification of the other
Trustees of such vacancy shall be conclusive. In the case of an existing
vacancy, the remaining Trustees shall fill such vacancy by appointing such other
person as they in their discretion shall see fit consistent with the limitations
under the 1940 Act. Such appointment shall be evidenced by a written instrument
signed by a majority of the Trustees in office or by resolution of the Trustees,
duly adopted, which shall be recorded in the minutes of a meeting of the
Trustees, whereupon the appointment shall take effect.
An appointment of a Trustee may be made by the Trustees then in office
in anticipation of a vacancy to occur by reason of retirement, resignation or
increase shall become effective only at or after the effective date of said
retirement, resignation or increase in number of Trustees. As soon as any
Trustee appointed pursuant to this Section 3.04 shall have accepted this Trust,
the Trust estate shall vest in the new Trustee or Trustees, together with the
continuing Trustees, without any further act or conveyance, and he or she shall
be deemed a Trustee hereunder. The power to appoint a Trustee pursuant to this
section 3.04 is subject to the provisions of Section 16(a) of the 1940 Act.
Section 3.05 Number of Trustees. The number of Trustees shall be at
least one (1), and thereafter shall be such number as shall be fixed from time
to time by a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be more than fifteen (15).
Section 3.06 Effect of Ending of a Trustee's Service. The disinclination
to serve, death, resignation, retirement, removal, incapacity, or inability of
the Trustees, or any one of them, shall not operate to terminate the Trust or to
revoke any existing agency created pursuant to the terms of this Trust
Instrument.
Section 3.07 Ownership of Assets of the Trust. The assets of the Trust
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. Legal title in all of the assets of the Trust and the
right to conduct any business shall at all times be considered as vested in the
Trustees on behalf of the Trust, except that the Trustees may cause legal title
to any Trust Property to be held by or in the name of the Trust, or in the name
of any person as nominee. No Shareholder shall be deemed to have a severable
ownership in any individual asset of the Trust or of any Series or any right of
partition or possession thereof, but each Shareholder shall have, except as
otherwise provided for herein, a proportionate undivided beneficial interest in
the Trust or Series. The Shares shall be personal property giving only the
rights specifically set forth in this Trust Instrument.
ARTICLE IV
POWERS OF THE TRUSTEES
Section 4.01 Powers. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust, and to
vary the investments of any Series in accordance with the prospectus applicable
to such Series. The Trustees shall not in any way be bound or limited by present
or future laws or customs in regard to Trust investments, but shall have full
authority and power to make any and all investments which they, in their sole
discretion, shall deem proper to accomplish the purpose of this Trust without
recourse to any court or other authority. Subject to any applicable limitation
in this Trust Instrument or the Bylaws of the Trust, the Trustees shall have the
power and authority:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by Trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease
any or all of the assets of the Trust;
(b) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations;
(c) To borrow money and in this connection issue notes or other evidence
of indebtedness; to secure borrowings by mortgaging, pledging or otherwise
subjecting as security the Trust Property; to endorse, guarantee, or undertake
the performance of an obligation or engagement of any other person and to lend
Trust Property;
(d) To provide for the distribution of interests of the Trust either
through a Principal Underwriter in the manner hereinafter provided for or by the
Trust itself, or both, or otherwise pursuant to a plan of distribution of any
kind;
(e) To adopt Bylaws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders; such
Bylaws shall be deemed incorporated and included in this Trust Instrument;
(f) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;
(g) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Trust Instrument or in the Bylaws;
(h) To retain one or more transfer agents, shareholder servicing agents,
and/or fund accountants;
(i) To set record dates in the manner provided herein or in the Bylaws;
(j) To delegate such authority as they consider desirable to any
officers of the Trust and to any investment adviser, manager, custodian,
underwriter or other agent or independent contractor;
(k) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, Subsection 11.04(b) hereof;
(l) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property, and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(m) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(n) To hold any security or property in a form not indicating any trust,
whether in bearer, book entry, unregistered or other negotiable form; or either
in the name of the Trust or in the name of a custodian or a nominee or nominees,
subject in either case to proper safeguards according to the usual practice of
Delaware business trusts or investment companies;
(o) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes of
such Series having relative rights, powers and duties as they may provide
consistent with applicable law;
(p) Subject to the provisions of Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series or
to apportion the same between or among two or more Series, provided that any
liabilities or expenses incurred by a particular Series shall be payable solely
out of the assets belonging to that Series as provided for in Article II hereof;
(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern; and to pay calls or
subscriptions with respect to any security held in the Trust;
(r) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(s) To make distributions of income and of capital gains to Shareholders
in the manner provided herein;
(t) To establish, from time to time, a minimum investment for
Shareholders in the Trust or in one or more Series or classes, and to require
the redemption of the Shares of any Shareholders whose investment is less than
such minimum, or who does not satisfy any other criteria the Trustees may set
from time to time, upon giving notice to such Shareholder;
(u) To establish one or more committees, to delegate any of the powers
of the Trustees to said committees and to adopt a committee charter providing
for such responsibilities, membership (including Trustees, officers or other
agents of the Trust therein) and any other characteristics of said committees as
the Trustees may deem proper. Notwithstanding the provisions of this Article IV,
and in addition to such provisions or any other provision of this Trust
Instrument or of the Bylaws, the Trustees may by resolution appoint a committee
consisting of less than the whole number of Trustees then in office, which
committee may be empowered to act for and bind the Trustees and the Trust, as if
the acts of such committee were the acts of all the Trustees then in office,
with respect to the institution, prosecution, dismissal, settlement, review or
investigation of any action, suit or proceeding which shall be pending or
threatened to be brought before any court, administrative agency or other
adjudicatory body;
(v) To interpret the investment policies, practices or limitations of
any Series;
(w) To establish a registered office and have a registered agent in the
state of Delaware; and
(x) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed as objects and powers, and the
foregoing enumeration of specific powers shall not be held to limit or restrict
in any manner the general powers of the Trustees. Any action by one or more of
the Trustees in their capacity as such hereunder shall be deemed an action on
behalf of the Trust or the applicable Series, and not an action in an individual
capacity.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see to the
application of any payments made or property transferred to the Trustees or upon
their order.
Section 4.02 Issuance and Repurchase of Shares. The Trustees shall have
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, and otherwise deal in Shares and, subject to the
provisions set forth in Article II and Article IX, to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust, or the particular Series of the Trust, with
respect to which such Shares are issued.
Section 4.03 Trustees and Officers as Shareholders. Any Trustee, officer
or other agent of the Trust may acquire, own and dispose of Shares to the same
extent as if he were not a Trustee, officer or agent; and the Trustees may issue
and sell or cause to be issued and sold, Shares, to and buy such Shares from,
any such person or any firm or company in which he is interested, subject only
to the general limitations herein contained as to the sale and purchase of such
Shares; and all subject to any restrictions which may be contained in the
Bylaws.
Section 4.04 Action by the Trustees. Except as otherwise provided herein
or in the Bylaws, any action to be taken by the Trustees may be taken by a
majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of the entire number
of Trustees then in office. The Trustees may adopt Bylaws not inconsistent with
this Trust Instrument to provide for the conduct of the business of the Trust
and may amend or repeal such Bylaws to the extent such power is not reserved to
the Shareholders.
Section 4.05 Chairman of the Trustees. The Trustees shall appoint one of
their number to be Chairman of the Board of Trustees. The Chairman shall preside
at all meetings of the Trustees, shall be responsible for the execution of
policies established by the Trustees and the administration of the Trust, and
may be (but is not required to be) the chief executive, financial and/or
accounting officer of the Trust.
Section 4.06 Principal Transactions. Except to the extent prohibited by
applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
Interested Person of such person; and the Trust may employ any such person, or
firm or company in which such person is an Interested Person, as broker, legal
counsel, registrar, investment adviser, administrator, distributor, transfer
agent, dividend disbursing agent, custodian or in any other capacity upon
customary terms.
ARTICLE V
EXPENSES OF THE TRUST
Subject to the provisions of Article II, Section 2.08 hereof, the
Trustees shall be reimbursed from the Trust estate or the assets belonging to
the appropriate Series for their expenses and disbursements, including, without
limitation, interest charges, taxes, brokerage fees and commissions; expenses of
issue, repurchase and redemption of shares; certain insurance premiums;
applicable fees, interest charges and expenses of third parties, including the
Trust's investment advisers, managers, administrators, distributors, custodian,
transfer agent and fund accountant; fees of pricing, interest, dividend, credit
and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; expenses of meetings of shareholders and proxy
solicitations therefore; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; fees and expenses of the Trustees;
compensation of the Trust's officers and employees and costs of other personnel
performing services for the Trust; costs of Trustee meetings; Securities and
Exchange Commission registration fees and related expenses; state or foreign
securities laws registration fees and related expenses; and for such
non-recurring items as may arise, including litigation to which the Trust (or a
Trustee acting as such) is a party, and for all losses and liabilities by them
incurred in administering the Trust, and for the payment of such expenses,
disbursements, losses and liabilities the Trustees shall have a lien on the
assets belonging to the appropriate Series, or in the case of an expense
allocable to more than one Series, on the assets of each such Series, prior to
any rights or interests of the Shareholders thereto. This section shall not
preclude the Trust from directly paying any of the aforementioned fees and
expenses.
ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT
Section 6.01 Investment Adviser. The Trustees may in their discretion,
from time to time, enter into an investment advisory contract or contracts with
respect to the Trust or any Series whereby the other party or parties to such
contract or contracts shall undertake to furnish the Trustees with such
investment advisory, statistical and research facilities and services and such
other facilities and services, if any, all upon such terms and conditions as may
be prescribed in the Bylaws or as the Trustees may in their discretion determine
(such terms and conditions not to be inconsistent with the provisions of this
Trust Instrument or of the Bylaws). Notwithstanding any other provision of this
Trust Instrument, the Trustees may authorize any investment adviser (subject to
such general or specific instructions as the Trustees may from time to time
adopt) to effect purchases, sales or exchanges of portfolio securities, other
investment instruments of the Trust, or other Trust Property on behalf of the
Trustees, or may authorize any officer, agent, or Trustee to effect such
purchases, sales or exchanges pursuant to recommendations of the investment
adviser (and all without further action by the Trustees). Any such purchases,
sales and exchanges shall be deemed to have been authorized by all of the
Trustees.
The Trustees may, subject to the requirements of the 1940 Act, authorize
the investment adviser to employ, from time to time, one or more sub-advisers to
perform such of the acts and services of the investment adviser, and upon such
terms and conditions, as may be agreed upon between the investment adviser and
sub-adviser (such terms and conditions not to be inconsistent with the
provisions of this Trust Instrument or of the Bylaws). Any reference in this
Trust Instrument to the investment adviser shall be deemed to include such
sub-advisers, unless the context otherwise requires.
Section 6.02 Principal Underwriter. The Trustees may in their discretion
from time to time enter into an exclusive or non-exclusive underwriting contract
or contracts providing for the sale of Shares, whereby the Trust may either
agree to sell Shares to the other party to the contract or appoint such other
party as its sales agent for such Shares. In either case, the contract shall be
on such terms and conditions as may be prescribed in the Bylaws and as the
Trustees may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws); and
such contract may also provide for the repurchase or sale of Shares by such
other party as principal or as agent of the Trust.
Section 6.03 Administration. The Trustees may in their discretion from
time to time enter into one or more management or administrative contracts
whereby the other party or parties shall undertake to furnish the Trustees with
management or administrative services. The contract or contracts shall be on
such terms and conditions as may be prescribed in the Bylaws and as the Trustees
may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws).
Section 6.04 Transfer Agent. The Trustees may in their discretion from
time to time enter into one or more transfer agency and shareholder service
contracts whereby the other party or parties shall undertake to furnish the
Trustees with transfer agency and shareholder services. The contract or
contracts shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws).
Section 6.05 Parties to Contract. Any contract of the character
described in Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or any
contract of the character described in Article VIII hereof may be entered into
with any corporation, firm, partnership, trust or association, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, shareholder, or member of such other party to the contract, and no such
contract shall be invalidated or rendered void or voidable by reason of the
existence of any relationship, nor shall any person holding such relationship be
disqualified from voting on or executing the same in his capacity as Shareholder
and/or Trustee, nor shall any person holding such relationship be liable merely
by reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article VI or Article VIII hereof or of
the Bylaws. The same person (including a firm, corporation, partnership, trust,
or association) may be the other party to contracts entered into pursuant to
Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or pursuant to Article
VIII hereof, and any individual may be financially interested or otherwise
affiliated with persons who are parties to any or all of the contracts mentioned
in this Section 6.05.
Section 6.06 Provisions and Amendments. Any contract entered into
pursuant to Sections 6.01 or 6.02 of this Article VI shall be consistent with
and subject to the requirements of Section 15 of the 1940 Act, if applicable, or
other applicable Act of Congress hereafter enacted with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal thereof, and no amendment to any contract
entered into pursuant to Section 6.01 of this Article VI shall be effective
unless assented to in a manner consistent with the requirements of said Section
15, as modified by any applicable rule, regulation or order of the Commission.
ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 7.01 Voting Powers. The Shareholders shall have power to vote
only (a) for the election of Trustees as provided in Article III, Sections 3.01
and 3.02 hereof, (b) for the removal of Trustees as provided in Article III,
Subsection 3.03(d) hereof, (c) with respect to any investment advisory contract
as provided in Article VI, Section 6.01 hereof, and (d) with respect to such
additional matters relating to the Trust as may be required by law, by this
Trust Instrument, or the Bylaws or any registration of the Trust with the
Commission or any state, or as the Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall
be voted separately by individual Series, except (i) when required by the 1940
Act, Shares shall be voted in the aggregate and not by individual Series; and
(ii) when the Trustees have determined that the matter affects the interests of
more than one Series, then the Shareholders of all such Series shall be entitled
to vote thereon. The Trustees may also determine that a matter affects only the
interests of one or more classes of a Series, in which case any such matter
shall be voted on by such class or classes. Each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Shares may be voted
in person or by proxy or in any manner provided for in the Bylaws. A proxy may
be given in writing. The Bylaws may provide that proxies may also, or may
instead, be given by any electronic or telecommunications device or in any other
manner. Notwithstanding anything else herein or in the Bylaws, in the event a
proposal by anyone other than the officers or Trustees of the Trust is submitted
to a vote of the Shareholders of one or more Series or of the Trust, or in the
event of any proxy contest or proxy solicitation or proposal in opposition to
any proposal by the officers or Trustees of the Trust, Shares may be voted only
in person or by written proxy. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required or
permitted by law, this Trust Instrument or any of the Bylaws of the Trust to be
taken by Shareholders.
Section 7.02 Meetings. A meeting of the Shareholders shall be held at
such times, on such day and at such hour as the Trustees may from time to time
determine, either at the principal office of the Trust, or at such other place,
within or without the State of Delaware, as may be designated by the Trustees,
for such purposes as may be specified by the Trustees.
Section 7.03 Quorum and Required Vote. One-third of Shares entitled to
vote in person or by proxy shall be a quorum for the transaction of business at
a Shareholders' meeting, except that where any provision of law or of this Trust
Instrument permits or requires that holders of any Series shall vote as a Series
(or that holders of a class shall vote as a class), then one-third of the
aggregate number of Shares of that Series (or that class) entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
Series (or that class). Any lesser number shall be sufficient for adjournments.
Any adjourned session or sessions may be held, within a reasonable time after
the date set for the original meeting, without the necessity of further notice.
Except when a larger vote is required by law or by any provision of this Trust
Instrument or the Bylaws, a majority of the Shares voted in person or by proxy
shall decide any questions and a plurality shall elect a Trustee, provided that
where any provision of law or of this Trust Instrument permits or requires that
the holders of any Series shall vote as a Series (or that the holders of any
class shall vote as a class), then a majority of the Shares present in person or
by proxy of that Series (or class) or, if required by law, a majority of the
Shares of that Series (or class), voted on the matter in person or by proxy
shall decide that matter insofar as that Series (or class) is concerned.
Shareholders may act by unanimous written consent. Actions taken by Series (or
class) may be consented to unanimously in writing by Shareholders of that Series
(or class).
ARTICLE VIII
CUSTODIAN
Section 8.01 Appointment and Duties. Except to the extent not required
with respect to any Series that is a feeder fund, the Trustees shall employ a
bank, a company that is a member of a national securities exchange, or a trust
company that has capital, surplus and undivided profits of at least two million
dollars ($2,000,000) and is a member of the Depository Trust Company, as
custodian with authority as its agent, but subject to such restrictions,
limitations and other requirements, if any, as may be contained in the Bylaws of
the Trust. Said custodian shall be authorized: (a) to hold the securities owned
by the Trust and deliver the same upon written order or oral order confirmed in
writing; (b) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may direct;
and (c) to disburse such funds upon orders or vouchers.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, subject to such
restrictions, limitations and other requirements, if any, as may be contained in
the Bylaws of the Trust.
Section 8.02 Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, as amended, or such other
person as may be permitted by the Commission, or otherwise in accordance with
the 1940 Act, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and may
be transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust or its custodians, sub-custodians or other agents.
ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS
Section 9.01 Distributions.
(a) The Trustees may from time to time declare and pay dividends or
other distributions with respect to any Series. The amount of such dividends or
distributions and the payment of them and whether they are in cash or any other
Trust Property shall be within the sole discretion of the Trustees.
(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other distribution
or among the Shareholders of record at such other date or time or dates or times
as the Trustees shall determine, which dividends or distributions, at the
election of the Trustees, may be paid pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans as the Trustees
shall deem appropriate.
(c) Anything in this Trust Instrument to the contrary notwithstanding,
the Trustees may at any time declare and distribute a stock dividend pro rata
among the Shareholders of a particular Series, or class thereof, as of the
record date of that Series fixed as provided in Subsection 9.01(b) hereof.
Section 9.02 Redemptions. In case any holder of record of Shares of a
particular Series desires to dispose of his Shares or any portion thereof, he
may deposit at the office of the transfer agent or other authorized agent of
that Series a written request or such other form of request as the Trustees may
from time to time authorize, requesting that the Series purchase the Shares in
accordance with this Section 9.02; and the Shareholder so requesting shall be
entitled to require the Series to purchase, and the Series or the Principal
Underwriter of the Series shall purchase his said Shares, but only at the Net
Asset Value thereof (as described in Section 9.03 of this Article IX). Any
Shareholder may be required to redeem some or all of his shares involuntarily
under such circumstances as the Trustees may determine from time to time. The
Series shall make payment for any such Shares to be redeemed, as aforesaid, in
cash or property from the assets of that Series and payment for such Shares
shall be made by the Series or the Principal Underwriter of the Series to the
Shareholder of record within seven (7) days after the date upon which the
request is effective, or such longer period as may be permitted. Upon
redemption, Shares shall become Treasury shares and may be re-issued from time
to time.
Section 9.03 Determination of Net Asset Value and Valuation of Portfolio
Assets. The term "Net Asset Value" of any Series shall mean that amount by which
the assets of that Series exceed its liabilities, all as determined by or under
the direction of the Trustees. Such value shall be determined separately for
each Series and shall be determined on such days and at such times as the
Trustees may determine. Such determination shall be made with respect to
securities for which market quotations are readily available, at the market
value of such securities; and with respect to other securities and assets, at
the fair value as determined in good faith by the Trustees; provided, however,
that the Trustees, without Shareholder approval, may alter the method of valuing
portfolio securities insofar as permitted under the 1940 Act and the rules,
regulations and interpretations thereof promulgated or issued by the Commission
or insofar as permitted by any Order of the Commission applicable to the Series.
The Trustees may delegate any of their powers and duties under this Section 9.03
with respect to valuation of assets and liabilities. The resulting amount, which
shall represent the total Net Asset Value of the particular Series, shall be
divided by the total number of Shares of that Series outstanding at the time and
the quotient so obtained shall be the Net Asset Value per Share of that Series.
At any time the Trustees may cause the Net Asset Value per Share last determined
to be determined again in similar manner and may fix the time when such
redetermined value shall become effective. If, for any reason, the net income of
any Series, determined at any time, is a negative amount, the Trustees shall
have the power with respect to that Series (a) to offset each Shareholder's pro
rata share of such negative amount from the accrued dividend account of such
Shareholder; (b) to reduce the number of Outstanding Shares of such Series by
reducing the number of Shares in the account of each Shareholder by a pro rata
portion of that number of full and fractional Shares which represents the amount
of such excess negative net income; (c) to cause to be recorded on the books of
such Series an asset account in the amount of such negative net income (provided
that the same shall thereupon become the property of such Series with respect to
such Series and shall not be paid to any Shareholder), which account may be
reduced by the amount, of dividends declared thereafter upon the Outstanding
Shares of such Series on the day such negative net income is experienced, until
such asset account is reduced to zero; (d) to combine the methods described in
clauses (a) and (b) and (c) of this sentence; or (e) to take any other action
they deem appropriate, in order to cause (or in order to assist in causing) the
Net Asset Value per Share of such Series to remain at a constant amount per
Outstanding Share immediately after each such determination and declaration. The
Trustees shall also have the power not to declare a dividend out of net income
for the purpose of causing the Net Asset Value per Share to be increased. The
Trustees shall not be required to adopt, but may at any time adopt, discontinue
or amend the practice of maintaining the Net Asset Value per Share of the Series
at a constant amount.
Section 9.04 Suspension of the Right of Redemption. The Trustees may
declare a suspension of the right of redemption or postpone the date of payment
as permitted under the 1940 Act. Such suspension shall take effect at such time
as the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share next determined after the termination of
the suspension. In the event that any Series is divided into classes, the
provisions of this Section 9.03, to the extent applicable as determined in the
discretion of the Trustees and consistent with applicable law, may be equally
applied to each such class.
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 10.01 Limitation of Liability. A Trustee, when acting in such
capacity, shall not be personally liable to any person other than the Trust or a
beneficial owner for any act, omission or obligation of the Trust or any
Trustee. A Trustee shall not be liable for any act or omission or any conduct
whatsoever in his capacity as Trustee, provided that nothing contained herein or
in the Delaware Act shall protect any Trustee against any liability to the Trust
or to Shareholders 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 the office of Trustee hereunder.
Section 10.02 Indemnification.
(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified
by the Trust to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a
party or otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and
the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office
or (B) not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or other
body approving the settlement; (B) by at least a majority of those Trustees
who are neither Interested Persons of the Trust nor are parties to the
matter based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or (C) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a full
trial-type inquiry); provided, however, that any Shareholder may, by
appropriate legal proceedings, challenge any such determination by the
Trustees or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be a Covered Person
and shall inure to the benefit of the heirs, executors and administrators of
such a person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered Persons, and other
persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
Subsection 10.02(a) of this Section 10.02 may be paid by the Trust or Series
from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be paid
over by him to the Trust or Series if it is ultimately determined that he is not
entitled to indemnification under this Section 10.02; provided, however, that
either (i) such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments, or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under Section 10.02.
Section 10.03 Shareholders. In case any Shareholder of any Series shall
be held to be personally liable solely by reason of his being or having been a
Shareholder of such Series and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives, or, in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled out
of the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
on behalf of the affected Series, shall, upon request by the Shareholder, assume
the defense of any claim made against the Shareholder for any act or obligation
of the Series and satisfy any judgment thereon from the assets of the Series.
ARTICLE XI
MISCELLANEOUS
Section 11.01 Trust Not A Partnership. It is hereby expressly declared
that a trust and not a partnership is created hereby; provided, however, that it
is acknowledged that, for federal tax purposes, the trust created hereby may be
characterized as a corporation. No Trustee hereunder shall have any power to
bind personally either the Trust officers or any Shareholder. All persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the appropriate Series or (if the
Trustees shall have yet to have established Series) of the Trust for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of their agents, whether past, present or future, shall be
personally liable therefor.
Section 11.02 Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretion hereunder in
good faith and with reasonable care under the circumstances then prevailing
shall be binding upon everyone interested. Subject to the provisions of Article
X hereof and to Section 11.01 of this Article XI, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees may take
advice of counsel or other experts with respect to the meaning and operation of
this Trust Instrument, and subject to the provisions of Article X hereof and
Section 11.01 of this Article XI, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
Section 11.03 Establishment of Record Dates. The Trustees may close the
Share transfer books of the Trust for a period not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date for the payment
of any dividends or other distributions, or the date for the allotment of
rights, or the date when any change or conversion or exchange of Shares shall go
into effect. In lieu of closing the stock transfer books as aforesaid, the
Trustees may fix in advance a date, not exceeding sixty (60) days preceding the
date of any meeting of Shareholders, or the date for payment of any dividend or
other distribution, or the date for the allotment of rights, or the date when
any change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend
or other distribution, or to any such allotment of rights, or to exercise the
rights in respect of any such change, conversion or exchange of Shares, and in
such case such Shareholders and only such Shareholders as shall be Shareholders
of record on the date so fixed shall be entitled to such notice of, and to vote
at, such meeting, or to receive payment of such dividend or other distribution,
or to receive such allotment or rights, or to exercise such rights, as the case
may be, notwithstanding any transfer of any Shares on the books of the Trust
after any such record date fixed as aforesaid.
Section 11.04 Termination of Trust.
(a) This Trust shall continue without limitation of time but subject to
the provisions of Subsection 11.04(b).
(b) The Trustees may, subject to a Majority Shareholder Vote of each
Series affected by the matter or, if applicable, to a Majority Shareholder Vote
of the Trust, and subject to a vote of a majority of the Trustees,
(i) sell and convey all or substantially all of the assets of the
Trust or any affected Series to another trust, partnership, association or
corporation, or to a separate series of shares thereof, organized under the
laws of any state which trust, partnership, association or corporation is
an open-end management investment company as defined in the 1940 Act, or is
a series thereof, for adequate consideration which may include the
assumption of all outstanding obligations, taxes and other liabilities,
accrued or contingent, of the Trust or any affected Series, and which may
include shares of beneficial interest, stock or other ownership interests
of such trust, partnership, association or corporation or of a series
thereof; or
(ii) at any time sell and convert into money all of the assets of the
Trust or any affected Series.
Upon making reasonable provision, in the determination of the Trustees, for the
payment of all such liabilities in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) of each Series (or class) ratably among the holders of Shares
of that Series then outstanding.
(c) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in Subsection 11.05(b), the Trust or any affected
Series shall terminate and the Trustees and the Trust shall be discharged of any
and all further liabilities and duties hereunder and the right, title and
interest of all parties with respect to the Trust or Series shall be canceled
and discharged.
Upon termination of the Trust, following completion of the winding up of
its business, the Trustees shall cause a certificate of cancellation of the
Trust's Certificate of Trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.
Without limiting the generality of the foregoing, the existence of the
Trust shall not be affected by sales or purchases of Shares or status of any
Shareholders.
Section 11.05 Reorganization. Notwithstanding anything else herein, the
Trustees, in order to change the form of organization of the Trust, may, without
prior Shareholder approval, (a) cause the Trust to merge or consolidate with or
into one or more trusts, partnerships, associations or corporations so long as
the surviving or resulting entity is an open-end management investment company
under the 1940 Act, or is a series thereof, that will succeed to or assume the
Trust's registration under that Act and which is formed, organized or existing
under the laws of a state, commonwealth, possession or colony of the United
States or (b) cause the Trust to incorporate under the laws of Delaware. Any
agreement of merger or consolidation or certificate of merger may be signed by a
majority of Trustees and facsimile signatures conveyed by electronic or
telecommunication means shall be valid.
Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, and notwithstanding anything to the contrary contained in this
Trust Instrument, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 11.05 may effect any amendment to the
Trust Instrument or effect the adoption of a new trust instrument of the Trust
if it is the surviving or resulting trust in the merger or consolidation.
Section 11.06 Filing of Copies, References, Headings. The original or a
copy of this Trust Instrument and of each amendment hereof or Trust Instrument
supplemental hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer or Trustee of the Trust as to whether or not any such
amendments or supplements have been made and as to any matters in connection
with the Trust hereunder, and with the same effect as if it were the original,
may rely on a copy certified by an officer or Trustee of the Trust to be a copy
of this Trust Instrument or of any such amendment or supplemental Trust
Instrument. In this Trust Instrument or in any such amendment or supplemental
Trust Instrument, references to this Trust Instrument, and all expressions like
"herein," "hereof" and "hereunder," shall be deemed to refer to this Trust
Instrument as amended or affected by any such supplemental Trust Instrument. All
expressions like "his", "he" and "him", shall be deemed to include the feminine
and neuter, as well as masculine, genders. Headings are placed herein for
convenience of reference only and in case of any conflict, the text of this
Trust Instrument, rather than the headings, shall control. This Trust Instrument
may be executed in any number of counterparts each of which shall be deemed an
original.
Section 11.07 Applicable Law. The Trust set forth in this instrument is
made in the State of Delaware, and the Trust and this Trust Instrument, and the
rights and obligations of the Trustees and Shareholders hereunder, are to be
governed by and construed and administered according to the Delaware Act and the
laws of said State; provided, however, that there shall not be applicable to the
Trust, the Trustees or this Trust Instrument (a) the provisions of Section 3540
of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or
common) of the State of Delaware (other than the Delaware Act) pertaining to
trusts which relate to or regulate (i) the filing with any court or governmental
body or agency of trustee accounts or schedules of trustee fees and charges,
(ii) affirmative requirements to post bonds for trustees, officers, agents or
employees of a trust, (iii) the necessity for obtaining court or other
governmental approval concerning the acquisition, holding or disposition of real
or personal property, (iv) fees or other sums payable to trustees, officers,
agents or employees of a trust, (v) the allocation of receipts and expenditures
to income or principal, (vi) restrictions or limitations on the permissible
nature, amount or concentration of trust investments or requirements relating to
the titling, storage or other manner of holding of trust assets, or (vii) the
establishment of fiduciary or other standards of responsibilities or limitations
on the acts or powers of trustees, which are inconsistent with the limitations
or liabilities or authorities and powers of the Trustees set forth or referenced
in this Trust Instrument. The Trust shall be of the type commonly called a
"business trust", and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust under
Delaware law. The Trust specifically reserves the right to exercise any of the
powers or privileges afforded to trusts or actions that may be engaged in by
trusts under the Delaware Act, and the absence of a specific reference herein to
any such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.
Section 11.08 Amendments. Except as specifically provided herein, the
Trustees may, without Shareholder vote, amend or otherwise supplement this Trust
Instrument by making an amendment, a Trust Instrument supplemental hereto or an
amended and restated Trust Instrument. Shareholders shall have the right to vote
(a) on any amendment which would affect their right to vote granted in Section
7.01 of Article VII hereof, (b) on any amendment to this Section 11.08, (c) on
any amendment as may be required by law or by the Trust's registration statement
filed with the Commission, and (d) on any amendment submitted to them by the
Trustees. Any amendment required or permitted to be submitted to Shareholders
which, as the Trustees determine, shall affect the Shareholders of one or more
Series (or classes) shall be authorized by vote of the Shareholders of each
Series (or class) affected and no vote of Shareholders of a Series (or class)
not affected shall be required. Notwithstanding anything else herein, any
amendment to Article X hereof shall not limit the rights to indemnification or
insurance provided therein with respect to action or omission of Covered Persons
prior to such amendment.
Section 11.09 Fiscal Year. The fiscal year of the Trust shall end on a
specified date as set forth in the Bylaws, provided, however, that the Trustees
may, without Shareholder approval, change the fiscal year of the Trust.
Section 11.10 Provisions in Conflict With Law. The provisions of this
Trust Instrument are severable, and if the Trustees shall determine, with the
advice of counsel, that any of such provisions is in conflict with the 1940 Act,
the regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Trust Instrument; provided, however,
that such determination shall not affect any of the remaining provisions of this
Trust Instrument or render invalid or improper any action taken or omitted prior
to such determination. If any provision of this Trust Instrument shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any matter affect such provisions in any other jurisdiction or any
other provision of this Trust Instrument in any jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees of
the Trust, have executed this instrument as of date first written above.
/s/ Kathy Levinson
-------------------------
Kathy Levinson, as Trustee
and not individually
/s/ Leonard C. Purkis
-------------------------
Leonard C. Purkis, as Trustee
and not individually
Form of Consent of Counsel
November ___, 1998
E*TRADE Funds
2400 Geng Road
Palo Alto, CA 94303
Dear Gentlemen:
This consent is given in connection with the filing by E*TRADE Funds, a
Delaware business trust ("Trust"), of the Registration Statement on Form N-1A
("Registration Statement") under the Securities Act of 1933 ("1933 Act") and
under the Investment Company Act of 1940 ("1940 Act").
We consent to the use of this letter as an exhibit to the Registration
Statement and to the reference to Dechert Price & Rhoads under the caption
"Counsel" in the Statement of Additional Information, which is incorporated by
reference into the Prospectus comprising a part of the Registration Statement.
Very truly yours,
/s/
DECHERT PRICE & RHOADS
