Registration Nos. 333-66807
811-09093
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1999
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. 4 /X/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 7 /X/
(Check appropriate box or boxes)
E*TRADE FUNDS
(Exact name of Registrant as specified in charter)
4500 Bohannon Drive
Menlo Park, CA 94025
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (650) 331-5000
Kathy Levinson
E*TRADE Securities, Inc.
4500 Bohannon Drive
Menlo Park, CA 94025
(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 4500 Bohannon Drive
Washington, DC 20006 Menlo Park, CA 94025
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
Immediately upon filing pursuant to paragraph (b)
- -------
X on August 12, 1999 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 EXTENDED MARKET INDEX FUND
Prospectus dated August 13, 1999
This Prospectus concisely sets forth information about the E*TRADE Extended
Market 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 E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The investment objective of the Fund is to match as closely as practicable,
before fees and expenses, the performance of the Wilshire 4500 Equity Index,
commonly known as the Extended Market Index. The Fund seeks to achieve its
objective by investing in a master portfolio. The Master Portfolio, in turn,
invests in a representative sample of those U.S. securities that comprise the
Wilshire 4500 Index and are selected in accordance with their capitalization,
industry sector and valuation, among other factors.
Eligible Investors. This Fund is designed and built specifically for on-line
investors. In order to be a shareholder of the Fund, you need to have an account
with E*TRADE Securities, Inc. ("E*TRADE Securities"). In addition, the Fund
requires you to consent to receive all information about the Fund
electronically. If you wish to rescind this consent or close your E*TRADE
Securities account, the Fund will redeem all of your shares in your Fund
account. The Fund is designed for long-term investors and the value of the
Fund's shares will fluctuate over time. The Fund is a true no-load fund, which
means you pay no sales charges or 12b-1 fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, 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.
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 August 13, 1999
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................3
FEES AND EXPENSES......................................................4
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................5
YEAR 2000..............................................................7
FUND MANAGEMENT........................................................7
THE FUND'S STRUCTURE...................................................8
PRICING OF FUND SHARES.................................................9
HOW TO BUY AND SELL SHARES............................................10
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................14
TAX CONSEQUENCES......................................................14
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of the Wilshire 4500 Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Extended Index Master Portfolio ("Master Portfolio"), a series of
Master Investment Portfolio ("MIP"), a registered open-end management investment
company, rather than directly in a portfolio of securities. In turn, the Master
Portfolio seeks to provide a portfolio that approximates the investment
characteristics and performance of the Wilshire 4500 Index.
The Wilshire 4500 Index is composed of over 6,500 equity securities of issuers
headquartered in the United States. The Wilshire 4500 Index is almost entirely
comprised of common stocks listed on the New York Stock Exchange, American Stock
Exchange or Nasdaq Stock Market, excluding the 500 largest capitalization
stocks. Many of the companies whose securities comprise the Wilshire 4500 Index
are small- to medium-capitalization companies. The weightings of stocks in the
Wilshire 4500 Index are based on each stock's relative total market
capitalization; that is, its market price per share times the number of shares
outstanding. The Master Portfolio invests in a representative sample of these
securities. The Master Portfolio selects securities for investment in accordance
with their capitalization, industry sector and valuation, among other factors.
Although the Master Portfolio attempts to be fully invested at all times in
securities comprising the Wilshire 4500 Index and in futures contracts and
options on futures contracts which may be considered derivatives, it also may
invest up to 10% of its assets in high-quality money market instruments to
provide liquidity. The Master Portfolio also may invest up to 15% of the value
of its net assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days.
Principal Risks
The stock market may rise and fall daily. The Wilshire 4500 Index represents a
significant segment of the U.S. stock market. The Wilshire 4500 Index may also
rise and fall daily. As with any stock investment, the value of your investment
in the Fund will fluctuate, meaning you could lose money.
* Wilshire Associates, Inc. ("Wilshire Associates") does not sponsor the Fund or
the Master Portfolio, nor is it affiliated in any way with the Fund or the
Master Portfolio or their respective investment advisors. "Wilshire 4500 Equity
Index(R)," "Wilshire 4500 Index(R)," and "Wilshire 4500(R)," are trademarks of
Wilshire Associates Incorporated and have been licensed for use by E*TRADE Asset
Management, Inc. The Fund and the Master Portfolio are not sponsored, endorsed,
sold, or promoted by Wilshire Associates, and neither Wilshire Associates nor
the Wilshire 4500 Index makes any representation or warranty, express or
implied, regarding the advisability of investing in the Fund or the Master
Portfolio.
<PAGE>
There is no assurance that the Fund will achieve its investment objective. The
Wilshire 4500 Index may not appreciate, and could depreciate, during the time
you are invested in the Fund, even if you are a long-term investor.
The Fund cannot as a practical matter own all of the equity securities that make
up the Wilshire 4500 Index in perfect correlation to the Wilshire 4500 Index
itself. The use of futures and options on futures contracts is intended to help
the Fund match the Wilshire 4500 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 Wilshire 4500 Index during down markets
as well as during up markets. The Fund's returns will be directly affected by
the volatility of the equity securities making up the Wilshire 4500 Index. The
Fund will also have exposure to the industries represented by those equity
securities.
Small- to medium-capitalization companies are more susceptible to market
fluctuations than securities of larger capitalization companies. As a result,
whenever these stocks perform worse than large-capitalization stocks, the Fund
may underperform funds that have exposure to larger capitalization segments of
the U.S. stock market. Likewise, whenever small to medium-capitalization U.S.
stocks fall behind other types of investments--bonds or foreign stocks, for
instance--the Fund's performance also will lag behind those investments. The
companies in the Wilshire 4500 Index are also exposed to the global economy.
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.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund is new, and therefore, has no historical expense
data. Thus, the numbers below are estimates.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment)
<S> <C>
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
(within 120 days of purchase) 0.50%
Annual Fund Operating Expenses*
(expenses that are deducted from Fund assets)
Management Fees 0.10%**
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.28%***
Total Annual Fund Operating Expenses 0.38%
<FN>
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** Management fees include a fee equal to 0.08% of daily net assets
payable at the Master Portfolio level to its investment advisor and an
investment advisory fee equal to 0.02% payable by the Fund to its investment
advisor.
*** The administrative fees include a fee equal to 0.02% of daily net
assets payable at the Master Portfolio level to its co-administrators and a fee
equal to 0.26% payable by the Fund to its administrator, E*TRADE Asset
Management, Inc. The administrative fee is based on estimated amounts for the
current fiscal year.
</FN>
</TABLE>
You should also know that the Fund does not charge investors any account
maintenance fees, account set-up fees, low balance fees, transaction fees or
customer service fees. E*TRADE Securities charges $20 for wire transfers out of
your E*TRADE Securities account. Also, transactions in Fund shares effected by
speaking with an E*TRADE Securities representative are subject to a $15 fee.
Transactions in Fund shares effected online are not subject to that fee. You
will be responsible for opening and maintaining an e-mail account and internet
access at your own expense.
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*
$40 $125
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
Under normal market conditions, the Master Portfolio invests at least 90% of the
value of its total assets in the securities comprising the Wilshire 4500 Index.
That portion of its assets is not actively managed but is designed to
substantially duplicate the investment performance of the Wilshire 4500 Index.
As investment advisor to the Master Portfolio, Barclays Global Fund Advisors
("BGFA") regularly monitors the Master Portfolio's correlation to the Wilshire
4500 Index and adjusts the Master Portfolio's portfolio to the extent necessary.
At times, the portfolio composition of the Master Portfolio may be altered (or
"rebalanced") to reflect changes in the characteristics of the Wilshire 4500
Index. Inclusion of a security in the Wilshire 4500 Index in no way implies an
opinion by Wilshire Associates as to its attractiveness as an investment.
The Master Portfolio also may enter into transactions in futures contracts and
options on futures contracts. The futures contracts and options on futures
contracts that the Master Portfolio may purchase may be considered derivatives.
Derivatives are financial instruments whose values are derived, at least in
part, from the prices of other securities or specified assets, indices or rates.
The Master Portfolio intends to use futures contracts and options as part of its
short-term liquidity holdings and/ or comparable market positions in the
underlying securities. Some derivatives may be more sensitive than direct
securities to changes in interest rates or sudden market moves. Some derivatives
also may be susceptible to fluctuations in yield or value due to their structure
or contract terms.
The Master Portfolio also uses these derivatives to minimize the gap in
performance that naturally exists between any index fund and its index. This gap
will occur mainly because, unlike the Wilshire 4500 Index, the Master Portfolio
and the Fund incur expenses and must keep a portion of their assets in cash for
paying expenses and processing shareholder redemptions. By using futures, the
Master Portfolio 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 Wilshire 4500 Index. The Master Portfolio also uses futures contracts to
gain exposure to the Wilshire 4500 Index for its cash balances, which could
cause the Fund to track the Wilshire 4500 Index less closely if the futures
contracts do not perform as expected.
Like all equity funds, the Fund's Net Asset Value ("NAV") 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 discussion also includes a description of the risks associated with
the investments of the Master Portfolio. The Fund's performance before
Fund-level fees will correspond directly to the performance of the Master
Portfolio.
Neither the Fund nor the Master Portfolio are 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 Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the Wilshire 4500 Index through computerized, quantitative techniques.
The Fund's ability to match its investment performance to the investment
performance of the Wilshire 4500 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; the manner in which the total return
of the Wilshire 4500 Index is calculated; the size of the Master Portfolio's
investment portfolio; the Master Portfolio's use of futures and options
transactions and other derivative securities transactions; Master Portfolio's
lending of its portfolio securities; 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
capitalization range and returns to those of the securities comprising the
Wilshire 4500 Index.
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).
YEAR 2000
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by its investment advisor, the Fund's other service providers, or persons
with whom they deal, do not properly process and calculate date-related
information and data on and after January 1, 2000. This possibility is commonly
known as the "Year 2000 Problem." Virtually all operations of the Fund are
computer reliant. The investment advisor, administrator, transfer agent and
custodian have informed the Fund that they are actively taking steps to address
the Year 2000 Problem with regard to their respective computer systems. The Fund
is also taking measures to obtain assurances that comparable steps are being
taken by the Fund's other significant service providers. While there can be no
assurance that the Fund's service providers will be Year 2000 compliant, the
Fund's service providers expect that their plans to be compliant will be
achieved. The Master Portfolio's investment advisor and principal service
providers have also advised the Master Portfolio that they are working on any
necessary changes to their systems and that they expect their systems to be Year
2000 compliant in time. There can, of course, be no assurance of success by
either the Fund's or the Master Portfolio's service providers. In addition,
because the Year 2000 Problem affects virtually all organizations, the issuers
in whose securities the Master Portfolio invests and the economy as a whole also
could be adversely impacted by the Year 2000 Problem. The extent of such impact
cannot be predicted.
FUND MANAGEMENT
Investment Advisors. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor"), a registered investment
advisor, provides investment advisory services to the Fund. The Investment
Advisor is a wholly owned subsidiary of E*TRADE and is located at 4500 Bohannon
Drive, Menlo Park, CA 94025. The Investment Advisor commenced operating in
February 1999 and therefore has limited experience as an investment advisor.
Subject to general supervision of the E*TRADE Funds' Board of Trustees (the
"Board") and in accordance with the investment objective, policies and
restrictions of the Fund, the Investment Advisor provides the Fund with ongoing
investment guidance, policy direction and monitoring of the Master Portfolio.
The Investment Advisor may in the future manage cash and money market
instruments for cash flow purposes. For its advisory services, the Fund pays the
Investment Advisor an investment advisory fee at an annual rate equal to 0.02%
of the Fund's average daily net assets.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a wholly owned direct subsidiary of Barclays Global Investors,
N.A. (which, in turn, is an indirect subsidiary of Barclays Bank PLC) and is
located at 45 Fremont Street, San Francisco, California 94105. BFGA has provided
asset management, administration and advisory services for over 26 years. As of
December 31, 1998, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $615 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.08% of the Master Portfolio's average daily net assets. From time to
time BGFA may waive such fees in whole or in part. Any such waiver will reduce
the expenses of the Master Portfolio, and accordingly, have a favorable impact
on its performance.
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'S STRUCTURE
The Fund is a separate series of E*TRADE Funds, a Delaware business trust
organized in 1998. The Fund is a feeder fund in a master/feeder structure.
Accordingly, the Fund invests all of its assets in the Master Portfolio. The
Master Portfolio seeks to provide investment results that match as closely as
practicable, before fees and expenses, the performance of the Wilshire 4500
Index. 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 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. 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 complex nature of the
master/feeder structure, accounting and operational difficulties could occur.
For example, coordination of calculation of NAV would be affected at the master
and/or feeder level.
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
determines that it is in the best interests of the Fund and its shareholders to
do so. Upon any such withdrawal, the Board 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 a 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.
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") next determined after E*TRADE Securities receives
your request in proper form. If E*TRADE Securities 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. Shares will
not be priced on the days on which the NYSE is closed for trading.
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. Net asset value per
share is computed by dividing the value of the Master Portfolio's net assets
(i.e., the value of its assets less liabilities) by the total number of
outstanding shares of such Master Portfolio. The Master Portfolio's investments
are valued each day the NYSE is open for business. The Master Portfolio's 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 net
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 (generally 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 AND SELL SHARES
This Fund is designed and built specifically for on-line investors. In order to
become a shareholder of the Fund, you will need to have an E*TRADE Securities
account. In addition, the Fund requires you to consent to receive all
information about the Fund electronically. If you wish to rescind this consent,
the Fund will require you redeem your position in the Fund, unless a new class
of shares of the Fund has been formed for those shareholders who rescinded
consent, 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.
E*TRADE Securities reserves the right to deliver paper-based documents in
certain circumstances, at no cost to the investor. Shareholder information
includes prospectuses, financial reports, confirmations and statements.
In order to buy shares, you will need to: 1) open an E*TRADE Securities account;
2) deposit money in the account; and 3) execute an order to buy shares.
STEP 1: How to Open an E*TRADE Securities Account
To open an E*TRADE Securities account, you must complete the application
available through our Website (www.etrade.com). You will be subject to E*TRADE
Securities' general account requirements as described in E*TRADE Securities'
customer agreement.
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 NAV changes daily, your purchase price will be the
next NAV determined after the Fund receives and accepts your purchase order.
On-line. 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 a day or call
1-800-786-2575 between 5:00 a.m. and 6 p.m. (pacific time), Monday - Friday.
By Mail. You can request an application by visiting the "Open an Account" area
of our Website, or by calling 1-800-786-2575. Complete and sign the application.
Make your check or money order payable to E*TRADE Securities, Inc. Mail to
E*TRADE Securities, Inc., P.O. Box 8160, Boston, MA 02266-8160, or if overnight
mail: 66 Brooks Drive, Braintree, MA 02184-8160.
Telephone. Request a new account kit by calling 1-800-786-2575 between 5:00 a.m.
and 6 p.m., Monday - Friday (pacific time).
STEP 2: Funding Your Account.
By check or money order. Make your check or money order payable to E*TRADE
Securities, Inc. and mail it to E*TRADE Securities, Inc., P.O. Box 8160, Boston,
MA 02266-8160, or if overnight mail: 66 Brooks Drive, Braintree, MA 02184-8160.
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 Securities will contact you with an
account number so that you can immediately wire funds.
STEP 3: Execute an Order to Buy/Sell Shares
<TABLE>
<CAPTION>
Minimum Investment Requirements:
<S> <C>
For your initial investment in the Fund $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
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
<FN>
* Your shares may be automatically redeemed if, as a result of selling shares,
you no longer meet a Fund's minimum balance requirements. Before taking such
action, the Fund will provide you with written notice and at least 30 days to
buy more shares to bring your investment up to $1,000.
</FN>
</TABLE>
After your account is established you may use any of the methods described below
to buy or sell shares. 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 may
assess a 0.50% fee on redemptions of Fund shares held for less than 120 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 three days
thereafter.
On-line. You can access E*TRADE Securities' secure trading pages at
www.etrade.com via 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. By clicking on one of several mutual fund
order buttons, you can quickly and easily place a buy or sell order for shares
in the Fund. 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 your co-account holder(s) are the
only people who can place orders in your E*TRADE account. When you buy shares,
you will be asked to: 1) affirm your consent to receive all Fund documentation
electronically, 2) provide an e-mail address and 3) affirm that you have read
the prospectus. The prospectus will be readily available for viewing and
printing on our Website.
Telephone. All initial purchases of Fund shares must be transacted online at the
E*TRADE Website (www.etrade.com). You may place subsequent purchase and
redemption orders with a telephone representative at 1-800-STOCKS1 (1-800-
786-2571) for an additional $15 fee.
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.
If you are already a shareholder, you may also call 1-800-STOCKS5
(1-800-786-2575) to sell shares by phone through an E*TRADE Securities broker
for an additional $15 fee.
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-STOCKS1 (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.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
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.
Redemption Fee. 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 may assess a 0.50% fee on redemptions of fund shares
held for less than 120 days.
Any redemption fees imposed 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 120-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 120 days, the fee may be assessed. The fee may
apply to shares held through omnibus accounts or certain retirement plans.
Closing your account. If you close your E*TRADE Securities account, you will be
required to redeem your shares in your Fund account.
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.
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 on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
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. 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 the 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 advisor 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 that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S.
federal income tax liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated August 13, 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.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available) may be obtained without charge, at our
Website (www.etrade.com). Shareholders will be alerted by e-mail when a
prospectus amendment, annual or semi-annual report is available. Shareholders
may also call the toll-free number listed below for additional information or
with any inquiries.
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.
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act File No.: 811-09093
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
E*TRADE Funds
E*TRADE Extended Market Index Fund
August 13, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE Extended Market
Index Fund (the "Fund") dated August 13, 1999 (as amended from time to time).
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued) free of charge, please access our Website
online (www.etrade.com) or call our toll-free number at (800) 786-2575. Only
customers of E*TRADE Securities, Inc. who consent to receive all information
about the Fund electronically may invest in the Fund.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY...........................................................3
THE FUND...............................................................3
INVESTMENT STRATEGIES AND RISKS........................................3
FUND POLICIES.........................................................12
TRUSTEES AND OFFICERS.................................................16
INVESTMENT MANAGEMENT.................................................20
SERVICE PROVIDERS.....................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION........................23
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..............................25
SHAREHOLDER INFORMATION...............................................26
TAXATION..............................................................26
UNDERWRITER...........................................................29
MASTER PORTFOLIO ORGANIZATION.........................................30
PERFORMANCE INFORMATION...............................................31
APPENDIX..............................................................37
<PAGE>
FUND HISTORY
The E*TRADE Extended Market 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 November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of the Wilshire 4500 Equity Index (the
"Wilshire 4500 Index"), commonly known as the Extended Market Index. This
investment objective is fundamental and therefore, cannot be changed without
approval of a majority (as defined in the Investment Company Act of 1940 Act, as
amended ("1940 Act")) of the Fund's outstanding voting interests. The Fund seeks
to achieve its objective by investing in a master portfolio. The Master
Portfolio, in turn, invests in a representative sample of those U.S. securities
that comprise the Wilshire 4500 Index and are selected in accordance with their
capitalization, industry sector and valuation, among other factors.
To achieve its investment objective, the Fund intends to invest all of its
assets in the Extended 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 Master Portfolio seeks to provide a portfolio
that approximates the investment characteristics and performance of the Wilshire
4500 Index.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio's investment strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted.
Futures Contracts and Options Transactions. The Master Portfolio may use futures
as a substitute for a comparable market position in the underlying securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial instrument 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. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
The Master Portfolio may enter into futures contracts and may purchase and write
options thereon. 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 Master Portfolio.
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio 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 Master Portfolio'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 or published positions of the SEC,
the Master Portfolio 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 Master Portfolio 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 Master Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the Master
Portfolio's investment objective and legally permissible for the Master
Portfolio. 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 Master Portfolio 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 on or before 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 Master Portfolio 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 Master Portfolio seeks to close
out a futures contract or a futures option position. Lack of a liquid market may
prevent liquidation of an unfavorable position.
Index Swaps. The Master Portfolio may enter into index swaps in pursuit of its
investment objective. Index swaps involve the exchange by the Master Portfolio
with another party of cash flows based upon the performance of an index of
securities or a portion of an index of securities that usually include dividends
or income. In each case, the exchange commitments can involve payments to be
made in the same currency or in different currencies. The Master Portfolio will
usually enter into swaps on a net basis. In so doing, the two payment streams
are netted out, with the Master Portfolio receiving or paying, as the case may
be, only the net amount of the two payments. If the Master Portfolio enters into
a swap, it will maintain a segregated account on a gross basis, unless the
contract provides for a segregated account on a net basis. If there is a default
by the other party to such a transaction, the Master Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The use of index swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. There is no limit, except as provided below, on
the amount of swap transactions that may be entered into by the Master
Portfolio. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount of payments
that the Master Portfolio is contractually obligated to make. There is also a
risk of a default by the other party to a swap, in which case the Master
Portfolio may not receive the net amount of payments that the Master Portfolio
contractually is entitled to receive.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Master Portfolio 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 Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the advisor.
Short-term instruments and temporary investments. The Master Portfolio 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 Master Portfolio 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 Master
Portfolio's investment advisor; (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 the Master Portfolio's investment advisor are
of comparable quality to obligations of U.S. banks which may be purchased by the
Master Portfolio.
Bank Obligations. The Master Portfolio 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 Master Portfolio 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.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the Federal
Deposit Insurance corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. In addition, state banks
whose certificates of deposit ("CDs") may be purchased by the Master Portfolio
are insured by the FDIC (although such insurance may not be of material benefit
to the Master Portfolio, depending on the principal amount of the CDs of each
bank held by the Master Portfolio) and are subject to Federal examination and to
a substantial body of Federal law and regulation. As a result of Federal or
state laws and regulations, domestic branches of domestic banks whose CDs may be
purchased by the Master Portfolio generally are required, among other things, to
maintain specified levels of reserves, are limited in the amounts which they can
loan to a single borrower and are subject to other regulation designed to
promote financial soundness. However, not all of such laws and regulations apply
to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may be required to: (1)
pledge to the regulator, by depositing assets with a designated bank within the
state, a certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of Federal and State Branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Master Portfolio's Advisor carefully evaluates such
investments on a case-by-case basis.
The Master Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided such Master Portfolio purchases
any such CD in a principal amount of not more than $100,000, which amount would
be fully insured by the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. No Master Portfolio will own more than one such CD per such issuer.
Commercial Paper and Short-Term Corporate Debt Instruments. The Master Portfolio
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 advisor
to the Master Portfolio monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand.
The Master Portfolio 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 Master Portfolio 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 Master
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Master Portfolio.
The investment adviser to the Master Portfolio will consider such an event in
determining whether the Master Portfolio should continue to hold the obligation.
To the extent the Master Portfolio 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 Master Portfolio 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.
Repurchase Agreements. The Master Portfolio may enter into a repurchase
agreement wherein the seller of a security to the Master Portfolio agrees to
repurchase that security from the Master Portfolio 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 Master
Portfolio may enter into repurchase agreements only with respect to securities
that could otherwise be purchased by the Master Portfolio, and all repurchase
transactions must be collateralized, although the underlying security may mature
in more than thirteen months.
The Master Portfolio 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 Master
Portfolio may participate in pooled repurchase agreement transactions with other
funds advised by its investment advisor.
The Master Portfolio may enter into repurchase agreements wherein the seller of
a security to the Master Portfolio agrees to repurchase that security from the
Master Portfolio at a mutually agreed-upon time and price that involves the
acquisition by the Master Portfolio of an underlying debt instrument, subject to
the seller's obligation to repurchase, and the Master Portfolio's obligation to
resell, the instrument at a fixed price usually not more than one week after its
purchase. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. The Master Portfolio may enter
into repurchase agreements only with respect to securities of the type in which
it may invest, 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 resale price. BGFA monitors on an ongoing basis
the value of the collateral to assure that it always equals or exceeds the
repurchase price. Certain costs may be incurred by the Master Portfolio in
connection with the sale of the underlying securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, disposition of the securities by the Master Portfolio may be delayed
or limited. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the Master
Portfolio in connection with insolvency proceedings), it is the policy of the
Master Portfolio to limit repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Master Portfolio considers on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements. Repurchase
agreements are considered to be loans by the Master Portfolio under the 1940
Act.
Floating- and variable- rate obligations. The Master Portfolio 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.
The Master Portfolio may purchase floating- and variable-rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
thirteen months, but which permit the holder to demand payment of principal at
any time, or at specified intervals not exceeding thirteen months. Variable rate
demand notes include master demand notes that are obligations that permit the
Master Portfolio to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Master Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Master
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and the Master Portfolio may invest in obligations which
are not so rated only if the Master Portfolio's Advisor determines that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Master Portfolio may invest. The Master Portfolio's
Advisor considers on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in the Master Portfolio's
portfolio. The Master Portfolio will not invest more than 10% of the value of
its total net assets in floating- or variable-rate demand obligations whose
demand feature is not exercisable within seven days. Such obligations may be
treated as liquid, provided that an active secondary market exists.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolio 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 Master Portfolio's total assets and
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. The Master Portfolio 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 Master Portfolio could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Master Portfolio 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 to the borrower or a placing
broker.
In determining whether or not to lend a security to a particular broker, dealer
or financial institution, the Master Portfolio'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 based on values that are marked to
market daily. The Master Portfolio does not enter into any portfolio security
lending arrangement having a duration of longer than one year. Any securities
that the Master Portfolio may receive as collateral will not become part of the
Master Portfolio's investment portfolio at the time of the loan and, in the
event of a default by the borrower, the Master Portfolio will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Master Portfolio is permitted to invest. During the time securities
are on loan, the borrower will pay the Master Portfolio any accrued income on
those securities, and the Master Portfolio 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 Master Portfolio may invest in securities
issued by other open-end, management investment companies to the extent
permitted under the 1940 Act. As a general matter, under the 1940 Act,
investment in such securities is limited to: (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Master Portfolio's net assets with
respect to any one investment company; and (iii) 10% of the Master Portfolio'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 Master Portfolio may also purchase shares of exchange-listed
closed-end funds to the extent permitted under the 1940 Act.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
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 Master Portfolio 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.
U.S. Government Obligations. The Master Portfolio 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, its
agencies or instrumentalities. 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.
Payment of principal and interest on U.S. Government obligations (i) may be
backed by the full faith and credit of the United States (as with U.S. Treasury
obligations and GNMA certificates) or (ii) may be backed solely by the issuing
or guaranteeing agency or instrumentality itself (as with FNMA notes).
In the latter case, 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.
Borrowing Money. As a fundamental policy, the Master Portfolio is permitted to
borrow the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money for temporary or emergency (not leveraging)
purposes, and may borrow up to one-third of the value of its total assets
(including the amount borrowed) valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made.
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. 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. 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. 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, as amended, 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 (i) securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities (or
repurchase agreements thereto); and (ii) any industry in which the Wilshire 4500
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 large that 25% or more of its total assets would be invested in a
single industry;
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; and
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.
1. The Fund may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act. Under
the 1940 Act, the Fund's investment in such securities currently is limited,
subject to certain exceptions, to (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.
Other investment companies in which the Fund invests can be expected to charge
fees for operating expenses, such as investment advisory and administrative
fees, that would be in addition to those charged by the Fund.
2. The Fund may not invest more than 15% of the Fund's net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days.
3. The Fund may lend securities from its portfolio to brokers, dealers and
financial institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund's total assets. Any such loans of portfolio securities will be fully
collateralized based on values that are marked to market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year.
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), may be deemed to give rise to a
senior security;
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. 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 Wilshire 4500 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; and
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.
Non-Fundamental Operating Policies
The Master Portfolio has adopted the following investment restrictions as
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.
1. The Master Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of Section 12(d)(1) of the 1940
Act. Under the 1940 Act, the Master Portfolio's investment in such securities
currently is limited, subject to certain exceptions, to (i) 3% of the total
voting stock of any one investment company, (ii) 5% of the Master Portfolio's
net assets with respect to any one investment company, and (iii) 10% of the
Master Portfolio's net assets in the aggregate. Other investment companies in
which the Master Portfolio invests can be expected to charge fees for operating
expenses, such as investment advisory and administrative fees, that would be in
addition to those charged by the Master Portfolio.
2. The Master Portfolio may not invest more than 15% of the Master Portfolio's
net assets in illiquid securities. For this purpose, illiquid securities
include, among others, (a) securities that are illiquid by virtue of the absence
of a readily available market or legal or contractual restrictions on resale,
(b) fixed time deposits that are subject to withdrawal penalties and that have
maturities of more than seven days, and (c) repurchase agreements not terminable
within seven days.
3. The Master Portfolio may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the aggregate)
one-third of the Master Portfolio's total assets. Any such loans of portfolio
securities will be fully collateralized based on values that are marked to
market daily. The Master Portfolio will not enter into any portfolio security
lending arrangement having a duration of longer than one year.
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 or affiliated
person," as defined in the 1940 Act, is indicated by an asterisk (*):
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Name, Address, and Age Position(s) Held with Principal Occupation(s) During
the Fund the Past 5 Years
- -----------------------------------------------------------------------------------
<S> <C> <C>
*Kathy Levinson (44) Trustee Ms. Levinson is executive vice
4500 Bohannon Drive, president of E*TRADE Group,
Menlo Park, CA 94025 Inc. and president and chief
operating officer of E*TRADE
Securities. 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
(Financial Services). She is
also a former senior vice
president of credit services
for Schwab.
*Leonard C. Purkis(50) Trustee Mr. Purkis is chief financial
4500 Bohannon Drive, officer and executive vice
Menlo Park, CA 94025 president of finance and
administration of E*TRADE
Group, Inc. He previously
served as chief financial
officer for Iomega
Corporation (Hardware
Manufacturer) 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
(Financial Services).
Shelly J. Meyers (39) Trustee Ms. Meyers is the Manager,
Chief Executive Officer, Chief
Financial Officer and founder
of Meyers Capital Management,
a registered investment
adviser formed in January
1996. She has also managed
the Meyers Pride Value Fund
since June 1996. Prior to
that, she was employed by The
Boston Company Asset
Management, Inc. as Assistant
Vice President of its
Institutional Asset Management
group.
Ashley T. Rabun (47) Trustee Ms. Rabun is the Founder and
Chief Executive Officer of
InvestorReach (which is a
consulting firm specializing
in marketing and distribution
strategies for financial
services companies formed in
October 1996). From 1992 to
1996, she was a partner and
President of Nicholas
Applegate Mutual Funds, a
division of Nicholas Applegate
Capital Management.
Steven Grenadier (34) Trustee Mr. Grenadier is an Associate
Professor of Finance at the
Graduate School of Business at
Stanford University, where he
has been employed as a
professor since 1992.
*Brian C. Murray (42) President Mr. Murray is President of
4500 Bohannon Drive, E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in January 1998. Prior to
that Mr. Murray was Principal
of Alameda Consulting
(Financial Services
Consulting) and prior to that
he was Director, Mutual Fund
Marketplace of Charles Schwab
Corporation (Financial
Services).
*Joe N. Van Remortel Vice President and Mr. Van Remortel is Vice
(34) Secretary President of Operations,
4500 Bohannon Drive, E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in September 1996. Prior
to that Mr. Van Remortel was
Senior Consultant of KPMG Peat
Marwick and Associate of
Analysis Group, Inc.
(management consulting).
</TABLE>
The Trust pays each non-affiliated Trustee a quarterly fee of $1,500 per Board
meeting for the Trust. In addition, the Trust reimburses each of the
non-affiliated 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. The following table provides an estimate
of each Trustee's compensation for the current fiscal year:
Estimated Compensation Table
<TABLE>
- --------------------------------------------------------------
<CAPTION>
Total Compensation
Name of Person, Aggregate From Fund and Fund
Position Compensation from Complex Paid to
the Fund Directors
Expected to be
Paid to Trustees
(1)
- --------------------------------------------------------------
<S> <C> <C>
Kathy Levinson, None None
Trustee
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers $6,000 $6,000
Ashley T. Rabun $6,000 $6,000
Steven Grenadier $6,000 $6,000
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- ------------
<FN>
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 1999.
</FN>
</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. To satisfy
regulatory requirements, as of August 11, E*TRADE Asset Management, Inc. owned
100% of the Fund's outstanding shares. There are no other shareholders holding
25% or more. E*TRADE Asset Management, Inc. is a Delaware corporation and is
wholly owned by E*TRADE Group, Inc. Its address is 4500 Bohannon Drive, Menlo
Park, CA 94025.
As of July 30, 1999, Softbank America Inc. owned 26.9% of the total outstanding
voting shares of E*TRADE Group, Inc. Softbank America, Inc. is a Delaware
corporation and is located 300 Delaware Ave., Suite 900, Wilmington, Delaware
19801. It is a wholly owned subsidiary of Softbank Holding, Inc., also a
Delaware corporation, which, in turn, is a wholly owned subsidiary of Softbank
Corporation, a Japanese corporation.
INVESTMENT 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 Group, Inc, and is located at 4500 Bohannon Drive, Menlo
Park, CA 94025. The Investment Advisor commenced operating in February 1999 and,
therefore, has limited experience as an investment advisor. As of June 30, 1999,
the Investment Advisor provided investment advisory services for over $27
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund pays the Investment Advisor an
investment advisory fee at an annual rate equal to 0.02% of the Fund's average
daily net assets.
The Master Portfolio's Investment Advisor. The Master Portfolio's investment
advisor is Barclays Global Fund Advisors ("BGFA"). 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. BFGA has provided asset management, administration
and advisory services for over 25 years. As of December 31, 1998, Barclays
Global Investors and its affiliates, including BGFA, provided investment
advisory services for over $615 billion of assets. Barclays has been involved in
banking in the United Kingdom for over 300 years. 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 Board of Trustees
periodic reports on the investment strategy and performance of the Master
Portfolio. BGFA receives a fee from the Master Portfolio at an annual rate equal
to 0.08% of the Master Portfolio's average daily net assets. From time to time,
BGFA may waive such fees in whole or in part. Any such waiver will reduce the
expenses of the Master Portfolio, and accordingly, have a favorable impact on
its performance. This advisory fee is an expense of the Master Portfolio borne
proportionately by its interestholders, including the Fund.
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
Board 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., 4500 Bohannon Drive, Menlo
Park, CA 94025, is the Fund's principal underwriter. The underwriter is a wholly
owned subsidiary of E*TRADE Group, Inc.
Co-Administrators 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 the Master Portfolio with administrative services, including: (i)
general supervision of the Master Portfolio's non-investment operations,
coordination of the other services provided to the Master Portfolio; (ii)
compilation of information for 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 MIP's officers and Board. Stephens also furnishes office space and
certain facilities required for conducting the business of the Master Portfolio,
and compensates the MIP's trustees, officers and employees who are affiliated
with Stephens. In addition, Stephens and BGI will be responsible for paying all
expenses incurred by the Master Portfolio other than the fees payable to BGFA
and other than custodial fees of up to 0.01% payable after the first two years
of the Master Portfolio's operations. Stephens and BGI are entitled to receive a
monthly fee, in the aggregate, at an annual rate of 0.02% of the average daily
net assets of the Master Portfolio for providing administrative services and
assuming expenses.
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.
Administrator of the Fund. E*TRADE Asset Management, Inc., the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management, Inc. provides administrative services directly or
through sub-contracting, including: (i) general supervision of the operation of
the Fund, including coordination of the services performed by the investment
advisor, transfer and dividend disbursing agent, custodian, sub-administrator,
shareholder servicing agent, 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 (iii) periodic reviews of management reports
and financial reporting. E*TRADE Asset Management, Inc. also furnishes office
space and certain facilities required for conducting the business of the Fund.
Pursuant to an agreement with the Fund, E*TRADE Asset Management, Inc. receives
a fee equal to 0.27% of the average daily net assets of the Fund. E*TRADE Asset
Management, Inc. is responsible under that agreement for the expenses otherwise
payable by the Fund for transfer agency, dividend disbursing, custody, auditing
and legal fees, to the extent that those expenses would otherwise equal or
exceed 0.005% of the Fund's average daily net assets. E*TRADE Asset Management,
Inc. is not responsible for any fees or expenses incurred at the master fund
level.
Custodian, Fund Accounting Services Agent and Sub-administrator. Investors Bank
& Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116, serves as
custodian of the assets of the Fund and the 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. IBT also serves as the Fund's sub-administrator,
under an agreement among IBT, the Trust and E*TRADE Asset Management, Inc.,
providing management reporting and treasury administration and financial
reporting to Fund management and the Fund's Board of Trustees and preparing
income tax provisions and tax return. IBT is compensated for its services by
E*TRADE Asset Management, Inc.
During the first two years of the Master Portfolio's operations, IBT as the
Master Portfolio's custodian, will be entitled to receive compensation for its
custodial services from Stephens and BGI, the co-administrators of the Master
Portfolio's. Thereafter, IBT will be entitled to receive custodial fees of up to
0.01% from the Master Portfolio.
Transfer Agent and Dividend Disbursing Agent. PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, acts as transfer agent and dividend-disbursing agent for
the Fund.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement with
E*TRADE Securities and E*TRADE Asset Management, Inc., E*TRADE Securities, 4500
Bohannon Drive, Menlo Park, CA 94025, acts as shareholder servicing agent for
the Fund. As shareholder servicing agent, E*TRADE Securities 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) providing certain printing and mailing services, such as printing
and mailing of shareholder account statements, checks, and tax forms; and (ix)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law.
Independent Accountants. Deloitte & Touche LLP, Suite 1500, 1000 Wilshire Blvd.,
Los Angeles, CA 90017-2472, acts as independent accountants for the Fund.
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 seeks 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 offer 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 November 4, 1998.
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. All shares, when
issued, will be fully paid and non-assessable by the Trust. 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 will 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.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon its trustees individually but only upon the property of the Trust
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.
Under Delaware law, the shareholders of the Fund are not generally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states or jurisdictions. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states or jurisdictions, the courts may not apply Delaware law and may thereby
subject the Delaware business trust shareholders to liability. To guard against
this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of a Portfolio. Notice of such
disclaimer will generally be given in each agreement, obligation or instrument
entered into or executed by a series or the Trustees. The Declaration of Trust
also provides for indemnification by the relevant series for all losses suffered
by a shareholder as a result of an obligation of the series. In view of the
above, the risk of personal liability of shareholders of a Delaware business
trust is remote.
SHAREHOLDER INFORMATION
Shares are sold through E*TRADE Securities.
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 on
national holidays observed by the NYSE.
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 Securities by accessing our Website. 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.
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., 4500 Bohannon Drive, Menlo
Park, CA 94025, 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 any 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, the
Investment Advisor 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
will be 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)(To the power of 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 will be
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 will be 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)(To the power of 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:
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 may 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.
The historical Wilshire 4500 data presented from time to time is 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 Fund, during the periods shown.
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 Wilshire 4500 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.
Master Fund Performance. The Fund intends to disclose historical performance of
the Master Portfolio, including the average annual and cumulative returns
restated to reflect the expense ratio of the Fund. This information will be
included by amendment. Although the investments of the Master Portfolio will be
reflected in the Fund, the Fund is a distinct mutual fund and has different
fees, expenses and returns than the Master Portfolio itself. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the Fund. Master Portfolio performance will be supplied by the
Master Portfolio.
Wilshire 4500 Index
The Fund is not sponsored, endorsed, sold or promoted by Wilshire Associates
Incorporated ("Wilshire"). Wilshire makes no representation or warranty, express
or implied, to the owners of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the Wilshire 4500 Equity Index to track general stock market
performance. Wilshire's only relationship to E*TRADE Asset Management or the
Fund is the licensing of certain trademarks and trade names of Wilshire. The
Wilshire 4500 Equity Index is composed and calculated by Wilshire without regard
to E*TRADE Asset Management or the Fund. Wilshire has no obligation to take the
needs of the E*TRADE Asset Management, the Fund, or the Shareholders into
consideration in determining, composing or calculating the Wilshire 4500 Equity
Index.
Wilshire does not guarantee the accuracy or the completeness of the Wilshire
4500 Equity Index or any data included therein and Wilshire shall have no
liability for any errors, omissions, or interruptions therein. Wilshire makes no
warranty, express or implied, as to results to be obtained by E*TRADE Asset
Management, the Fund, the shareholders, or any other person or entity from the
use of the Wilshire 4500 Equity Index or any data included therein. Wilshire
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose or use with respect to
the Wilshire 4500 Equity Index or any data included therein. Without limiting
any of the foregoing, in no event shall Wilshire have any liability for any
special, punitive, indirect, or consequential damages (including lost profits),
even if notified of the possibility of such damages.
<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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
E*TRADE FUNDS
E*TRADE BOND INDEX FUND
Prospectus dated August 13, 1999
This Prospectus concisely sets forth information about the E*TRADE Bond 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.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman Brothers
Government/Corporate Bond Index (the "Bond Index"). The Fund seeks to achieve
its objective by investing in a master portfolio. The Master Portfolio, in turn,
invests in a representative sample of the securities that comprise the Bond
Index and in proportions that match their index weights.
Eligible Investors. This Fund is designed and built specifically for on-line
investors. In order to be a shareholder of the Fund, you need to have an account
with E*TRADE Securities, Inc. ("E*TRADE Securities"). In addition, the Fund
requires you to consent to receive all information about the Fund
electronically. If you wish to rescind this consent or close your E*TRADE
Securities account, the Fund will redeem all of your shares in your Fund
account. The Fund is designed for long-term investors and the value of the
Fund's shares will fluctuate over time. The Fund is a true no-load fund, which
means you pay no sales charges or 12b-1 fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, 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.
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 August 13, 1999
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................3
FEES AND EXPENSES......................................................5
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................6
YEAR 2000..............................................................7
FUND MANAGEMENT........................................................8
THE FUND'S STRUCTURE...................................................9
PRICING OF FUND SHARES................................................10
HOW TO BUY AND SELL SHARES............................................10
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................14
TAX CONSEQUENCES......................................................14
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that correspond
to the total return performance of fixed-income securities in the aggregate, as
represented by the Bond Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Bond Index Master Portfolio (the "Master Portfolio"), a series of
Master Investment Portfolio ("MIP"), a registered open-end management investment
company, rather than directly in a portfolio of securities. In turn, the Master
Portfolio seeks to replicate the total return performance of the Bond Index.*
The Bond Index includes approximately 5000 fixed-income securities, including
U.S. Government securities and investment grade corporate bonds, each with an
outstanding market value of at least $25 million and remaining maturity of
greater than one year. The Master Portfolio invests in a representative sample
of these securities and generally invests at least 65% of its total assets in
bonds and debentures. The Master Portfolio selects securities for investment
based on a number of factors, including the relative proportion of such
securities in the Bond Index; credit quality; issuer sector; maturity structure;
coupon rates; and callability, among other factors.
Although the Master Portfolio attempts to be fully invested at all times in
securities comprising the Bond Index and in futures and options, it may also
invest up to 10% of its total assets in high-quality money market instruments to
provide liquidity. In seeking to replicate the performance of the Bond Index,
the Master Portfolio also may engage in other derivatives securities
transactions and lend its portfolio securities, each of which involves risk. The
Master Portfolio may also invest in the securities of foreign issuers, including
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs")
and similar securities.
*Lehman Brothers ("Lehman") does not sponsor the Fund or the Master Portfolio,
nor is it affiliated in any way with the Fund or the Master Portfolio or their
respective investment advisors. "Lehman Brothers Government/Corporate Bond
Index(R)" is a trademark of Lehman. The Fund and the Master Portfolio are not
sponsored, endorsed, sold, or promoted by Lehman, and neither Lehman nor the
Bond Index makes any representation or warranty, express or implied, regarding
the advisability of investing in the Fund or the Master Portfolio. Principal
Risks
<PAGE>
The Fund invests primarily in debt securities, which are subject to credit and
interest rate risk. Credit risk is the risk that issuers of the debt securities
in which the Fund invests may default on the payment of principal or interest.
Interest rate risk is the risk that increases in market interest rates may
adversely affect the value of the debt securities in which the Fund invests.
Debt securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. The Bond Index may also rise and fall
daily. Changes in the financial strength of an issuer or changes in the ratings
of any particular security may also affect the value of these investments. The
value of individual bonds may fall with the decline in a borrower's real or
apparent ability to meet its financial obligations. As with any 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. The
Bond Index may not appreciate, and could depreciate, during the time you are
invested in the Fund, even if you are a long-term investor.
Although some of the Fund's portfolio securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, such securities are subject to
interest rate risk and the market value of these securities, upon which the
Fund's daily net asset value is based, will fluctuate. No assurance can be given
that the U.S. Government would provide financial support to its agencies or
instrumentalities where it is not obligated to do so.
The Fund cannot as a practical matter own all the securities that make up the
Bond Index in perfect correlation to the Bond Index itself. The bonds that the
Master Portfolio's investment advisor selects may not match the performance of
the Bond Index. The use of futures and options and other derivative securities
is intended to help the Fund match the Bond 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 prices of bonds may fall in response to
economic events or trends. The Fund seeks to track the Bond Index during down
markets as well as during up markets. The Fund's returns will be directly
affected by the volatility of the securities making up the Bond Index.
Requirements for large cash balances may also exert a drag on overall Fund
performances.
The Bond Index primarily consists of fixed-income securities. As a result,
whenever these securities perform worse than equity securities, the Fund may
underperform funds that have exposure to the stock market. Likewise, whenever
bonds fall behind other types of investments--U.S. stocks or foreign stocks, for
instance--the Fund's performance also will lag behind those investments. The
Master Portfolio's investments in securities of foreign issuers, including ADRs,
EDRs and similar securities, involve special risks and considerations not
typically associated with investing in U.S. companies including, among others,
different and changing regulatory and/or reporting standards, and adverse
political, social or monetary developments.
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.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund is new, and therefore, has no historical expense
data. Thus, the numbers below are estimates.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment)
<S> <C>
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
(within 120 days of purchase) 0.50%
Annual Fund Operating Expenses*
(expenses that are deducted from Fund assets)
Management Fees 0.10%**
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.25%***
Total Annual Fund Operating Expenses 0.35%
<FN>
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** Management fees include a fee equal to 0.08% of daily net assets
payable at the Master Portfolio level to its investment advisor and an
investment advisory fee equal to 0.02% payable by the Fund to its investment
advisor.
*** The administrative fee is payable by the Fund to E*TRADE Asset
Management, Inc. The administrative fee is based on estimated amounts for the
current fiscal year.
</FN>
</TABLE>
You should also know that the Fund does not charge investors any account
maintenance fees, account set-up fees, low balance fees, transaction fees or
customer service fees. E*TRADE Securities charges $20 for wire transfers out of
your E*TRADE Securities account. Also, transactions in Fund shares effected by
speaking with an E*TRADE Securities representative are subject to a $15 fee.
Transactions in Fund shares effected online are not subject to that fee. You
will be responsible for opening and maintaining an e-mail account and internet
access at your own expense.
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*
$37 $115
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
Under normal market conditions, the Master Portfolio invests at least 90% of the
value of its total net assets in the securities making up the Bond Index. That
portion of its assets is not actively managed but is designed to substantially
replicate, to the extent feasible, the investment characteristics of the Bond
Index. As investment advisor to the Master Portfolio, Barclays Global Fund
Advisors ("BGFA") regularly monitors the Master Portfolio's correlation to the
Bond Index and adjusts the Master Portfolio's portfolio to the extent necessary
to achieve, in both rising and falling markets, a correlation of at least 95%
between the capitalization-weighted total return of its assets before expenses
and the Bond Index. A 100% correlation would mean the total return of the Master
Portfolio's assets would increase and decrease exactly the same as the Bond
Index. The Master Portfolio also may engage in futures and options transactions
and other derivative securities transactions and may lend its portfolio
securities, each of which involves risk. The Master Portfolio also may invest up
to 10% of its total assets in high-quality money market instruments to provide
liquidity.
Like all funds, the Fund's Net Asset Value ("NAV") 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 securities. Since
the investment characteristics and therefore, the investment risks of the Fund
correspond to those of the Master Portfolio, the following discussion also
includes a description of the risks associated with the investments of the
Master Portfolio. The Fund's performance before Fund-level fees will correspond
directly to the performance of the Master Portfolio.
Neither the Fund nor the Master Portfolio are 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 Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the Bond Index through computerized, quantitative techniques.
The Fund's ability to match its investment performance to the investment
performance of the Bond 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 Bond Index is calculated; the size of the Master Portfolio's
investment portfolio; the Master Portfolio's use of futures and options
transactions and other derivative securities transactions; the Master
Portfolio's lending of its portfolio securities; 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 purchases and
redemption activity to maintain, to the extent feasible, the similarity of its
portfolio to the securities comprising the Bond Index.
As do 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 Bond 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 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 Bond Index. The Master Portfolio also uses some derivatives to gain exposure
to the Bond Index for its cash balances, which could cause the Fund to track the
Bond Index less closely if the derivatives do not perform as expected.
The Master Portfolio also may invest in the securities of foreign issuers,
including ADRs and EDRs and similar securities, which involve special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political,
social and monetary or diplomatic developments that could affect U.S.
investments in foreign countries. Additionally, dispositions of foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including withholding taxes. Foreign securities often trade
with less frequency and volume than domestic securities and, therefore, may
exhibit greater price volatility.
Because the Master Portfolio may shift investment allocations significantly from
time to time, its performance may differ from funds which invest in one asset
class or from funds with a stable mix of assets. Further, shifts among asset
classes may result in relatively high turnover and transaction (i.e., brokerage
commission) costs. Portfolio turnover also can generate short-term capital gains
tax consequences. During those periods in which a higher percentage of the
Master Portfolio's assets are invested in long-term bonds, the Master
Portfolio's exposure to interest-rate risk will be greater because the longer
maturity of such securities means they are generally more sensitive to changes
in market interest rates than the short-term securities.
YEAR 2000
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by its investment advisor, the Fund's other service providers, or persons
with whom they deal, do not properly process and calculate date-related
information and data on and after January 1, 2000. This possibility is commonly
known as the "Year 2000 Problem." Virtually all operations of the Fund are
computer reliant. The investment advisor, administrator, transfer agent and
custodian have informed the Fund that they are actively taking steps to address
the Year 2000 Problem with regard to their respective computer systems. The Fund
is also taking measures to obtain assurances that comparable steps are being
taken by the Fund's other significant service providers. While there can be no
assurance that the Fund's service providers will be Year 2000 compliant, the
Fund's service providers expect that their plans to be compliant will be
achieved. The Master Portfolio's investment advisor and principal service
providers have also advised the Master Portfolio that they are working on any
necessary changes to their systems and that they expect their systems to be Year
2000 compliant in time. There can, of course, be no assurance of success by
either the Fund's or the Master Portfolio's service providers. In addition,
because the Year 2000 Problem affects virtually all organizations, the issuers
in whose securities the Master Portfolio invests and the economy as a whole also
could be adversely impacted by the Year 2000 Problem. The extent of such impact
cannot be predicted.
FUND MANAGEMENT
Investment Advisors. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor"), a registered investment
advisor, provides investment advisory services to the Fund. The Investment
Advisor is a wholly owned subsidiary of E*TRADE and is located at 4500 Bohannon
Drive, Menlo Park, CA 94025. The Investment Advisor commenced operating in
February, 1999 and therefore has limited experience as an investment advisor.
Subject to general supervision of the E*TRADE Funds' Board of Trustees (the
"Board") and in accordance with the investment objective, policies and
restrictions of the Fund, the Investment Advisor provides the Fund with ongoing
investment guidance, policy direction and monitoring of the Master Portfolio.
The Investment Advisor may in the future manage cash and money market
instruments for cash flow purposes. For its advisory services, the Fund pays the
Investment Advisor an investment advisory fee at an annual rate equal to 0.02%
of the Fund's average daily net assets.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a wholly owned direct subsidiary of Barclays Global Investors,
N.A. (which, in turn, is an indirect subsidiary of Barclays Bank PLC and is
located at 45 Fremont Street, San Francisco, California 94105. BFGA has provided
asset management, administration and advisory services for over 26 years. As of
December 31, 1998, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $615 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.08% of the Master Portfolio's average daily net assets. From time to
time, BGFA may waive such fees in whole or in part. Any such waiver will reduce
the expenses of the Master Portfolio, and accordingly, have a favorable impact
on its performance.
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'S STRUCTURE
The Fund is a separate series of E*TRADE Funds, a Delaware business trust
organized in 1998. The Fund is a feeder fund in a master/feeder structure.
Accordingly, the Fund invests all of its assets in the Master Portfolio. The
Master Portfolio seeks to provide investment results that correspond to the
total return performance of fixed-income securities in the aggregate, as
represented by the Bond Index. 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 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. 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 complex nature of the
master/feeder structure, accounting and operational difficulties could occur.
For example, coordination of calculation of NAV would be affected at the master
and/or feeder level.
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
determines that it is in the best interests of the Fund and its shareholders to
do so. Upon any such withdrawal, the Board 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 a 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.
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") next determined after E*TRADE Securities receives
your request in proper form. If E*TRADE Securities 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. Shares will
not be priced on the days on which the NYSE is closed for trading.
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. Net asset value per
share is computed by dividing the value of the Master Portfolio's net assets
(i.e., the value of its assets less liabilities) by the total number of
outstanding shares of such Master Portfolio. The Master Portfolio's investments
are valued each day the NYSE is open for business. The Master Portfolio's 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 net
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 (generally 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 AND SELL SHARES
This Fund is designed and built specifically for on-line investors. In order to
become a shareholder of the Fund, you will need to have an E*TRADE Securities
account. In addition, the Fund requires you to consent to receive all
information about the Fund electronically. If a you wish to rescind this
consent, the Fund will redeem your position in the Fund, unless a new class of
shares of the Fund has been formed for those shareholders who rescinded consent,
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.
E*TRADE Securities reserves the right to deliver paper-based documents in
certain circumstances, at no cost to the investor. Shareholder information
includes prospectuses, financial reports, confirmations and statements.
In order to buy shares, you will need to: 1) open an E*TRADE Securities account;
2) deposit money in the account; and 3) execute an order to buy shares.
STEP 1: How to Open an E*TRADE Securities Account
To open an E*TRADE Securities account, you must complete the application
available through our Website (www.etrade.com). You will be subject to E*TRADE
Securities' general account requirements as described in E*TRADE Securities'
customer agreement.
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 NAV changes daily, your purchase price will be the
next NAV determined after the Fund receives and accepts your purchase order.
On-line. 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 a day or call
1-800-786-2575 between 5:00 a.m. and 6 p.m. (pacific time), Monday - Friday.
By Mail. You can request an application by visiting the "Open an Account" area
of our Website, or by calling 1-800-786-2575. Complete and sign the application.
Make your check or money order payable to E*TRADE Securities, Inc. Mail to
E*TRADE Securities, Inc., P.O. Box 8160, Boston, MA 02266-8160, or if by
overnight mail: 66 Brooks Drive, Braintree, MA 02184-8160.
Telephone. Request a new account kit by calling 1-800-786-2575 between 5:00 a.m.
and 6 p.m., Monday - Friday (pacific time).
STEP 2: Funding Your Account.
By check or money order. Make your check or money order payable to E*TRADE
Securities, Inc. Mail it to E*TRADE Securities, Inc., 4500 Bohannon Drive, Menlo
Park, CA 94025, or if by overnight mail: 66 Brooks Drive, Braintree, MA
02184-8160.
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 Securities will contact you with an
account number so that you can immediately wire funds.
STEP 3: Execute an Order to Buy/Sell Shares
<TABLE>
<CAPTION>
Minimum Investment Requirements:
<S> <C>
For your initial investment in the Fund $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
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
<FN>
* Your shares may be automatically redeemed if, as a result of selling shares,
you no longer meet a Fund's minimum balance requirements. Before taking such
action, the Fund will provide you with written notice and at least 30 days to
buy more shares to bring your investment up to $1,000.
</FN>
</TABLE>
After your account is established you may use any of the methods described below
to buy or sell shares. 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 may
assess a 0.50% fee on redemptions of Fund shares held for less than 120 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 three days
thereafter.
On-line. You can access E*TRADE Securities' secure trading pages at
www.etrade.com via 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. By clicking on one of several mutual fund
order buttons, you can quickly and easily place a buy or sell order for shares
in the Fund. 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 your co-account holder(s) are the
only people who can place orders in your E*TRADE account. When you buy shares,
you will be asked to: 1) affirm your consent to receive all Fund documentation
electronically, 2) provide an e-mail address and 3) affirm that you have read
the prospectus. The prospectus will be readily available for viewing and
printing on our Website.
Telephone. All initial purchases of Fund shares must be transacted online at the
E*TRADE Website (www.etrade.com). You may place subsequent purchase and
redemption orders with a telephone representative at 1-800-STOCKS1 (1-800-
786-2571) for an additional $15 fee.
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.
If you are already a shareholder, you may also call 1-800-STOCKS5
(1-800-786-2575) to sell shares by phone through an E*TRADE Securities broker
for an additional $15 fee.
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-STOCKS1 (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.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
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.
Redemption Fee. 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 may assess a 0.50% fee on redemptions of fund shares
held for less than 120 days.
Any redemption fees imposed 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 120-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 120 days, the fee may be assessed. The fee may
apply to shares held through omnibus accounts or certain retirement plans.
Closing your account. If you close your E*TRADE Securities account, you will be
required to redeem your shares in your Fund account.
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.
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 on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
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. 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 the 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 advisor 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 that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S.
federal income tax liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated August 13,1999
("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.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available) may be obtained without charge, at our
Website (www.etrade.com). Shareholders will be alerted by e-mail when a
prospectus amendment, annual or semi-annual report is available. Shareholders
may also call the toll-free number listed below for additional information or
with any inquiries.
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.
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act File No.: 811-09093
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
E*TRADE Funds
E*TRADE Bond Index Fund
August 13, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE Total Index Fund
(the "Fund"), as a separate series of the E*TRADE Funds, dated , 1999 (as
amended from time to time).
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued) free of charge, please access our Website
online (www.etrade.com) or call our toll-free number at (800) 786-2575. Only
customers of E*TRADE Securities, Inc. who consent to receive all information
about the Fund electronically may invest in the Fund.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY...........................................................3
THE FUND...............................................................3
INVESTMENT STRATEGIES AND RISKS........................................3
FUND POLICIES.........................................................12
TRUSTEES AND OFFICERS.................................................16
INVESTMENT MANAGEMENT.................................................20
SERVICE PROVIDERS.....................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION........................23
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..............................24
SHAREHOLDER INFORMATION...............................................25
TAXATION..............................................................26
UNDERWRITER...........................................................29
MASTER PORTFOLIO ORGANIZATION.........................................30
PERFORMANCE INFORMATION...............................................31
APPENDIX..............................................................36
<PAGE>
FUND HISTORY
The E*TRADE Bond 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 November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman Brothers
Government/Corporate Bond Index. This investment objective is fundamental and
therefore, cannot be changed without approval of a majority (as defined in the
Investment Company Act of 1940, as amended ("1940 Act")) of the Fund's
outstanding voting interests.
To achieve its investment objective, the Fund intends to invest all of its
assets in the Bond 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 Master Portfolio, in turn, invests in a
representative sample of the securities that comprise the Bond Index and in
proportions that match their index weights.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio's investment strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted.
Futures Contracts and Options Transactions. The Master Portfolio may use futures
as a substitute for a comparable market position in the underlying securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial instrument 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. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
The Master Portfolio may enter into futures contracts and may purchase and write
options thereon. 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 Master Portfolio.
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio 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 Master Portfolio'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 or published positions of the SEC,
the Master Portfolio 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 Master Portfolio 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 Master Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the Master
Portfolio's investment objective and legally permissible for the Master
Portfolio. Before entering into such transactions or making any such investment,
the Fund will provide appropriate disclosure in its prospectus.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures Contracts.
The Master Portfolio may invest in interest-rate futures contracts and options
on interest-rate futures contracts as a substitute for a comparable market
position in the underlying securities. The Master Portfolio may also sell
options on interest-rate futures contracts as part of closing purchase
transactions to terminate their options positions. No assurance can be given
that such closing transactions can be effected or the degree of correlation
between price movements in the options on interest rate futures or price
movements in the Master Portfolio's securities which are the subject of the
transactions.
Interest-Rate and Index Swaps. The Master Portfolio may enter into interest-rate
and index swaps in pursuit of its investment objectives. Interest-rate swaps
involve the exchange by the Master Portfolio with another party of their
respective commitments to pay or receive interest (for example, an exchange of
floating-rate payments or fixed-rate payments). Index swaps involve the exchange
by the Master Portfolio with another party of cash flows based upon the
performance of an index of securities or a portion of an index of securities
that usually include dividends or income. In each case, the exchange commitments
can involve payments to be made in the same currency or in different currencies.
The Master Portfolio will usually enter into swaps on a net basis. In so doing,
the two payment streams are netted out, with the Master Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. If the
Master Portfolio enters into a swap, it will maintain a segregated account on a
gross basis, unless the contract provides for a segregated account on a net
basis. If there is a default by the other party to such a transaction, the
Master Portfolio will have contractual remedies pursuant to the agreements
related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. There is no limit, except as provided
below, on the amount of swap transactions that may be entered into by the Master
Portfolio. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount of principal.
Accordingly, the risk of loss with respect to swaps generally is limited to the
net amount of payments that the Master Portfolio is contractually obligated to
make. There is also a risk of a default by the other party to a swap, in which
case the Master Portfolio may not receive the net amount of payments that a
Master Portfolio contractually is entitled to receive.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Master Portfolio 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 Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the advisor.
Borrowing Money. As a fundamental policy, the Master Portfolio is permitted to
borrow to the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, and may borrow up to one-third of the value of its total
assets including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of the Master Portfolio's total assets, the
Master Portfolio will not make any new investments.
Short-term instruments and temporary investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions. The instruments in which the Master
Portfolio 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 the Master Portfolio's investment advisor;
(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 the
Master Portfolio's investment advisor are of comparable quality to obligations
of U.S. banks which may be purchased by the Master Portfolio.
Bank Obligations. The Master Portfolio 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 Master Portfolio 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.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. In addition, state banks
whose certificates of deposit ("CDs") may be purchased by the master Portfolio
are insured by the FDIC (although such insurance may not be of material benefit
to the Master Portfolio, depending on the principal amount of the CDs of each
bank held by the Master Portfolio) and are subject to federal examination and to
a substantial body of federal law and regulation. As a result of federal or
state laws and regulations, domestic branches of domestic banks whose CDs may be
purchased by the Master Portfolio generally are required, among other things, to
maintain specific levels of reserves, are limited in the amounts which they can
loan to a single borrower and are subject to other regulation designed to
promote financial soundness. However, not all of such laws and regulations apply
to the foreign branches of domestic banks. Obligations of foreign branches of
domestic banks, foreign subsidiaries of domestic banks and domestic and foreign
branches of foreign banks, such as CDs and time deposits ("TDs"), may be general
obligations of the parent banks in addition tot he issuing branch, or may be
limited by the terms of a specific obligations and governmental regulation. Such
obligations are subject to different risks than are those of domestic banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal and
interest on the obligations, foreign exchange controls and foreign withholding
and other taxes on interest income. These foreign branches and subsidiaries are
not necessarily subject to the same or similar regulatory requirements that
apply to domestic banks, such as mandatory reserve requirements, loan
limitations, and accounting, auditing and financial record keeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank or about a foreign bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may be required to: (1)
pledge to the regulator, by depositing assets with a designated bank within the
state, a certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of federal and State Branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Master Portfolio's investment advisor carefully evaluates
such investments on a case-by-case basis.
The Master Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided such Master Portfolio purchases
any such CD in a principal amount of not more than $100,000, which amount would
be fully insured by the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. The Master Portfolio will not own more than one such CD per such
issuer.
Commercial Paper and Short-Term Corporate Debt Instruments. The Master Portfolio
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 advisor
to the Master Portfolio monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand.
The Master Portfolio 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 Master Portfolio 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 Master
Portfolio, an issuer of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Master Portfolio.
The investment advisor to the Master Portfolio will consider such an event in
determining whether the Master Portfolio should continue to hold the obligation.
To the extent the Master Portfolio 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 Master Portfolio 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.
Repurchase Agreements. The Master Portfolio may enter into a repurchase
agreement with respect to any security in which it is authorized to invest
(although the underlying security may mature in more than thirteen months)
wherein the seller of a security to the Master Portfolio agrees to repurchase
that security from the Master Portfolio 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 Master Portfolio may
enter into repurchase agreements only with respect to securities that could
otherwise be purchased by the Master Portfolio, 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
Master Portfolio's investment advisor monitors on an on-going basis the value of
the collateral to assure that it always equals or exceeds the repurchase price.
Certain costs may be incurred by the master Portfolio in connection with the
sale of the underlying securities if the seller does not repurchase them in
accordance with the repurchase agreement. In addition, if bankruptcy proceedings
are commenced with respect to the seller of the securities, disposition of the
securities by the Master Portfolio may be delayed or limited.
The Master Portfolio 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 Master
Portfolio's custodian has custody of, and holds in a segregated account,
securities acquired as collateral by the Master Portfolio under a repurchase
agreement. All repurchase transactions must be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
the Master Portfolio limits investments in repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. Repurchase agreements are considered loans by the Master Portfolio
under the 1940 Act.
Floating- and variable- rate obligations. The Master Portfolio 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.
The Master Portfolio may purchase floating- and variable-rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
thirteen months, but which permit the holder to demand payment of principal at
any time, or at specified intervals not exceeding thirteen months. Variable rate
demand notes include master demand notes that are obligations that permit the
Master Portfolio to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Master Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice of the holders of such obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Master
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and the Master Portfolio may invest in obligations which
are not so rated only if its investment advisor determines that at the time of
investment the obligations are of comparable quality to the other obligations in
which the Master Portfolio may invest. The Master Portfolio's investment advisor
considers on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in the Master Portfolio's
portfolio. The Master Portfolio will not invest more than 10% of the value of
its total net assets in floating- or variable-rate demand obligations whose
demand feature is not exercisable within seven days. Such obligations may be
treated as liquid, provided that an active secondary market exists.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions (but not individuals)
if cash, U.S. Government securities or other high quality debt obligations equal
to at least 100% of the current market value of the securities loaned (including
accrued interest thereon) plus the interest payable to the Master Portfolio with
respect to the loan is maintained with the Master Portfolio. In determining
whether to lend a security to a particular broker, dealer or financial
institution, the Master Portfolio'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 Master Portfolio does
not enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that the Master Portfolio may receive as
collateral will not become part of the Master Portfolio's investment portfolio
at the time of the loan and, in the event of a default by the borrower, the
Master Portfolio will, if permitted by law, dispose of such collateral except
for such part thereof that is a security in which the Master Portfolio is
permitted to invest. During the time securities are on loan, the borrower will
pay the Master Portfolio any accrued income on those securities, and the Master
Portfolio may invest the cash collateral and earn income or receive an agreed
upon fee from a borrower that has delivered cash-equivalent collateral. The
Master Portfolio will not lend securities having a value that exceeds one-third
of the current value of the Master Portfolio's total assets. Loans of securities
by the Master Portfolio are subject to termination at the Master Portfolio's or
the borrower's option. The principal risk of portfolio lending is potential
default or insolvency of the borrower. In either of these cases, the Master
Portfolio could experience delays in recovering securities or collateral or
could lose all or part of the value of the loaned securities. The Master
Portfolio 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 to the borrower or a placing broker. Borrowers are not permitted
to be affiliated, directly or indirectly, with the Master Portfolio, its
investment advisor or Stephens, Inc.
Investment company securities. The Master Portfolio may invest in securities
issued by other open-end management investment companies which principally
invest in securities of the type in which such Master Portfolio invests. Under
the 1940 Act, a Master Portfolio'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 Master Portfolio's net assets with
respect to any one investment company and (iii) 10% of the Master Portfolio'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 Master Portfolio may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
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 Master Portfolio 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 Master Portfolio
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 its
investment advisor to be of comparable quality to the other obligations in which
the Master Portfolio may invest.
The Master Portfolio 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
Master Portfolio'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 Master Portfolio 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 Master Portfolio 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 are supported 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.
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 not borrow money, except to the extent permitted under the 1940 Act,
provided that the Fund may borrow from banks up to 10% 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 10% 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 Fund'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 Fund;
5. may not act as an underwriter of securities of other issuers, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933, as amended, in connection with the disposition of
portfolio securities;
6. may make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Fund may not 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 Fund's Board of Trustees;
7. may not 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; (ii) any industry in
which the Lehman Brothers Government/Corporate Bond Index becomes concentrated
to the same degree during the same period. The Fund will be concentrated as
specified above only to the extent the percentage of its assets invested in
those categories of investments is sufficiently large that 25% or more of its
total assets would be invested in a single industry;
8. may not purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but the Fund may purchase and
sell securities secured by real estate or interests therein, or securities
issued by companies which invest in real estate, or interests therein; and
9. may not invest in commodities, except that the Fund may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
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.
1. The Fund may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act. Under
the 1940 Act, the Fund's investment in such securities currently is limited,
subject to certain exceptions, to (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.
Other investment companies in which the Fund invest can be expected to charge
fees for operating expenses, such as investment advisory and administrative
fees, that would be in addition to those charged by the Fund.
2. The Fund may not invest more than 15% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days.
3. The Fund may lend securities from its portfolio to brokers, dealers and
financial institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund's total assets. Any such loans of portfolio securities will be fully
collateralized based on values that are marked to market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year.
The Fund may, notwithstanding any other fundamental or non-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. 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;
4. 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;
5. borrow money, except to the extent permitted under the 1940 Act, provided
that the Master Portfolio may borrow from banks up to 10% 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 10% 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;
6. 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;
7. 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;
8. 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; (ii) any industry in which
the Lehman Brothers Government/Corporate Bond 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 large that 25% or more of its
total assets would be invested in a single industry;
9. 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 numbers (3) and (5), may be deemed to give rise
to a senior security; 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 has adopted the following investment restrictions as
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. 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 will not constitute a violation of such restriction.
1. The Master Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of Section 12(d)(1) of the 1940
Act. Under the 1940 Act, the Master Portfolio's investment in such securities
currently is limited, subject to certain exceptions, to (i) 3% of the total
voting stock of any one investment company, (ii) 5% of the Master Portfolio's
net assets with respect to any one investment company, and (iii) 10% of the
Master Portfolio's net assets in the aggregate. Other investment companies in
which the Master Portfolio invests can be expected to charge fees for operating
expenses, such as investment advisory and administrative fees, that would be in
addition to those charged by the Master Portfolio.
2. The Master Portfolio may not invest more than 15% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (a) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (b) fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days, and (c) repurchase agreements not terminable within seven
days.
3. The Master Portfolio may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the aggregate)
one-third of the Master Portfolio's total assets. Any such loans of portfolio
securities will be fully collateralized based on values that are marked to
market daily. The Master Portfolio will not enter into any portfolio security
lending arrangement having a duration of longer than one year.
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 or affiliated
person," as defined in the 1940 Act, is indicated by an asterisk (*):
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Name, Address, and Age Position(s) Held with Principal Occupation(s) During
the Fund the Past 5 Years
- -----------------------------------------------------------------------------------
<S> <C> <C>
*Kathy Levinson (44) Trustee Ms. Levinson is executive vice
4500 Bohannon Drive president of E*TRADE Group,
Menlo Park, CA 94025 Inc. and president and chief
operating officer of E*TRADE
Securities. 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
(Financial Services). She is
also a former senior vice
president of credit services
for Schwab.
*Leonard C. Purkis(50) Trustee Mr. Purkis is chief financial
4500 Bohannon Drive, officer and executive vice
Menlo Park, CA 94025 president of finance and
administration of E*TRADE
Group, Inc. He previously
served as chief financial
officer for Iomega
Corporation (Hardware
Manufacturer) 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
(Financial Services).
Shelly J. Meyers (39) Trustee Ms. Meyers is the Manager,
Chief Executive Officer, Chief
Financial Officer and founder
of Meyers Capital Management,
a registered investment
adviser formed in January
1996. She has also managed
the Meyers Pride Value Fund
since June 1996. Prior to
that, she was employed by The
Boston Company Asset
Management, Inc. as Assistant
Vice President of its
Institutional Asset Management
group.
Ashley T. Rabun (47) Trustee Ms. Rabun is the Founder and
Chief Executive Officer of
InvestorReach (which is a
consulting firm specializing
in marketing and distribution
strategies for financial
services companies formed in
October 1996). From 1992 to
1996, she was a partner and
President of Nicholas
Applegate Mutual Funds, a
division of Nicholas Applegate
Capital Management.
Steven Grenadier (34) Trustee Mr. Grenadier is an Associate
Professor of Finance at the
Graduate School of Business at
Stanford University, where he
has been employed as a
professor since 1992.
*Brian C. Murray (42) President Mr. Murray is President of
4500 Bohannon Drive, E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in January 1998. Prior to
that Mr. Murray was Principal
of Alameda Consulting
(Financial Services
Consulting) and prior to that
he was Director, Mutual Fund
Marketplace of Charles Schwab
Corporation (Financial
Services).
*Joe N. Van Remortel Vice President and Mr. Van Remortel is Vice
(34) Secretary President of Operations,
4500 Bohannon Drive, E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in September 1996. Prior
to that Mr. Van Remortel was
Senior Consultant of KPMG Peat
Marwick and Associate of
Analysis Group, Inc.
(management consulting).
</TABLE>
The Trust pays each non-affiliated Trustee a quarterly fee of $1,500 per Board
meeting for the Trust. In addition, the Trust reimburses each of the
non-affiliated 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. The following table provides an estimate
of each Trustee's compensation for the current fiscal year:
Estimated Compensation Table
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
Total Compensation
Name of Person, Position Aggregate Compensation From Fund and Fund
from the Fund(1) Complex Paid to
Directors
Expected to be Paid to
Trustees (1)
- -------------------------------------------------------------------------
<S> <C> <C>
Kathy Levinson, Trustee None None
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers, $6,000 $6,000
Trustee
Ashley T. Rabun, Trustee $6,000 $6,000
Steven Grenadier, $6,000 $6,000
Trustee
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- ------------
<FN>
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 1999.
</FN>
</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. To satisfy
regulatory requirements, as of August 11, 1999, E*TRADE Asset Management, Inc.
owned 100% of the Fund's outstanding shares. There are no other shareholders
holding 25% or more. E*TRADE Asset Management, Inc. is a Delaware corporation
and is wholly owned by E*TRADE Group, Inc. Its address is 4500 Bohannon Drive,
Menlo Park, CA 94025.
As of July 30, 1999, Softbank America Inc. owned 26.9% of the total outstanding
voting shares of E*TRADE Group, Inc. Softbank America, Inc. is a Delaware
corporation and is located 300 Delaware Ave., Suite 900, Wilmington, Delaware
19801. It is a wholly owned subsidiary of Softbank Holding, Inc., also a
Delaware corporation, which, in turn, is a wholly owned subsidiary of Softbank
Corporation, a Japanese corporation.
INVESTMENT 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 Group, Inc and is located at 4500 Bohannon Drive, Menlo
Park, CA 94025. The Investment Advisor commenced operating in February, 1999 and
therefore, has limited experience as an investment advisor. As of June 30, 1999,
the Investment Advisor provided investment advisory services for over $27
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund pays the Investment Advisor an
investment advisory fee at an annual rate equal to 0.02% of the Fund's average
daily net assets.
The Master Portfolio's Investment Advisor. The Master Portfolio's investment
advisor is Barclays Global Fund Advisors ("BGFA"). 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. BFGA has provided assets management, administration
and advisory services for over 25 years. As of December 31, 1998, BGFA and its
affiliates provided investment advisory services for over $615 billion of
assets. Barclays Bank PLC has been involved in banking in the United Kingdom for
over 300 years. 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 Board of Trustees periodic reports on the investment
strategy and performance of the Master Portfolio. BGFA receives a fee from the
Master Portfolio at an annual rate equal to 0.08% of the Master Portfolio's
average daily net assets. From time to time, BGFA may waive such fees in whole
or in part. Any such waiver will reduce the expenses of the Master Portfolio,
and accordingly, have a favorable impact on its performance. This advisory fee
is an expense of the Master Portfolio borne proportionately by its
interestholders, including the Fund.
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
Board 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., 4500 Bohannon Drive, Menlo
Park, CA 94025, is the Fund's principal underwriter. The underwriter is a wholly
owned subsidiary of E*TRADE Group, Inc.
Co-Administrators 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 the Master Portfolio with administrative services, including: (i)
general supervision of the Master Portfolio's non-investment operations,
coordination of the other services provided to the Master Portfolio; (ii)
compilation of information for 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 MIP's officers and Board. Stephens also furnishes office space and
certain facilities required for conducting the business of the Master Portfolio
and compensates the MIP's Master Portfolio's trustees, officers and employees
who are affiliated with Stephens. Furthermore, except as provided in the
advisory contract, Stephens and BGI bear 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 non-affiliated
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.
Administrator of the Fund. E*TRADE Asset Management, Inc., the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management, Inc. provides administrative services directly or
through sub-contracting, including: (i) general supervision of the operation of
the Fund, including coordination of the services performed by the investment
advisor, transfer and dividend disbursing agent, custodian, sub-administrator,
shareholder servicing agent, 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 (iii) periodic reviews of management reports
and financial reporting. E*TRADE Asset Management, Inc. also furnishes office
space and certain facilities required for conducting the business of the Fund.
Pursuant to an agreement with the Fund, E*TRADE Asset Management, Inc. receives
a fee equal to 0.25% of the average daily net assets of the Fund. E*TRADE Asset
Management, Inc. is responsible under that agreement for the expenses otherwise
payable by the Fund for transfer agency, dividend disbursing, custody, auditing
and legal fees, to the extent that those expenses would otherwise equal or
exceed 0.005% of the Fund's average daily net assets.
Custodian, Fund Accounting Services Agent and Sub-administrator. Investors Bank
& Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116, serves as
custodian of the assets of the Fund and the 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. IBT also serves as the Fund's sub-administrator,
under an agreement among IBT, the Trust and E*TRADE Asset Management, Inc.,
providing management reporting and treasury administration and financial
reporting to Fund management and the Fund's Board of Trustees and preparing
income tax provisions and tax returns. IBT is compensated for its services by
E*TRADE Asset Management, Inc.
Transfer Agent and Dividend Disbursing Agent. PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, acts as transfer agent and dividend-disbursing agent for
the Fund.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement with
E*TRADE Securities and E*TRADE Asset Management, Inc., E*TRADE Securities, 4500
Bohannon Drive, Menlo Park, CA 94025, acts as shareholder servicing agent for
the Fund. As shareholder servicing agent, E*TRADE Securities 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) providing certain printing and mailing services, such as printing
and mailing of shareholder account statements, checks, and tax forms; and (ix)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law.
Independent Accountants. Deloitte & Touche LLP, Suite 1500, 1000 Wilshire Blvd.,
Los Angeles, CA 90017-2472, acts as independent accountants for the Fund.
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 seeks 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.
Purchases and sales of portfolio securities for the Master Portfolio usually are
principal transactions. Portfolio securities ordinarily are purchased directly
from the issuer or from an underwriter or market maker. Usually no brokerage
commissions are paid by the Master Portfolio for such purchases and sales. The
prices paid to the underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter, and purchases of securities
from market makers may include the spread between the bid and asked price.
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 provides 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 offer 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 November 4, 1998.
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. All shares, when
issued, will be fully paid and non-assessable by the Trust. 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 will 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.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon its trustees individually but only upon the property of the Trust
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.
Under Delaware law, the shareholders of the Fund are not generally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states or jurisdictions. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states or jurisdictions, the courts may not apply Delaware law and may thereby
subject the Delaware business trust shareholders to liability. To guard against
this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of a Portfolio. Notice of such
disclaimer will generally be given in each agreement, obligation or instrument
entered into or executed by a series or the Trustees. The Declaration of Trust
also provides for indemnification by the relevant series for all losses suffered
by a shareholder as a result of an obligation of the series. In view of the
above, the risk of personal liability of shareholders of a Delaware business
trust is remote.
SHAREHOLDER INFORMATION
Shares are sold through E*TRADE Securities.
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 on
national holidays observed by the NYSE.
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 Securities by accessing our Website. 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., 4500 Bohannon Drive, Menlo
Park, CA 94025, 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 any 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, the
Investment Advisor 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
will be 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)(To the power of 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 will be
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 will be 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)(To the power of 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:
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 may 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.
The historical Bond Index data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one debt security or in managed portfolios of debt securities, such as the
fund, during the periods shown.
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.
Master Fund Performance. The Fund intends to disclose historical performance of
the Master Portfolio, including the average annual and cumulative returns
restated to reflect the expense ratio of the Fund. This information will be
included by amendment. Although the investments of the Master Portfolio will be
reflected in the Fund, the Fund is a distinct mutual fund and has different
fees, expenses and returns than the Master Portfolio itself. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the Fund. Master Portfolio performance will be supplied by the
Master Portfolio.
<PAGE>
APPENDIX
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. 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.
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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
E*TRADE FUNDS
E*TRADE TECHNOLOGY INDEX FUND
Prospectus dated August 13, 1999
This Prospectus concisely sets forth information about the E*TRADE Technology
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.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to match, before fees and expenses, the total
return of the stocks making up the Goldman Sachs Technology (GSTI(TM) Composite)
Index. The Fund seeks to achieve its objective by investing substantially all of
its assets in the same stocks and in substantially the same percentages as the
securities that comprise the GSTI Composite Index.
Eligible Investors. This Fund is designed and built specifically for on-line
investors. In order to be a shareholder of the Fund, you need to have an account
with E*TRADE Securities, Inc. ("E*TRADE Securities"). In addition, the Fund
requires you to consent to receive all information about the Fund
electronically. If you wish to rescind this consent or close your E*TRADE
Securities account, the Fund will redeem all of your shares in your Fund
account. The Fund is designed for long-term investors and the value of the
Fund's shares will fluctuate over time. The Fund is a true no-load fund, which
means you pay no sales charges or 12b-1 fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, 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.
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 August 13, 1999
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................3
FEES AND EXPENSES......................................................4
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................5
YEAR 2000..............................................................7
FUND MANAGEMENT........................................................7
PRICING OF FUND SHARES.................................................8
HOW TO BUY AND SELL SHARES.............................................8
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................13
TAX CONSEQUENCES......................................................13
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that match,
before fees and expenses, the total return of the stocks making up the GSTI
Composite Index.*
Principal Strategies
The Fund seeks to achieve its investment objective by investing substantially
all of its assets in the same stocks and in substantially the same percentages
as the securities that comprise the GSTI Composite Index. The Fund seeks to
provide investment results that correspond to the total return performance of
publicly traded common stocks in the aggregate, as represented by the GSTI
Composite Index. The GSTI Composite Index is one of the broadest measures of
U.S. traded technology stocks available. The GSTI Composite Index generally
includes over 175 companies representing six different segments of the U.S.
technology marketplace selected by Goldman Sachs & Co. (including hardware,
internet, multi-media networking, semiconductors, services, and software). The
GSTI Composite Index primarily consists of stocks of companies in the technology
industry with capitalizations of at least $1 billion. However, it may also
include companies with smaller capitalizations.
Generally, the Fund attempts to be fully invested at all times in securities
comprising the GSTI Composite Index and futures and options on stock index
futures, covered by liquid assets. The Fund also may invest up to 10% of its
total assets in high-quality money market instruments to provide liquidity for
redemptions.
Principal Risks
Technology stocks may rise and fall daily. The GSTI Composite Index represents a
significant segment of the U.S. market of technology stocks. Thus, the GSTI
Composite Index may also rise and fall 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. The
GSTI Composite Index may not appreciate, and could depreciate, during the time
you are invested in the Fund, even if you are a long-term investor.
*"GSTI(TM)" is a registered trademark of Goldman Sachs & Co. and has been
licensed for use by E*TRADE Asset Management, Inc. for use in connection with
the Fund. The Fund is not sponsored, endorsed, sold, or promoted by Goldman
Sachs & Co. and Goldman Sachs & Co. makes no representation regarding the
advisability of investing in the Fund.
<PAGE>
The Fund is limited in investment to industry segments of the U.S. stock market
that are generally associated with technology. Greater risk and increased
volatility is associated with investments in segments of the stock market (as
opposed to investments in a broader range of industries). The Fund is
non-diversified which means that the Fund may invest a greater percentage of its
assets in a single issuer. The technology industry can be affected by specific
risks including: aggressive product prices due to competition pressure from
numerous market entrants, short product cycles and product obsolescence, among
others.
The Fund cannot as a practical matter own all the stocks that make up the GSTI
Composite Index in perfect correlation to the GSTI Composite Index itself. The
use of futures and options on futures is intended to help the Fund better match
the GSTI Composite 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 GSTI Composite Index during down markets
as well as during up markets. The Fund's returns will be directly affected by
the volatility of the stocks making up the GSTI Composite Index.
In seeking to follow the GSTI Composite Index, the Fund will be limited as to
its investments in other segments of the U.S. stock market. As a result,
whenever the technology segment of the U.S. stock market performs worse than
other segments, the Fund may underperform funds that have exposure to those
segments of the market. Likewise, whenever technology stocks fall behind other
types of investments--bonds, for instance--the Fund's performance also will lag
behind those investments. The Fund may also invest in securities of foreign
issuers to the extent that such issuers are included in the GSTI Composite
Index.
An investment in the Fund is not a deposit in a 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.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund is new, and therefore, has no historical expense
data. Thus, the numbers below are estimates.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment)
<S> <C>
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 (within 180 days of purchase) 1.00%
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.25%
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.60%*
Total Annual Fund Operating Expenses 0.85%
<FN>
* The administrative fee is payable by the Fund to E*TRADE Asset Management,
Inc. The administrative fee is based on estimated amounts for the current fiscal
year.
</FN>
</TABLE>
You should also know that the Fund does not charge investors any account
maintenance fees, account set-up fees, low balance fees, transaction fees or
customer service fees. E*TRADE Securities charges $20 for wire transfers out of
your E*TRADE Securities account. Also, transactions in Fund shares effected by
speaking with an E*TRADE Securities representative are subject to a $15 fee.
Transactions in Fund shares effected online are not subject to the $15 fee. You
will be responsible for opening and maintaining an e-mail account and internet
access at your own expense.
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
$89 $277
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
Under normal market conditions, the Fund invests at least 90% of its assets in
the stocks making up the GSTI Composite Index. That portion of its assets is not
actively managed but simply tries to match the total return of the GSTI
Composite Index. The Fund attempts to achieve, in both rising and falling
markets, a correlation of approximately 95% between the capitalization-weighted
total return of its assets before expenses and the GSTI Composite Index. 100%
correlation would mean the total return of the Fund's assets would increase and
decrease exactly the same as the GSTI Composite Index. The Fund also purchases
and sells futures and options on stock index futures. The Fund also may invest
up to 10% of its total assets in high-quality money market instruments to
provide liquidity to pay redemptions and fees, among other reasons.
The GSTI Composite Index is one of the broadest measures of U.S. traded
technology stocks available. The GSTI Composite Index generally includes over
175 companies representing six different component segments of the U.S.
technology marketplace selected by Goldman Sachs & Co. (including hardware,
internet, multi-media networking, semiconductors, services, and software). There
is no limit as to how many companies are included in the GSTI Composite Index.
Performance of the index is compiled by using a modified-cap weighted
calculation to limit the extent that large-cap stocks can dominate the index.
The GSTI Composite Index primarily consists of stocks of companies with
capitalization of at least $1 billion. However, the index may include companies
with smaller capitalizations. Smaller capitalized companies may be more volatile
and less liquid than larger capitalized companies.
The Fund may also invest in securities of foreign issuers to the extent such
issuers are included in the GSTI Composite Index. The Fund does not anticipate
investments in securities to be a significant strategy but such investments may
expose the Fund to special risks and considerations not typically associated
with investing in U.S. companies. Such risks may include, among others,
different accounting, auditing and financial reporting standards, higher
commission rates, adverse changes in regulatory structures, and political,
social and monetary developments that could affect U.S.
investments in foreign countries.
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
Fund is managed by utilizing an "indexing" investment approach to determine
which securities are to be purchased or sold to replicate, to the extent
feasible, the investment characteristics of the GSTI Composite Index.
Like all stock funds, the Fund's Net Asset Value ("NAV") 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.
The Fund's ability to match its investment performance to the investment
performance of the GSTI Composite Index may be affected by, among other things:
the Fund's expenses; the amount of cash and cash equivalents held by the Fund's
investment portfolio; the manner in which the total return of the GSTI Composite
Index is calculated; the timing, frequency and size of shareholder purchases and
redemptions of the Fund, and the weighting of a particular stock in the GSTI
Composite Index. The Fund 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 GSTI Composite Index.
As do many index funds, the Fund also may invest in futures and options
transactions and other derivative securities transactions to help 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 Fund incurs expenses
and must keep a portion of its assets in cash for paying expenses and processing
shareholders orders. By using futures, the Fund potentially can offset a portion
of the gap attributable to their cash holdings. However, because some of the
effect of expenses remains, the Fund's performance normally will be below that
of the GSTI Composite Index. The Fund uses futures contracts to gain exposure to
the GSTI Composite Index for its cash balances, which could cause the Fund to
track the GSTI Composite Index less closely if the futures contracts do not
perform as expected.
YEAR 2000
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's service providers or persons with whom they deal, do not
properly process and calculate date-related information and data on and after
January 1, 2000. This possibility is commonly known as the "Year 2000 Problem."
Virtually all operations of the Fund are computer reliant. The Fund's investment
adviser or subadviser, administrator, custodian and transfer agent have informed
the Fund that they are actively taking steps to address the Year 2000 Problem
with regard to their respective computer systems. The Fund is also taking
measures to obtain assurances that comparable steps are being taken by the
Fund's other significant service providers. While there can be no assurance that
the Fund's service providers will be Year 2000 compliant, the Fund's service
providers expect that their plans to be compliant will be achieved. The Fund's
principal service providers have also advised the Fund that they are working on
any necessary changes to their systems and that they expect their systems to be
Year 2000 compliant in time. There can, of course, be no assurance of success by
the Fund's service providers. In addition, because the Year 2000 Problem affects
virtually all organizations the issuers whose securities the Fund invests also
could be adversely impacted by the Year 2000 Problem. The extent of such impact
cannot be predicted. The Year 2000 Problem may have a disproportionate impact on
the technology sector with its emphasis on computing.
FUND MANAGEMENT
Investment Advisor. Under an investment advisory agreement ("Investment Advisory
Agreement") with the Fund, E*TRADE Asset Management, Inc. ("Investment
Advisor"), a registered investment advisor, provides investment advisory
services to the Fund. The Investment Advisor is a wholly owned subsidiary of
E*TRADE Group, Inc. and is located at 4500 Bohannon Drive, Menlo Park, CA 94025.
The Investment Advisor commenced operating in February 1999 and therefore has
limited experience as an investment advisor.
Subject to general supervision of the E*TRADE Funds' Board of Trustees (the
"Board") and in accordance with the investment objective, policies and
restrictions of the Fund, the Investment Advisor provides the Fund with ongoing
investment guidance, policy direction and monitoring of the Fund pursuant to the
Investment Advisory Agreement. For its advisory services, the Fund pays the
Investment Advisor an investment advisory fee at an annual rate equal to 0.25%
of the Fund's average daily net assets.
The Investment Advisor is seeking an exemptive order from the SEC that will
permit the Investment Advisor, subject to approval by the Board, to retain
sub-advisers that are unaffiliated with the Investment Advisor without approval
by the Fund's shareholders. If granted, such relief would require shareholder
notification in the event of any change in sub-advisers. There is no assurance
the exemptive order will be granted.
The Investment Advisor has entered into a subadvisory agreement ("Subadvisory
Agreement") with Barclays Global Fund Advisors ("BGFA") to delegate the
day-to-day discretionary management of the Fund's assets. 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. BFGA has provided asset management,
administration and advisory services for over 26 years. As of December 31, 1998,
BGFA and its affiliates provided investment advisory services for over $615
billion of assets. The Investment Advisor pays BGFA a fee out of the Investment
Adviser fee at an annual rate equal to 0.20% of the Fund's average daily net
assets. BGFA is not compensated directly by the Fund. The Subadvisory Agreement
may be terminated by the Board.
PRICING OF FUND SHARES
The Fund is a true no-load fund, which means you may buy or sell shares directly
at the NAV next determined after E*TRADE Securities receives your request in
proper form. If E*TRADE Securities 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 investments are
valued each day the NYSE is open for business as of the close of trading on the
floor of the NYSE (generally 4:00 p.m., Eastern time). 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.
Net asset value per share is computed by dividing the value of the Fund's net
assets (i.e., the value of its assets less liabilities) by the total number of
shares of the Fund outstanding. The Fund's assets are valued generally by using
available market quotations or at fair value as determined in good faith by the
Board. Expenses are accrued daily and applied when determining the NAV.
HOW TO BUY AND SELL SHARES
This Fund is designed and built specifically for on-line investors. In order to
become a shareholder of the Fund, you will need to open an E*TRADE Securities
account. In addition, the Fund requires you to consent to receive all
information about the Fund electronically. If you wish to rescind this consent,
the Fund will redeem your position in the Fund, unless a new class of shares of
the Fund has been formed for those shareholders who rescinded consent,
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.
E*TRADE Securities reserves the right to deliver paper-based documents in
certain circumstances, at no cost to the investor. Shareholder information
includes prospectuses, financial reports, confirmations and statements. If for
any reason you decide you no longer wish to receive shareholder information
electronically, you rescind the right to own shares and you must sell your
position.
In order to buy shares, you will need to: 1) open an E*TRADE Securities
account; 2) deposit money in the account; and 3) execute an order to buy
shares.
STEP 1: How to Open an E*TRADE Securities Account
To open an E*TRADE Securities account, you must complete the application
available through our website (www.etrade.com). You will be subject to E*TRADE
Securities' general account requirements as described in E*TRADE Securities'
customer agreement.
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 NAV changes daily, your purchase price will be the
next NAV determined after the Fund receives and accepts your purchase order.
On-line. 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 a day or call
1-800-786-2575 between 5:00 a.m. and 6 p.m. (pacific time), Monday -Friday.
By Mail. You can request an application by visiting the "Open an Account" area
of our Website, or by calling 1-800-786-2575. Complete and sign the application.
Make your check or money order payable to E*TRADE Securities, Inc. Mail to
E*TRADE Securities, Inc., P.O. Box 8160, Boston, MA 02266-8160, or if by
overnight mail: 66 Brooks Drive, Braintree, MA 02184-8160.
Telephone. Request a new account kit by calling 1-800-786-2575 between 5:00 a.m.
and 6 p.m., Monday - Friday (pacific time).
STEP 2: Funding Your Account.
By check or money order. Make your check or money order payable to E*TRADE
Securities, Inc. and mail it to E*TRADE Securities, Inc., P.O. Box 8160, Boston,
MA 02266-8160, or if by overnight mail: 66 Brooks Drive, Braintree, MA
02184-8160.
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 Securities will contact you with an
account number so that you can immediately wire funds.
STEP 3: Execute an Order to Buy/Sell Shares
<TABLE>
<CAPTION>
Minimum Investment Requirements:
<S> <C>
For your initial investment in the Fund $ 1,000
To buy additional shares of the Fund $ 500
Continuing minimum investment* $ 1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 1,000
To invest in the Fund for your Education IRA account $ 1,000
To invest in the Fund for your UGMA/UTMA account $ 1,000
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 1,000
<FN>
* Your shares may be automatically redeemed if, as a result of selling shares,
you no longer meet a Fund's minimum balance requirements. Before taking such
action, the Fund will provide you with written notice and at least 30 days to
buy more shares to bring your investment up to $1,000.
</FN>
</TABLE>
After your account is established you may use any of the methods described below
to buy or sell shares. 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 may
assess a 1.00% fee on redemptions of Fund shares held for less than 180 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 three days
thereafter.
On-line. You can access E*TRADE Securities' secure trading pages at
www.etrade.com via 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. By clicking on one of several mutual fund
order buttons, you can quickly and easily place a buy or sell order for shares
in the Fund. 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 your co-account holder(s) are the
only people who can place orders in your E*TRADE account. When you buy shares,
you will be asked to: 1) affirm your consent to receive all Fund documentation
electronically, 2) provide an e-mail address and 3) affirm that you have read
the prospectus. The prospectus will be readily available for viewing and
printing on our Website.
Telephone. All initial purchases of Fund shares must be transacted online at the
E*TRADE Website (www.etrade.com). You may place subsequent purchase and
redemption orders with a telephone representative at 1-800-STOCKS1 (1-800-
786-2571) for an additional $15 fee.
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.
If you are already a shareholder, you may also call 1-800-STOCKS5
(1-800-786-2575) to sell shares by phone through an E*TRADE Securities broker
for an additional $15 fee.
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-STOCKS1 (1-800-786-2571). All initial share purchases must be transacted
on line, at www.etrade.com.
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.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
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.
Redemption Fee. 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 may assess a 0.50% fee on redemptions of fund shares
held for less than 120 days.
Any redemption fees imposed 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 120-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 120 days, the fee may be assessed. The fee may
apply to shares held through omnibus accounts or certain retirement plans.
Closing your account. If you close your E*TRADE Securities account, you will be
required to redeem your shares in your Fund account.
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.
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 on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
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. 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 the 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 advisor 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 that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S.
federal income tax liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated August 13, 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.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available) may be obtained without charge, at our
Website (www.etrade.com). Shareholders will be alerted by e-mail when a
prospectus amendment, annual or semi-annual report is available. Shareholders
may also call the toll-free number listed below for additional information or
with any inquiries.
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.
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act No.: 811-09093
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
E*TRADE Funds
E*TRADE TECHNOLOGY INDEX FUND
August 13, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE Technology Index
Fund (the "Fund"), as a separate series of the E*TRADE Funds, dated August 13,
1999 (as amended from time to time).
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued) free of charge, please access our Website
online (www.etrade.com) or call our toll-free number at (800) 786-2575. Only
customers of E*TRADE Securities, Inc. who consent to receive all information
about the Fund electronically may invest in the Fund.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY.................................................................3
THE FUND.....................................................................3
INVESTMENT STRATEGIES AND RISKS..............................................3
FUND POLICIES...............................................................11
TRUSTEES AND OFFICERS.......................................................13
INVESTMENT MANAGEMENT.......................................................17
SERVICE PROVIDERS...........................................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................20
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................21
SHAREHOLDER INFORMATION.....................................................22
TAXATION....................................................................23
UNDERWRITER.................................................................26
PERFORMANCE INFORMATION.....................................................26
GOLDMAN SACHS & CO..........................................................30
APPENDIX....................................................................32
<PAGE>
FUND HISTORY
The E*TRADE Technology Fund (the "Fund") is a non-diversified series of E*TRADE
Funds (the "Trust"). The Trust is organized as a Delaware business trust and was
formed on November 4, 1998.
THE FUND
The Fund is classified as an open-end, management investment company. The Fund's
investment objective is to provide investment results that match, before fees
and expenses, the total return of the stocks making up the Goldman Sachs
Technology (GSTI(TM) Composite) Index.* This investment objective is fundamental
and therefore, cannot be changed without approval of a majority (as defined in
the Investment Company Act of 1940, as amended, and the Rules thereunder ("1940
Act")) of the Fund's outstanding voting interests.
The Fund seeks to achieve its objective by investing substantially all of its
assets in the same stocks and in substantially the same percentages as the
securities that comprise the GSTI Composite Index. The Fund seeks to provide
investment results that correspond to the total return performance of publicly
traded common stocks in the aggregate, as represented by the GSTI Composite
Index.
The GSTI Composite Index is one of the broadest measures of U.S. traded
technology stocks available. The GSTI Composite Index generally includes over
175 companies representing six different segments of the U.S. technology
marketplace selected by Goldman Sachs & Co. (including hardware, internet,
multi-media networking, semiconductors, services, and software).
*"GSTI(TM)" is a registered trademark of Goldman Sachs & Co. and has been
licensed for use by E*TRADE Asset Management, Inc. for use in connection with
the Fund. The Fund is not sponsored, endorsed, sold, or promoted by Goldman
Sachs & Co. and Goldman Sachs & Co. makes no representation regarding the
advisability of investing in the Fund.
<PAGE>
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Fund's
investment strategies, policies and risks.
Generally, the technology industry segments may be more susceptible to effects
caused by changes in the economic climate, overall market volatility, or
regulatory changes. The technology industry segments are experiencing an
increasing rate of innovation and competition. As such, many companies in the
GSTI Composite Index are exposed to product obsolescence and downward pricing
pressures which may have adverse effects on a company's stock price. While the
stocks of many companies in the technology segment of the industry have
experienced substantial appreciation recently, there can be no assurance that
they will continue to appreciate, retain their current values or not depreciate.
Since the Fund will be investing in only technology industry segments, which may
offer the opportunity for above average growth, investors may also be exposed to
greater financial and market risk. An investment in the Fund is not a balanced
investment program.
These investment strategies and policies may be changed without shareholder
approval unless otherwise noted.
Futures Contracts and Options Transactions. The Fund may use futures as a
substitute for a comparable market position in the underlying securities.
Although the Fund intends to purchase or sell futures contracts only if there is
an active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or if the Fund determines not to
close a futures position in anticipation of adverse price movements, the Fund
will be required to make daily cash payments on variation margin.
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.
Futures and options on the GSTI Composite Index are not currently available and
may not be liquid if they become available. 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 on or before 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.
The Fund's futures transactions must constitute permissible transactions
pursuant to regulations promulgated by the Commodity Futures Trading Commission
("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
or published positions of the SEC, the Fund may be required to segregate liquid
portfolio securities, including cash, 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 any appropriate additional
disclosure in its prospectus.
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.
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 Fund may invest in
high-quality money market instruments on an ongoing basis to provide liquidity
or for temporary purposes when there is an unexpected level of shareholder
purchases or redemptions. 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 Fund's
investment advisor; (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 the Fund's investment advisor 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 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 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.
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 marked-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
to 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, subject to certain exceptions, to (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 Fund may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, 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. 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.
Foreign Securities. The GSTI Composite Index may include only the securities of
foreign issuers approved for listing on the New York Stock Exchange, the
American Stock Exchange, or the NASDAQ market system. Since the stocks of some
foreign issuers may be included in the GSTI Composite Index, the Fund's
portfolio may contain securities of such foreign issuers which may subject the
Fund to additional investment risks with respect to those securities that are
different in some respects from those incurred by a fund which invests only in
securities of domestic issuers. Such risks include possible adverse political
and economic developments, seizure or nationalization of foreign deposits or
adoption of governmental restrictions which might adversely affect the value of
the securities of a foreign issuer to investors located outside the country of
the issuer, whether from currency blockage or otherwise.
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 its investment adviser to be of
comparable quality to the other obligations in which the Fund may invest.
To the extent that such investments are consistent with its investment
objective, 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 obligations 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 are supported 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.
Unrated, Downgraded and Below Investment Grade Investments. The Fund may
purchase instruments that are not rated if, in the opinion of its investment
advisor, such obligations are of investment quality comparable to other rated
investments that are permitted to be purchased by the Fund. After purchase by
the Fund, a security may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event will require a sale
of such security by the Fund provided that the amount of such securities held by
the Fund does not exceed 5% of the Fund's net assets. 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 this SAI. The ratings of Moody's and S&P are more fully described in the
Appendix to this SAI.
Because the Fund is not required to sell downgraded securities, the Fund could
hold up to 5% of its net assets in debt securities rated below "Baa" by Moody's
or below "BBB" by S&P or in unrated, low quality (below investment grade)
securities. Although they may offer higher yields than do higher rated
securities, low rated, and unrated, low quality debt securities generally
involve greater volatility of price and risk of principal and income, including
the possibility of default by, or bankruptcy of, the issuers of the securities.
In addition, the markets in which low rated and unrated, low quality debt are
traded are more limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may diminish the
Fund's ability to sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets and
could adversely affect and cause fluctuations in the daily net asset value of
the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated or unrated, low
quality debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated or unrated, low quality debt securities
may be more complex than for issuers of higher rated securities, and the ability
of the Fund to achieve its investment objective may, to the extent it holds low
rated or unrated low quality debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund held exclusively
higher rated or higher quality securities.
Low rated or unrated low quality debt securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. The prices of such debt securities have been found
to be less sensitive to interest rate changes than higher rated or higher
quality investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in low rated
or unrated, low quality debt securities prices because the advent of a recession
could dramatically lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of the
debt securities defaults, the Fund may incur additional expenses to seek
recovery.
Warrants. To the extent that such investments are consistent with its investment
objective, 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.
Securities Related Businesses. The 1940 Act limits the ability of the Fund to
invest in securities issued by companies deriving more than 15% of their gross
revenues from securities related activities ("financial companies"). If the GSTI
Composite Index provides a higher concentration in one or more financial
companies, the Fund may experience increased tracking error due to the
limitations on investments in such companies.
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 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;
2. may not issue senior securities, except as permitted under the 1940 Act;
3. may (i) borrow money from banks and (ii) make other investments or engage in
other transactions permissible under the 1940 Act which may involve a borrowing,
provided that the combination of (i) and (ii) 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. The Fund may also borrow money from
other persons to the extent permitted by applicable law;
4. 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, as amended, in connection with the disposition of
portfolio securities;
5. may not invest 25% or more of its total assets (taken at market value at the
time of such investment) 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 repurchase agreements thereto); or (ii) any
industry in which the GSTI Composite Index is concentrated to the approximately
same degree during the same period.
6. 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;
7. 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;
8. 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. 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;
2. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act;
3. 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
4. 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.
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 or affiliated
person," as defined in the 1940 Act, is indicated by an asterisk (*):
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Name, Address, and Age Position(s) Held with Principal Occupation(s) During
the Fund the Past 5 Years
- -----------------------------------------------------------------------------------
<S> <C> <C>
*Kathy Levinson (44) Trustee Ms. Levinson is executive vice
4500 Bohannon Drive president of E*TRADE Group,
Menlo Park, CA 94025 Inc. and president and chief
operating officer of E*TRADE
Securities. 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
(Financial Services). She is
also a former senior vice
president of credit services
for Schwab.
*Leonard C. Purkis(50) Trustee Mr. Purkis is chief financial
4500 Bohannon Drive officer and executive vice
Menlo Park, CA 94025 president of finance and
administration of E*TRADE
Group, Inc. He previously
served as chief financial
officer for Iomega
Corporation (Hardware
Manufacturer) 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
(Financial Services).
Shelly J. Meyers (39) Trustee Ms. Meyers is the Manager,
Chief Executive Officer, Chief
Financial Officer and founder
of Meyers Capital Management,
a registered investment
adviser formed in January
1996. She has also managed
the Meyers Pride Value Fund
since June 1996. Prior to
that, she was employed by The
Boston Company Asset
Management, Inc. as Assistant
Vice President of its
Institutional Asset Management
group.
Ashley T. Rabun (47) Trustee Ms. Rabun is the Founder and
Chief Executive Officer of
InvestorReach (which is a
consulting firm specializing
in marketing and distribution
strategies for financial
services companies formed in
October 1996). From 1992 to
1996, she was a partner and
President of Nicholas
Applegate Mutual Funds, a
division of Nicholas Applegate
Capital Management.
Steven Grenadier (34) Trustee Mr. Grenadier is an Associate
Professor of Finance at the
Graduate School of Business at
Stanford University, where he
has been employed as a
professor since 1992.
*Brian C. Murray (42) President Mr. Murray is President of
4500 Bohannon Drive E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in January 1998. Prior to
that Mr. Murray was Principal
of Alameda Consulting
(Financial Services
Consulting) and prior to that
he was Director, Mutual Fund
Marketplace of Charles Schwab
Corporation (Financial
Services).
*Joe N. Van Remortel Vice President and Mr. Van Remortel is Vice
(34) Secretary President of Operations,
4500 Bohannon Drive E*TRADE Asset Management, Inc.
Menlo Park, CA 94025 He joined E*TRADE Securities,
Inc. in September 1996. Prior
to that Mr. Van Remortel was
Senior Consultant of KPMG Peat
Marwick and Associate of
Analysis Group, Inc., a
management consulting firm.
</TABLE>
The Trust pays each non-affiliated Trustee a quarterly fee of $1,500 per Board
meeting for the Fund. In addition, the Trust reimburses each of the
non-affiliated 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. The following table provides an estimate
of each Trustee's compensation for the current fiscal year:
Estimated Compensation Table
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Total Compensation
Name of Person, Position Aggregate From Trust and Fund
Compensation from Complex Paid to
the Trust Directors
Expected to be Paid
to Trustees (1)
- -----------------------------------------------------------------------------
<S> <C> <C>
Kathy Levinson, Trustee None None
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers $6,000 $6,000
Ashley T. Rabun $6,000 $6,000
Steven Grenadier $6,000 $6,000
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- ------------
<FN>
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 1999.
</FN>
</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. To satisfy
regulatory and requirements and for compliance purposes, as of August 11, 1999,
E*TRADE Asset Management, Inc. owned 100% of the Fund's outstanding shares.
There are no other shareholders holding 25% or more. E*TRADE Asset Management,
Inc. is a Delaware corporation and is wholly owned by E*TRADE Group, Inc. Its
address is 4500 Bohannon Drive, Menlo Park, CA 94025.
As of July 30, 1999, Softbank America Inc. owned 26.9% of the total outstanding
voting shares of E*TRADE Group, Inc. Softbank America, Inc. is a Delaware
corporation and is located 300 Delaware Ave., Suite 900, Wilmington, Delaware
19801. It is a wholly owned subsidiary of Softbank Holding, Inc., also a
Delaware corporation, which, in turn, is a wholly owned subsidiary of Softbank
Corporation, a Japanese corporation.
INVESTMENT MANAGEMENT
Investment Advisor. Under an investment advisory agreement ("Investment Advisory
Agreement") with the Fund, E*TRADE Asset Management, Inc. ("Investment
Advisor"), a registered investment advisor, provides investment advisory
services to the Fund. The Investment Advisor is a wholly owned subsidiary of
E*TRADE Group, Inc. and is located at 4500 Bohannon Drive, Menlo Park, CA 94025.
The Investment Advisor commenced operating in February 1999 and therefore has
limited experience as an investment advisor. As of June 30,1999, the Investment
Advisor provided investment advisory services for over $27 million in assets.
Subject to general supervision of the Trust's Board and in accordance with the
investment objective, policies and restrictions of the Fund, the Investment
Advisor provides the Fund with ongoing investment management guidance, policy
direction and monitoring of the Fund and any sub-advisers pursuant to an
investment advisory agreement. For its advisory services, the Fund pays the
Investment Advisor an investment advisory fee at an annual rate equal to 0.25%
of the Fund's average daily net assets. The Investment Advisor retains a portion
of that fee not paid to BGFA, as described below.
The Investment Advisor is seeking an exemptive order from the SEC that will
permit the Investment Advisor, subject to approval by the Board, to retain
sub-advisers that are unaffiliated with the Investment Advisor without approval
by the Fund's shareholders. If granted, such relief would require shareholder
notification in the event of any change in sub-advisers. There is no assurance
the exemptive order will be granted.
Sub-Advisor to the Fund. The Investment Advisor has entered into a sub-advisory
agreement ("Sub-Advisory Agreement") with Barclays Global Fund Advisors
("BGFA"). 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. BFGA has provided
asset management, administration and advisory services for over 26 years. As of
December 31, 1998, BGFA and its affiliates provided investment advisory services
for over $615 billion of assets.
Under the Sub-Advisory Agreement, BGFA is responsible for the day-to-day
management of the Fund's assets pursuant to the Fund's investment objective and
restrictions. For its services, BGFA receives a fee from the Investment Advisor
at an annual rate equal to 0.20% of the Fund's average daily net assets. The
Sub-Advisory Agreement is subject to the same Board of Trustee approval,
oversight and renewal as the Investment Advisory Agreement.
BGFA has agreed to provide to the Fund, among other things, analysis and
statistical and economic data and information concerning the compilation of the
GSTI Composite Index, including portfolio composition.
Both the Investment Advisory Agreement and the Sub-Advisory Agreement will
continue in effect for more than two years provided the continuance is approved
annually (i) by the holders of a majority of the Fund's outstanding voting
securities or by the Fund's Board of Trustees and (ii) by a majority of the
Trustees of the Fund who are not parties to the Investment Advisory Agreement or
the Sub-Advisory Agreement or affiliates of any such party. Both the Investment
Advisory Agreement and the Sub-Advisory Agreement may be terminated on 60 days'
written notice any such party and will terminate automatically if assigned.
Asset allocation, index 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 Fund 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 Fund or the price paid or
received by the Fund.
SERVICE PROVIDERS
Principal Underwriter. E*TRADE Securities, Inc., 4500 Bohannon Drive, Menlo
Park, CA 94025, is the Fund's principal underwriter. The underwriter is a wholly
owned subsidiary of E*TRADE Group, Inc.
Administrator of the Fund. E*TRADE Asset Management, Inc., the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management, Inc. provides administrative services directly or
through sub-contracting, including: (i) general supervision of the operation of
the Fund, including coordination of the services performed by the investment
advisor, transfer and dividend disbursing agent, custodian, sub-administrator,
shareholder servicing agent, 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 (iii) periodic reviews of management reports
and financial reporting. E*TRADE Asset Management, Inc. also furnishes office
space and certain facilities required for conducting the business of the Fund.
Pursuant to an agreement with the Fund, E*TRADE Asset Management, Inc. receives
a fee equal to 0.60% of the average daily net assets of the Fund. E*TRADE Asset
Management, Inc. is responsible under that agreement for the expenses otherwise
payable by the Fund for transfer agency, dividend disbursing, custody, auditing
and legal fees, to the extent that those expenses would otherwise equal or
exceed 0.005% of the Fund's average daily net assets.
Custodian, Fund Accounting Services Agent and Sub-administrator. PFPC Trust
Company ("PFPC Trust"), 400 Bellevue Parkway, Wilmington, DE 19809, serves as
custodian of the assets of the Fund. As a result, PFPC Trust has custody of all
securities and cash of the Fund, 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. The custodian has no responsibility for any of the investment policies or
decisions of the Fund. PFPC, Inc. ("PFPC"), an affiliate of PFPC Trust, also
acts as the Fund's Accounting Services Agent. PFPC also serves as the Fund's
sub-administrator, under an agreement among PFPC, the Trust and E*TRADE Asset
Management, Inc., providing management reporting and treasury administration,
financial reporting to Fund Management and the Fund's Board of Trustees and
preparing income tax provisions and tax returns. PFPC Trust and PFPC are
compensated for their services by E*TRADE Asset Management, Inc.
Transfer Agent and Dividend Disbursing Agent. PFPC, 400 Bellevue Parkway,
Wilmington, DE 19809, also acts as transfer agent and dividend disbursing agent
for the Fund.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement with
E*TRADE Securities, Inc. and E*TRADE Asset Management, Inc., E*TRADE Securities,
Inc., 4500 Bohannon Drive, Menlo Park, CA 94025, 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) providing certain printing and mailing services,
such as printing and mailing of shareholder account statements, checks, and tax
forms; and (ix) providing such other related services as the Fund or a
shareholder may reasonably request, to the extent permitted by applicable law.
Independent Accountants. Deloitte & Touche LLP, Suite 1500, 1000 Wilshire Blvd.,
Los Angeles, CA 90017-2472, acts as independent accountants for the Fund.
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 Fund has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Pursuant to the Sub-Advisory
Agreement and subject to policies established by the Fund's Board of Trustees,
BGFA, as sub-advisor, is responsible for the Fund's investment portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Fund 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 seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available.
Purchase and sale orders of the securities held by the Fund may be combined with
those of other accounts that BGFA manages, and for which they have 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 Fund and other accounts managed by BGFA, BGFA undertakes to
allocate those transactions among the participants equitably.
Under the 1940 Act, persons affiliated with the Fund, BGFA and their affiliates
are prohibited from dealing with the Fund 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 Fund, 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 Fund 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 Fund'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, affiliates of BGFA [or Barclays]. 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 Fund, 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 Fund 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 Fund. 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
Fund's Board of Trustees.
Certain of the brokers or dealers with whom the Fund may transact business offer
commission rebates to the Fund. 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 non-diversified series of E*TRADE Funds (the "Trust"), an open-end
investment company, organized as a Delaware business trust on November 4, 1998.
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. Shareholders are
not entitled to any preemptive rights. All shares, when issued, will be fully
paid and non-assessable by the Trust. 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 will 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.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon its trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a trustee against any liability to
which a 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.
Under Delaware law, the shareholders of the Fund are not generally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states or jurisdictions. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states or jurisdictions, the courts may not apply Delaware law and may thereby
subject the Delaware business trust shareholders to liability. To guard against
this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of a Portfolio. Notice of such
disclaimer will generally be given in each agreement, obligation or instrument
entered into or executed by a series or the Trustees. The Declaration of Trust
also provides for indemnification by the relevant series for all losses suffered
by a shareholder as a result of an obligation of the series. In view of the
above, the risk of personal liability of shareholders of a Delaware business
trust is remote.
SHAREHOLDER INFORMATION
Shares are sold through E*TRADE Securities.
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 on
national holidays observed by the NYSE.
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 Securities by accessing our Website. 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.
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., 4500 Bohannon Drive, Menlo
Park, CA 94025, 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 any 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.
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, the
Investment Advisor 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
will be 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)(To the power of 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 will be
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 will be 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)(To the power of 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:
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 may 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.
The historical GSTI Composite Index data presented from time to time is 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 Fund, during the periods shown.
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.
GOLDMAN SACHS & CO.
The Fund is not sponsored, endorsed sold or promoted by Goldman Sachs & Co.
Goldman Sachs & Co. makes no representation or warranty, express or implied, to
the owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the GSTI Composite Index to track the technology stock market performance.
Goldman Sachs & Co.'s only relationship to E*TRADE Asset Management or the Fund
is the licensing of certain trademarks and trade names of Goldman Sachs & Co.
and of the GSTI Composite Index which is determined, composed and calculated by
Goldman Sachs & Co. without regard to E*TRADE Asset Management or the Fund.
Goldman Sachs & Co. has no obligation to take the needs of E*TRADE Asset
Management, the Fund or the shareholders into consideration in determining,
composing or calculating the GSTI Composite Index. Goldman Sachs & Co. is not
responsible for and has not participated in the determination of the prices and
amount of the Fund or the timing of the issuance or sale of shares of the Fund
or in the determination or calculation of the redemption price per share.
Goldman Sachs & Co. has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
Goldman Sachs & Co. does not guarantee the accuracy and/or the completeness of
the GSTI Composite Index or any data included therein and Goldman Sachs & Co.
hereby expressly disclaims any and all liability for any errors, omissions, or
interruptions therein. Goldman Sachs & Co. makes no warranty, express or
implied, as to results to be obtained by the Fund, the shareholders, or any
other person or entity from the use of the GSTI Composite Index or any data
included therein. Goldman Sachs & Co. makes no express or implied warranties,
and expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the GSTI Composite Index or any data
included therein. Without limiting any of the foregoing, in no event shall
Goldman Sachs & Co. have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
<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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-5000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
PART C:
OTHER INFORMATION
Item 23. Exhibits
(a)(i) Certificate of Trust.1
(a)(ii) Trust Instrument.1
(b) By-laws.2
(c) Certificates for Shares will not be issued. Articles II, VII, IX and X
of the Trust Instrument, previously filed as exhibit (a)(ii), define
the rights of holders of the Shares.1
(d)(i) Form of Investment Advisory Agreement between E*TRADE Asset Management,
Inc. and the Registrant with respect to the E*TRADE S&P 500 Index
Fund.2
(d)(ii) Form of Amended and Restated Investment Advisory Agreement between
E*TRADE Asset Management, Inc. and the Registrant with respect to the
E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund, E*TRADE
Bond Index Fund, and E*TRADE International Index Fund.
(d)(iii) Form of Investment Advisory Agreement between E*TRADE Asset Management,
Inc. and the Registrant with respect to the E*TRADE Technology Index
Fund.
(d)(iv) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant with
respect to the E*TRADE Technology Index Fund.
(e)(i) Form of Underwriting Agreement between E*TRADE Securities, Inc. and the
Registrant with respect to the E*TRADE S&P 500 Index Fund.2
(e)(ii) Amended and Restated Underwriting Agreement between E*TRADE Securities,
Inc. and the Registrant with respect to E*TRADE Extended Market Index
Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*Trade
International Index Fund, and E*TRADE E-Commerce Index Fund.
(f) Bonus or Profit Sharing Contracts: Not applicable.
(g)(i) Form of Custodian Agreement between the Registrant and Investors Bank &
Trust Company with respect to the E*TRADE S&P 500 Index Fund.2
(g)(ii) Form of Amendment No. 1 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, and E*TRADE
International Index Fund.
(g)(iii) Form of Custodian Services Agreement between Registrant and PFPC Trust
Company with respect to the E*TRADE Technology Index Fund and E*TRADE
E-Commerce Index Fund.
(h)(1)(i) Form of Third Party Feeder Fund Agreement among the Registrant,
E*TRADE Securities, Inc. and Master Investment Portfolio with respect
to the E*TRADE S&P 500 Index Fund.2
(h)(1)(ii) Form of Third Party Feeder Fund Agreement among the Registrant,
E*TRADE Securities, Inc. and Master Investment Portfolio with respect
to the E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund,
and E*TRADE Bond Index Fund.
(h)(2)(i) Form of Administrative Services Agreement between the Registrant and
E*TRADE Asset Management, Inc. with respect to the E*TRADE S&P 500
Index Fund.2
(h)(2)(ii) Form of Amendment No. 1 to the Administrative Services Agreement
between the Registrant and E*TRADE Asset Management, Inc. with respect
to the E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund,
E*TRADE Technology Index Fund, International Index Fund, and E-Commerce
Index Fund.
(h)(3)(i)Form of Sub-Administration Agreement among E*TRADE Asset Management,
Inc., the Registrant and Investors Bank & Trust Company with respect to
the E*TRADE S&P 500 Index Fund.2
(h)(3)(ii) Form of Amendment No. 1 to the Sub-Administration Agreement among
E*TRADE Asset Management, Inc., the Registrant and Investors Bank &
Trust Company with respect to the E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund and E*TRADE International Index Fund.
(h)(4) Form of Sub-Administration and Accounting Services Agreement between
E*TRADE Funds and PFPC, Inc. with respect to the E*TRADE Technology
Index Fund and E*TRADE E-Commerce Index Fund.
(h)(5)(i) Form of Transfer Agency Services Agreement between PFPC, Inc. and the
Registrant with respect to the E*TRADE S&P 500 Index Fund.2
(h)(5)(ii) Form of Amendment No. 1 to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology
Index Fund, E*TRADE International Index Fund, and E*TRADE E-Commerce
Index Fund.
(h)(6)(i)Form of Retail Shareholder Services Agreement between E*TRADE Group,
Inc., the Registrant and E*TRADE Asset Management, Inc. with respect to
the E*TRADE S&P 500 Index Fund.2
(h)(6)(ii) Form of Amendment No. 1 to the Retail Shareholder Services Agreement
between E*TRADE Group, Inc., the Registrant and E*TRADE Asset
Management, Inc. with respect to the E*TRADE Extended Market Index
Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund, and E*TRADE E-Commerce Index Fund.
(h)(7) State Securities Compliance Services Agreement between E*TRADE Funds
and PFPC, Inc. with respect to S&P 500 Index Fund, E*TRADE Extended
Market Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index
Fund, E*TRADE International Index Fund, and E*TRADE E-Commerce Index
Fund.
(i)(1) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE S&P 500 Index Fund.2
(i)(2) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund and E*TRADE
Technology Index Fund.
(j) Consent of Deloitte &Touche LLP: Not applicable.
(k) Omitted Financial Statements: Not applicable.
(l) Form of Subscription Letter Agreements between E*TRADE Asset
Management, Inc. and the Registrant.2
(m) Rule 12b-1 Plan: Not applicable.
(n) Financial Data Schedules: Not applicable.
(o) Rule 18f-3 Plan: Not applicable.
* Power of Attorney.3
** Power of Attorney for Master Investment Portfolio.2
1 Incorporated by reference from the Registrant's Initial Registration Statement
on Form N-1A filed with the Securities and Exchange Commission ("SEC") on
November 5, 1998.
2 Incorporated by reference from the Registrant's Pre-effective Amendment No. 2
to the Registration Statement on Form N-1A filed with the SEC on January 28,
1999.
3 Incorporated by reference from the Registrant's Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A filed with the SEC on May 17, 1999.
Item 24. Persons Controlled by or Under Common Control With Registrant
As of July 30, 1999, Softbank America Inc. owned 26.9% of the total
outstanding voting shares of E*TRADE Group, Inc. Softbank America, Inc. is a
Delaware corporation and is located 300 Delaware Ave., Suite 900, Wilmington,
Delaware 19801. It is a wholly owned subsidiary of Softbank Holding, Inc., also
a Delaware corporation, which, in turn, is a wholly owned subsidiary of Softbank
Corporation, a Japanese corporation.
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, as amended (the "Act") 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, 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
E*TRADE Asset Management, Inc. (the "Investment Advisor") is a Delaware
corporation that offers investment advisory services. The Investment Advisor's
offices are located at 4500 Bohannon Drive, Menlo Park, CA 94025. The directors
and officers of the Investment Advisor and their business and other connections
are as follows:
<TABLE>
<CAPTION>
Directors and Officers Title/Status with Other Business
of Investment Adviser Investment Adviser Connections
<S> <C> <C>
Kathy Levinson Director Director, President and
Chief Operating
Officer, E*TRADE
Securities, Inc. and
Executive Vice
President, Operations
and Customer Operations
Officer, E*TRADE Group,
Inc. 1997-98
Connie M. Dotson Director Corporate Secretary and
Senior Vice President,
E*TRADE Securities, Inc.
Brian C. Murray President and Director Vice President and
General Manager of
Mutual Funds, E*TRADE
Securities, Inc.;
Principal of Alameda
Consulting, 1997
Jerry D. Gramaglia Director Senior Vice President,
E*TRADE Group, Inc.,
1998; Vice President,
Sprint Corp., 1997-98
Joseph N. Van Remortel Vice President and Secretary Sr. Manager, E*TRADE
Securities, Inc.,
1997-98
</TABLE>
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) The officers and directors of E*TRADE Securities, Inc. are:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
<S> <C> <C>
Kathy Levinson Director, President and Chief Trustee
Operating Officer
Stephen C. Richards Director and Senior Vice None
President
Steve Hetlinger Director and Vice President None
Connie M. Dotson Corporate Secretary and None
Senior Vice President
<FN>
* The business address of all officers of the Distributor is 4500 Bohannon
Drive, Menlo Park, CA 94025.
</FN>
</TABLE>
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 in the physical possession of:
(1) the Registrant's investment advisor, E*TRADE Asset Management, Inc.,
at 4500 Bohannon Drive, Menlo Park, CA 94025;
(2) the Registrant's custodian, accounting services agent and
sub-administrator with respect to the E*TRADE S&P 500 Index Fund, E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, and E*TRADE International
Index Fund, Investors Bank & Trust Company, at 200 Clarendon Street, Boston, MA
02111;
(3) the Registrant's transfer agent and dividend disbursing agent, PFPC
Inc. at 400 Bellevue Parkway, Wilmington, DE 19809;
(4) the Registrant's custodian, accounting services agent and
sub-administrator with respect to the E*TRADE Technology Index Fund and E*TRADE
E-Commerce Index Fund, PFPC Inc. at 400 Bellevue Parkway, Wilmington, DE 19809;
and
(5) the Master Portfolio's investment advisor, Barclays Global Fund
Advisors, at 45 Fremont Street, San Francisco, CA 94105.
Item 29. Management Services
Not applicable
Item 30. Undertakings: Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Post-Effective Amendment No. 4 to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Menlo Park in the State of California on the 10th day
of August, 1999.
E*TRADE FUNDS
(Registrant)
By:/s/
---------------------------------
Name: Brian C. Murray
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 4 to the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/
- -------------------------------
Kathy Levinson Trustee August 6, 1999
/s/
- -------------------------------
Leonard C. Purkis Trustee and Treasurer August 10, 1999
(Principal Financial and
Accounting Officer)
/s/
- -------------------------------
Brian C. Murray President (Principal August 10, 1999
Executive Officer)
/s/
- -------------------------------
Shelly J. Meyers Trustee August 10, 1999
/s/
- -------------------------------
Ashley T. Rabun Trustee August 5, 1999
/s/
- -------------------------------
Steven Grenadier Trustee August 5, 1999
By August 10, 1999
---------------------------
David A. Vaughan
Attorney-In-Fact
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A of the E*TRADE Funds pursuant to Rule 485(b)
under the Securities Act of 1933 and Master Investment Portfolio has duly caused
this Post-Effective Amendment No. 4 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Little Rock, and State of
Arkansas on the 9th day of August, 1999.
MASTER INVESTMENT PORTFOLIO
BOND INDEX MASTER PORTFOLIO
EXTENDED INDEX MASTER PORTFOLIO
By: /s/
---------------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
(and Principal Financial
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A of the
E*TRADE Funds has been signed below by the following persons in the capacities
and on the date indicated:
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
- ------------------------------- Chairman, President (Principal 8/9/99
R. Greg Feltus* Executive Officer) and Trustee
/s/
- ------------------------------- Secretary and Treasurer 8/9/99
Richard H. Blank, Jr. (Principal Financial Officer)
- ------------------------------- Trustee 8/9/99
Jack S. Euphrat*
- ------------------------------- Trustee 8/9/99
W. Rodney Hughes*
By:/s/
----------------------------
Richard H. Blank, Jr.
Attorney-in-Fact pursuant to powers of attorney as previously filed.
</TABLE>
<PAGE>
EXHIBIT LIST
Exhibit
No. DESCRIPTION
(d)(ii) Form of Amended and Restated Investment Advisory Agreement between
E*TRADE Asset Management, Inc. and the Registrant with respect to
E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund, E*TRADE
Bond Index Fund, and E*TRADE International Index Fund.
(d)(iii) Form of Investment Advisory Agreement between E*TRADE Asset Management,
Inc. and the Registrant with respect to E*TRADE Technology Index Fund.
(d)(iv) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant with
respect to E*TRADE Technology Index Fund.
(e)(ii) Form of Amended and Restated Underwriting Agreement between E*TRADE
Securities, Inc. and the Registrant with respect to E*TRADE S&P 500
Index Fund, E*TRADE Extended Market Index Fund, E*TRADE Bond Index
Fund, E*TRADE Technology Index Fund, E*Trade International Index Fund,
and E*TRADE E-Commerce Index Fund.
(g)(ii) Form of Amendment No. 1 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to E*TRADE
S&P 500 Index Fund, E*TRADE Extended Market Index Fund, E*TRADE Bond
Index Fund, and E*TRADE International Index Fund.
(g)(iii) Form of Custodian Services Agreement between Registrant and PFPC Trust
Company with respect to E*TRADE Technology Index Fund and E*TRADE
E-Commerce Index Fund.
(h)(l)(ii) Form of Third Party Feeder Fund Agreement among the Registrant,
E*TRADE Securities, Inc. and Master Investment Portfolio with respect
to E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund, and
E*TRADE Bond Index Fund.
(h)(2)(ii) Form of Amendment No. 1 to the Administrative Services Agreement
between the Registrant and E*TRADE Asset Management, Inc. with respect
to E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund,
E*TRADE Bond Index /Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund and E*TRADE E-Commerce Index Fund.
(h)(3)(ii) Form of Amendment No. 1 to the Sub-Administration Agreement among
E*TRADE Asset Management, Inc., the Registrant and Investors Bank &
Trust Company with respect to E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund, and E*TRADE International Index Fund.
(h)(4) Form of Sub-Administration and Accounting Services Agreement between
E*TRADE Funds and PFPC, Inc. with respect to E*TRADE Technology Index
Fund and E*TRADE E-Commerce Index Fund.
(h)(5)(ii) Form of Amendment No. 1 to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to E*TRADE S&P 500
Index Fund, E*TRADE Extended Market Index Fund, E*TRADE Bond Index
Fund, E*TRADE Technology Index Fund, E*TRADE International Index Fund,
and E*TRADE E-Commerce Index Fund.
(h)(6)(ii) Form of Amendment No. 1 to the Retail Shareholder Services Agreement
between E*TRADE Group, Inc., the Registrant and E*TRADE Asset
Management, Inc. with respect to E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund, and E*TRADE E-Commerce Index Fund.
(h)(7) Form of State Securities Compliance Services Agreement between E*TRADE
Funds and PFPC, Inc. with respect to S&P 500 Index Fund, E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology
Index Fund, E*TRADE International Index Fund, and E*TRADE E-Commerce
Index Fund.
(i)(2) Opinion and Consent of Dechert Price & Rhoads with respect to E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund and E*TRADE
Technology Index Fund.
FORM OF
AMENDED AND RESTATED
INVESTMENT ADVISORY AGREEMENT
AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT ("Agreement"),
effective commencing as of ________________, 1999 between E*TRADE Asset
Management, Inc. (the "Adviser") and E*TRADE Funds (the "Trust") with respect to
each series of the Trust as listed on Exhibit A attached hereto (each a "Fund"
and collectively, the "Funds"), as Exhibit A may be amended from time to time.
WHEREAS, the Trust is a Delaware business trust organized pursuant to a
Declaration of Trust dated November 4, 1998 (the "Declaration of Trust"), and is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, diversified management investment company, and the
E*TRADE S&P 500 Index Fund is the original series of the Trust; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act"); and
WHEREAS, the Trust and the Adviser have entered into an Investment
Advisory Agreement with respect to the E*TRADE S&P 500 Index Fund, dated
February 3, 1999 (the "Original Advisory Agreement"); and
WHEREAS, the Trust also wishes to retain the Adviser to render investment
advisory services with respect to the Extended Market Index Fund, the E*TRADE
Bond Index Fund, and the International Index Fund, each a new series of the
Trust (the "New Series"), and the Adviser is willing to furnish such services to
the New Series; and
WHEREAS, the Trust and the Adviser wish to include the New Series under
substantially the same terms of the Original Advisory Agreement and wish to
amend and restate the Original Advisory Agreement to include the New Series;
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Trust and the Adviser as follows:
1. Appointment. The Trust hereby appoints the Adviser to act as investment
adviser to each Fund for the periods and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties.
(a) Subject to the supervision of the Trustees of the Trust, the Adviser
will: (i) provide a program of continuous investment management for each Fund in
accordance with each Fund's investment objective, policies and limitations as
stated in each Fund's Prospectus and Statement of Additional Information
included as part of the Trust's Registration Statement filed with the Securities
and Exchange Commission ("SEC") and as the Prospectus and Statement of
Additional Information may be amended from time to time, copies of which shall
be provided to the Adviser by the Trust; and (ii) select and manage, subject to
approval by the Trustees, investment subadvisers, who may be granted
discretionary investment authority, and/or master funds for each Fund.
(b) In performing its investment management services to each Fund
hereunder, the Adviser will provide each Fund with ongoing investment guidance,
policy direction, including oral and written research, monitoring of any master
funds, analysis, advice, statistical and economic data and judgments regarding
individual investments, general economic conditions and trends and long-range
investment policy.
(c) To the extent permitted by the Adviser's Form ADV as filed with the
SEC and subject to the approval of the Trustees of the Trust, the Adviser shall
have the authority to manage cash and money market instruments for cash flow
purposes.
(d) To the extent permitted by the Adviser's current Form ADV as filed
with the SEC, the Adviser will advise as to the securities, instruments,
repurchase agreements, options and other investments and techniques that each
Fund will purchase, sell, enter into or use, and will provide an ongoing
evaluation of each Fund's portfolio. The Adviser will advise as to what portion
of each Fund's portfolio shall be invested in securities and other assets, and
what portion if any, should be held uninvested.
(e) The Adviser may engage and remove one or more subadvisers, subject to
the legally required approvals of the Trust and its shareholders, and the
Adviser shall monitor the performance of any subadviser and report to the Trust
thereon.
(f) The Adviser further agrees that, in performing its duties hereunder,
it will:
(i) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Trustees;
(ii) use reasonable efforts to manage each Fund so that it will
qualify, and continue to qualify, as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder;
(iii) place orders pursuant to each Fund's investment determinations
as approved by the Trustees for each Fund directly with the issuer, or with any
broker or dealer, in accordance with applicable policies expressed in each
Fund's Prospectus and/or Statement of Additional Information and in accordance
with applicable legal requirements;
(iv) furnish to the Trust whatever statistical information the Trust
may reasonably request with respect to each Fund's assets or contemplated
investments. In addition, the Adviser will keep the Trust and the Trustees
informed of developments materially affecting each Fund's portfolio and shall,
on the Adviser's own initiative, furnish to the Trust from time to time whatever
information the Adviser believes appropriate for this purpose;
(v) make available to the Trust's administrator (the "Administrator")
and the Trust, promptly upon their request, such copies of its investment
records and ledgers with respect to each Fund as may be required to assist the
Administrator and the Trust in their compliance with applicable laws and
regulations. The Adviser will furnish the Trustees with such periodic and
special reports regarding each Fund and any subadviser as they may reasonably
request;
(vi) immediately notify the Trust in the event that the Adviser or any
of its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the SEC or other regulatory
authority. The Adviser further agrees to notify the Trust immediately of any
material fact known to the Adviser respecting or relating to the Adviser that is
not contained in the Trust's Registration Statement regarding each Fund, or any
amendment or supplement thereto, but that is required to be disclosed thereon,
and of any statement contained therein that becomes untrue in any material
respect; and
(vii) in providing investment advice to each Fund, use no inside
information that may be in its possession or in the possession of any of its
affiliates, nor will the Adviser seek to obtain any such information.
3. Futures and Options. The Adviser's investment authority shall include
advice with regard to purchasing, selling, covering open positions, and
generally dealing in financial futures contracts and options thereon, or master
funds which do so in accordance with Rule 4.5 of the Commodity Futures Trading
Commission.
The Adviser's authority shall include authority to: (i) open and
maintain brokerage accounts for financial futures and options (such accounts
hereinafter referred to as "Brokerage Accounts") on behalf of and in the name of
each Fund; and (ii) execute for and on behalf of the Brokerage Accounts,
standard customer agreements with a broker or brokers. The Adviser may, using
such of the securities and other property in the Brokerage Accounts as the
Adviser deems necessary or desirable, direct the custodian to deposit on behalf
of each Fund, original and maintenance brokerage deposits and otherwise direct
payments of cash, cash equivalents and securities and other property into such
brokerage accounts and to such brokers as the Adviser deems desirable or
appropriate.
4. Use of Securities Brokers and Dealers. The Adviser will monitor the use
by master funds of broker-dealers. To the extent permitted by the Adviser's Form
ADV as filed with the SEC, purchase and sale orders will usually be placed with
brokers who are selected by the Adviser as able to achieve "best execution" of
such orders. "Best execution" shall mean prompt and reliable execution at the
most favorable securities price, taking into account the other provisions
hereinafter set forth. Whenever the Adviser places orders, or directs the
placement of orders, for the purchase or sale of portfolio securities on behalf
of each Fund, in selecting brokers or dealers to execute such orders, the
Adviser is expressly authorized to consider the fact that a broker or dealer has
furnished statistical, research or other information or services which enhance
the Adviser's research and portfolio management capability generally. It is
further understood in accordance with Section 28(e) of the Securities Exchange
Act of 1934, as amended, that the Adviser may negotiate with and assign to a
broker a commission which may exceed the commission which another broker would
have charged for effecting the transaction if the Adviser determines in good
faith that the amount of commission charged was reasonable in relation to the
value of brokerage and/or research services (as defined in Section 28(e))
provided by such broker, viewed in terms either of each Fund or the Adviser's
overall responsibilities to the Adviser's discretionary accounts.
Neither the Adviser nor any parent, subsidiary or related firm shall act
as a securities broker with respect to any purchases or sales of securities
which may be made on behalf of each Fund, provided that this limitation shall
not prevent the Adviser from utilizing the services of a securities broker which
is a parent, subsidiary or related firm, provided such broker effects
transactions on a "cost only" or "nonprofit" basis to itself and provides
competitive execution. Unless otherwise directed by the Trust in writing, the
Adviser may utilize the service of whatever independent securities brokerage
firm or firms it deems appropriate to the extent that such firms are competitive
with respect to price of services and execution.
5. Allocation of Charges and Expenses.
(a) Except as otherwise specifically provided in this section 5, the
Adviser shall pay the compensation and expenses of all of its directors,
officers and employees who serve as trustees, officers and executive employees
of the Trust (including the Trust's share of payroll taxes), and the Adviser
shall make available, without expense to each Fund, the service of its
directors, officers and employees who may be duly elected officers of the Trust,
subject to their individual consent to serve and to any limitations imposed by
law.
(b) The Adviser shall not be required to pay pursuant to this Agreement
any expenses of each Fund other than those specifically allocated to the Adviser
in this section 5. In particular, but without limiting the generality of the
foregoing, the Adviser shall not be responsible, except to the extent of the
reasonable compensation of such of the Trust's employees as are officers or
employees of the Adviser whose services may be involved, for the following
expenses of each Fund: organization and certain offering expenses of each Fund
(including out-of-pocket expenses, but not including the Adviser's overhead and
employee costs); fees payable to the Adviser and to any other Fund advisers or
consultants; legal expenses; auditing and accounting expenses; interest
expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses incurred by or
with respect to each Fund in connection with membership in investment company
trade organizations; cost of insurance relating to fidelity coverage for the
Trust's officers and employees; fees and expenses of each Fund's Administrator
or of any custodian, subcustodian, transfer agent, registrar, or dividend
disbursing agent of each Fund; expenses of any master fund in which each Fund
invests; payments to the Administrator for maintaining each Fund's financial
books and records and calculating its daily net asset value; other payments for
portfolio pricing or valuation services to pricing agents, accountants, bankers
and other specialists, if any; expenses of preparing share certificates; other
expenses in connection with the issuance, offering, distribution or sale of
securities issued by each Fund; expenses relating to investor and public
relations; expenses of registering and qualifying shares of each Fund for sale;
freight, insurance and other charges in connection with the shipment of each
Fund's portfolio securities; brokerage commissions or other costs of acquiring
or disposing of any portfolio securities or other assets of each Fund, or of
entering into other transactions or engaging in any investment practices with
respect to each Fund; expenses of printing and distributing prospectuses,
Statements of Additional Information, reports, notices and dividends to
stockholders; costs of stationery or other office supplies; any litigation
expenses; costs of stockholders' and other meetings; the compensation and all
expenses (specifically including travel expenses relating to each Fund's
business) of officers, Trustees and employees of the Trust who are not
interested persons of the Adviser; and travel expenses (or an appropriate
portion thereof) of officers or Trustees of the Trust who are officers,
directors or employees of the Adviser to the extent that such expenses relate to
attendance at meetings of the Board of Trustees of the Trust with respect to
matters concerning each Fund, or any committees thereof or advisers thereto.
6. Compensation.
As compensation for the services provided and expenses assumed by
the Adviser under this Agreement, the Trust will arrange for each Fund to pay
the Adviser at the end of each calendar month an advisory fee computed daily at
an annual rate equal to the amount of average daily net assets listed opposite
each Fund's name in Exhibit A, attached hereto. The "average daily net assets"
of each Fund shall mean the average of the values placed on each Fund's net
assets as of 4:00 p.m. (New York time) on each day on which the net asset value
of each Fund is determined consistent with the provisions of Rule 22c-1 under
the 1940 Act or, if each Fund lawfully determines the value of its net assets as
of some other time on each business day, as of such other time. The value of net
assets of each Fund shall always be determined pursuant to the applicable
provisions of the Declaration of Trust and the Registration Statement. If,
pursuant to such provisions, the determination of net asset value is suspended
for any particular business day, then for the purposes of this section 6, the
value of the net assets of each Fund as last determined shall be deemed to be
the value of its net assets as of the close of the New York Stock Exchange, or
as of such other time as the value of the net assets of each Fund's portfolio
may lawfully be determined, on that day. If the determination of the net asset
value of the shares of each Fund has been so suspended for a period including
any month end when the Adviser's compensation is payable pursuant to this
section, then the Adviser's compensation payable at the end of such month shall
be computed on the basis of the value of the net assets of each Fund as last
determined (whether during or prior to such month). If each Fund determines the
value of the net assets of its portfolio more than once on any day, then the
last such determination thereof on that day shall be deemed to be the sole
determination thereof on that day for the purposes of this section 6.
7. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to each Fund as are required by Section 31
under the 1940 Act, and rules adopted thereunder, and by other applicable legal
provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Adviser also
agrees that records it maintains and preserves pursuant to Rules 31a-1 and Rule
31a-2 under the 1940 Act and otherwise in connection with its services hereunder
are the property of the Trust and will be surrendered promptly to the Trust upon
its request. The Adviser further agrees that it will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with its services hereunder which may be requested in order to
determine whether the operations of each Fund are being conducted in accordance
with applicable laws and regulations.
8. Aggregation of Orders. Provided that the investment objective, policies
and restrictions of each Fund are adhered to, the Trust agrees that the Adviser
may aggregate sales and purchase orders of securities held in each Fund with
similar orders being made simultaneously for other accounts managed by the
Adviser or with accounts of the affiliates of the Adviser, if in the Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to the respective Fund taking into consideration the advantageous selling or
purchase price, brokerage commission and other expenses. The Trust acknowledges
that the determination of such economic benefit to each Fund by the Adviser
represents the Adviser's evaluation that each Fund is benefited by relatively
better purchase or sales prices, lower commission expenses and beneficial timing
of transactions or a combination of these and other factors.
9. Standard of Care and Limitation of Liability. The Adviser shall
exercise its best judgment in rendering the services provided by it under this
Agreement. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by each Fund or the holders of each Fund's
shares in connection with the matters to which this Agreement relates, provided
that nothing in this Agreement shall be deemed to protect or purport to protect
the Adviser against any liability to the Trust, each Fund or to holders of each
Fund's shares to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Adviser's reckless disregard of
its obligations and duties under this Agreement. As used in this Section 9, the
term "Adviser" shall include any officers, directors, employees or other
affiliates of the Adviser performing services with respect to each Fund.
10. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or to
other series of investment companies, including the Trust (whether or not their
investment objectives and policies are similar to those of each Fund) or from
engaging in other activities, provided such other services and activities do
not, during the term of this Agreement, interfere in a material manner with the
Adviser's ability to meet its obligations to each Fund hereunder. When the
Adviser recommends the purchase or sale of a security for other investment
companies and other clients, and at the same time the Adviser recommends the
purchase or sale of the same security for each Fund, it is understood that in
light of its fiduciary duty to each Fund, such transactions will be executed on
a basis that is fair and equitable to each Fund. In connection with purchases or
sales of portfolio securities for the account of each Fund, neither the Adviser
nor any of its directors, officers or employees shall act as a principal or
agent or receive any commission. If the Adviser provides any advice to its
clients concerning the shares of each Fund, the Adviser shall act solely as
investment counsel for such clients and not in any way on behalf of the Trust or
each Fund.
11. Duration and Termination.
(a) This Agreement shall continue with respect to the E*TRADE S&P 500
Index Fund until February 3, 2001 and shall continue with respect to the New
Series until ___________, 2001. This Agreement shall continue automatically for
successive annual periods thereafter, provided such continuance is specifically
approved at least annually by (i) the Trustees or (ii) a vote of a "majority"
(as defined in the 1940 Act) of each Fund's outstanding voting securities (as
defined in the 1940 Act), provided that in either event the continuance is also
approved by a majority of the Trustees who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person (to the extent required by the 1940 Act) at a
meeting called for the purpose of voting on such approval.
(c) Notwithstanding the foregoing, this Agreement may be terminated: (a)
at any time without penalty by each Fund upon the vote of a majority of the
Trustees or by vote of the majority of each Fund's outstanding voting
securities, upon sixty (60) days' written notice to the Adviser or (b) by the
Adviser at any time without penalty, upon sixty (60) days' written notice to the
Trust. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
12. Amendments. This Agreement may be amended at any time but only by the
mutual agreement of the parties to this Agreement and in accordance with any
applicable legal or regulatory requirements.
13. Proxies. Unless the Trust gives written instructions to the contrary,
the Adviser shall vote all proxies solicited by or with respect to the issuers
of securities in which assets of each Fund may be invested in a manner which
best serves the interests of each Fund's shareholders. The Adviser shall use its
best good faith judgment to vote such proxies in a manner which best serves the
interests of each Fund's shareholders.
14. Use of "E*TRADE" Name.
(a) It is understood that the name "E*TRADE" and any logo associated with
that name, is the valuable property of E*TRADE Group, Inc., and that the Trust
and Adviser have the right to include "E*TRADE" as a part of their name only so
long as this Agreement shall continue in effect and the Adviser is a wholly
owned subsidiary of the E*TRADE Group, Inc. Further, the Trust and the Adviser
agree that: (i) they will use the name "E*TRADE" only as a component of the
names of the Trust, each Fund and the Adviser, and for no other purposes; (ii)
neither will purport to grant to any third party any rights in the name
"E*TRADE"; (iii) at the request of E*TRADE Group, Inc., the Trust or the Adviser
take such action as may be required to provide their consent to use of the name
"E*TRADE" by E*TRADE Group, Inc. or any affiliate of E*TRADE Group, Inc., to
whom E*TRADE Group, Inc. shall have granted the right to such use; and (iv)
E*TRADE Group, Inc. may use or grant to others the right to use the name
"E*TRADE", or any abbreviation thereof, as all or a portion of a corporate or
business name or for any commercial purpose, including a grant of such right to
any other investment company.
(b) Upon termination of this Agreement as to the Trust or its Fund, the
Trust and the Adviser shall, upon request of E*TRADE Group, Inc. , cease to use
the name "E*TRADE" as part of the name of the Trust, each Fund or the Adviser,
as applicable. In the event of any such request by E*TRADE Group, Inc. that use
of the name "E*TRADE" shall cease, the Trust and the Adviser shall cause their
officers, trustees, directors and stockholders to take any and all such actions
which E*TRADE Group, Inc. may request to effect such request and to reconvey to
E*TRADE Group, Inc. any and all rights to the name "E*TRADE."
15. Use of "S&P 500" & Wilshire 4500 Names.
(a) It is understood that the Adviser has entered into a licensing
agreement with The McGraw-Hill Companies, Inc., for use of the terms "S&P 500",
"S&P", "Standard & Poor's", and "Standard & Poor's 500" (the "license"). In
accordance with such license, the Adviser shall permit the Trust, on behalf of
the S&P 500 Index Fund, to use the terms "S&P 500", "S&P", "Standard & Poor's",
and "Standard & Poor's 500", so long as the license and this Agreement shall
continue in effect.
(b) It is understood that the Adviser has entered into a licensing
agreement with The McGraw-Hill Companies, Inc., for use of the terms "Wilshire
4500", "Wilshire 4500 Index" and "Wilshire 4500 Equity Index". In accordance
with such license, the Adviser shall permit the Trust, on behalf of the Wilshire
4500 Index Fund, to use the terms "Wilshire 4500", "Wilshire 4500 Index" and
"Wilshire 4500 Equity Index" so long as the license and this Agreement shall
continue in effect.
16. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
(b) The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Adviser as an
agent of the Trust or each Fund.
(e) All liabilities of the Trust hereunder are limited to the assets of
each Fund.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Investment Advisory Agreement to be executed by their officers
designated below as of ____________, 1999.
E*TRADE FUNDS, on behalf of each of
the Funds listed on Exhibit A
By:
Name:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT A
TO THE
AMENDED AND RESTATED
INVESTMENT ADVISORY AGREEMENT
Name of Fund Advisory Fee
E*TRADE S&P 500 Index Fund 0.02%, if the Fund invests
all of its assets in a master
fund and 0.07% on that
portion of the Fund's assets
not invested in a master fund.
E*TRADE Extended Market Index Fund
0.02%, if the Fund invests all
of its assets in a master fund
and 0.08% on that portion of the
Fund's assets not invested in a
master fund.
E*TRADE Bond Index Fund 0.02%, if the
Fund invests all of its assets
in a master fund and 0.08% on
that portion of the Fund's
assets not invested in a master
fund.
E*TRADE International Index Fund 0.02%,
if the Fund invests all of its
assets in a master fund and
0.08% on that portion of the
Fund's assets not invested in a
master fund.
INVESTMENT ADVISORY AGREEMENT
E*TRADE FUNDS
with respect to
E*TRADE TECHNOLOGY INDEX FUND
AGREEMENT, effective commencing as of _________, 1999 between E*TRADE
Asset Management, Inc. (the "Adviser") and E*TRADE Funds (the "Trust") with
respect to E*TRADE Technology Index Fund (the "Fund").
WHEREAS, the Trust is a Delaware business trust organized pursuant to a
Declaration of Trust dated November 4, 1998 (the "Declaration of Trust"), and is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, diversified management investment company, and the Fund
is a portfolio of the Trust; and
WHEREAS, the Trust wishes to retain the Adviser to render investment
advisory services to the Fund, and the Adviser is willing to furnish such
services to the Fund; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Trust and the Adviser as follows:
1. Appointment. The Trust hereby appoints the Adviser to act as investment
adviser to the Fund for the periods and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties.
(a) Subject to the supervision of the Trustees of the Trust, the Adviser
will: (i) provide a program of continuous investment management for the Fund in
accordance with the Fund's investment objective, policies and limitations as
stated in the Fund's Prospectus and Statement of Additional Information included
as part of the Trust's Registration Statement filed with the Securities and
Exchange Commission ("SEC") and as the Prospectus and Statement of Additional
Information may be amended from time to time, copies of which shall be provided
to the Adviser by the Trust; and (ii) select and manage, subject to approval by
the Trustees, investment subadvisers, who may be granted discretionary
investment authority for the Fund.
(b) In performing its investment management services to the Fund
hereunder, the Adviser will provide the Fund with ongoing investment guidance,
policy direction, including oral and written research, monitoring of all
subadvised portions of the Fund, analysis, advice, statistical and economic data
and judgments regarding individual investments, general economic conditions and
trends and long-range investment policy.
(c) To the extent permitted by the Adviser's Form ADV as filed with the
SEC and subject to the approval of the Trustees of the Trust, the Adviser shall
have the authority to manage cash and money market instruments for cash flow
purposes.
(d) To the extent permitted by the Adviser's current Form ADV as filed
with the SEC, the Adviser will advise as to the securities, instruments,
repurchase agreements, options and other investments and techniques that the
Fund will purchase, sell, enter into or use, and will provide an ongoing
evaluation of the Fund's portfolio. The Adviser will advise as to what portion
of the Fund's portfolio shall be invested in securities and other assets, and
what portion if any, should be held uninvested.
(e) The Adviser may engage and remove one or more subadvisers, subject to
the legally required approvals of the Trust and its shareholders, and the
Adviser shall monitor the performance of any subadviser and report to the Trust
thereon.
(f) The Adviser further agrees that, in performing its duties hereunder,
it will:
(i) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Trustees;
(ii) use reasonable efforts to manage the Fund so that it will
qualify, and continue to qualify, as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder;
(iii) place orders pursuant to the Fund's investment determinations as
approved by the Trustees for the Fund directly with the issuer, or with any
broker or dealer, in accordance with applicable policies expressed in the Fund's
Prospectus and/or Statement of Additional Information and in accordance with
applicable legal requirements;
(iv) furnish to the Trust whatever statistical information the Trust
may reasonably request with respect to the Fund's assets or contemplated
investments. In addition, the Adviser will keep the Trust and the Trustees
informed of developments materially affecting the Fund's portfolio and shall, on
the Adviser's own initiative, furnish to the Trust from time to time whatever
information the Adviser believes appropriate for this purpose;
(v) make available to the Trust's administrator (the "Administrator")
and the Trust, promptly upon their request, such copies of its investment
records and ledgers with respect to the Fund as may be required to assist the
Administrator and the Trust in their compliance with applicable laws and
regulations. The Adviser will furnish the Trustees with such periodic and
special reports regarding the Fund and any subadviser as they may reasonably
request;
(vi) immediately notify the Trust in the event that the Adviser or any
of its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the SEC or other regulatory
authority. The Adviser further agrees to notify the Trust immediately of any
material fact known to the Adviser respecting or relating to the Adviser that is
not contained in the Trust's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed thereon,
and of any statement contained therein that becomes untrue in any material
respect; and
(vii) in providing investment advice to the Fund, use no inside
information that may be in its possession or in the possession of any of its
affiliates, nor will the Adviser seek to obtain any such information.
3. Futures and Options. The Adviser's investment authority shall include
advice with regard to purchasing, selling, covering open positions, and
generally dealing in financial futures contracts and options thereon, or master
funds which do so in accordance with Rule 4.5 of the Commodity Futures Trading
Commission.
The Adviser's authority shall include authority to: (i) open and
maintain brokerage accounts for financial futures and options (such accounts
hereinafter referred to as "Brokerage Accounts") on behalf of and in the name of
the Fund; and (ii) execute for and on behalf of the Brokerage Accounts, standard
customer agreements with a broker or brokers. The Adviser may, using such of the
securities and other property in the Brokerage Accounts as the Adviser deems
necessary or desirable, direct the custodian to deposit on behalf of the Fund,
original and maintenance brokerage deposits and otherwise direct payments of
cash, cash equivalents and securities and other property into such brokerage
accounts and to such brokers as the Adviser deems desirable or appropriate.
4. Use of Securities Brokers and Dealers. The Adviser will monitor the use
by any subadviser of broker-dealers. To the extent permitted by the Adviser's
Form ADV as filed with the SEC, purchase and sale orders will usually be placed
with brokers who are selected by the Adviser as able to achieve "best execution"
of such orders. "Best execution" shall mean prompt and reliable execution at the
most favorable securities price, taking into account the other provisions
hereinafter set forth. Whenever the Adviser places orders, or directs the
placement of orders, for the purchase or sale of portfolio securities on behalf
of the Fund, in selecting brokers or dealers to execute such orders, the Adviser
is expressly authorized to consider the fact that a broker or dealer has
furnished statistical, research or other information or services which enhance
the Adviser's research and portfolio management capability generally. It is
further understood in accordance with Section 28(e) of the Securities Exchange
Act of 1934, as amended, that the Adviser may negotiate with and assign to a
broker a commission which may exceed the commission which another broker would
have charged for effecting the transaction if the Adviser determines in good
faith that the amount of commission charged was reasonable in relation to the
value of brokerage and/or research services (as defined in Section 28(e))
provided by such broker, viewed in terms either of the Fund or the Adviser's
overall responsibilities to the Adviser's discretionary accounts.
Neither the Adviser nor any parent, subsidiary or related firm shall act
as a securities broker with respect to any purchases or sales of securities
which may be made on behalf of the Fund, provided that this limitation shall not
prevent the Adviser from utilizing the services of a securities broker which is
a parent, subsidiary or related firm, provided such broker effects transactions
on a "cost only" or "nonprofit" basis to itself and provides competitive
execution. Unless otherwise directed by the Trust in writing, the Adviser may
utilize the service of whatever independent securities brokerage firm or firms
it deems appropriate to the extent that such firms are competitive with respect
to price of services and execution.
5. Allocation of Charges and Expenses.
(a) Except as otherwise specifically provided in this section 5, the
Adviser shall pay the compensation and expenses of all of its directors,
officers and employees who serve as trustees, officers and executive employees
of the Trust (including the Trust's share of payroll taxes), and the Adviser
shall make available, without expense to the Fund, the service of its directors,
officers and employees who may be duly elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law.
(b) The Adviser shall not be required to pay pursuant to this Agreement
any expenses of the Fund other than those specifically allocated to the Adviser
in this section 5. In particular, but without limiting the generality of the
foregoing, the Adviser shall not be responsible, except to the extent of the
reasonable compensation of such of the Trust's employees as are officers or
employees of the Adviser whose services may be involved, for the following
expenses of the Fund: organization and certain offering expenses of the Fund
(including out-of-pocket expenses, but not including the Adviser's overhead and
employee costs); fees payable to the Adviser and to any other Fund advisers or
consultants; legal expenses; auditing and accounting expenses; interest
expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses incurred by or
with respect to the Fund in connection with membership in investment company
trade organizations; cost of insurance relating to fidelity coverage for the
Trust's officers and employees; fees and expenses of the Fund's Administrator or
of any custodian, subcustodian, transfer agent, registrar, or dividend
disbursing agent of the Fund; expenses of any master fund in which the Fund
invests; payments to the Administrator for maintaining the Fund's financial
books and records and calculating its daily net asset value; other payments for
portfolio pricing or valuation services to pricing agents, accountants, bankers
and other specialists, if any; expenses of preparing share certificates; other
expenses in connection with the issuance, offering, distribution or sale of
securities issued by the Fund; expenses relating to investor and public
relations; expenses of registering and qualifying shares of the Fund for sale;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; brokerage commissions or other costs of acquiring
or disposing of any portfolio securities or other assets of the Fund, or of
entering into other transactions or engaging in any investment practices with
respect to the Fund; expenses of printing and distributing prospectuses,
Statements of Additional Information, reports, notices and dividends to
stockholders; costs of stationery or other office supplies; any litigation
expenses; costs of stockholders' and other meetings; the compensation and all
expenses (specifically including travel expenses relating to the Fund's
business) of officers, Trustees and employees of the Trust who are not
interested persons of the Adviser; and travel expenses (or an appropriate
portion thereof) of officers or Trustees of the Trust who are officers,
directors or employees of the Adviser to the extent that such expenses relate to
attendance at meetings of the Board of Trustees of the Trust with respect to
matters concerning the Fund, or any committees thereof or advisers thereto.
6. Compensation.
As compensation for the services provided and expenses assumed by
the Adviser under this Agreement, the Trust will arrange for the Fund to pay the
Adviser at the end of each calendar month an advisory fee computed daily at an
annual rate equal to the amount of average daily net assets listed opposite the
Fund's name in Exhibit A, attached hereto. The "average daily net assets" of the
Fund shall mean the average of the values placed on the Fund's net assets as of
4:00 p.m. (New York time) on each day on which the net asset value of the Fund
is determined consistent with the provisions of Rule 22c-1 under the 1940 Act
or, if the Fund lawfully determines the value of its net assets as of some other
time on each business day, as of such other time. The value of net assets of the
Fund shall always be determined pursuant to the applicable provisions of the
Declaration of Trust and the Registration Statement. If, pursuant to such
provisions, the determination of net asset value is suspended for any particular
business day, then for the purposes of this section 6, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of the close of the New York Stock Exchange, or as of such other time
as the value of the net assets of the Fund's portfolio may lawfully be
determined, on that day. If the determination of the net asset value of the
shares of the Fund has been so suspended for a period including any month end
when the Adviser's compensation is payable pursuant to this section, then the
Adviser's compensation payable at the end of such month shall be computed on the
basis of the value of the net assets of the Fund as last determined (whether
during or prior to such month). If the Fund determines the value of the net
assets of its portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this section 6.
7. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to the Fund as are required by Section 31
under the 1940 Act, and rules adopted thereunder, and by other applicable legal
provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Adviser also
agrees that records it maintains and preserves pursuant to Rules 31a-1 and Rule
31a-2 under the 1940 Act and otherwise in connection with its services hereunder
are the property of the Trust and will be surrendered promptly to the Trust upon
its request. The Adviser further agrees that it will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with its services hereunder which may be requested in order to
determine whether the operations of the Fund are being conducted in accordance
with applicable laws and regulations.
8. Aggregation of Orders. Provided that the investment objective, policies
and restrictions of the Fund are adhered to, the Trust agrees that the Adviser
may aggregate sales and purchase orders of securities held in the Fund with
similar orders being made simultaneously for other accounts managed by the
Adviser or with accounts of the affiliates of the Adviser, if in the Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to the respective Fund taking into consideration the advantageous selling or
purchase price, brokerage commission and other expenses. The Trust acknowledges
that the determination of such economic benefit to the Fund by the Adviser
represents the Adviser's evaluation that the Fund is benefited by relatively
better purchase or sales prices, lower commission expenses and beneficial timing
of transactions or a combination of these and other factors. 9. Standard of Care
and Limitation of Liability. The Adviser shall exercise its best judgment in
rendering the services provided by it under this Agreement. The Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund or the holders of the Fund's shares in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect the Adviser against any
liability to the Trust, the Fund or to holders of the Fund's shares to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Adviser's reckless disregard of its obligations and duties under this
Agreement or otherwise for breach of this Agreement. As used in this Section 9,
the term "Adviser" shall include any officers, directors, employees or other
affiliates of the Adviser performing services with respect to the Fund.
Notwithstanding any other provision of this Agreement, the Adviser shall not be
liable for any loss to the Fund caused directly or indirectly by circumstances
beyond the Adviser's reasonable control including, but not limited to,
government restrictions, exchange or market rulings, suspensions of trading,
acts of civil or military authority, national emergencies, earthquakes, floods
or other catastrophes, acts of God, wars or failures of communication or power
supply. 10. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or to
other series of investment companies, including the Trust (whether or not their
investment objectives and policies are similar to those of the Fund) or from
engaging in other activities, provided such other services and activities do
not, during the term of this Agreement, interfere in a material manner with the
Adviser's ability to meet its obligations to the Fund hereunder. When the
Adviser recommends the purchase or sale of a security for other investment
companies and other clients, and at the same time the Adviser recommends the
purchase or sale of the same security for the Fund, it is understood that in
light of its fiduciary duty to the Fund, such transactions will be executed on a
basis that is fair and equitable to the Fund. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the Adviser
nor any of its directors, officers or employees shall act as a principal or
agent or receive any commission. If the Adviser provides any advice to its
clients concerning the shares of the Fund, the Adviser shall act solely as
investment counsel for such clients and not in any way on behalf of the Trust or
the Fund.
11. Duration and Termination.
(a) This Agreement shall continue for a period of two years from the date
of commencement, and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Trustees or (ii) a vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Trustees who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person (to the extent required by the 1940 Act) at a meeting called for
the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated: (a)
at any time without penalty by the Fund upon the vote of a majority of the
Trustees or by vote of the majority of the Fund's outstanding voting securities,
upon sixty (60) days' written notice to the Adviser or (b) by the Adviser at any
time without penalty, upon sixty (60) days' written notice to the Trust. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
12. Amendments. This Agreement may be amended at any time but only by the
mutual agreement of the parties to this Agreement and in accordance with any
applicable legal or regulatory requirements.
13. Proxies. Unless the Trust gives written instructions to the contrary,
the Adviser shall vote all proxies solicited by or with respect to the issuers
of securities in which assets of the Fund may be invested in a manner which best
serves the interests of the Fund's shareholders. The Adviser shall use its best
good faith judgment to vote such proxies in a manner which best serves the
interests of the Fund's shareholders.
14. Use of "E*TRADE" Name.
(a) It is understood that the name "E*TRADE" and any logo associated with
that name, is the valuable property of E*TRADE Group, Inc., and that the Trust
and Adviser have the right to include "E*TRADE" as a part of their name only so
long as this Agreement shall continue in effect and the Adviser is a wholly
owned subsidiary of the E*TRADE Group, Inc. Further, the Trust and the Adviser
agree that: (i) they will use the name "E*TRADE" only as a component of the
names of the Trust, the Fund and the Adviser, and for no other purposes; (ii)
neither will purport to grant to any third party any rights in the name
"E*TRADE"; (iii) at the request of E*TRADE Group, Inc., the Trust or the Adviser
take such action as may be required to provide their consent to use of the name
"E*TRADE" by E*TRADE Group, Inc. or any affiliate of E*TRADE Group, Inc., to
whom E*TRADE Group, Inc. shall have granted the right to such use; and (iv)
E*TRADE Group, Inc. may use or grant to others the right to use the name
"E*TRADE", or any abbreviation thereof, as all or a portion of a corporate or
business name or for any commercial purpose, including a grant of such right to
any other investment company.
(b) Upon termination of this Agreement as to the Trust or its Fund, the
Trust and the Adviser shall, upon request of E*TRADE Group, Inc., cease to use
the name "E*TRADE" as part of the name of the Trust, the Fund or the Adviser, as
applicable. In the event of any such request by E*TRADE Group, Inc. that use of
the name "E*TRADE" shall cease, the Trust and the Adviser shall cause their
officers, trustees, directors and stockholders to take any and all such actions
which E*TRADE Group, Inc. may request to effect such request and to reconvey to
E*TRADE Group, Inc. any and all rights to the name "E*TRADE."
15. Use of "GSTI Composite" Name.
It is understood that the Adviser has entered into a licensing agreement
with Goldman Sachs & Co., for use of the terms "GSTI Composite", "GSTI" or
"Goldman Sachs Technology Index" (the "license"). In accordance with such
license, the Adviser shall permit the Trust, on behalf of the Fund, to use the
terms "GSTI Composite", "GSTI" or "Goldman Sachs Technology Index", so long as
the license and this Agreement shall continue in effect.
16. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State of
California without regard to the conflicts of law provisions thereof, provided
that nothing herein shall be construed in a manner inconsistent with the 1940
Act, the Advisers Act, or rules or orders of the SEC thereunder.
(b) The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Adviser as an
agent of the Trust or the Fund.
(e) All liabilities of the Trust hereunder are limited to the assets of
the Fund.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the date first set forth
above.
E*TRADE FUNDS
By:
Name:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT A
Name of Fund Advisory Fee
E*TRADE Technology Index Fund 0.05%, of the Fund's assets
calculated as described in
Section 6 of the foregoing
Agreement.
INVESTMENT SUBADVISORY AGREEMENT
E*TRADE FUNDS
with respect to
E*TRADE TECHNOLOGY INDEX FUND
AGREEMENT, effective commencing as of __________, 1999 among Barclays
Global Fund Advisors (the "Subadviser"), E*TRADE Asset Management, Inc. (the
"Adviser") and E*TRADE Funds (the "Trust") with respect to E*TRADE Technology
Index Fund (the "Fund").
WHEREAS, the Trust is a Delaware business trust organized pursuant to a
Declaration of Trust dated November 4, 1998 (the "Declaration of Trust"), and is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, diversified management investment company, and the Fund
is a portfolio of the Trust; and
WHEREAS, the Trust has retained the Adviser to render investment advisory
services to the Trust on behalf of the Fund, pursuant to an Investment Advisory
Agreement dated as of _________, 1999, among the Adviser and the Trust
("Investment Advisory Agreement");
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not "interested persons," as defined in the 1940 Act, and the
Fund shareholders have approved the appointment of the Subadviser to perform
certain investment advisory services for the Trust on behalf of the Fund
pursuant to this Subadvisory Agreement ("the "Subadvisory Agreement") and the
Subadviser is willing to perform such services for the Trust on behalf of the
Fund; and
WHEREAS, the Subadviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Subadviser, the Adviser and the Trust
as follows:
1. Appointment. The Trust and Adviser hereby appoint the Subadviser to act
as investment adviser to the Fund for the periods and on the terms set forth in
this Agreement. The Subadviser accepts such appointment and agrees to furnish
the services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties.
(a) Subject to the supervision of the Trustees of the Trust and the
Adviser, the Subadviser will, in coordination with the Adviser: (i) provide a
program of continuous investment management for the Fund in accordance with the
Fund's investment objective, policies and limitations as stated in the Fund's
Prospectus and Statement of Additional Information included as part of the
Trust's Registration Statement filed with the Securities and Exchange Commission
("SEC") and as the Prospectus and Statement of Additional Information may be
amended from time to time, copies of which shall be provided to the Subadviser
by the Adviser; (ii) make investment decisions for the Fund; and (iii) place
orders to purchase and sell securities and other assets for the Fund.
(b) In performing its investment management services to the Fund
hereunder, the Subadviser will provide the Fund, among other things, as received
by the index compilation provider, analysis of statistical and economic data and
information concerning index compilation, including portfolio composition. The
Subadviser will determine the securities, instruments, repurchase agreements,
futures, options and other investments and techniques that the Fund will
purchase, sell, enter into or use, and will provide an ongoing evaluation of the
Fund's portfolio. The Subadviser will advise as to what portion of the Fund's
portfolio shall be invested in securities and other assets, and what portion if
any, should be held uninvested.
(c) The Subadviser's duties shall not include and the Subadviser shall
have no responsibility for tax reporting or securities lending.
(d) The Subadviser further agrees that, in performing its duties
hereunder, it will:
(i) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Trustees;
(ii) manage the Fund so that it will qualify, and continue to qualify,
as a regulated investment company under Subchapter M of the Code and regulations
issued thereunder;
(iii) place orders for the Fund directly with the issuer, or with any
broker or dealer, in accordance with applicable policies expressed in the Fund's
Prospectus and/or Statement of Additional Information and in accordance with
applicable legal requirements;
(iv) furnish to the Trust whatever statistical information the Trust
may reasonably request with respect to the Fund's assets or contemplated
investments. In addition, the Subadviser will keep the Trust, the Trustees and
the Adviser informed of developments materially affecting the Fund's portfolio
and shall, when requested meet quarterly with the Trustees to explain its
activities. Further, on the Subadviser's own initiative, furnish to the Trust
from time to time whatever information the Subadviser believes appropriate for
this purpose;
(v) make available to the Trust's administrator (the "Administrator"),
the Adviser and the Trust, promptly upon their request, such copies of its
investment records and ledgers with respect to the Fund as may be required to
assist the Administrator, the Adviser and the Trust in their compliance with
applicable laws and regulations. The Subadviser will furnish the Trustees with
such periodic and special reports regarding the Fund and any subadviser as they
may reasonably request;
(vi) immediately notify the Trust in the event that the Subadviser or
any of its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Subadviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the SEC or other regulatory
authority. The Subadviser further agrees to notify the Trust immediately of any
material fact known to the Subadviser respecting or relating to the Subadviser
that is not contained in the Trust's Registration Statement regarding the Fund,
or any amendment or supplement thereto, but that is required to be disclosed
thereon, and of any statement contained therein that becomes untrue in any
material respect; and
(vii) in providing investment advice to the Fund, use no inside
information that may be in its possession or in the possession of any of its
affiliates, nor will the Subadviser seek to obtain any such information.
3. Futures and Options. The Subadviser's investment authority shall
include advice with regard to purchasing, selling, covering open positions, and
generally dealing in financial futures contracts and options thereon, in
accordance with Rule 4.5 of the Commodity Futures Trading Commission.
The Subadviser's authority shall include authority to: (i) open and
maintain brokerage accounts for financial futures and options (such accounts
hereinafter referred to as "Brokerage Accounts") on behalf of and in the name of
the Fund; and (ii) execute for and on behalf of the Brokerage Accounts, standard
customer agreements with a broker or brokers. The Subadviser may, using such of
the securities and other property in the Brokerage Accounts as the Subadviser
deems necessary or desirable, direct the custodian to deposit on behalf of the
Fund, original and maintenance brokerage deposits and otherwise direct payments
of cash, cash equivalents and securities and other property into such brokerage
accounts and to such brokers as the Subadviser deems desirable or appropriate.
PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING
COMMISSION (THE "COMMISSION") IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE
CLIENTS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT
BEEN, FILED WITH THE COMMISSION. THE COMMISSION DOES NOT PASS UPON THE MERITS OF
PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY
TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMISSION HAS NOT REVIEWED OR
APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.
The Trust represents and warrants that it is a "qualified eligible client"
within the meaning of CFTC Regulations Section 4.7 and, as such, consents to
treat the Fund in accordance with the exemption contained in CFTC Regulations
Section 4.7(b).
4. Use of Securities Brokers and Dealers. The Subadviser will monitor the use of
broker-dealers. To the extent permitted by the Subadviser's Form ADV as filed
with the SEC, purchase and sale orders will usually be placed with brokers who
are selected by the Subadviser as able to achieve "best execution" of such
orders. "Best execution" shall mean prompt and reliable execution at the most
favorable securities price, taking into account the other provisions hereinafter
set forth. Whenever the Subadviser places orders, or directs the placement of
orders, for the purchase or sale of portfolio securities on behalf of the Fund,
in selecting brokers or dealers to execute such orders, the Subadviser is
expressly authorized to consider the fact that a broker or dealer has furnished
statistical, research or other information or services which enhance the
Subadviser's research and portfolio management capability generally. It is
further understood in accordance with Section 28(e) of the Securities Exchange
Act of 1934, as amended, that the Subadviser may negotiate with and assign to a
broker a commission which may exceed the commission which another broker would
have charged for effecting the transaction if the Subadviser determines in good
faith that the amount of commission charged was reasonable in relation to the
value of brokerage and/or research services (as defined in Section 28(e))
provided by such broker, viewed in terms either of the Fund or the Subadviser's
overall responsibilities to the Subadviser's discretionary accounts.
Neither the Subadviser nor any parent, subsidiary or related firm shall
act as a securities broker with respect to any purchases or sales of securities
which may be made on behalf of the Fund, provided that this limitation shall not
prevent the Subadviser from utilizing the services of a securities broker which
is a parent, subsidiary or related firm, provided such broker effects
transactions on a "cost only" or "nonprofit" basis to itself and provides
competitive execution. Unless otherwise directed by the Trust in writing, the
Subadviser may utilize the service of whatever independent securities brokerage
firm or firms it deems appropriate to the extent that such firms are competitive
with respect to price of services and execution.
5. Allocation of Charges and Expenses.
(a) Except as otherwise specifically provided in this section 5, the
Subadviser shall pay the compensation and expenses of all of its directors,
officers and employees who serve as trustees, officers and executive employees
of the Trust (including the Trust's share of payroll taxes), and the Subadviser
shall make available, without expense to the Fund, the service of its directors,
officers and employees who may be duly elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law.
(b) The Subadviser shall not be required to pay pursuant to this Agreement
any expenses of the Fund other than those specifically allocated to the
Subadviser in this section 5. In particular, but without limiting the generality
of the foregoing, the Subadviser shall not be responsible, except to the extent
of the reasonable compensation of such of the Trust's employees as are officers
or employees of the Subadviser whose services may be involved, for the following
expenses of the Fund: organization and certain offering expenses of the Fund
(including out-of-pocket expenses, but not including the Subadviser's overhead
and employee costs); fees payable to the Subadviser and to any other Fund
advisers or consultants; legal expenses; auditing and accounting expenses;
interest expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses incurred by or
with respect to the Fund in connection with membership in investment company
trade organizations; cost of insurance relating to fidelity coverage for the
Trust's officers and employees; fees and expenses of the Fund's Administrator or
of any custodian, subcustodian, transfer agent, registrar, or dividend
disbursing agent of the Fund; payments to the Administrator for maintaining the
Fund's financial books and records and calculating its daily net asset value;
other payments for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates; other expenses in connection with the issuance, offering,
distribution or sale of securities issued by the Fund; expenses relating to
investor and public relations; expenses of registering and qualifying shares of
the Fund for sale; freight, insurance and other charges in connection with the
shipment of the Fund's portfolio securities; brokerage commissions or other
costs of acquiring or disposing of any portfolio securities or other assets of
the Fund, or of entering into other transactions or engaging in any investment
practices with respect to the Fund; expenses of printing and distributing
prospectuses, Statements of Additional Information, reports, notices and
dividends to stockholders; costs of stationery or other office supplies; any
litigation expenses; costs of stockholders' and other meetings; the compensation
and all expenses (specifically including travel expenses relating to the Fund's
business) of officers, Trustees and employees of the Trust who are not
interested persons of the Subadviser; and travel expenses (or an appropriate
portion thereof) of officers or Trustees of the Trust who are officers,
directors or employees of the Subadviser to the extent that such expenses relate
to attendance at meetings of the Board of Trustees of the Trust with respect to
matters concerning the Fund, or any committees thereof or advisers thereto.
6. Compensation.
As compensation for the services provided and expenses assumed by
the Subadviser under this Agreement, the Adviser will pay the Subadviser at the
end of each calendar month an advisory fee computed daily at an annual rate
equal to the amount of average daily net assets listed opposite the Fund's name
in Exhibit A, attached hereto. The "average daily net assets" of the Fund shall
mean the average of the values placed on the Fund's net assets as of 4:00 p.m.
(New York time) on each day on which the net asset value of the Fund is
determined consistent with the provisions of Rule 22c-1 under the 1940 Act or,
if the Fund lawfully determines the value of its net assets as of some other
time on each business day, as of such other time. The value of net assets of the
Fund shall always be determined pursuant to the applicable provisions of the
Declaration of Trust and the Registration Statement. If, pursuant to such
provisions, the determination of net asset value is suspended for any particular
business day, then for the purposes of this Section 6, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of the close of the New York Stock Exchange, or as of such other time
as the value of the net assets of the Fund's portfolio may lawfully be
determined, on that day. If the determination of the net asset value of the
shares of the Fund has been so suspended for a period including any month end
when the Subadviser's compensation is payable pursuant to this section, then the
Subadviser's compensation payable at the end of such month shall be computed on
the basis of the value of the net assets of the Fund as last determined (whether
during or prior to such month). If the Fund determines the value of the net
assets of its portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this Section 6.
7. Books and Records. The Subadviser agrees to maintain such books and records
with respect to its services to the Fund as are required by Section 31 under the
1940 Act, and rules adopted thereunder, and by other applicable legal
provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Subadviser
also agrees that records it maintains and preserves pursuant to Rules 31a-1 and
Rule 31a-2 under the 1940 Act and otherwise in connection with its services
hereunder are the property of the Trust and will be surrendered promptly to the
Trust upon its request. The Subadviser further agrees that it will furnish to
regulatory authorities having the requisite authority any information or reports
in connection with its services hereunder which may be requested in order to
determine whether the operations of the Fund are being conducted in accordance
with applicable laws and regulations.
8. Aggregation of Orders. Provided that the investment objective, policies and
restrictions of the Fund are adhered to, the Trust agrees that the subadviser
may aggregate sales and purchase orders of securities held in the Fund with
similar orders being made simultaneously for other accounts managed by the
subadviser or with accounts of the affiliates of the Subadviser, if in the
Subadviser's reasonable judgment such aggregation shall result in an overall
economic benefit to the respective Fund taking into consideration the
advantageous selling or purchase price, brokerage commission and other expenses.
The Trust acknowledges that the determination of such economic benefit to the
Fund by the subadviser represents the Subadviser's evaluation that the Fund is
benefited by relatively better purchase or sales prices, lower commission
expenses and beneficial timing of transactions or a combination of these and
other factors. 9. Standard of Care and Limitation of Liability. The Subadviser
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Subadviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or the holders of the Fund's
shares in connection with the matters to which this Agreement relates, provided
that nothing in this Agreement shall be deemed to protect or purport to protect
the Subadviser against any liability to the Trust, the Fund or to holders of the
Fund's shares to which the Subadviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Subadviser's reckless disregard of
its obligations and duties under this Agreement or otherwise for breach of this
Agreement. As used in this Section 9, the term "Subadviser" shall include any
officers, directors, employees or other affiliates of the Subadviser performing
services with respect to the Fund.
10. Liability.
(a) Neither Subadviser nor its officers, directors, employees, affiliates,
agents or controlling persons shall be liable to the Trust, the Fund, its
shareholders and/or any other person for the acts, omissions, errors of judgment
and/or mistakes of law of any other fiduciary and/or person with respect to the
Fund.
(b) Neither the Subadviser nor its officers, directors, employees,
affiliates, agents or controlling persons or assigns shall be liable for any
act, omission, error of judgment or mistake of law and/or for any loss suffered
by the Trust, the Fund, its shareholders and/or any other person in connection
with the matters to which this Agreement relates; provided that no provision of
this Agreement shall be deemed to protect the Subadviser against any liability
to the Trust, the Fund and/or its shareholders which it might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of its duties or the reckless disregard of its obligations and
duties under this Subadvisory Agreement.
(c) The Trust on behalf of the Fund, hereby agrees to indemnify and hold
harmless the Subadviser, its directors, officers and employees and agents and
each person, if any, who controls the Subadviser (collectively, the "Indemnified
Parties") against any and all losses, claims damages or liabilities (including
reasonable attorneys fees and expenses), joint or several, relating to the Trust
or Fund, to which any such Indemnified Party may become subject under the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
of 1934, the Investment Advisers Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(1) any act, omission, error and/or mistake of any other fiduciary and/or any
other person; or (2) any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission to state a material fact
required to be stated or necessary to make the statements made not misleading in
(a) the Registration Statement, the prospectus or any other filing, (b) any
advertisement or sales literature authorized by the Trust for use in the offer
and sale of shares of the Fund, or (c) any application or other document filed
in connection with the qualification of the Trust or shares of the Fund under
the Blue Sky or securities laws of any jurisdiction, except insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any such untrue statement or omission or alleged untrue
statement or omission (i) in a document prepared by the Subadviser, or (ii) made
in reliance upon and in conformity with information furnished to the Trust by or
on behalf of the Subadviser pertaining to or originating with the Subadviser for
use in connection with any document referred to in clauses (a), (b) or (c).
(d) It is understood, however, that nothing in this paragraph 10 shall
protect any Indemnified Party against, or entitle any Indemnified Party to,
indemnification against any liability to the Trust, Fund and/or its shareholders
to which such Indemnified Party is subject, by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of any reckless disregard of its obligations and duties under this
Agreement or any breach of this Agreement.
(e) Notwithstanding any other provision of this Agreement, the Subadviser
shall not be liable for any loss to the Fund or the Adviser caused directly or
indirectly by circumstances beyond the Subadviser's reasonable control
including, but not limited to, government restrictions, exchange or market
rulings, suspensions of trading, acts of civil or military authority, national
emergencies, earthquakes, floods or other catastrophes, acts of God, wars or
failures of communication or power supply.
11. Services Not Exclusive. It is understood that the services of the Subadviser
are not exclusive, and that nothing in this Agreement shall prevent the
Subadviser from providing similar services to other investment companies or to
other series of investment companies, including the Trust (whether or not their
investment objectives and policies are similar to those of the Fund) or from
engaging in other activities, provided such other services and activities do
not, during the term of this Agreement, interfere in a material manner with the
Subadviser's ability to meet its obligations to the Fund hereunder. When the
Subadviser recommends the purchase or sale of a security for other investment
companies and other clients, and at the same time the Subadviser recommends the
purchase or sale of the same security for the Fund, it is understood that in
light of its fiduciary duty to the Fund, such transactions will be executed on a
basis that is fair and equitable to the Fund. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Subadviser nor any of its directors, officers or employees shall act as a
principal or agent or receive any commission. If the Subadviser provides any
advice to its clients concerning the shares of the Fund, the Subadviser shall
act solely as investment counsel for such clients and not in any way on behalf
of the Trust or the Fund.
Duration and Termination.
(a) This Agreement shall continue for a period of two years from the date
of commencement, and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Trustees or (ii) a vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Trustees who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person (to the extent required by the 1940 Act) at a meeting called for
the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated: (a)
at any time without penalty by the Fund upon the vote of a majority of the
Trustees or by vote of the majority of the Fund's outstanding voting securities,
upon sixty (60) days' written notice to the Subadviser or (b) by the Subadviser
at any time without penalty, upon sixty (60) days' written notice to the Trust.
This Agreement will also terminate automatically in the event of its assignment
(as defined in the 1940 Act).
13. Amendments. This Agreement may be amended at any time but only by the mutual
written agreement of the parties to this Agreement and in accordance with any
applicable legal or regulatory requirements.
14. Proxies. Unless the Trust gives written instructions to the contrary, the
Subadviser shall vote all proxies solicited by or with respect to the issuers of
securities in which assets of the Fund may be invested in a manner which best
serves the interests of the Fund's shareholders. The Subadviser shall use its
best good faith judgment to vote such proxies in a manner which best serves the
interests of the Fund's shareholders. The Subadviser shall maintain a record of
how the Subadviser voted and such record shall be available to the Trust or
Adviser upon request. 15. Use of Name. The Subadviser hereby consents to the use
of its name and the names of its affiliates in the Fund's disclosure documents,
shareholder communications, advertising, sales literature and similar
communications. 16. Confidential Information. The Subadviser shall maintain the
strictest confidence regarding the business affairs of the Fund. Written reports
furnished by the Subadviser to the Trust or the Adviser shall be treated by such
entities as confidential and for the exclusive use and benefit of the Trust
except as disclosure may be required by applicable law. 17. Notices. All notices
hereunder shall be provided in writing and delivered by first class postage
pre-paid U.S. mail or by fax. Notices delivered by mail shall be deemed given
three days after mailing and upon receipt if sent by fax.
If to Trust: E*TRADE FUNDS
4500 Bohannon Drive
Menlo Park, CA 94025
Attn: President Fax No.: (650) 331-6802
If to Adviser: E*TRADE ASSET MANAGEMENT, INC.
4500 Bohannon Drive
Menlo Park, CA 94025
Attn: President Fax No.: (650) 331-6802
If to Subadviser: BARCLAYS GLOBAL FUND ADVISORS
45 Fremont Street
San Francisco, CA 94105
Attn: Legal Department Fax No.: (415) 597-2698
18. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State of
California without regard to the conflicts of law provisions thereof, provided
that nothing herein shall be construed in a manner inconsistent with the 1940
Act, the Advisers Act, or rules or orders of the SEC thereunder.
(b) The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Subadviser as an
agent of the Adviser, the Trust or the Fund.
(e) All liabilities of the Trust hereunder are limited to the assets of
the Fund.
(f) Concurrently with the execution of this Subadvisory Agreement, the
Subadviser is delivering to the Adviser and the Trust a copy of part II of its
Form ADV, as revised, on file with the SEC. The Adviser and the Trust hereby
acknowledge receipt of such copy.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the date first stated above.
E*TRADE FUNDS
By:
Name: __________________________
Title:
- ---------------------------
E*TRADE ASSET MANAGEMENT, INC.
By:
Name: __________________________
Title:
- ---------------------------
BARCLAYS GLOBAL FUND ADVISORS
By:
Name: __________________________
Title:
- ---------------------------
<PAGE>
EXHIBIT A
Name of Fund Subadvisory Fee
E*TRADE Technology Index Fund Based on an annual basis of
the Fund's daily net assets
calculated as described in
Section 6 of the foregoing
Agreement using the following
rates: 0.20% of daily net
assets on amounts up to $200
million; 0.15% of daily net
assets on amounts between
$200 and $500 million; and
0.12% of daily net assets on
amounts above $500 million;
FORM OF
AMENDED AND RESTATED
UNDERWRITING AGREEMENT
E*TRADE FUNDS
2400 Geng Road
Palo Alto, CA 94303
___________, 1999
E*TRADE Securities, Inc.
2400 Geng Road
Palo Alto, CA 94303
Re: Underwriting Agreement
Gentlemen:
E*TRADE Funds is a Delaware business trust operating as an open-end
management investment company (hereinafter referred to as the "Company"). The
Company is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act"), and interests in the Company ("Shares") are registered
under the Securities Act of 1933, as amended (the "1933 Act"). The Company
currently consists of four series listed on the attached Schedule A which are
subject to this Agreement (each a "Fund"). The Company, on behalf of each Fund,
desires to offer and sell the authorized but unissued Shares of each Fund to the
public in accordance with applicable federal and state securities laws.
The Company and E*TRADE Securities entered into an Underwriting Agreement
with respect to the E*TRADE S&P 500 Index Fund, dated February 3, 1999 (the
"Original Underwriting Agreement"). The purpose of this document is to amend and
restate the Original Underwriting Agreement to permit E*TRADE Securities to
continue to act as the exclusive selling agent and principal underwriter for the
Shares of the E*TRADE S&P 500 Index Fund and to act as the exclusive selling
agent and principal underwriter for the Shares of the E*TRADE Extended Market
Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund and the E*TRADE E-Commerce Index Fund, each a new
series of the Trust (the "New Series"), under substantially the same terms as
the Original Underwriting Agreement. This Agreement shall supersede the terms of
the original Underwriting Agreement.
You have informed us that E*TRADE Securities, Inc. is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934 and is
a member in good standing of the National Association of Securities Dealers,
Inc. You have indicated your desire to act as the exclusive selling agent and
principal underwriter for the Shares of each Fund and for such other series of
the Company hereinafter established as agreed to from time to time and evidenced
by the addition of such series to Schedule A of this Agreement. We have been
authorized by the Company to execute and deliver this Agreement to you by a
resolution of our Board of Trustees (the "Trustees") adopted at a meeting of the
Trustees, at which a majority of Trustees, including a majority of our Trustees
who are not otherwise interested persons of our investment manager or its
related organizations, were present and voted in favor of the said resolution
approving this Underwriting Agreement. This Underwriting Agreement is intended
to apply to all Shares of each Fund issued before or after this amendment.
1. Appointment of Underwriter. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for distribution of the Shares and agree that we will deliver to you such
Shares as you may sell. You agree to use your best efforts to promote the sale
of the Shares, but you are not obligated to sell any specific number of the
Shares.
2. Independent Contractor. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind the Company or each Fund by your actions, conduct
or contracts, except that you are authorized to accept orders for the purchase
or repurchase of the Shares as our agent. You may appoint sub-agents or
distribute the Shares through dealers (or otherwise) as you may determine
necessary or desirable from time to time. This Agreement shall not, however, be
construed as authorizing any dealer or other person to accept orders for sale or
repurchase on our behalf or to otherwise act as our agent for any purpose.
3. Offering Price. Shares of each Fund shall be offered at a price
equivalent to their net asset value as set forth in each Fund's Prospectus. On
each business day on which the New York Stock Exchange is open for business, we
will furnish you with the net asset value of the Shares, which shall be
determined and become effective as of the close of business of the New York
Stock Exchange on that day. The net asset value so determined shall apply to all
orders for the purchase of the Shares received by dealers prior to such
determination, and you are authorized in your capacity as our agent to accept
orders and confirm sales at such net asset value; provided that, such dealers
notify you of the time when they received the particular order and that the
order is placed with you prior to your close of business on the day on which the
applicable net asset value is determined. To the extent that our Fund
Shareholder Servicing Agent and Transfer Agent and Dividend Disbursing Agent
(collectively, "Agent") and the Custodian(s) for any pension, profit-sharing,
employer or self-employed plan receive payments on behalf of the investors, such
Agent and Custodian(s) shall be required to record the time of such receipt with
respect to each payment, and the applicable net asset value shall be that which
is next determined and effective after the time of receipt by them. In all
events, you shall forthwith notify all of the dealers comprising your selling
group and the Agent and Custodian(s) of the effective net asset value as
received from us. Should we at any time calculate our net asset value more
frequently than once each business day, you and we will follow procedures with
respect to such additional price or prices comparable to those set forth above
in this Section 3.
4. Payment of Shares. At or prior to the time of delivery of any of the
Shares you will pay or cause to be paid to the Custodian, for our account, an
amount in cash equal to the net asset value of such Shares. In the event that
you pay for Shares sold by you prior to your receipt of payment from purchasers,
you are authorized to reimburse yourself for the net asset value of such Shares
from the offering price of such Shares when received by you.
5. Registration of Shares. No Shares shall be registered on our books
until (i) receipt by us of your written request therefor; (ii) receipt by the
Custodian and Agent of a certificate signed by an officer of the Company stating
the amount to be received therefor; and (iii) receipt of payment of that amount
by the Custodian. We will provide for the recording of all Shares purchased in
unissued form in "book accounts", unless a request in writing for certificates
is received by the Agent, in which case certificates for shares in such names
and amounts as is specified in such writing will be delivered by the Agent, as
soon as practicable after registration thereof on the books.
6. Purchases for Your Own Account. You shall not purchase Shares for your
own account for purposes of resale to the public, but you may purchase Shares
for your own investment account upon your written assurance that the purchase is
for investment purposes only and that the Shares will not be resold except
through redemption by us.
7. Payment of Expenses.
(a) Each Fund shall assume and pay for the following expenses: (i)
costs of preparing, printing and distributing reports, Prospectuses and
Statements of Information used by it in connection with the sale or offering of
its Shares and all advertising and sales literature relating to it printed at
your instruction; and (ii) counsel fees and expenses in connection with the
foregoing.
(b) You shall pay all of your own costs and expenses connected with
the sale of Shares.
8. Furnishing of Information. We will furnish to you such information with
respect to our company and its Shares, in such form and signed by such of our
officers as you may reasonably request, and we warrant that the statements
therein contained when so signed will be true and correct. We will also furnish
you with such information and will take such action as you may reasonably
request in order to qualify our Shares for sale to the public under the Blue Sky
Laws or in jurisdictions in which you may wish to offer them. We will furnish
you at least annually with audited financial statements of our books and
accounts certified by independent public accountants, and with such additional
information regarding our financial condition, as you may reasonably request
from time to time.
9. Conduct of Business. Other than the currently effective Prospectus and
Statement of Additional Information, you will not issue any sales material or
statements except literature or advertising which conforms to the requirements
of federal and state securities laws and regulations and which have been filed,
where necessary, with the appropriate regulatory authorities. You will furnish
us with copies of all such material prior to their use and no such material
shall be published if we shall reasonably and promptly object.
You shall comply with the applicable federal and state laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
10. Redemption . You are authorized as our agent and subject to our
direction, to redeem outstanding Shares of each Fund when properly tendered by
shareholders pursuant to the redemption right granted to the shareholders by the
Trust Instrument of the Company, as from time to time in effect, at a redemption
price equal to the NAV per Share of each Fund next determined after proper
tender and acceptance. The Company has delivered to you a copy of its Trust
Instrument as currently in effect and agrees to deliver to you any amendments
thereto promptly upon filing thereof with the Office of the Secretary of State
of the State of Delaware.
11. Other Activities. Your services pursuant to this Agreement shall not
be deemed to be exclusive, and you may render similar services and act as an
underwriter, distributor or dealer for other investment companies in the
offering of their Shares.
12. Term of Agreement. This Agreement shall continue in effect with
respect to E*TRADE S&P 500 Index Fund until February 3, 2001, and shall continue
in effect with respect to the New Series until ________________, 2001. This
Agreement shall continue annually thereafter for successive one (1) year periods
if approved at least annually for a Fund (i) by a vote of a majority of the
outstanding voting securities of the respective Fund or by a vote of the
Trustees of the Company, and (ii) by a vote of a majority of the Trustees of the
Company who are not interested persons or parties to this Agreement (other than
as Trustees of the Company), cast in person at a meeting called for the purpose
of voting on this Agreement.
13. Termination. Either party may terminate this Agreement without the
payment of any penalty, upon not more than sixty days' nor less than thirty
days' written notice delivered personally or mailed by registered mail, postage
prepaid, to the other party; provided, that in the case of termination by any
series of the Company, such action shall have been authorized (i) by resolution
of the Trustees, or (ii) by vote of a majority of the outstanding voting
securities of the respective series, or (iii) by written consent of a majority
of the disinterested Trustees. The Agreement shall automatically terminate if it
is assigned by you.
14. Suspension of Sales. We reserve the right at all times to suspend or
limit the public offering of the Shares upon written notice to you, and to
reject any order in whole or in part.
15. Miscellaneous.
(a) This Agreement shall be subject to the laws of the State of
Maryland and shall be interpreted and construed to further and promote the
operation of the Company as an open-end investment company.
(b) As used herein, the terms "Net Asset Value," "Offering Price,"
"Investment Company," "Open-End Investment Company," "Assignment," "Principal
Underwriter," "Interested Person," "Parents," and "Majority of the Outstanding
Voting Securities," shall have the meanings set forth in the 1933 Act and the
1940 Act, as applicable, and the rules and regulations promulgated thereunder.
Any question of interpretation of any term or provision of this Agreement having
a counterpart in or otherwise derived from a provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretation thereof, if any, by the United States courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the SEC validly issued pursuant to the 1940 Act. In addition, when the effect
of a requirement of the 1940 Act reflected in any provision of this Agreement is
modified, interpreted or relaxed by a rule, regulation or order of the SEC,
whether of special or of general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order. the company and you
may from time to time agree on such provisions interpreting or clarifying the
provisions of this Agreement as, in our joint opinion, are consistent with the
general tenor of this Agreement and with the specific provisions of this Section
15(b). Any such interpretations or clarification shall be in writing signed by
the parties and annexed hereto, but no such interpretation or clarification
shall be effected if in contravention of any applicable federal or state law or
regulations, and no such interpretation or clarification shall be deemed to be
an amendment of this Agreement.
16. Liability.
(a) Nothing contained herein shall be deemed to protect you against
any liability to us or to our shareholders to which you would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
(b) You shall look only to the assets of a series for the
performance of this Agreement by the Company on behalf of such series and
neither the Trustees nor any of the Company's officers, employees or agents,
whether past, present or future, shall be personally liable therefor.
<PAGE>
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed counterparts hereof and returning
such counterparts to us, whereupon this shall constitute a binding agreement as
of the date first above written.
Very truly yours,
E*TRADE FUNDS
(on behalf of each Fund listed in the attached
Schedule A)
By: ___________________________________
Title: ___________________________________
Agreed to and Accepted:
E*TRADE SECURITIES, INC.
By: ______________________________
Title: ______________________________
<PAGE>
SCHEDULE A
The series of E*TRADE Funds currently subject to this Amended and Restated
Underwriting Agreement are as follows:
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE Technology Index Fund
E*TRADE International Index Fund
E*TRADE E-Commerce Index Fund
FORM OF AMENDMENT NO. 1
to the
CUSTODIAN AGREEMENT
The Custodian Agreement dated as of February 3, 1999, between E*TRADE
FUNDS and INVESTORS BANK & TRUST COMPANY is hereby amended as follows:
1. Appendix A is hereby amended and substituted with the attached Appendix A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
the Custodian Agreement to be executed by their respective officers thereunto
duly authorized as of _______________, 1999.
E*TRADE FUNDS
By:_________________________________
Name:
Title:
INVESTORS BANK & TRUST COMPANY
By:_________________________________
Name:
Title:
<PAGE>
APPENDIX A
to the
CUSTODIAN AGREEMENT
Portfolios
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE International Index Fund
CUSTODIAN SERVICES AGREEMENT
THIS AGREEMENT is made as of , 1999 by and between PFPC TRUST COMPANY, a
limited purpose trust company incorporated under the laws of Delaware ("PFPC
Trust"), and E*TRADE FUNDS, a Delaware business trust (the "Fund"), on behalf of
its series investment portfolios (each a "Portfolio") listed on Exhibit A
attached hereto and made a part hereof, as such Exhibit A may be amended from
time to time.
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, the Fund wishes to retain PFPC Trust to provide custodian
services for the Portfolio, and PFPC Trust wishes to furnish custodian services
to the Portfolio, either directly or through an affiliate or affiliates, as more
fully described herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Definitions.
As Used in This Agreement and not previously defined:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) "1940 Act" means the Investment Company Act of 1940, as amended
(d) "Authorized Person" means any officer of the Fund and any other
person authorized by the Fund's Board of Trustees to give Oral
Instructions or Written Instructions on behalf of the Fund and
listed on the Authorized Persons Appendix attached hereto or any
amendment thereto as may be received by PFPC Trust. An Authorized
Person's scope of authority may be limited by the Fund by setting
forth such limitation in the Authorized Persons Appendix.
(e) "Book-Entry System" means Federal Reserve Treasury book-entry
system for United States and federal agency securities, its
successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC
under the 1934 Act.
(f) "CEA" means the Commodity Exchange Act, as amended.
(g) "Change of Control" means a change in ownership or control (not
including transactions between wholly-owned direct or indirect
subsidiaries of a common parent) of 25% or more of the beneficial
ownership of the shares of common stock or shares of beneficial
interest of an entity or its parent(s).
(h) "Oral Instructions" mean oral instructions received by PFPC Trust
from an Authorized Person or from a person reasonably believed by
PFPC Trust to be an Authorized Person.
(i) "PFPC Trust" means PFPC Trust Company or a subsidiary or affiliate
of PFPC Trust Company.
(j) "SEC" means the Securities and Exchange Commission.
(k) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940
Act and the CEA.
(l) "Shares" mean the shares of beneficial interest of any class of
the Portfolio.
(m) "Property" means:
(i) any and all securities and other investment items of the
Portfolio which the Fund may from time to time deposit, or
cause to be deposited, with PFPC Trust or which PFPC Trust may
from time to time hold for the Portfolio;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Portfolio, which are received by PFPC Trust from time to time.
(n) "Written Instructions" mean (i) written instructions signed by two
Authorized Persons and received by PFPC Trust. The instructions may
be delivered electronically or by hand, mail, tested telegram,
cable, telex, facsimile, or electronic mail sending device.
2. Appointment and Representation. The Fund hereby appoints PFPC Trust to
provide custodian services to the Fund, on behalf of the Portfolio and
PFPC Trust accepts such appointment and agrees to furnish such services.
PFPC represents that it has, and will continue to have, at least the
minimum qualifications required by Section 17(f)(1) of the 1940 Act to act
as custodian of the portfolio securities and cash of the Portfolio.
3. Delivery of Documents. The Fund has provided or, where applicable, will
provide PFPC Trust with the following: (a) copies of the resolutions of
the Fund's Board of Trustees,
approving the appointment of PFPC Trust to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Portfolio's advisory agreements;
(d) a copy of the Portfolio's administration agreement if PFPC Trust is
not providing the Portfolio with such services;
(e) copies of any shareholder servicing agreements made with
respect to the Portfolio; and
(f) copies of any and all amendments or supplements to the
foregoing.
4. Compliance with Laws.
PFPC Trust undertakes to comply with material applicable requirements of
the Securities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties to be performed
by PFPC Trust hereunder. Except as specifically set forth herein, PFPC
Trust assumes no responsibility for such compliance by the Fund or the
Portfolio.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC Trust shall act
only upon Oral Instructions or Written Instructions.
(b) PFPC Trust shall be entitled to rely upon any Oral Instructions
or Written Instructions it receives from an Authorized Person (or
from a person reasonably believed by PFPC Trust to be an
Authorized Person) pursuant to this Agreement. PFPC Trust may
assume that any Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any
vote, resolution or proceeding of the Fund's Board of Trustees or
of the Portfolio's shareholders, unless and until PFPC Trust
receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Trust Written Instructions
confirming Oral Instructions (except where such Oral Instructions
are given by PFPC Trust or its affiliates) so that PFPC Trust
receives the Written Instructions by the close of business on the
same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC
Trust shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral
Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized
Person, PFPC Trust shall incur no liability to the Fund in acting
upon such Oral Instructions or Written Instructions provided that
PFPC Trust's actions comply with the other provisions of this
Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC Trust is in doubt as to any action it
should or should not take, PFPC Trust may request directions or
advice, including Oral Instructions or Written Instructions, from
the Fund.
(b) Advice of Counsel. If PFPC Trust shall be in doubt as to any
question of law pertaining to any action it should or should not
take, PFPC Trust may request advice at its own cost from such
counsel of its own choosing (who may be counsel for the Fund, the
Portfolio's investment adviser or PFPC Trust, at the option of PFPC
Trust).
(c) Conflicting Advice. In the event of a conflict between
--------------------
directions, advice or Oral Instructions or Written Instructions
PFPC Trust receives from the Fund and the advice it receives from
counsel, PFPC Trust may rely upon and follow the advice of
counsel if such counsel is also counsel to the Fund. In the
event PFPC Trust so relies on the advice of counsel, PFPC Trust
remains liable for any action or omission on the part of PFPC
Trust which constitutes willful misfeasance, bad faith,
negligence, or reckless disregard by PFPC Trust of any duties,
obligations or responsibilities set forth in this Agreement. If
PFPC Trust intends to rely on advice from counsel which conflicts
with Oral or Written Instructions from the Fund, PFPC shall
notify the Fund, as applicable, in writing prior to such reliance.
(d) Protection of PFPC Trust. PFPC Trust shall be protected in any
--------------------------------
action it takes or does not take in reliance upon directions,
advice or Oral Instructions or Written Instructions it receives
from the Fund or from counsel and which PFPC Trust believes, in
good faith, to be consistent with those directions, advice or
Oral Instructions or Written Instructions. Nothing in this
section shall be construed so as to impose an obligation upon
PFPC Trust to seek such directions, advice or Oral Instructions
or Written Instructions. Nothing in this subsection shall
excuse PFPC Trust when an action or omission on the part of PFPC
Trust constitutes willful misfeasance, bad faith, negligence or
reckless disregard by PFPC Trust of any duties, obligations or
responsibilities set forth in this Agreement.
7. Records; Visits. The books and records pertaining to the Fund and the
----------------
Portfolio, which are in the possession or under the control of PFPC
Trust, shall be the property of the Fund. Such books and records shall
be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund and
Authorized Persons shall have access to such books and records at all
times during PFPC Trust's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records shall be
provided by PFPC Trust to the Fund or to an authorized representative
of the Fund, at the Fund's expense.
8. Confidentiality. PFPC Trust agrees to keep confidential the records of
---------------
the Fund and the Portfolio and information relating to the Fund, the
Portfolio and its shareholders, unless the release of such records or
information is otherwise consented to, in writing, by the Fund. The
Fund agrees that such consent shall not be unreasonably withheld and
may not be withheld where PFPC Trust may be exposed to civil or
criminal contempt proceedings or when PFPC Trust is required to divulge
such information or records to duly constituted authorities.
9. Cooperation with Accountants. PFPC Trust shall cooperate with the Fund's
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. Disaster Recovery. PFPC Trust shall enter into and shall maintain in
- -------------------------
effect with appropriate parties one or more agreements making
reasonable provisions for emergency use of electronic data processing
equipment to the extent appropriate equipment is available. In the
event of equipment failures, PFPC Trust shall, at no additional expense
to the Portfolio, take reasonable steps to minimize service
interruptions. PFPC Trust shall have no liability with respect to the
loss of data or service interruptions caused by equipment failure
provided such loss or interruption is not caused by PFPC Trust's own
willful misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement.
11. Year 2000 Readiness Disclosure. PFPC Trust, with respect to services
- --------------------------------------
provided hereunder, (a) has reviewed its business and operations, (b)
has implemented a program to remediate or replace computer applications
and systems, and (c) has implemented a testing plan to test the
remediation or replacement of computer applications and systems, in
each case, to address on a timely basis the risk that certain computer
applications and systems used by PFPC may be unable to recognize and
perform properly date sensitive functions involving dates prior to,
including and after December 31, 1999, including dates such as February
29, 2000 (the "Year 2000 Challenge"). To the best of PFPC's knowledge
and belief, the reasonably foreseeable consequences of the Year 2000
Challenge will not adversely effect PFPC's ability to perform its
duties and obligations under this Agreement. If requested by the Fund
or its Board of Trustees, PFPC will provide written materials
describing PFPC's current status and plans with respect to the Year
2000 Challenge for use in the Fund's registration statement and/or in
materials presented to the Fund's Board of Trustees.
12. Compensation. As compensation for custody services rendered by PFPC Trust
during the term of this Agreement, the Fund, on behalf of the Portfolio,
will pay to PFPC Trust a fee or fees as may be agreed to in writing from
time to time by the Fund and PFPC Trust.
13. Indemnification. The Fund, on behalf of the Portfolio, agrees to
---------------
indemnify and hold harmless PFPC Trust from all taxes, charges,
expenses, assessments, claims and liabilities including without
limitation liabilities arising under the Securities Laws and any state
or foreign securities or blue sky laws, and amendments thereto, and
reasonable expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from
any action or omission to act which PFPC Trust takes (i) at the request
or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral Instructions or Written Instructions. Neither PFPC Trust nor
any of its affiliates shall be indemnified against any liability (or
any expenses incident to such liability) arising out of PFPC Trust's or
its affiliates' own willful misfeasance, bad faith, negligence or
reckless disregard of its duties under this Agreement. Any amounts
payable by the Fund hereunder shall be satisfied only against the
Portfolio's assets and not against the assets of any other series of
the Fund or the Fund as a whole.
14. Responsibility of PFPC Trust.
(a) PFPC Trust shall be under no duty to take any action on behalf of
the Fund or Portfolio except as specifically set forth herein or
as may be specifically agreed to by PFPC Trust in writing. PFPC
Trust shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to
use its best efforts, within reasonable limits, in performing
services provided for under this Agreement. PFPC Trust shall be
liable for any damages arising out of PFPC Trust's failure to
perform its duties under this Agreement to the extent such
damages arise out of PFPC Trust's willful misfeasance, bad faith,
negligence or reckless disregard of such duties or a breach of
this Agreement.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PFPC Trust shall not be under
any duty or obligation to inquire into and shall not be liable
for (A) the validity or invalidity or authority or lack thereof
of any Oral Instruction or Written Instruction, notice or other
instrument which conforms to the applicable requirements of this
Agreement and which PFPC Trust reasonably believes to be genuine;
or (B) subject to Section 10, delays, errors, or loss of data
occurring by reason of circumstances beyond PFPC Trust's control,
including acts of civil or military authority, national
emergencies, fire, flood, catastrophe, acts of God, insurrection,
war, riots or failure of the mails, transportation, communication
or power supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC Trust nor its affiliates shall be liable to the Fund
or to the Portfolio for any consequential or special losses or
damages which the Fund or the Portfolio may incur or suffer
including by or as a consequence of PFPC Trust's or its
affiliates' performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known
by PFPC Trust or its affiliates.
15. Description of Services.
(a) Delivery of the Property. The Fund will deliver, or arrange for
delivery to PFPC Trust of, all the Property owned by the Portfolio,
including cash received as a result of the distribution of Shares,
during the period that is set forth in this Agreement. PFPC Trust
will not be responsible for such Property until actual receipt.
(b) Receipt and Disbursement of Money. PFPC Trust, acting upon
-------------------------------------
Written Instructions, shall open and maintain on its books
separate accounts in the Portfolio's name using all cash received
from or for the account of the Portfolio, subject to the terms of
this Agreement. In addition, upon Written Instructions, PFPC
Trust shall open and maintain on its books separate custodial
accounts for the Portfolio (collectively, the "Accounts") and
shall hold in the Accounts all cash received from or for the
Accounts of the Portfolio.
PFPC Trust shall make cash payments from or for the Accounts of
the Portfolio only for:
(i) purchases of securities in the name of the Portfolio, or in
PFPC Trust's nominee name as provided in sub-section (j) and
for which PFPC Trust has received a copy of the broker's or
dealer's confirmation or payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Portfolio delivered to
PFPC Trust;
(iii) payment of, subject to Written Instructions, interest, taxes,
administration, accounting, distribution, advisory, management
fees or similar expenses which are to be borne by the
Portfolio;
(iv) payment to, subject to receipt of Written Instructions, the
Portfolio's transfer agent, as agent for the shareholders,
of an amount equal to the amount of dividends and
distributions stated in the Written Instructions to be
distributed in cash by the transfer agent to shareholders,
or, in lieu of paying the Portfolio's transfer agent, PFPC
Trust may arrange for the direct payment of cash dividends
and distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and
among the Fund (on behalf of the Portfolio), PFPC Trust and
the Portfolio's transfer agent;
(v) payments, upon receipt of Written Instructions, in connection
with the conversion, exchange or surrender of securities owned
or subscribed to by the Portfolio and held by or delivered to
PFPC Trust;
(vi) payments of the amounts of dividends received with respect to
securities sold short;
(vii) payments made to a sub-custodian pursuant to provisions in
sub-section (c) of this Section; and
(viii)payments upon Written Instructions, made for other proper
Portfolio purposes.
PFPC Trust is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian
for the Accounts.
(c) Receipt of Securities; Subcustodians.
(i) PFPC Trust shall hold all securities received by it for the
Accounts in a separate account that physically segregates
such securities from those of any other persons, firms or
corporations, except for securities held in a Book-Entry
System. The ownership of Property in the Accounts, whether
securities or otherwise, and whether any Property is held
directly by PFPC Trust or through a sub-custodian or
Book-Entry System shall be clearly recorded on PFPC Trust's
books as belonging to the Portfolio. All such securities
shall be held or disposed of only upon Written Instructions
of the Fund pursuant to the terms of this Agreement.
Except as otherwise provided herein, no Property is, nor
shall any Property be, subject to any right, charge,
security interest, lien or claim of any kind in favor of
PFPC Trust, any sub-custodian, any Book-Entry System or any
creditors of them. PFPC Trust shall have no power or
authority to loan, encumber, assign, hypothecate, pledge or
otherwise dispose of any such securities or investment,
except upon the express terms of this Agreement and upon
Written Instructions, accompanied by a certified resolution
of the Fund's Board of Trustees, authorizing the
transaction. In no case may any member of the Fund's Board
of Trustees, or any officer, employee or agent of the
Portfolio withdraw any securities. Beneficial ownership of
the Property shall be freely transferable without the
payment of money or value other than for safe custody or
administration.
At PFPC Trust's own expense and for its own convenience, PFPC
Trust may enter into sub-custodian agreements with a
subsidiary or affiliate of PFPC Trust to perform duties
described in this sub-section (c). Such subsidiary or
affiliate shall have an aggregate capital, surplus and
undivided profits, according to its last published report, of
at least twenty million dollars ($20,000,000). In addition,
such bank or trust company must be qualified to act as
custodian and agree to comply with the relevant provisions of
the 1940 Act and other applicable rules and regulations. Any
such arrangement will not be entered into without prior
written notice to the Fund.
PFPC Trust shall remain responsible for the performance of all
of its duties as described in this Agreement and shall hold
the Fund and the Portfolio harmless from its own acts or
omissions, under the standards of care provided for herein, or
the acts and omissions of any sub-custodian chosen by PFPC
Trust under the terms of this sub-section (c).
(d) Transactions Requiring Instructions. Upon receipt of Oral
Instructions or Written Instructions and not otherwise, PFPC
Trust, directly or through the use of the Book-Entry System,
shall:
(i) deliver any securities held for the Portfolio against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated in
such Oral Instructions or Written Instructions, proxies,
consents, authorizations, and any other instruments whereby
the authority of the Portfolio as owner of any securities may
be exercised;
(iii) deliver any securities to the issuer thereof, or its agent,
when such securities are called, redeemed, retired or
otherwise become payable; provided that, in any such case, the
cash or other consideration is to be delivered to PFPC Trust;
(iv) deliver any securities held for the Portfolio against receipt
of other securities or cash issued or paid in connection with
the liquidation, reorganization, refinancing, tender offer,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege;
(v) deliver any securities held for the Portfolio to any
protective committee, reorganization committee or other
person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets
of any corporation, and receive and hold under the terms of
this Agreement such certificates of deposit, interim
receipts or other instruments or documents as may be issued
to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Portfolio
and take such other steps as shall be stated in said Oral
Instructions or Written Instructions to be for the purpose of
effectuating a duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of
the Portfolio;
(vii) release securities belonging to the Portfolio to any bank or
trust company for the purpose of a pledge or hypothecation to
secure any loan incurred by the Fund on behalf of the
Portfolio; provided, however, that securities shall be
released only upon payment to PFPC Trust of the monies
borrowed, except that in cases where additional collateral is
required to secure a borrowing already made subject to proper
prior authorization, further securities may be released for
that purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon surrender
of the note or notes evidencing the loan;
(viii)release and deliver securities owned by the Portfolio in
connection with any repurchase agreement entered into on
behalf of the Portfolio, but only on receipt of payment
therefor; and pay out moneys of the Portfolio in connection
with such repurchase agreements, but only upon the delivery of
the securities;
(ix) release and deliver or exchange securities owned by the
Portfolio in connection with any conversion of such
securities, pursuant to their terms, into other securities;
(x) release and deliver securities to a broker in connection with
the broker's custody of margin collateral relating to futures
and options transactions;
(xi) release and deliver securities owned by the Portfolio for the
purpose of redeeming in kind shares of the Portfolio upon
delivery thereof to PFPC Trust; and
(xii) release and deliver or exchange securities owned by the
Portfolio for other corporate purposes.
PFPC Trust must also receive a certified resolution describing the
nature of the corporate purpose and the name and address of the
person(s) to whom delivery shall be made when such action is
pursuant to sub-paragraph d(xi).
(e) Use of Book-Entry System. The Fund shall deliver to PFPC Trust
--------------------------
certified resolutions of the Fund's Board of Trustees approving,
authorizing and instructing PFPC Trust on a continuous basis, to
deposit in the Book-Entry System all securities belonging to the
Portfolio eligible for deposit therein and to utilize the
Book-Entry System to the extent possible in connection with
settlements of purchases and sales of securities by the
Portfolio, and deliveries and returns of securities loaned,
subject to repurchase agreements or used as collateral in
connection with borrowings. PFPC Trust shall continue to perform
such duties until it receives Written Instructions or Oral
Instructions authorizing contrary actions.
PFPC Trust shall administer the Book-Entry System as follows:
(i) With respect to securities of the Portfolio which are
maintained in the Book-Entry System, the records of PFPC Trust
shall identify by Book-Entry or otherwise those securities
belonging to the Portfolio. PFPC Trust shall furnish to the
Fund a detailed statement of the Property held for the
Portfolio under this Agreement at least monthly and upon
written request.
(ii) Securities and any cash of the Portfolio deposited in the
Book-Entry System will at all times be segregated from any
assets and cash controlled by PFPC Trust in other than a
fiduciary or custodian capacity but may be commingled with
other assets held in such capacities. PFPC Trust and its
sub-custodian, if any, will pay out cash only upon receipt
of securities and will deliver securities only upon the
receipt of cash.
(iii) All books and records maintained by PFPC Trust which relate to
the Portfolio's participation in the Book-Entry System will at
all times during PFPC Trust's regular business hours be open
to the inspection of Authorized Persons, and PFPC Trust will
furnish to the Fund all information in respect of the services
rendered as it may require.
PFPC Trust will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably request from
time to time.
(f) Registration of Securities. All Securities held for the
-----------------------------
Portfolio which are issued or issuable only in bearer form,
except such securities held in the Book-Entry System, shall be
held by PFPC Trust in bearer form; all other securities held for
the Portfolio may be registered in the name of the Fund on behalf
of the Portfolio, PFPC Trust, the Book-Entry System, a
sub-custodian, or any duly appointed nominees of the Fund, PFPC
Trust, Book-Entry System or sub-custodian. With respect to
securities held in the nominee name of PFPC Trust or any
sub-custodian, such name shall be assigned exclusively to be used
for the Property of the Portfolio or to be used in common for the
Property of the Portfolio together with the property of other
clients of PFPC Trust or sub-custodian (which nominee name shall
not in any event be used for assets of PFPC Trust or
sub-custodian other than as a fiduciary, custodian, or otherwise
for customers and in which assets neither PFPC Trust nor the
sub-custodian has any beneficial interest). PFPC Trust shall
inform the Portfolio of the name in which any Property held
hereunder is initially registered and of any changes in
registration (other than those changes pursuant to Written
Instructions or Oral Instructions). The specific Property held
by PFPC Trust or on its behalf hereunder shall be at all times
identifiable in its records. The Fund reserves the right to
instruct PFPC Trust as to the method of registration and
safekeeping of the securities of the Portfolio. The Fund agrees
to furnish to PFPC Trust appropriate instruments to enable PFPC
Trust to hold or deliver in proper form for transfer, or to
register in the name of its nominee or in the name of the
Book-Entry System any securities which it may hold for the
Accounts and which may from time to time be registered in the
name of the Fund on behalf of the Portfolio.
(g) Voting and Other Action. Neither PFPC Trust nor its nominee
-------------------------
shall vote any of the securities held pursuant to this Agreement
by or for the account of the Portfolio, except in accordance with
Written Instructions. PFPC Trust, directly or through the use of
the Book-Entry System, shall execute in blank and promptly
deliver all notices, proxies and proxy soliciting materials
received by PFPC Trust as custodian of the Property to the
registered holder of such securities. If the registered holder
is not the Fund on behalf of the Portfolio, then Written
Instructions or Oral Instructions must designate the person who
owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PFPC Trust is authorized to take
the following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the Accounts of the Portfolio,
all income, dividends, distributions, coupons, option
premiums, other payments and similar items, included or
to be included in the Property, and, in addition,
promptly advise the Portfolio of such receipt and credit
such income, as collected, to the Portfolio's custodian
Accounts;
(B) endorse and deposit for collection, in the name of the
Portfolio, checks, drafts, or other orders for the
payment of money;
(C) receive and hold for the Accounts of the Portfolio
all securities received as a distribution on the
Portfolio's securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other rearrangement
or distribution of rights or similar securities
issued with respect to any securities belonging to
the Portfolio and held by PFPC Trust hereunder;
(D) present for payment and collect the amount payable upon
all securities which may mature or be called, redeemed,
or retired, or otherwise become payable on the date such
securities become payable; and
(E) take any action which may be necessary and proper in
connection with the collection and receipt of such
income and other payments and the endorsement for
collection of checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
(A) PFPC Trust is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer selling for
the account of a Portfolio in accordance with
street delivery custom;
(2) for the exchange of interim receipts or temporary
securities for definitive securities; and
(3) for transfer of securities into the name of the
Portfolio or PFPC Trust or a nominee of either, or
for exchange of securities for a different number
of bonds, certificates, or other evidence,
representing the same aggregate face amount or
number of units bearing the same interest rate,
maturity date and call provisions, if any;
provided that, in any such case, the new
securities are to be delivered to PFPC Trust.
(B) Unless and until PFPC Trust receives Oral Instructions
or Written Instructions to the contrary, PFPC Trust
shall:
(1) pay all income items held by it which call for
payment upon presentation and hold the cash
received by it upon such payment for the Accounts
of the Portfolio;
(2) collect interest and cash dividends received, with
notice to the Fund, to the Accounts of the
Portfolio;
(3) hold for the account of the Portfolio all stock
dividends, rights and similar securities issued
with respect to any securities held by PFPC Trust;
and
(4) execute as agent on behalf of the Portfolio all
necessary ownership certificates required by the
Internal Revenue Code or the Income Tax
Regulations of the United States Treasury
Department or under the laws of any state now or
hereafter in effect, inserting the Fund's name, on
behalf of the Portfolio, on such certificate as
the owner of the securities covered thereby, to
the extent it may lawfully do so.
(i) Segregated Accounts.
(i) PFPC Trust shall upon receipt of Written Instructions or Oral
Instructions establish and maintain segregated accounts on its
records for and on behalf of the Portfolio. Such accounts may
be used to transfer cash and securities, including securities
in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option exchange,
providing such procedures comply with the 1940 Act and
any releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies;
and
(B) upon receipt of Written Instructions, for other
corporate purposes.
(ii) PFPC Trust shall arrange for the establishment of IRA
custodian accounts for such shareholders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code of 1986, as amended
(including regulations promulgated thereunder), and with
such other procedures as are mutually agreed upon from time
to time by and among the Fund, PFPC Trust and the
Portfolio's transfer agent.
(j) Purchases of Securities. PFPC Trust shall settle upon receipt of
Oral Instructions or Written Instructions specify: (i) the name of
the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and
accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such
purchase;
(vi) the Portfolio involved; and
(vii) the name of the person from whom or the broker through whom
the purchase was made. PFPC Trust shall upon receipt of
securities purchased by or for a Portfolio pay out of the
moneys held for the account of the Portfolio the total amount
payable to the person from whom or the broker through whom the
purchase was made, provided that the same conforms to the
total amount payable as set forth in such Oral Instructions or
Written Instructions.
(k) Sales of Securities. PFPC Trust shall settle sold securities upon
receipt of Oral Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued
interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Portfolio upon such sale;
(vi) the name of the broker through whom or the person to whom the
sale was made;
(vii) the location to which the security must be delivered and
delivery deadline, if any; and
(viii) the Portfolio involved.
PFPC Trust shall deliver the securities upon receipt of the total amount
payable to the Portfolio upon such sale, provided that the total amount
payable is the same as was set forth in the Oral Instructions or Written
Instructions. In addition to the other provisions hereof, provided PFPC
Trust has previously informed the Portfolio in writing of its intention to
do so (which notification may be by means of a standing notification and
need not be repeated with respect to each particular transaction), PFPC
Trust may also accept payment in such form as shall be satisfactory to it,
and deliver securities and arrange for payment in accordance with the
customs prevailing among dealers in securities. (l) Reports; Proxy
Materials.
(i) PFPC Trust shall furnish to the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions and
entries for the Accounts of the Portfolio, listing each
portfolio security belonging to the Portfolio with the
adjusted average cost of each issue and the market value
at the end of such month and stating the cash account of
the Portfolio including disbursements;
(C) the reports required to be furnished to the Fund
pursuant to Rule 17f-4, or any successor provision, of
the 1940 Act; and
(D) such other information as may be agreed upon from time
to time between the Fund and PFPC Trust.
(ii) PFPC Trust shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion or
similar communication received by it as custodian of the
Property. PFPC Trust shall be under no other obligation to
inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property in
-----------
respect, or which are to become part, of the Property (but not
the safekeeping thereof upon receipt by PFPC Trust) shall be at
the sole risk of the Fund. If payment is not received by PFPC
Trust within a reasonable time after proper demands have been
made, PFPC Trust shall notify the Fund in writing, including
copies of all demand letters, any written responses and memoranda
of all oral responses and shall await instructions from the
Fund. PFPC Trust shall not be obliged to take legal action for
collection unless and until reasonably indemnified to its
satisfaction. PFPC Trust shall also notify the Fund as soon as
reasonably practicable whenever income due on securities is not
collected in due course and shall provide the Fund with periodic
status reports of such income collected after a reasonable time.
16. Duration and Termination. This Agreement shall continue until terminated
by the Fund or PFPC Trust on 120 days' prior written notice to the other
party. In the event this Agreement is terminated (pending appointment of a
successor to PFPC Trust or vote of the shareholders of the Fund to
dissolve or to function without a custodian of its cash, securities, or
other property), PFPC Trust shall not deliver cash, securities or other
property of the Portfolio to the Fund.
17. Notices. All notices and other communications, including Written
- --------------
Instructions, shall be in writing or by confirming telegram, cable,
telex, facsimile, or electronic mail sending device. Notice shall be
addressed (a) if to PFPC Trust at 200 Stevens Drive, Lester,
Pennsylvania 19113, Attention: Sam Sparhawk; (b) if to the Fund, at
4500 Bohannon Drive, Menlo Park, CA 94025, Attention: Joe Van
Remortel; or (c) if to neither of the foregoing, at such other address
as shall have been given by like notice to the sender of any such
notice or other communication by the other party. If notice is sent by
confirming telegram, cable, telex, facsimile, or electronic mail
sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been
given five days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is
delivered.
18. Amendments. This Agreement, or any term hereof, may be changed or waived
only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19. Delegation; Assignment. PFPC Trust may assign its rights and delegate
- ------------------------------
its duties hereunder to any majority-owned direct or indirect
subsidiary of PFPC Trust, provided that (i) PFPC Trust receives the
Fund's prior written consent to such assignment or delegation; (ii)
the assignee or delegate agrees to comply with the relevant provisions
of the 1940 Act; and (iii) PFPC Trust and such assignee or delegate
promptly provide such information as the Fund may reasonably request,
and respond to such questions as the Fund may reasonably ask, relative
to the assignment or delegation (including, without limitation, the
capabilities of the assignee or delegate). In the event of such
delegation PFPC Trust shall remain liable under this Agreement for the
acts of its delegate or assignee.
20. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
22. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof,
provided that the parties may embody in one or more separate
documents their agreement, if any, with respect to delegated duties
or Oral Instructions.
(b) The parties agree that the Fund is executing this Agreement on
behalf of the Portfolio; that the Portfolio is acting solely on
its own behalf separately from each of the other series of the
Fund and not jointly or jointly and severally with any of the
other series of the Fund; that this Agreement shall constitute,
and shall for all purposes be construed to give effect to the
intention of the parties that it constitute, a separate Agreement
between PFPC Trust and the Fund on behalf of the Portfolio
separately, and that no other series of the Fund shall be liable
for the obligations of the Portfolio arising hereunder.
(c) A copy of the Certificate of Trust of the Fund is on file with
the Secretary of State of the State of Delaware and notice is
hereby given that this instrument is executed on behalf of the
Trustees of the Fund as trustees and not individually and that
the obligations of this instrument are not binding upon any of
the Trustees, officers, or shareholders of the Fund or the
Portfolio individually but are binding only upon the assets and
property of the Portfolio.
(d) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of
the provisions hereof or otherwise affect their construction or
effect.
(e) Governing Law. This Agreement shall be deemed to be a contract made
in Delaware and governed by Delaware law, without regard to
principles of conflicts of law.
(f) Partial Invalidity. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(g) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(h) Facsimile Signatures. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by
such party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above
written.
PFPC TRUST COMPANY
By:
Name:
Title:
E*TRADE FUNDS, on behalf of
E*TRADE Technology Index Fund
By:
Name:
Title:
<PAGE>
EXHIBIT A
This Exhibit A, dated as ____________, 1999, is Exhibit A to that certain
Custodian Services Agreement dated as of ______________, 1999 between PFPC Trust
Company and E*TRADE Funds.
PORTFOLIOS
E*TRADE Technology Index Fund
E*TRADE E-Commerce Index Fund
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
FORM OF
THIRD PARTY FEEDER FUND
AGREEMENT
AMONG
E*TRADE FUNDS
E*TRADE SECURITIES, INC.
AND
MASTER INVESTMENT PORTFOLIO
dated as of
August 9, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I. REPRESENTATIONS AND WARRANTIES..................................1
1.1 Company.........................................................1
1.2 MIP.............................................................2
1.3 Distributor.....................................................3
ARTICLE II. COVENANTS.......................................................4
2.1 Company.........................................................4
2.2 MIP.............................................................5
2.3 Reasonable Actions..............................................7
ARTICLE III. INDEMNIFICATION.................................................7
3.1 Company and Distributor.........................................7
3.2 MIP.............................................................9
ARTICLE IV. ADDITIONAL AGREEMENTS..........................................11
4.1 Access to Information..........................................11
4.2 Confidentiality................................................11
4.3 Obligations of Company and MIP ................................11
ARTICLE V. TERMINATION, AMENDMENT.........................................11
5.1 Termination....................................................11
5.2 Amendment......................................................12
ARTICLE VI. GENERAL PROVISIONS.............................................12
6.1 Expenses.......................................................12
6.2 Headings.......................................................12
6.3 Entire Agreement...............................................12
6.4 Successors.....................................................12
6.5 Governing Law..................................................12
6.6 Counterparts...................................................12
6.7 Third Parties..................................................12
6.8 Notices........................................................12
6.9 Interpretation.................................................13
6.10 Operation of Fund..............................................13
6.11 Relationship of Parties; No Joint Venture, Etc. ...............13
6.12 Use of Name....................................................13
Signatures ...............................................................15
Schedule A ...............................................................16
Schedule B ...............................................................17
<PAGE>
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the 9th
day of August, 1999, by and among E* TRADE Funds, a Delaware business trust (the
"Company"), for itself and on behalf of its series now existing or hereafter
created as set forth in Schedule A (the "Funds"), E*TRADE Securities, Inc. (the
"Distributor"), a California corporation, and Master Investment Portfolio
("MIP"), a Delaware business trust, for itself and on behalf of its series now
existing or hereafter created as set forth in Schedule B ("the Portfolios").
WITNESSETH
WHEREAS, Company and MIP are each registered under the Investment Company
Act of 1940 (the "1940 Act") as open-end management investment companies;
WHEREAS, each Fund and its corresponding Portfolio have the same
investment objectives and substantially the same investment policies;
WHEREAS, each Fund desires to invest on an ongoing basis all or
substantially all of its investable assets (the "Assets") in exchange for a
beneficial interest in the corresponding Portfolio (the "Investments") on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
made herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
1.1 Company. Company represents and warrants to MIP that:
(a) Organization. Company is a business trust duly organized,
validly existing and in good standing under the laws of the State of
Delaware, and the Funds are duly and validly designated series of Company.
Company and each of the Funds has the requisite power and authority to own
its property and conduct its business as proposed to be conducted pursuant
to this Agreement.
(b) Authorization of Agreement. The execution and delivery of this
Agreement by Company on behalf of the Funds and the conduct of business
contemplated hereby have been duly authorized by all necessary action on
the part of Company's Board of Trustees and no other action or proceeding
is necessary for the execution and delivery of this Agreement by the
Funds, or the performance by the Funds of its obligations hereunder. This
Agreement when executed and delivered by Company on behalf of the Funds
shall constitute a legal, valid and binding obligation of Company,
enforceable against the Funds in accordance with its terms, except as may
be limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or other similar law affecting the enforcement of creditors'
rights generally, and subject to general principals of equity. No meeting
of, or consent by, shareholders of the Funds is necessary to approve or
implement the Investments.
(c) 1940 Act Registration. Company is duly registered under the
Investment Company Act of 1940, as amended (the "1940 Act") as an open-end
management investment company, and such registration is in full force and
effect.
(d) SEC Filings. Company has duly filed all forms, reports, proxy
statements and other documents (collectively, the "SEC Filings") required
to be filed with the Securities and Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act, and the rules and
regulations thereunder, (collectively, the "Securities Laws") in
connection with the registration of the Funds' shares, any meetings of its
shareholders and its registration as an investment company. All SEC
Filings relating to the Funds were prepared to comply in all material
respects in accordance with the requirements of the applicable Securities
Laws and do not, as of the date of this Agreement, contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(e) Fund Assets. The Funds currently intend on an ongoing basis to
invest their Assets solely in the corresponding Portfolio, although it
reserves the right to invest Assets in other securities and other assets
and/or to redeem any or all units of a corresponding Portfolio at any time
without notice.
(f) Registration Statement. Company has reviewed MIP's and each
Portfolio's registration statement on Form N-lA, as filed with the SEC.
(g) Insurance. The Funds have in force an errors and omissions
liability insurance policy insuring each Fund against loss up to $2.5
million for negligence or wrongful acts.
1.2 MIP. MIP represents and warrants to Company that:
(a) Organization. MIP is a trust duly organized, validly existing
and in good standing under the laws of the State of Delaware and the
Portfolios are duly and validly designated series of MIP. MIP and each of
the Portfolios has the requisite power and authority to own its property
and conduct its business as now being conducted and as proposed to be
conducted pursuant to this Agreement.
(b) Authorization of Agreement. The execution and delivery of this
Agreement by MIP on behalf of the Portfolios and the conduct of business
contemplated hereby have been duly authorized by all necessary action on
the part of MIP's Board of Trustees and no other action or proceeding is
necessary for the execution and delivery of this Agreement by the
Portfolios, or the performance by the Portfolios of its obligations
hereunder and the consummation by the Portfolios of the transactions
contemplated hereby. This Agreement when executed and delivered by MIP on
behalf of the Portfolios shall constitute a legal, valid and binding
obligation of MIP and the Portfolios, enforceable against MIP and the
Portfolios in accordance with its terms. No meeting of, or consent by,
interestholders of the Portfolios is necessary to approve the issuance of
the Interests (as defined below) to the Funds.
(c) Issuance of Beneficial Interest. The issuance by MIP of
beneficial interests in the Portfolios ("Interests") in exchange for the
Investments by the Funds of their Assets has been duly authorized by all
necessary action on the part of the Board of Trustees of MIP. When issued
in accordance with the terms of this Agreement, the Interests will be
validly issued, fully paid and non-assessable.
(d) 1940 Act Registration. MIP is duly registered as an open-end
management investment company under the 1940 Act and such registration is
in full force and effect.
(e) SEC Filings; Securities Exemptions. MIP has duly filed all SEC
Filings, as defined herein, relating to the Portfolios required to be
filed with the SEC under the Securities Laws. Interests in the Portfolios
are not required to be registered under the 1933 Act, because such
Interests are offered solely in private placement transactions which do
not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. In addition, Interests in the Portfolios are either noticed
or qualified for sale or exempt from notice or qualification requirements
under applicable securities laws in those states or jurisdictions in which
Interests are offered and sold. All SEC Filings relating to the Portfolios
comply in all material respects with the requirements of the applicable
Securities Laws and do not, as of the date of this Agreement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(f) Tax Status. Each Portfolio is taxable as a partnership for
federal income tax purposes under the Internal Revenue Code of 1986, as
amended (the "Code").
(g) Taxable and Fiscal Year: The taxable and fiscal year end of each
Portfolio is currently February 28th.
(h) Insurance. MIP has in force an errors and omissions liability
insurance policy insuring each Portfolio against loss up to $5.0 million
for negligence and wrongful acts.
1.3 Distributor. Distributor represents and warrants to MIP that the
execution and delivery of this Agreement by Distributor have been duly
authorized by all necessary action on the part of Distributor and no other
action or proceeding is necessary for the execution and delivery of this
Agreement by Distributor, or the performance by Distributor of its obligations
hereunder. This Agreement when executed and delivered by Distributor shall
constitute a legal, valid and binding obligation of Distributor, enforceable
against Distributor in accordance with its terms, except as may be limited by or
subject to any bankruptcy, insolvency, reorganization, moratorium or other
similar law affecting the enforcement of creditors' rights generally, and
subject to general principals of equity.
ARTICLE II
COVENANTS
2.1 Company. Company covenants that:
(a) Advance Review of Certain Documents. Company will furnish MIP at
least ten (10) business days prior to the earlier of filing or first use,
with drafts of each Fund's registration statement on Form N-lA and any
amendments thereto, and also will furnish MIP at least three (3) business
days' prior to the earlier of filing or first use, with drafts of any
prospectus or statement of additional information supplements. In
addition, Company will furnish or will cause to be furnished to MIP at
least two (2) business days prior to the earlier of filing or first use,
as the case may be, any proposed advertising or sales literature that
contains language that describes or refers to MIP or the Portfolios and
that was not previously approved by MIP. Company agrees that it will
include in all such Fund documents any disclosures that may be required by
law, and that it will incorporate in all such Fund documents any material
and reasonable comments made by MIP. MIP will not, however, in any way be
liable to Company for any errors or omissions in such documents, whether
or not MIP makes any objection thereto, except to the extent such errors
or omissions result from information provided in each Portfolios' 1940 Act
registration statement or otherwise provided by MIP for inclusion therein.
In addition, neither the Funds nor Distributor will make any other written
or oral representations about MIP or the Portfolios other than those
contained in such documents without MIP's prior written consent.
(b) SEC and Blue Sky Filings. Company will file all SEC Filings
required to be filed with the SEC under the Securities Laws in connection
with the registration of the Funds' shares, any meetings of its
shareholders, and its registration as a series of an investment company.
Company will file such similar or other documents as may be required to be
filed with any securities commission or similar authority by the laws or
regulations of any state, territory or possession of the United States,
including the District of Columbia, in which shares of a Fund are or will
be noticed for sale ("State Filings"). Each Fund's SEC Filings will be
prepared in all material respects in accordance with the requirements of
the applicable Securities Laws, and, insofar as they relate to information
other than that supplied or required to be supplied by MIP, will not, at
the time they are filed or used to offer a Fund's shares, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Each Fund's State Filings will be prepared in accordance with
the requirements of applicable state and federal laws and the rules and
regulations thereunder.
(c) 1940 Act Registration. Company will be duly registered as an
open-end management investment company under the 1940 Act.
(d) Tax Status. The Funds will qualify for treatment as regulated
investment companies under Subchapter M of the Code for any taxable year
during which this Agreement continues in effect except to the extent a
failure to do so qualify may result from any action or omission of the
Portfolio or MIP.
(e) Fiscal Year. The Funds shall take appropriate action to adopt
and maintain the same fiscal year end as their corresponding Portfolio
(currently the last day of February).
(f) Proxy Voting. If requested to vote on matters pertaining to MIP
or the Portfolios, the Funds will vote such shares in accordance with
applicable law or exemption therefrom.
(g) Compliance with Laws. Company shall comply, in all material
respects, with all applicable laws, rules and regulations in connection
with conducting its operations as a registered investment company.
(h) Year 2000 Readiness. Company shall use its best efforts to
ensure the readiness of its computer systems, or those used by it in the
performance of its duties, to properly process information and data from
and after January 1, 2000. Company shall promptly notify MIP of any
significant problems that arise in connection with such readiness.
2.2 MIP. MIP covenants that:
(a) Signature Pages. MIP shall promptly provide all required
signature pages to Company for inclusion in any SEC Filings of Company,
provided Company is in material compliance with its covenants and other
obligations under this Agreement at the time such signature pages are
provided and included in the SEC Filing. Company and Distributor
acknowledge and agree that the provision of such signature pages does not
constitute a representation by MIP, its Trustees or Officers, that such
SEC Filing complies with the requirements of the applicable Securities
Laws, or that such SEC Filing does not contain any untrue statement of a
material fact or does not omit to the state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading,
except with respect to information provided by MIP for inclusion in such
SEC Filing or for use by Company in preparing such filing, which shall in
any event include any written information obtained from MIP's current
registration statement on Form N-1A.
(b) Redemption. Except as otherwise provided in this Section 2.2(b),
redemptions of Interests owned by the Funds will be effected pursuant to
Section 2.2(c). In the event a Fund desires to withdraw its entire
Investment from its corresponding Portfolio, either by submitting a
redemption request or by terminating this Agreement in accordance with
Section 5.1 hereof, the Portfolio, unless otherwise agreed to by the
parties, and in all cases subject to Sections 17 and 18 of the 1940 Act
and the rules and regulations thereunder, will effect such redemption "in
kind" and in such a manner that the securities delivered to the
corresponding Fund or its custodian for the account of the Fund mirror, as
closely as practicable, the composition of the corresponding Portfolio
immediately prior to such redemption. Each Portfolio further agrees that,
to the extent legally possible, it will not take or cause to be taken any
action without Company's prior approval that would cause the withdrawal of
the corresponding Fund's Investments to be treated as a taxable event to
the Fund. Each Portfolio further agrees to conduct its activities in
accordance with all applicable requirements of Regulation 1.731-2(e) under
the Code or any successor regulation.
(c) Ordinary Course Redemptions. Each Portfolio will effect
redemptions of Interests in accordance with the provisions of the 1940 Act
and the rules and regulations thereunder, including, without limitation,
Section 17 thereof. All redemption requests other than a withdrawal of the
corresponding Fund's entire Investment in the corresponding Portfolio
under Section 2.2(b) or, at the sole discretion of MIP, a withdrawal (or
series of withdrawals over any three (3) consecutive business days) of an
amount that exceeds 10% of the Portfolio's net asset value, will be
effected in cash at the next determined net asset value after the
redemption request is received. The Portfolio will use its best efforts to
settle redemptions on the business day following the receipt of a
redemption request by the corresponding Fund and if such next business day
settlement is not practicable, will immediately notify the Fund regarding
the anticipated settlement date, which shall in all events be a date
permitted under the 1940 Act.
(d) SEC Filings. MIP will file all SEC Filings required to be filed
with the SEC under the Securities Laws in connection with any meetings of
each Portfolio's investors and its registration as an investment company
and will provide copies of all such definitive filings to Company. The
Portfolios' SEC Filings will comply in all material respects with the
requirements of the applicable Securities Laws, and will not, at the time
they are filed or used, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(e) 1940 Act Registration. MIP will remain duly registered as an
open-end management investment company under the 1940 Act.
(f) Tax Status. Based upon applicable IRS interpretations and
rulings and Treasury Regulations, each Portfolio will continue to be
treated as a partnership for federal income tax purposes. Each Portfolio
will continue to satisfy (i) the income test imposed on regulated
investment companies under Section 851(b)(2) of the Code and (ii) the
diversification test imposed on regulated investment companies under
Section 851(b)(3) of the Code as if such Sections applied to it for so
long as this Agreement continues in effect. MIP agrees to forward to
Company prior to the Fund's initial Investment a copy of its opinion of
counsel or private letter ruling relating to the tax status of its
corresponding Portfolio and agrees that Company and the Funds may rely
upon such opinion or ruling during the term of this Agreement.
(g) Securities Exemptions. Interests in each Portfolio have been and
will continue to be offered and sold solely in private placement
transactions which do not involve any "public offering" within the meaning
of Section 4(2) of the 1933 Act or require registration or notification
under any state law.
(h) Advance Notice of Certain Changes. MIP shall provide Company
with at least one hundred twenty (120) days' advance notice, or such
lesser time as may be agreed to by the parties, of any change in a
Portfolio's investment objective, and at least ninety (90) days' advance
notice, or if MIP has knowledge or should have knowledge that one of the
following changes is likely to occur more than ninety (90) days in advance
of such event, notice shall be provided as soon as reasonably possible
after MIP obtains or should have obtained such knowledge, of any material
change in a Portfolio's investment policies or activities, any material
increase in a Portfolio's fees or expenses, or any change in a Portfolio's
fiscal year or time for calculating net asset value for purposes of Rule
22c-1.
(i) Compliance with Laws. MIP shall comply, in all material
respects, with all applicable laws, rules and regulations in connection
with conducting its operations as a registered investment company.
(j) Proxy Costs. If and to the extent that: (i) MIP submits a matter
to a vote of a Portfolio's Interestholders; (ii) each Fund determines that
it is necessary or appropriate to solicit proxies from its shareholders in
order to vote its Interests; and (iii) MIP agrees to assume the costs
associated with soliciting proxies from the shareholders of any other
feeder fund that invest substantially all of its investable assets in a
corresponding Portfolio, then MIP shall assume the costs associated with
soliciting proxies from the shareholders of a Fund.
(k) Year 2000 Readiness. MIP shall use its best efforts to ensure
the readiness of its computer systems, or those used by it in the
performance of its duties, to properly process information and data from
and after January 1, 2000. MIP shall promptly notify Company of any
significant problems that arise in connection with such readiness.
2.3 Reasonable Actions. Each party covenants that it will, subject to the
provisions of this Agreement, from time to time, as and when requested by
another party or in its own discretion, as the case may be, execute and deliver
or cause to be executed and delivered all such documents, assignments and other
instruments, take or cause to be taken such actions, and do or cause to be done
all things reasonably necessary, proper or advisable in order to conduct the
business contemplated by this Agreement and to carry out its intent and purpose.
ARTICLE III
INDEMNIFICATION
3.1 Company and Distributor
(a) Company and Distributor agree to indemnify and hold harmless
MIP, each Portfolio and each Portfolio's investment adviser, and any
director/trustee, officer, employee or agent of MIP, a Portfolio or a
Portfolio's investment adviser (in this Section, each, a "Covered Person"
and collectively, "Covered Persons"), against any and all losses, claims,
demands, damages, liabilities or expenses (including, with respect to each
Covered Person, the reasonable cost of investigating and defending against
any claims therefor and reasonable counsel fees incurred in connection
therewith, except as provided in subparagraph (b)), that:
(i) arise out of or are based upon any violation or alleged
violation of any of the Securities Laws, or any other applicable
statute, rule, regulation or common law, or are incurred in
connection with or as a result of any formal or informal
administrative proceeding or investigation by a regulatory agency,
insofar as such violation or alleged violation, proceeding or
investigation arises out of or is based upon any direct or indirect
omission or commission (or alleged omission or commission) by a Fund
with respect to Company or by Distributor or by any of their
trustees/directors, officers, employees or agents, but only insofar
as such omissions or commissions relate to a Fund; or
(ii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
advertising or sales literature used by the Distributor, prospectus,
registration statement, or any other SEC Filing relating to Company,
or any amendments or supplements to the foregoing (in this Section,
collectively "Offering Documents"), or arise out of or are based
upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they
were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was not made in the Offering
Documents in reliance upon and in conformity with MIP's registration
statement on Form N-1A and other written information furnished by
MIP to a Fund or by any service provider of MIP for use therein or
for use by a Fund in preparing such documents, including but not
limited to any written information contained in MIP's current
registration statement on Form N-1A;
provided, however, that in no case shall Company or Distributor be
liable for indemnification hereunder with respect to any claims made
against any Covered Person unless a Covered Person shall have notified
Company or Distributor in writing within a reasonable time after the
summons, other first legal process, notice of a federal, state or local
tax deficiency, or formal initiation of a regulatory investigation or
proceeding giving information of the nature of the claim shall have
properly been served upon or provided to a Covered Person seeking
indemnification. Failure to notify Company or Distributor of such claim
shall not relieve Company or Distributor from any liability that it may
have to any Covered Person otherwise than on account of the
indemnification contained in this Section.
(b) Company and Distributor will be entitled to participate at their
own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if Company and/or
Distributor elect(s) to assume the defense, such defense shall be
conducted by counsel chosen by Company and/or Distributor, as applicable.
In the event Company and/or Distributor elect(s) to assume the defense of
any such suit and retain such counsel, each Covered Person in the suit may
retain additional counsel but shall bear the fees and expenses of such
counsel unless (A) Company and Distributor shall have specifically
authorized the retaining of and payment of fees and expenses of such
counsel or (B) the parties to such suit include any Covered Person and
Company and/or Distributor, and any such Covered Person has been advised
in a written opinion by counsel acceptable to Company and Distributor in
its reasonable judgement that one or more legal defenses may be available
to Company and/or Distributor, in which case Company and/or Distributor
shall not be entitled to assume the defense of such suit notwithstanding
their obligation to bear the reasonable fees and expenses of one counsel
to such persons. For purposes of the foregoing, the parties agree that the
fact that interests in a Portfolio are not registered under the 1933 Act
shall be deemed not to give rise to one or more legal or equitable
defenses available to a Portfolio that are not available to Company and/or
Distributor. Company shall not be required to indemnify any Covered Person
for any settlement of any such claim effected without its written consent
and Distributor shall not be required to indemnify any Covered Person for
any settlement of any such claim effected without its written consent,
which consent, in each case shall not be unreasonably withheld or delayed.
The indemnities set forth in paragraph (a) will be in addition to any
liability that Company and/or Distributor might otherwise have to Covered
Persons.
3.2 MIP.
(a) MIP agrees to indemnify and hold harmless Company, the Funds,
Distributor, and any affiliate of the Company, the Distributor and/or the
Funds, and any trustee/director, officer, employee or agent of any of them
(in this Section, each, a "Covered Person" and collectively, "Covered
Persons"), against any and all losses, claims, demands, damages,
liabilities or expenses (including, with respect to each Covered Person,
the reasonable cost of investigating and defending against any claims
therefor and any counsel fees incurred in connection therewith, except as
provided in subparagraph (b), that:
(i) arise out of or are based upon any violation or alleged
violation of any of the Securities Laws, or any other applicable
statute, rule, regulation or common law or are incurred in
connection with or as a result of any formal or informal
administrative proceeding or investigation by a regulatory agency,
insofar as such violation or alleged violation, proceeding or
investigation arises out of or is based upon any direct or indirect
omission or commission (or alleged omission or commission) by MIP,
or any of its trustees, officers, employees or agents; or
(ii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
advertising or sales literature, or any other SEC Filing relating to
a Portfolio, or any amendments to the foregoing (in this Section,
collectively, the "Offering Documents") relating to a Portfolio, or
arise out of or are based upon the omission or alleged omission to
state therein, a material fact required to be stated therein, or
necessary to make the statements therein in light of the
circumstances under which they were made, not misleading; or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
Offering Documents relating to Company or the Funds or relating to
the Distributor or any of their affiliates or arise out of are based
upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they
were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to a Fund by MIP for
use therein or for use by a Fund in preparing such documents,
including but not limited to any written information contained in
MIP's current registration statement on Form N-1A.
provided, however, that in no case shall MIP be liable for
indemnification hereunder with respect to any claims made against any
Covered Person unless a Covered Person shall have notified MIP in writing
within a reasonable time after the summons, other first legal process,
notice of a federal, state or local tax deficiency, or formal initiation
of a regulatory investigation or proceeding giving information of the
nature of the claim shall have properly been served upon or provided to a
Covered Person seeking indemnification. Without limiting the generality of
the foregoing, a Portfolio's indemnity to Covered Persons shall include
all relevant liabilities of Covered Persons under the Securities Laws, as
if the Offering Documents constitute a "prospectus" within the meaning of
the 1933 Act, and MIP had registered its interests under the 1933 Act
pursuant to a registration statement meeting the requirements of the 1933
Act. Failure to notify MIP of such claim shall not relieve MIP from any
liability that it may have to any Covered Person otherwise than on account
of the indemnification contained in this Section.
(b) MIP will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but, if MIP elects to assume the defense, such
defense shall be conducted by counsel chosen by MIP. In the event MIP
elects to assume the defense of any such suit and retain such counsel,
each Covered Person in the suit may retain additional counsel but shall
bear the fees and expenses of such counsel unless (A) MIP shall have
specifically authorized the retaining of and payment of fees and expenses
of such counsel or (B) the parties to such suit include any Covered Person
and MIP, and any such Covered Person has been advised in a written opinion
by counsel acceptable to MIP in its reasonable judgement that one or more
legal defenses may be available to it that may not be available to MIP, in
which case MIP shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of one
counsel to such persons. MIP shall not be required to indemnify any
Covered Person for any settlement of any such claim effected without its
written consent, which consent shall not be unreasonably withheld or
delayed. The indemnities set forth in paragraph (a) will be in addition to
any liability that MIP might otherwise have to Covered Persons.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Access to Information. Throughout the life of this Agreement, Company
and MIP shall afford each other reasonable access at all reasonable times to
such party's officers, employees, agents and offices and to all relevant books
and records and shall furnish each other party with all relevant financial and
other data and information as such other party may reasonably request.
4.2 Confidentiality. Each party agrees that it shall hold in strict
confidence all data and information obtained from another party (unless such
information is or becomes readily ascertainable from public or published
information or trade sources or public disclosure of such information is
required by law) and shall ensure that its officers, employees and authorized
representatives do not disclose such information to others without the prior
written consent of the party from whom it was obtained, except if disclosure is
required by the SEC, any other regulatory body, a Fund's or a Portfolio's
respective auditors, or in the opinion of counsel to the disclosing party such
disclosure is required by law, and then only with as much prior written notice
to the other parties as is practical under the circumstances. Each party hereto
acknowledges that the provisions of this Section 4.2 shall not prevent Company
or MIP from filing a copy of this Agreement as an exhibit to a registration
statement on Form N-1A as it relates to a Fund or a Portfolio, respectively, and
that such disclosure by Company or MIP shall not require any additional consent
from the other parties.
4.3 Obligations of Company and MIP. MIP agrees that the financial
obligations of Company under this Agreement shall be binding only upon the
assets of the Funds, and that except to the extent liability may be imposed
under relevant Securities Laws, MIP shall not seek satisfaction of any such
obligation from the officers, agents, employees, trustees or shareholders of
Company or the Funds and in no case shall MIP or any covered person have
recourse to the assets of any series of the Company other than the Funds.
Company agrees that the financial obligations of MIP under this Agreement shall
be binding only upon the assets of the Portfolios and that, except to the extent
liability may be imposed under relevant Securities Laws, Company shall not seek
satisfaction of any such obligation from the officers, agents, employees,
trustees or shareholders of MIP or other classes or series of MIP.
ARTICLE V
TERMINATION, AMENDMENT
5.1 Termination. This Agreement may be terminated at any time by the
mutual agreement in writing of all parties, or by any party on one hundred and
eighty (180) days' advance written notice to the other parties hereto; provided,
however, that nothing in this Agreement shall limit Company's right to redeem
all or a portion of its units of a Portfolio in accordance with the 1940 Act and
the rules thereunder. The provisions of Article III and Sections 4.2 and 4.3
shall survive any termination of this Agreement.
5.2 Amendment. This Agreement may be amended, modified or supplemented at
any time in such manner as may be mutually agreed upon in writing by the
parties.
ARTICLE VI
GENERAL PROVISIONS
6.1 Expenses. All costs and expenses incurred in connection with this
Agreement and the conduct of business contemplated hereby shall be paid by the
party incurring such costs and expenses.
6.2 Headings. The headings and captions contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
6.3 Entire Agreement. This Agreement sets forth the entire understanding
between the parties concerning the subject matter of this Agreement and
incorporates or supersedes all prior negotiations and understandings. There are
no covenants, promises, agreements, conditions or understandings, either oral or
written, between the parties relating to the subject matter of this Agreement
other than those set forth herein. This Agreement may be amended only in writing
signed by all parties.
6.4 Successors. Each and all of the provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement, nor any
rights herein granted may be assigned to, transferred to or encumbered by any
party, without the prior written consent of the other parties hereto.
6.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California with regard to the conflicts
of law provisions thereof; provided, however, that in the event of any conflict
between the 1940 Act and the laws of California, the 1940 Act shall govern.
6.6 Counterparts. This Agreement may be executed in any number of
counterparts, all of which shall constitute one and the same instrument, and any
party hereto may execute this Agreement by signing one or more counterparts.
6.7 Third Parties. Except as expressly provided in Article III, nothing
herein expressed or implied is intended or shall be construed to confer upon or
give any person, other than the parties hereto and their successors or assigns,
any rights or remedies under or by reason of this Agreement.
6.8 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
when delivered in person or three days after being sent by certified or
registered United States mail, return receipt requested, postage prepaid,
addressed:
If to the Funds:
Joe Van Remortel, Vice President
E*TRADE Funds, c/o E*TRADE Asset Management
2400 Geng Road
Palo Alto, California 94303
If to Distributor:
================================================
================================================
If to MIP:
Chief Operating Officer
Master Investment Portfolio
c/o Stephens Inc.
111 Center Street
Little Rock, AR 72201
6.9___Interpretation. Any uncertainty or ambiguity existing herein shall
not be interpreted against any party, but shall be interpreted according to the
application of the rules of interpretation for arms' length agreements.
6.10__Operation of Fund. Except as otherwise provided herein, this
Agreement shall not limit the authority of a Fund, Company or Distributor to
take such action as it may deem appropriate or advisable in connection with all
matters relating to the operation of a Fund and the sale of its shares.
6.11__Relationship of Parties; No Joint Venture, Etc. It is understood and
agreed that neither Company nor Distributor shall hold itself out as an agent of
MIP with the authority to bind such party, nor shall MIP hold itself out as an
agent of Company or Distributor with the authority to bind such party.
6.12__Use of Name. Except as otherwise provided herein or required by law
(e.g., in Company's Registration Statement on Form N-1A), neither Company, the
Funds nor Distributor shall describe or refer to the name of MIP, the Portfolios
or any derivation thereof, or any affiliate thereof, or to the relationship
contemplated by this Agreement in any advertising or promotional materials
without the prior written consent of MIP, nor shall MIP describe or refer to the
name of Company, the Funds or Distributor or any derivation thereof, or any
affiliate thereof, or to the relationship contemplated by this Agreement in any
advertising or promotional materials without the prior written consent of
Company, the Funds or Distributor, as the case may be. In no case shall any such
consents be unreasonably withheld or delayed. In addition, the party required to
give its consent shall have at least three (3) business days prior to the
earlier of filing or first use, as the case may be, to review the proposed
advertising or promotional materials.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers, thereunto duly authorized, as of the date first
written above.
E* TRADE Funds
on behalf of itself and the E*
TRADE S&P 500 Index Fund
By:
Name: Joseph N. Van Remortel
Title: Vice President
E*TRADE Securities, Inc.
By:
Name: Brian Murray
Title: President
MASTER INVESTMENT PORTFOLIO,
on behalf of itself and the S&P 500 Index
MASTER PORTFOLIO
By:
Name: Richard H. Blank, Jr.
Title: Chief Operating Officer
<PAGE>
SCHEDULE A
E*TRADE FUNDS
E*TRADE Bond Index Fund
E*TRADE Extended Market Index Fund
E*TRADE S&P 500 Fund
<PAGE>
SCHEDULE B
MASTER INVESTMENT PORTFOLIOS
Bond Index Master Portfolio
Extended Index Master Portfolio
S&P 500 Index Master Portfolio
FORM OF AMENDMENT NO. 1
to the
ADMINISTRATIVE SERVICES AGREEMENT
The Administrative Services Agreement dated as of February 3, 1999 by and
between E*TRADE Funds on behalf of the series listed on Exhibit A hereto (each a
"Fund" and collectively, the "Funds") and E*TRADE Asset Management, Inc., is
hereby amended as follows:
1. Exhibit A is hereby amended and substituted with the attached
Exhibit A;
2. Section 9 is hereby amended to delete the first sentence of that
section and substitute the following language:
This Agreement shall continue in effect with respect to the E*TRADE S&P
500 Index Fund until February 3, 2001, if not sooner terminated and shall become
effective with respect to the E*TRADE Extended Market Index Fund, the E*TRADE
Total Bond Index Fund and the E*TRADE Technology Index Fund, as of __________,
1999 and shall continue in effect until ______, 2001, if not sooner terminated.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
the Administrative Services Agreement to be executed as of __________________,
1999.
E*TRADE FUNDS (on behalf of the Funds
listed on Exhibit A)
By:________________________________
Name:
Title:
E*TRADE ASSET
MANAGEMENT, INC.
By:________________________________
Name:
Title:
<PAGE>
EXHIBIT A
to the
ADMINISTRATIVE SERVICES AGREEMENT
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE Technology Index Fund
E*TRADE International Index Fund
E*TRADE E-Commerce Index Fund
FORM OF
AMENDMENT NO. 1
to the
SUB-ADMINISTRATION AGREEMENT
The Sub-Administration Agreement ("Agreement") dated February 3, 1999 by
and between E*TRADE FUNDS (the "Fund"), E*TRADE ASSET MANAGEMENT, INC. and
INVESTORS BANK & TRUST COMPANY (the "Bank"), is hereby amended as follows.
(a) Appendix A is hereby amended and substituted with the attached Appendix
A;
(b) Section 1 is hereby deleted and replaced with the following:
Appointment. The Fund hereby appoints the Bank to act as Sub-Administrator
of the Fund with respect to the Portfolios listed on Appendix A attached
hereto on the terms set forth in the Agreement. The Bank accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
(c) Section 7 is hereby deleted and replaced with the following:
(a) The term of this Agreement for the E*Trade S&P 500 Index Fund shall be
for a period of two years which commenced on February 3, 1999 and ends on
February 3, 2001 unless earlier terminated as provided herein. The terms
of this Agreement with respect to the other Portfolios shall be an initial
term of two (2) years commencing upon the date of the Amendment to the
Agreement adding the respective Portfolio(s) to Appendix A, unless earlier
terminated as provided herein. After the expiration of a Portfolio's
two-year initial term, the terms of this Agreement shall automatically
renew for successive one-year terms (each a "Renewal Term") unless notice
of non-renewal is delivered by the non-renewing party to the other party
no later than ninety days prior to the expiration of such initial two-year
term or any Renewal Term, as the case may be.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
the Sub-Administration Agreement to be duly executed and delivered by their duly
authorized officers as of ________________, 1999.
E*TRADE FUNDS E*TRADE ASSET MANAGEMENT, INC.
By: __________________________ By: __________________________________
Name: Name:
Title: Title:
INVESTORS BANK & TRUST COMPANY
By: ______________________________
Name:
Title:
<PAGE>
APPENDIX A
TO THE
SUB-ADMINISTRATION AGREEMENT
Portfolios
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE International Index Fund
FORM OF
SUB-ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of ________, 1999 by and among E*TRADE ASSET
MANAGEMENT, INC., a Delaware corporation ("E*TRADE Asset Management"), E*TRADE
FUNDS, a Delaware business trust (the "Fund"), and PFPC Inc., a Delaware
corporation ("PFPC"), which is an indirect wholly owned subsidiary of PFPC
Worldwide, Inc.
W I T N E S S E T H :
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; consisting of
separate investment portfolios; and
WHEREAS, E*TRADE Asset Management is the Administrator to the Fund with
respect to the investment portfolios of the Fund; and
WHEREAS, the E*TRADE Asset Management and the Fund wish to retain PFPC to
render certain administrative services to the Fund with respect to the
investment portfolios listed on Exhibit A attached hereto and made a part
hereof, as such Exhibit A may be amended from time to time (each a "Portfolio")
and PFPC is willing to render such services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the
parties hereto agree as follows:
1. Definitions.
As Used in this Agreement and not previously defined:
(a) "1933 Act" means the Securities Act of 1933, as amended. (b) "1934
Act" means the Securities Exchange Act of 1934, as amended. (c) "1940 Act"
means the Investment Company Act of 1940, as amended.
<PAGE>
(d) "Authorized Person" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Trustees to give
Oral Instructions and Written Instructions on behalf of the Fund
and listed on the Authorized Persons Appendix attached hereto and
made a part hereof or any amendment thereto as may be received by
PFPC. An Authorized Person's scope of authority may be limited
by the Fund by setting forth such limitation in the Authorized
Persons Appendix.
(e) "Change of Control" means a change in ownership or control (not
including transactions between wholly-owned direct or indirect
subsidiaries of a common parent) of 25% or more of the beneficial
ownership of the shares of common stock or shares of beneficial
interest of an entity or its parent(s).
(f) "Oral Instructions" mean oral instructions received by PFPC from an
Authorized Person or from a person reasonably believed by PFPC to be
an Authorized Person.
(g) "SEC" means the Securities and Exchange Commission. (h) "Securities
Laws" means the 1933 Act, the 1934 Act, the 1940 Act
and the Commodity Exchange Act, as amended..
(i) "Shares" means the shares of beneficial interest of any series or
class of the Fund.
(j) "Written Instructions" mean written instructions signed by an
Authorized Person and received by PFPC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex, facsimile,
or electronic mail sending device.
2. Appointment. E*TRADE Asset Management hereby appoints PFPC to act as
Sub-Administrator of the Portfolios and provide administration and
accounting services to each of the Portfolios, in accordance with the
terms set forth in this Agreement. PFPC accepts such appointment and
agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable, will
provide PFPC with the following: (a) accurate copies of the resolutions of
the Fund's Board of
Trustees, approving the appointment of PFPC or its affiliates to
provide services to each Portfolio and approving this Agreement;
(b) a copy of the Fund's most recent effective registration statement;
(c) a copy of each Portfolio's advisory agreement or agreements;
(d) a copy of the distribution agreement with respect to each class of
Shares representing an interest in a Portfolio;
(e) a copy of any additional administration agreement with respect to a
Portfolio;
(f) a copy of any shareholder servicing agreement made in respect of the
Fund or a Portfolio; and
(g) copies of any and all amendments or supplements to the foregoing.
4. Compliance with Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of the
Securities Laws, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties to be performed
by PFPC hereunder. Except as specifically set forth herein, PFPC assumes
no responsibility for such compliance by the Fund or any Portfolio.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or
from a person reasonably believed by PFPC to be an Authorized
Person) pursuant to this Agreement. PFPC may assume that any
Oral Instruction or Written Instruction received hereunder is not
in any way inconsistent with the provisions of organizational
documents or this Agreement or of any vote, resolution or
proceeding of the Fund's Board of Trustees or of the Fund's
shareholders, unless and until PFPC receives Written Instructions
to the contrary.
(c) E*TRADE Asset Management and the Fund agree to forward to PFPC
Written Instructions confirming Oral Instructions (except where
such Oral Instructions are given by PFPC or its affiliates) so
that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are
not received by PFPC shall in no way invalidate the transactions
or enforceability of the transactions authorized by the Oral
Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized
Person, PFPC shall incur no liability to E*TRADE Asset Management
or the Fund in acting upon such Oral Instructions or Written
Instructions provided that PFPC's actions comply with the other
provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should
or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from E*TRADE Asset
Management or the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of
law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing
(who may be counsel for E*TRADE Asset Management, the Fund, the
Fund's investment adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
--------------------
directions, advice or Oral Instructions or Written Instructions
PFPC receives from E*TRADE Asset Management or the Fund and the
advice PFPC receives from counsel, PFPC may rely upon and follow
the advice of counsel if such counsel is also counsel to the Fund
or its adviser. In the event PFPC so relies on the advice of
counsel, PFPC remains liable for any action or omission on the
part of PFPC which constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties,
obligations or responsibilities set forth in this Agreement. If
PFPC intends to rely on advice from counsel which conflicts with
Oral or Written Instructions from E*TRADE Asset Management or the
Fund, PFPC shall notify E*TRADE Asset Management or the Fund, as
applicable, in writing prior to such reliance.
(d) Protection of PFPC. PFPC shall be protected in any action it
-------------------
takes or does not take in reliance upon directions, advice or
Oral Instructions or Written Instructions it receives from
E*TRADE Asset Management or the Fund or from counsel and which
PFPC believes, in good faith, to be consistent with those
directions, advice and Oral Instructions or Written
Instructions. Nothing in this section shall be construed so as
to impose an obligation upon PFPC (i) to seek such directions,
advice or Oral Instructions or Written Instructions, or (ii) to
act in accordance with such directions, advice or Oral
Instructions or Written Instructions unless, under the terms of
other provisions of this Agreement, the same is a condition of
PFPC's properly taking or not taking such action. Nothing in
this subsection shall excuse PFPC when an action or omission on
the part of PFPC constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties,
obligations or responsibilities set forth in this Agreement.
7. Records; Visits.
(a) The books and records pertaining to the Fund and the Portfolios
which are in the possession or under the control of PFPC shall be
the property of the Fund. Such books and records shall be
prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. E*TRADE Asset
Management, the Fund and Authorized Persons shall have access to
such books and records at all times during PFPC's normal business
hours. Upon the reasonable request of E*TRADE Asset Management
or the Fund, copies of any such books and records shall be
provided by PFPC to E*TRADE Asset Management or the Fund or to an
Authorized Person.
(b) PFPC shall keep the following records:
(i) all books and records with respect to each Portfolio's
books of account;
(ii) records of each Portfolio's securities transactions; and
(iii) all other books and records as the Fund is required to
maintain with respect to the Portfolios pursuant to Rule 31a-1
of the 1940 Act in connection with the services provided
hereunder for the periods described by Rule 31a-2 under 1940
Act.
8. Confidentiality. PFPC agrees to keep confidential the records of the Fund
and information relating to the Fund and its shareholders, unless the
release of such records or information is otherwise consented to, in
writing, by the Fund. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to
civil or criminal contempt proceedings or when required to divulge such
information or records to duly constituted authorities.
9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal
year summaries, and other audit-related schedules with respect to each
Portfolio. PFPC shall take all reasonable action in the performance of its
duties under this Agreement to assure that the necessary information is
made available to such accountants for the expression of their opinion, as
required by the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
- -------------------------
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to
the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to E*TRADE
Asset Management or the Fund, take reasonable steps to minimize service
interruptions. PFPC shall have no liability with respect to the loss
of data or service interruptions caused by equipment failure, provided
such loss or interruption is not caused by PFPC's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties
or obligations under this Agreement.
11. Year 2000 Readiness Disclosure. PFPC, with respect to services
- ----------------------------------------
provided hereunder, (a) has reviewed its business and operations, (b)
has implemented a program to remediate or replace computer applications
and systems, and (c) has implemented a testing plan to test the
remediation or replacement of computer applications and systems, in
each case, to address on a timely basis the risk that certain computer
applications and systems used by PFPC may be unable to recognize and
perform properly date sensitive functions involving dates prior to,
including and after December 31, 1999, including dates such as February
29, 2000 (the "Year 2000 Challenge"). To the best of PFPC's knowledge
and belief, the reasonably foreseeable consequences of the Year 2000
Challenge will not adversely effect PFPC's ability to perform its
duties and obligations under this Agreement. If requested by E*TRADE
Asset Management, the Fund or the Fund's Board of Trustees, PFPC will
provide written materials describing PFPC's current status and plans
with respect to the Year 2000 Challenge for use in the Fund's
registration statement and/or in materials presented to the Fund's
Board of Trustees.
12. Compensation. As compensation for services rendered by PFPC during the
term of this Agreement, E*TRADE Asset Management, will pay to PFPC a fee
or fees as may be agreed to in writing by E*TRADE Asset Management and
PFPC.
13. Indemnification. E*TRADE Asset Management and the Fund, on behalf of
---------------
each Portfolio, agrees to indemnify and hold harmless PFPC and its
affiliates from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under
the Securities Laws and any state or foreign securities and blue sky
laws, and amendments thereto), including, without limitation,
attorneys' fees and disbursements arising directly or indirectly from
any action or omission to act which PFPC takes (i) at the request or on
the direction of or in reliance on the advice of E*TRADE Asset
Management or the Fund or (ii) upon Oral Instructions or Written
Instructions. Neither PFPC, nor any of its affiliates, shall be
indemnified against any liability (or any expenses incident to such
liability) arising out of PFPC's or its affiliates' own willful
misfeasance, bad faith, negligence or reckless disregard of its duties
and obligations under this Agreement. Any amounts payable by E*TRADE
Asset Management hereunder shall be satisfied only against the relevant
Portfolio's assets and not against the assets of any other investment
portfolio of the Fund.
14. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on behalf of
E*TRADE Asset Management or the Fund or any Portfolio except as
specifically set forth herein or as may be specifically agreed to
by PFPC in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder and to act
in good faith in performing services provided for under this
Agreement. PFPC shall be liable for any damages arising out of
PFPC's failure to perform its duties under this Agreement to the
extent such damages arise out of PFPC's willful misfeasance, bad
faith, negligence or reckless disregard of such duties or a
breach of this Agreement.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PFPC shall not be liable for
losses beyond its control, provided that PFPC has acted in
accordance with the standard of care set forth above; and (ii)
PFPC shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the
applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (B) subject to Section 10,
delays or errors or loss of data occurring by reason of
circumstances beyond PFPC's control, including acts of civil or
military authority, national emergencies, labor difficulties,
fire, flood, catastrophe, acts of God, insurrection, war, riots
or failure of the mails, transportation, communication or power
supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to E*TRADE Asset
Management or the Fund or to any Portfolio for any consequential,
special or indirect losses or damages which E*TRADE Asset
Management, the Fund or any Portfolio may incur or suffer by or
as a consequence of PFPC's or any affiliates' performance of the
services provided hereunder, whether or not the likelihood of
such losses or damages was known by PFPC or its affiliates.
15. Description of Accounting Services on a Continuous Basis. PFPC will
perform the following accounting services with respect to
each Portfolio:
(i) Journalize investment, capital share and income and expense
activities;
(ii) Verify investment buy/sell trade tickets when received from the
investment adviser for a Portfolio (the "Adviser") and transmit
trades to the Fund's custodian (the "Custodian") for proper
settlement;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund with the
Custodian, and provide the Adviser with the beginning cash balance
available for investment purposes;
(vi) Update the cash availability throughout the day as required by the
Adviser;
(vii) Post to and prepare the Statement of Assets and Liabilities and the
Statement of Operations;
(viii)Calculate various contractual expenses (e.g., advisory and custody
fees);
(ix) Monitor the expense accruals and notify an officer of the Fund of
any proposed adjustments;
(x) Control all disbursements and authorize such disbursements upon
Written Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine net income;
(xiii)Obtain security market quotes from independent pricing services
approved by the Adviser, or if such quotes are unavailable, then
obtain such prices from the Adviser, and in either case calculate
the market value of each Portfolio's Investments;
(xiv) Transmit or mail a copy of the daily portfolio valuation to the
Adviser;
(xv) Compute net asset value;
(xvi) As appropriate or at the request of the Fund, compute yields, total
return, expense ratios, portfolio turnover rate, and, if required,
portfolio average dollar-weighted maturity; and
(xvii)Prepare a monthly financial statement, which will include the
following items:
Schedule of Investments Statement of Assets and
Liabilities Statement of Operations Statement of Changes
in Net Assets Cash Statement Schedule of Capital Gains
and Losses.
16. Description of Administration Services on a Continuous Basis. PFPC will
perform the following administration services with respect to
each Portfolio:
(i) Prepare quarterly broker security transactions summaries;
(ii) Prepare monthly security transaction listings;
(iii) Supply various normal and customary Portfolio and Fund statistical
data as requested on an ongoing basis;
(iv) Prepare for execution and file the Fund's Federal and state tax
returns;
(v) Prepare and file the Fund's Semi-Annual Reports with the SEC on Form
N-SAR;
(vi) Prepare and file with the SEC the Fund's annual, semi-annual, and
quarterly shareholder reports;
(vii) Assist in the preparation of registration statements and other
filings relating to the registration of Shares;
(viii)Monitor each Portfolio's status as a regulated investment company
under Sub-chapter M of the Internal Revenue Code of 1986, as
amended; and
(ix) Coordinate contractual relationships and communications between the
Fund and its contractual service providers.
17. Duration and Termination. This Agreement shall continue until terminated
by E*TRADE Asset Management or the Fund or by PFPC on sixty (60) days'
prior written notice to the other parties.
18. Change of Control. Notwithstanding any other provision of this Agreement,
in the event of an agreement to enter into a transaction that would result
in a Change of Control of the Fund's adviser or sponsor, the Fund's
ability to terminate the Agreement will be suspended from the time of such
agreement until ninety-days after the Change of Control.
19. Notices. All notices and other communications, including Written
- --------------
Instructions, shall be in writing or by confirming telegram, cable,
telex, facsimile or electronic mail sending device. If notice is sent
by confirming telegram, cable, telex or facsimile sending device, it
shall be deemed to have been given immediately. If notice is sent by
first-class mail, it shall be deemed to have been given three days
after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be
addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware
19809, Attention: President, or electronic mail: [email protected];
(b) if to E*TRADE Asset Management, at 4500 Bohannon Drive, Menlo Park,
CA 94025, Attention: , or electronic mail:
-------
[email protected]; (c) if to the Fund, at 4500 Bohannon Drive, Menlo
Park, CA 94025, Attention: , or electronic mail:
------
[email protected]; or (d) if to neither of the foregoing, at such
other address as shall have been provided by like notice to the sender
of any such notice or other communication by the other party.
20. Amendments. This Agreement, or any term thereof, may be changed or waived
only by written amendment, signed by the party against whom enforcement of
such change or waiver is sought.
21. Delegation; Assignment. PFPC may delegate its duties hereunder to any
- ------------------------------
majority-owned direct or indirect subsidiary of PFPC or another wholly
owned subsidiary of PFPC Worldwide Inc., provided that (i) PFPC gives
E*TRADE Asset Management and the Fund 30 days prior written notice of
such assignment or delegation, (ii) the delegate agrees to comply with
this Agreement and the relevant provisions of the Securities Laws, and
(iii) PFPC and such delegate promptly provide such information as
E*TRADE Asset Management or the Fund may reasonably request, and
respond to such questions as E*TRADE Asset Management or the Fund may
reasonably ask, relative to the delegation (including, without
limitation, the capabilities of the delegate).
22. Counterparts. This Agreement may be executed in two or more counter-parts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
23. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
24. Miscellaneous.
(a) This Agreement embodies the entire agreement and understanding
between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents
their agreement, if any, with respect to delegated duties and
Oral Instructions. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their
construction or effect. Notwithstanding any provision hereof, the
services of PFPC are not, nor shall they be, construed as
constituting legal advice or the provision of legal services for
or on behalf of E*TRADE Asset Management, the Fund or any other
person.
(b) This Agreement shall be deemed to be a contract made in Delaware and
governed by Delaware law, without regard to principles of conflicts
of law.
(c) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
(d) The facsimile signature of any party to this Agreement shall
constitute the valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By:
Title:
E*TRADE FUNDS
By:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:
Title:
<PAGE>
EXHIBIT A
THIS EXHIBIT A, dated as of _________, 1999 is Exhibit A to that
Sub-Administration and Accounting Services Agreement dated as of ________, 1999
between PFPC Inc. and E*Trade Funds.
PORTFOLIOS
E*TRADE Technology Index Fund
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
FORM OF
AMENDMENT NO. 1
to the
TRANSFER AGENCY SERVICES AGREEMENT
The Transfer Agency Services Agreement dated as of December 29, 1998, by and
between PFPC INC. and E*TRADE FUNDS is hereby amended as follows:
1. Exhibit A is hereby amended and substituted with the attached Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
the Transfer Agency Services Agreement to be executed by their respective
officers thereunto duly authorized as of _______________, 1999.
PFPC INC.
By:_________________________________
Name:
Title:
E*TRADE FUNDS
By:_________________________________
Name:
Title:
<PAGE>
EXHIBIT A
to the
TRANSFER AGENCY SERVICES AGREEMENT
This Exhibit A, amended as of ______________, 1999, is Exhibit A to that certain
Transfer Agency Services Agreement dated as of December 29, 1998 between PFPC,
Inc. and E*TRADE Funds.
PORTFOLIOS
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE Technology Index Fund
E*TRADE International Index Fund
E*TRADE E-Commerce Index Fund
FORM OF
AMENDMENT NO. 1
to the
RETAIL SHAREHOLDER SERVICES AGREEMENT
The Retail Shareholder Services Agreement dated February 3, 1999, by and
among E*TRADE Securities, Inc., E*TRADE Funds and E*TRADE Asset Management,
Inc., is hereby amended as follows:
1. Schedule C is hereby amended and substituted with the attached
Scheduled C.
In witness whereof, each Party has executed this Amendment No. 1 to the
Retail Shareholder Services Agreement by a duly authorized representative of
such Party as of ______________, 1999.
E*TRADE Securities, Inc.
By:
Name:
Title:
E*TRADE Funds
By:
Name:
Title:
E*TRADE Asset Management, Inc.
By:
Name:
Title:
<PAGE>
Schedule C
to the
RETAIL SHAREHOLDER SERVICES AGREEMENT
Fund Portfolios and Classes
Fund Name/Class: Cusip/Ticker Symbol:
E*TRADE S&P 500 Index Fund* 269244109/ET SPX
E*TRADE Extended Market Index Fund* 269244307
E*TRADE Bond Index Fund* 2692444208
E*TRADE Technology Index Fund* 269244406
E*TRADE International Index Fund __________
E*TRADE E-Commerce Index Fund __________
* indicates that the Fund is a "No-Load" or "No-Sales Charge" Fund as defined in
Section 26 of the NASD's Rules of Fair Practice.
FORM OF
STATE SECURITIES COMPLIANCE SERVICES AGREEMENT
THIS AGREEMENT is made as of August __, 1999 by and between E*TRADE ASSET
MANAGEMENT, INC., a Delaware corporation ("E*TRADE"), and PFPC INC., a Delaware
corporation ("PFPC"), which is a wholly owned subsidiary of PFPC Worldwide, Inc.
W I T N E S S E T H :
WHEREAS, E*TRADE wishes to retain PFPC to provide service, on behalf of
E*TRADE Funds (the "Fund"), to the Fund's investment portfolios listed on
Exhibit A attached hereto and made a part hereof, as such Exhibit A may be
amended from time to time (each a "Portfolio"), and PFPC wishes to furnish such
service.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the
parties hereto agree as follows:
1. Definitions. As Used in this Agreement:
(a) "Change of Control" means a change in ownership or control (not
including transactions between wholly-owned direct or indirect
subsidiaries of a common parent) of 25% or more of the beneficial
ownership of the shares of common stock or shares of beneficial
interest of an entity or its parent(s).
(b) "SEC" means the Securities and Exchange Commission. (c) "Securities
Laws" means the state securities laws pertaining to
the registration or qualification of Shares and those state
requirements to benefit from the federal preemption thereof.
(d) "Shares" means the shares of beneficial interest of any series or
class of the Fund.
(e) "Written Instructions" mean written instructions signed by a
representative of E*TRADE and received by PFPC. The instructions may
be delivered by hand, mail, tested telegram, cable, telex, facsimile
sending device or electronic mail transmission.
2. Appointment. E*TRADE hereby appoints PFPC to provide service to each of
the Portfolios, in accordance with the terms set forth in this Agreement.
PFPC accepts such appointment and agrees to furnish such service.
3. Delivery of Documents. The Fund has provided or, where applicable, will
provide PFPC with the following: (a) copies of the resolutions of the
Fund's Board of Trustees,
approving the appointment of PFPC or its affiliates to provide
the services set forth herein to each Portfolio and approving
this Agreement;
(b) a copy of Fund's most recent effective registration statement;
and
(c) copies of any and all amendments or supplements to the foregoing.
4. Compliance with Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of any laws,
rules and regulations of governmental authorities having jurisdiction with
respect to the duties to be performed by PFPC hereunder. Except as
specifically set forth herein, PFPC assumes no responsibility for such
compliance by E*TRADE, the Fund or any Portfolio.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Written Instructions.
(b) PFPC shall be entitled to rely upon any Written Instructions it
receives from E*TRADE (or from a person reasonably believed by
PFPC to be a representative of E*TRADE) pursuant to this
Agreement. PFPC may assume that any Written Instruction received
hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Board of Trustees or of
the Fund's shareholders, unless and until PFPC receives Written
Instructions to the contrary.
6. Right to Receive Advice.
(a) Advice of E*TRADE. If PFPC is in doubt as to any action it should or
should not take, PFPC may request directions or advice from E*TRADE.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of
law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's investment adviser, the
Fund's investment sub-adviser, or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
--------------------
directions, advice or Written Instructions PFPC receives from
E*TRADE and the advice PFPC receives from counsel, PFPC may rely
upon and follow the advice of counsel provided PFPC notifies
E*TRADE in advance and in writing as to the nature of the action
and the advice. In the event PFPC so relies on and in accordance
with the advice of counsel, PFPC remains liable for any action or
omission on the part of PFPC which constitutes willful
misfeasance, bad faith, negligence or reckless disregard by PFPC
of any duties, obligations or responsibilities set forth in this
Agreement.
(d) Protection of PFPC. PFPC shall be protected in any action it
-------------------
takes or does not take in reliance upon directions, advice or
Written Instructions it receives from E*TRADE and which PFPC
believes, in good faith, to be consistent with those directions,
advice and Written Instructions. Nothing in this section shall
be construed so as to impose an obligation upon PFPC (i) to seek
such directions, advice or Written Instructions, or (ii) to act
in accordance with such directions, advice or Written
Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PFPC's properly taking or
not taking such action. Nothing in this subsection shall excuse
PFPC when an action or omission on the part of PFPC constitutes
willful misfeasance, bad faith, negligence, reckless disregard by
PFPC of any duties, obligations or responsibilities set forth in
this Agreement or any breach of this Agreement.
7. Records; Visits.
(a) The books and records pertaining to the Fund and the Portfolios
which are in the possession or under the control of PFPC shall be
the property of the Fund. Such books and records shall be
prepared and maintained as required by the applicable securities
laws, rules and regulations. The Fund and E*TRADE shall have
access to such books and records at all times during PFPC's
normal business hours. Upon the reasonable request of the Fund
or E*TRADE, copies of any such books and records shall be
provided by PFPC to the Fund or to E*TRADE, at the Fund's expense.
(b) PFPC shall keep the following records:
(i) all books and records with respect to each Portfolio's
books of account; and
(ii) all other books and records as are required to maintain
pursuant to Securities Laws in connection with the services
provided hereunder.
8. Confidentiality. PFPC agrees to keep confidential the records of the Fund
and information relating to the Fund and its shareholders, unless the
release of such records or information is otherwise consented to, in
writing, by the Fund. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to
civil or criminal contempt proceedings or when required to divulge such
information or records to duly constituted authorities.
9. Disaster Recovery. PFPC shall enter into and shall maintain in effect
- -------------------------
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to
the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund,
take reasonable steps to minimize service interruptions. PFPC shall
have no liability with respect to the loss of data or service
interruptions caused by equipment failure, provided such loss or
interruption is not caused by PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations
under this Agreement.
10. Year 2000 Readiness Disclosure. PFPC, with respect to services
- ----------------------------------------
provided hereunder, (a) has reviewed its business and operations, (b)
has implemented a program to remediate or replace computer applications
and systems, and (c) has implemented a testing plan to test the
remediation or replacement of computer applications and systems, in
each case, to address on a timely basis the risk that certain computer
applications and systems used by PFPC may be unable to recognize and
perform properly date sensitive functions involving dates prior to,
including and after December 31, 1999, including dates such as February
29, 2000 (the "Year 2000 Challenge"). To the best of PFPC's knowledge
and belief, the reasonably foreseeable consequences of the Year 2000
Challenge will not adversely effect PFPC's ability to perform its
duties and obligations under this Agreement. If requested by E*TRADE
Asset Management, the Fund or the Fund's Board of Trustees, PFPC will
provide written materials describing PFPC's current status and plans
with respect to the Year 2000 Challenge for use in the Fund's
registration statement and/or in materials presented to the Fund's
Board of Trustees.
11. Compensation. As compensation for services rendered by PFPC during the
term of this Agreement, E*TRADE will pay to PFPC a fee or fees as may be
agreed to in writing by E*TRADE and PFPC.
12. Indemnification. E*TRADE agrees to indemnify and hold harmless PFPC
- ----------------------
and its affiliates from all taxes, charges, expenses, assessments,
claims and liabilities (including, without limitation, liabilities
arising under securities laws and any state or foreign securities and
blue sky laws, and amendments thereto), and expenses, including
(without limitation) attorneys' fees and disbursements arising directly
or indirectly from any action or omission to act which PFPC takes (i)
at the request or on the direction of or in reliance on the advice of
the Fund or (ii) upon Written Instructions. Neither PFPC, nor any of
its affiliates, shall be indemnified against any liability (or any
expenses incident to such liability) arising out of PFPC's or its
affiliates' own willful misfeasance, bad faith, negligence, reckless
disregard of its duties and obligations under this Agreement or any
breach of this Agreement. Any amounts payable by the Fund hereunder
shall be satisfied only against the relevant Portfolio's assets and not
against the assets of any other investment portfolio of the Fund. PFPC
agrees to indemnify and hold harmless E*TRADE from all taxes, charges,
expenses, assessments, claims and liabilities (including, without
limitation, liabilities arising under securities laws and any state or
foreign securities and blue sky laws, and amendments thereto), and
expenses, including (without limitation) attorneys' fees and
disbursements arising directly or indirectly from any action or
omission to act which E*TRADE takes at the request or on the direction
of or in reliance on the advice of PFPC.
13. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on behalf of
E*TRADE, the Fund or any Portfolio, except as specifically set
forth herein or as may be specifically agreed to by PFPC in
writing. PFPC shall be obligated to exercise care and diligence
in the performance of its duties hereunder and to act in good
faith in performing services provided for under this Agreement.
PFPC shall be liable for any damages arising out of PFPC's
failure to perform its duties under this Agreement to the extent
such damages arise out of PFPC's willful misfeasance, bad faith,
negligence, reckless disregard of such duties or any breach of
this Agreement.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PFPC shall not be liable for
losses beyond its control, provided that PFPC has acted in
accordance with the standard of care set forth above; and (ii)
PFPC shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Written Instruction, notice or
other instrument which conforms to the applicable requirements of
this Agreement, and which PFPC reasonably believes to be genuine;
or (B) subject to Section 9, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control,
including acts of civil or military authority, national
emergencies, labor difficulties, fire, flood, catastrophe, acts
of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to E*TRADE, the
Fund or to any Portfolio for any consequential, special or
indirect losses or damages which E*TRADE, the Fund or any
Portfolio may incur or suffer by or as a consequence of PFPC's or
any affiliates' performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known
by PFPC or its affiliates.
14. Description of Services on a Continuous Basis. For those Portfolios
------------------------------------------------
not previously registered, PFPC will register or claim available
preemption for shares of such Portfolios in each jurisdiction in which
shares of the Portfolios are offered or sold and in connection
therewith shall have the power to prepare, execute, and deliver and
file any and all notices, applications, including without limitation,
notices and applications to register shares, claim preemption,
consents, including consents to service of process, reports, including
without limitation, all periodic reports, claims for exemption, or
other documents and instruments now or hereafter required or
appropriate in the judgment of the E*TRADE, the Fund or PFPC in
connection with the registration of shares of the Portfolios. For
those Portfolios previously registered, and for those Portfolios
initially registered by PFPC, PFPC will monitor, update, amend and file
the registrations, claims for preemption, notices, reports, including
without limitation, all periodic reports for amounts of shares of
Portfolios sold in each state, and any claims for exemption now or
hereafter required or appropriate in the judgment of the E*TRADE, the
Fund or PFPC in connection with the offer and sale of shares of the
Portfolios.
15. Duration and Termination. This Agreement shall continue until terminated
by the Fund or by PFPC on sixty (60) days' prior written notice to the
other party.
16. Notices. All notices and other communications, including Written
-------
Instructions, shall be in writing or by confirming telegram, cable,
telex, facsimile or electronic mail sending device. If notice is sent
by confirming telegram, cable, telex, facsimile or electronic mail
sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been
given three days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is
delivered. Notices shall be addressed (a) if to PFPC, at 400 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: President; (b) if to
E*TRADE, at 4500 Bohannon Drive, Menlo Park, CA 94025, Attention:
President; or (c) if to neither of the foregoing, at such other address
as shall have been provided by like notice to the sender of any such
notice or other communication by the other party.
17. Amendments. This Agreement, or any term thereof, may be changed or waived
only by written amendment, signed by the party against whom enforcement of
such change or waiver is sought.
18. Delegation; Assignment. PFPC may assign its rights and delegate its
-----------------------
duties hereunder to any majority-owned direct or indirect subsidiary of
PFPC or another wholly owned subsidiary of PFPC Worldwide, Inc.,
provided that (i) PFPC gives E*TRADE 30 days prior written notice of
such assignment or delegation, (ii) the assignee or delegate agrees and
is ready, willing and able to comply with the terms of the Agreement,
and (iii) PFPC and such assignee or delegate promptly provide such
information as E*TRADE may reasonably request, and respond to such
questions as E*TRADE may reasonably ask, relative to the assignment or
delegation (including, without limitation, the capabilities of the
assignee or delegate).
19. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous.
(a) This Agreement embodies the entire agreement and understanding
between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents
their agreement, if any, with respect to delegated duties. The
captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect. Notwithstanding any provision hereof, the services of
PFPC are not, nor shall they be, construed as constituting legal
advice or the provision of legal services for or on behalf of
E*TRADE, the Fund or any other person.
(b) PFPC shall have, unless otherwise expressly provided or authorized
in this Agreement, no authority to act for or represent E*TRADE or
the Fund in any way or otherwise be deemed an agent of E*TRADE or
the Fund.
(c) This Agreement shall be deemed to be a contract made in Delaware and
governed by Delaware law, without regard to principles of conflicts
of law.
(d) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
(e) The facsimile signature of any party to this Agreement shall
constitute the valid and binding execution hereof by such party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:
Title:
Sections 7, 9, 10 and 13 Accepted and Agreed:
E*TRADE FUNDS
By: ____________________
Title: ___________________
<PAGE>
EXHIBIT A
THIS EXHIBIT A, dated as of _________, 1999 is Exhibit A to that certain
Service Agreement dated as of ________, 1999 between PFPC Inc. and E*TRADE Asset
Management.
PORTFOLIOS
E*TRADE S&P 500 Index Fund
E*TRADE Extended Market Index Fund
E*TRADE Bond Index Fund
E*TRADE Technology Index Fund
E*TRADE International Index Fund
E*TRADE E-Commerce Index Fund
<PAGE>
COMPENSATION SCHEDULE
Portfolio
E*TRADE S&P 500 Index Fund ________________________
E*TRADE Extended Market Index Fund ________________________
E*TRADE Bond Index Fund ________________________
E*TRADE Technology Index Fund ________________________
E*TRADE International Index Fund ________________________
E*TRADE E-Commerce Index Fund ________________________
The Compensation Schedule to the State Securities Compliance Services
Agreement is accepted and agreed to on this ___ day in _________, 1999.
PFPC INC.
By:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:
Title:
August 10, 1999
E*TRADE Funds
4500 Bohannon Drive
Menlo Park, CA 94025
Re: E*TRADE Funds
Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A
(Registration Nos.: 333-66807, 811-09093)
Dear Sirs:
We have acted as counsel for E*TRADE Funds (the "Fund"), a business trust
organized and validly existing under the laws of the State of Delaware, in
connection with the above-referenced Registration Statement relating to the
issuance and sale by the Fund of an indefinite number of its shares of common
stock under the Securities Act of 1933, as amended and under the Investment
Company Act of 1940, as amended. We have examined such governmental and
corporate certificates and records as we deemed necessary to render this opinion
and we are familiar with the Fund's Certificate of Trust, Trust Instrument and
its Bylaws.
Based upon the foregoing, we are of the opinion that the shares proposed
to be sold pursuant to the Fund's Post-Effective Amendment No. 4 Registration
Statement, when paid for as contemplated in the Fund's Registration Statement,
will be legally and validly issued, fully paid and non-assessable. We hereby
consent to the filing of this opinion as an exhibit to Post-Effective Amendment
No. 4 to the Fund's Registration Statement on Form N-1A, to be filed with the
Securities and Exchange Commission, and to the use of our name in the Fund's
Statement of Additional Information of the Fund's Registration Statement to be
dated as of August 11, 1999, and in any revised or amended versions thereof
under the caption "Legal Counsel." In giving such consent, however, we do not
admit that we are within the category of persons whose consent is required by
Section 7 of the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
Very truly yours,
/s/
---------------------------------
Dechert Price & Rhoads
