Registration Nos. 333-66807
811-09093
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 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. 10 /X/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 13 /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):
X Immediately upon filing pursuant to paragraph (b)
- -------
on October __, 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 INTERNATIONAL INDEX FUND
Prospectus dated October 20, 1999
This Prospectus concisely sets forth information about the E*TRADE International
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 investment objective of the Fund is to match as closely as practicable,
before fees and expenses, the performance of an international portfolio of
common stocks represented by the Morgan Stanley Capital International Europe,
Australia, and Far East Free Index (the "EAFE Free Index" or the "Index"). The
Fund seeks to achieve its objective by investing in a master portfolio. The
Master Portfolio, in turn, seeks to match the total return performance of
foreign stock markets by investing in a representative sample of common stocks
that comprise the EAFE Free 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 October 20, 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.................................................9
HOW TO BUY, SELL AND EXCHANGE SHARES..................................10
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................15
<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 an international portfolio of common
stocks represented by the EAFE Free Index.*
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the International 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 match the total return performance of foreign
stock markets by investing in a representative sample of common stocks that
comprise the EAFE Free Index.
The EAFE Free Index is intended to represent broadly the performance of foreign
stock markets. The Master Portfolio selects a sampling of securities in the
Index for investments in accordance with their capitalization, industry sector
and valuation, among other factors. The Index is a capitalization-weighted index
and consists of approximately 1100 securities listed on the stock exchanges of
developed markets of countries in Europe (Austria, Belgium, Denmark, Finland,
France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland and the United Kingdom), Australia, New Zealand, Hong Kong,
Japan, Malaysia, and Singapore. The EAFE Free Index may also include
smaller-capitalization companies.
The Master Portfolio attempts to be fully invested at all times, and under
normal market conditions will have at least 90% of its total assets invested, in
securities comprising the EAFE Free Index. In seeking to match the performance
of the EAFE Index, the Master Portfolio may also engage in futures and options
transactions and options on futures contracts.
Principal Risks
The international stock markets may rise and fall daily. The EAFE Free Index
represents a significant portion of foreign markets. Thus, the EAFE Free 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.
- -------------
* Morgan Stanley Capital International Inc. ("MSCI") does not sponsor the Fund,
nor is it affiliated in any way with the E*TRADE Group, Inc. "Morgan Stanley
Capital International Europe, Australia, Far East Free Index(R)", "EAFE Free
Index(R)", and "EAFE(R)" are trademarks of MSCI. The Fund is not sponsored,
endorsed, sold, or promoted by the EAFE Free Index or MSCI and neither the
EAFE Free Index nor MSCI make any representation or warranty, express or
implied, regarding the advisability of investing in the Fund.
<PAGE>
The Master Portfolio invests substantially all of its assets in foreign
securities. This means the Fund can be affected by the risks of foreign
investing, including: changes in currency exchange rates and the costs of
converting currencies; foreign government controls on foreign investment;
repatriation of capital; foreign taxes; inadequate supervision and regulation of
some foreign markets; volatility from lack of liquidity; different settlement
practices or delayed settlements in some markets; difficulty in obtaining
complete and accurate information about foreign companies; less strict
accounting, auditing and financial reporting standards than those in the U.S.;
political, economic and social instability; and difficulty enforcing legal
rights outside the U.S.
Foreign securities are also subject to the risks associated with the value of
foreign currencies. A decline in the value of a foreign currency relative to the
U.S. dollar reduces the U.S. dollar value of securities denominated in that
currency.
To the extent the EAFE Free Index consists of securities of small to medium
sized companies, the value of these securities can be more volatile than that of
larger issuers and can react differently to issuer, political, market and
economic developments than the market as a whole and other types of stocks.
Smaller issuers can be lesser-known, have more limited product lines, markets
and financial resources.
There is no assurance that the Fund will achieve its investment objective. The
EAFE Free 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 Master Portfolio cannot as a practical matter own all the stocks that make
up the EAFE Free Index in perfect correlation to the Index itself. The use of
futures and options on futures contracts is intended to help the Master
Portfolio match the Index but that may not be the result. In seeking its
objective, the Master Portfolio may also engage in other derivative securities
transactions and lend securities in its Portfolio. Some derivatives may be more
sensitive than direct securities to changes in interest rates, or sudden market
moves. The value of an investment in the Fund depends to a great extent upon
changes in market conditions. The Fund seeks to track the 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 Index. The Fund will also
have exposure to the industries represented by those stocks.
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.
Performance
This Fund is expected to commence operations October 22, 1999. Therefore, the
performance information (including annual and average annual total returns) for
a full calendar year is not yet available.
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.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed in Reinvested
Dividends and other Distributions None
Redemption Fee 0.50%
(within four months of purchase)
Annual Fund Operating Expenses*
(expenses that are deducted from Fund assets)
Management Fees 0.17%**
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.38%***
Total Annual Fund Operating Expenses 0.55%
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** Management fees include a fee equal to 0.15% of daily net assets payable at
the Master Portfolio level to its investment advisor, as well as an investment
advisory fee equal to 0.02% payable by the Fund to its investment advisor.
*** The administrative fee includes a fee equal to 0.10% of daily net assets
payable at the Master Portfolio level to its co-administrators, as well as an
administrative fee equal to 0.28% payable by the Fund to E*TRADE Asset
Management, Inc. The administrative fee is based on estimated amounts for the
current fiscal year.
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*
$57 $117
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Master Portfolio's investment objective is to match as closely as
practicable, before fees and expenses, the performance of an international
portfolio of common stocks represented by the EAFE Free Index. Under normal
market conditions, the Master Portfolio invests at least 90% of its total assets
in a representative sample of the securities comprising the EAFE Free Index.
That portion of its assets is not actively managed but is designed to
substantially duplicate the investment performance of the Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the total return of its net assets before expenses and
the total return of the EAFE Free Index. A 100% correlation would mean the total
return of the Master Portfolio's assets would increase and decrease exactly the
same as the Index. As investment advisor to the Master Portfolio, Barclays
Global Fund Advisors ("BGFA") regularly monitors the Master Portfolio's
correlation to the 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 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. 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 will correspond
directly to the performance of the Master Portfolio.
The Master Portfolio may also invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity for purposes such as
payment of redemption requests and fees. The Master Portfolio may also invest up
to 15% of its net assets in illiquid securities including repurchase agreements
providing for settlement in more than seven days.
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 Master Portfolio is managed by using statistical sampling
techniques to attempt to replicate the returns of the EAFE Free Index using a
smaller number of securities. Statistical sampling techniques attempt to match
the investment characteristics of the Index and the Master Portfolio by taking
into account such factors as capitalization, industry exposures, dividend yield,
price/earnings ratio, price/book ratio, earnings growth, country weightings and
the effect of foreign taxes. The sampling techniques utilized by the Master
Portfolio are designed to allow the Master Portfolio to substantially duplicate
the investment performance of the EAFE Free Index. However, the Master Portfolio
is not expected to track the EAFE Free Index with the same degree of accuracy
that complete replication of such Index would provide.
The Fund's ability to match its investment performance to the investment
performance of the EAFE Free 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 Index is calculated, the size of the Master
Portfolio and the Fund's investment portfolios; 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
Index.
As do many index funds, the Master Portfolio also may engage in futures and
options transactions as well as other derivative securities transactions to
minimize the gap in performance that naturally exists between any index fund and
its index. This gap will occur mainly because, unlike the Index, the Master
Portfolio and the Fund incur expenses and cannot be fully invested in order to
maintain cash reserves 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 EAFE Free Index.
Temporary Investments for Liquidity Purposes. In response to market, economic or
other conditions, such as an unexpected level of shareholder purchases or
redemptions, the Master Portfolio may temporarily use such different investment
strategy as high-quality money market instruments for defensive purposes. If the
Master Portfolio does so, different factors could affect the Fund's performance
and the Fund may not achieve its investment objective.
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.
In addition, many foreign countries are less prepared than the United States to
properly process and calculate information related to dates from and after
January 1, 2000, which could result in difficulty pricing foreign investments
and failure by foreign issuers to pay timely dividends, interest or principal.
All of these factors can make foreign investments, especially those in emerging
markets, more volatile and potentially less liquid than U.S. investments. 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 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 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 25 years. As of
March 31, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $650 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.15% of the first $1 billion, and 0.10% thereafter 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 the 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 EAFE Free 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 Fund's Board of Trustees 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 prices reported on stock exchanges and securities markets around the world
are usually used to value securities in the Master Portfolio. If prices are not
readily available, the price of a security will be based on its fair market
value determined in good faith by the Master Portfolio pursuant to guidelines
approved by the MIP's Board of Trustees. International markets may be open on
days when U.S. markets are closed, and the value of foreign securities owned by
the Master Portfolio could change on days when shares of the Fund may not be
purchased, redeemed or exchanged.
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, redemptions and
exchanges 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, SELL AND EXCHANGE 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 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.
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.
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. E*TRADE's
customer service is available 24 hours, seven days a week.
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: E*TRADE Securities., Inc., 66 Brooks
Drive, Braintree, MA 02184-8160.
In Person. Investors may visit E*TRADE Securities' self-service center in Menlo
Park, California at the address on the back cover page of this prospectus
between 8:00 a.m. and 5:00 p.m. (pacific time). Customer service will only
accept checks or money orders made payable to E*TRADE Securities, Inc.
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/Exchange Shares
Minimum Investment Requirements:
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
* 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.
After your account is established you may use any of the methods described below
to buy, sell or exchange shares. You can only sell funds that are held in your
E*TRADE Securities account; that means you cannot "short" shares of the Fund.
Whether you are investing in the Fund for the first time, adding to an existing
investment or exchanging shares, 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.
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 four months.
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, sell or exchange 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 or exchange shares by phone through an E*TRADE
Securities broker for an additional $15 fee.
The Fund reserves the right to refuse a telephone redemption or exchange request
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, redemptions or exchanges 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 four months.
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 four-month 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 four months, the fee may be assessed. The
fee may apply to shares held through omnibus accounts or certain retirement
plans.
Redemption In-Kind. The Fund reserves the right to honor any request for
redemption or repurchases by making payment in whole or in part in readily
marketable securities ("redemption in-kind"). These securities will be chosen by
the Fund and valued as they are for purposes of computing the Fund's NAV. You
may incur transaction expenses in converting these securities to cash.
Exchange. You may exchange your shares of the Fund for shares of another E*TRADE
fund. An exchange is two transactions: a sale (or redemption) of shares of one
fund and the purchase of shares of a different fund with the redemption
proceeds. After we receive your exchange request, the Fund's transfer agent will
simultaneously process exchange redemptions and exchange purchases at the share
prices next determined, as further explained under "Pricing of Fund Shares."
You must meet the minimum investment requirements for the E*TRADE fund into
which you are exchanging or purchasing shares. The Fund reserves the right to
revise or terminate the exchange privilege, limit the amount of an exchange, or
reject an exchange at any time, without notice.
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 (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), 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. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
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 October 20, 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 International Index Fund
October 20, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE International Index
Fund (the "Fund") dated October 20, 1999 (as amended from time to time). Unless
otherwise defined herein, capitalized terms have the meanings given to them in
the Fund's Prospectus.
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.........................................................17
TRUSTEES AND OFFICERS.................................................21
INVESTMENT MANAGEMENT.................................................24
SERVICE PROVIDERS.....................................................25
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION........................27
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..............................29
SHAREHOLDER INFORMATION...............................................30
TAXATION..............................................................30
UNDERWRITER...........................................................34
MASTER PORTFOLIO ORGANIZATION.........................................35
PERFORMANCE INFORMATION...............................................35
APPENDIX..............................................................40
<PAGE>
FUND HISTORY
The E*TRADE International 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 Morgan Stanley Capital International
Europe, Australia, and Far East Free Index (the "EAFE Free 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.
To achieve its investment objective, the Fund intends to invest all of its
assets in the International Index Master Portfolio (the "Master Portfolio"), 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.
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 of either
the Fund or the Master Portfolio unless otherwise noted.
Floating- and Variable-Rate Obligations. 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 BGFA determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Master Portfolio may invest. BGFA, on behalf of the Master Portfolio, 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.
Foreign Currency Futures Contracts. In General. A foreign currency futures
contract is an agreement between two parties for the future delivery of a
specified currency at a specified time and at a specified price. A "sale" of a
futures contract means the contractual obligation to deliver the currency at a
specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange.
While futures contracts based on currencies do provide for the delivery and
acceptance of a particular currency, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. The Master Portfolio will incur brokerage fees when it
purchases and sells futures contracts. At the time such a purchase or sale is
made, the Master Portfolio must provide cash or money market securities as a
deposit known as "margin." The initial deposit required will vary, but may be as
low as 2% or less of a contract's face value. Daily thereafter, the futures
contract is valued through a process known as "marking to market," and the
Master Portfolio may receive or be required to pay "variation margin" as the
futures contract becomes more or less valuable.
Purchase and Sale of Currency Futures Contracts. In order to hedge its portfolio
and to protect it against possible variations in foreign exchange rates pending
the settlement of securities transactions, the Master Portfolio may buy or sell
currency futures contracts. If a fall in exchange rates for a particular
currency is anticipated, the Master Portfolio may sell a currency futures
contract as a hedge. If it is anticipated that exchange rates will rise, the
Master Portfolio may purchase a currency futures contract to protect against an
increase in the price of securities denominated in a particular currency the
Master Portfolio intends to purchase. These futures contracts will be used only
as a hedge against anticipated currency rate changes.
A currency futures contract sale creates an obligation by the Master Portfolio,
as seller, to deliver the amount of currency called for in the contract at a
specified futures time for a special price. A currency futures contract purchase
creates an obligation by the Master Portfolio, as purchaser, to take delivery of
an amount of currency at a specified future time at a specified price. Although
the terms of currency futures contracts specify actual delivery or receipt, in
most instances the contracts are closed out before the settlement date without
the making or taking of delivery of the currency. Closing out of a currency
futures contract is effected by entering into an offsetting purchase or sale
transaction.
In connection with transactions in foreign currency futures, the Master
Portfolio will be required to deposit as "initial margin" an amount of cash or
short-term government securities equal to from 5% to 8% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the futures contract.
Risk Factors Associated with Futures Transactions. The effective use of futures
strategies depends on, among other things, the Master Portfolio's ability to
terminate futures positions at times when BGFA deems it desirable to do so.
Although the Master Portfolio will not enter into a futures position unless BGFA
believes that a liquid secondary market exists for such future, there is no
assurance that the Master Portfolio will be able to effect closing transactions
at any particular time or at an acceptable price. The Master Portfolio generally
expects that its futures transactions will be conducted on recognized U.S. and
foreign securities and commodity exchanges.
Futures markets can be highly volatile and transactions of this type carry a
high risk of loss. Moreover, a relatively small adverse market movement with
respect to these transactions may result not only in loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited.
The use of futures involves the risk of imperfect correlation between movements
in futures prices and movements in the price of currencies which are the subject
of the hedge. The successful use of futures strategies also depends on the
ability of BGFA to correctly forecast interest rate movements, currency rate
movements and general stock market price movements.
In addition to the foregoing risk factors, the following sets forth certain
information regarding the potential risks associated with the Master Portfolio's
futures transactions.
Risk of Imperfect Correlation. The Master Portfolio's ability effectively to
hedge currency risk through transactions in foreign currency futures depends on
the degree to which movements in the value of the currency underlying such
hedging instrument correlate with movements in the value of the relevant
securities held by the Master Portfolio. If the values of the securities being
hedged do not move in the same amount or direction as the underlying currency,
the hedging strategy for the Master Portfolio might not be successful and the
Master Portfolio could sustain losses on its hedging transactions which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the currency underlying a futures contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the Master
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken.
Under certain extreme market conditions, it is possible that the Master
Portfolio will not be able to establish hedging positions, or that any hedging
strategy adopted will be insufficient to completely protect the Master
Portfolio.
The Master Portfolio will purchase or sell futures contracts only if, in BGFA's
judgment, there is expected to be a sufficient degree of correlation between
movements in the value of such instruments and changes in the value of the
relevant portion of the Master Portfolio's portfolio for the hedge to be
effective. There can be no assurance that BGFA's judgment will be accurate.
Potential Lack of a Liquid Secondary Market. The ordinary spreads between prices
in the cash and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin requirements. This
could require the Master Portfolio to post additional cash or cash equivalents
as the value of the position fluctuates. Further, rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market may be
lacking. Prior to exercise or expiration, a futures position may be terminated
only by entering into a closing purchase or sale transaction, which requires a
secondary market on the exchange on which the position was originally
established. While the Master Portfolio will establish a futures position only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures contract at
any specific time. In such event, it may not be possible to close out a position
held by the Master Portfolio, which could require the Master Portfolio to
purchase or sell the instrument underlying the position, make or receive a cash
settlement, or meet ongoing variation margin requirements. The inability to
close out futures positions also could have an adverse impact on the Master
Portfolio's ability effectively to hedge its securities, or the relevant portion
thereof.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a contract during a single
trading day and prohibit trading beyond such limits once they have been reached.
The trading of futures contracts also is subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of the brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Trading and Position Limits. Each contract market on which futures contracts are
traded has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert with
others. "Shares" means the equal proportionate transferable units of interest
into which the beneficial interest of each Series or Class is divided from time
to time (including whole Shares and fractions of Shares). BGFA does not believe
that these trading and position limits will have an adverse impact on the
hedging strategies regarding the Master Portfolio's investments.
Regulations on the Use of Futures Contracts. Regulations of the CFTC require
that the Master Portfolio enter into transactions in futures contracts for
hedging purposes only, in order to assure that it is not deemed to be a
"commodity pool" under such regulations. In particular, CFTC regulations require
that all short futures positions be entered into for the purpose of hedging the
value of investment securities held by the Master Portfolio, and that all long
futures positions either constitute bona fide hedging transactions, as defined
in such regulations, or have a total value not in excess of an amount determined
by reference to certain cash and securities positions maintained for the Master
Portfolio, and accrued profits on such positions. In addition, the Master
Portfolio may not purchase or sell such instruments if, immediately thereafter,
the sum of the amount of initial margin deposits on its existing futures
positions and premiums paid for options on futures contracts would exceed 5% of
the market value of the Master Portfolio's total assets.
When the Master Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be segregated with the
Master Portfolio's custodian so that the amount so segregated, plus the initial
deposit and variation margin held in the account of its broker, will at all
times equal the value of the futures contract, thereby insuring that the use of
such futures is unleveraged.
The Master Portfolio's ability to engage in the hedging transactions described
herein may be limited by the policies and concerns of various Federal and state
regulatory agencies. Such policies may be changed by vote of the Master
Portfolio's Board of Trustees.
BGFA uses a variety of internal risk management procedures to ensure that
derivatives use is consistent with the Master Portfolio's investment objective,
does not expose the Master Portfolio to undue risk and is closely monitored.
These procedures include providing periodic reports to the Board of Trustees
concerning the use of derivatives.
Foreign Obligations and Securities. The foreign securities in which the Master
Portfolio may invest include common stocks, preferred stocks, warrants,
convertible securities and other securities of issuers organized under the laws
of countries other than the United States. Such securities also include equity
interests in foreign investment funds or trusts, real estate investment trust
securities and any other equity or equity-related investment whether denominated
in foreign currencies or U.S. dollars.
The Master Portfolio may invest in foreign securities through American
Depositary Receipts ("ADRs"), Canadian Depositary Receipts ("CDRs"), European
Depositary Receipts ("EDRs"), International Depositary Receipts ("IDRs") and
Global Depositary Receipts ("GDRs") or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. stock exchange, and CDRs are
receipts typically issued by a Canadian bank or trust company that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR. EDRs and IDRs are receipts typically issued by European banks
and trust companies, and GDRs are receipts issued by either a U.S. or non-U.S.
banking institution, that evidence ownership of the underlying foreign
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and IDRs in bearer form are designed primarily for
use in Europe.
For temporary defensive purposes, the Master Portfolio may invest in fixed
income securities of non-U.S. governmental and private issuers. Such investments
may include bonds, notes, debentures and other similar debt securities,
including convertible securities.
Investments in foreign obligations involve certain considerations that are not
typically associated with investing in domestic securities. There may be less
publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same accounting,
auditing and financial reporting standards or governmental supervision as
domestic issuers. In addition, with respect to certain foreign countries, taxes
may be withheld at the source under foreign tax laws, and there is a possibility
of expropriation or confiscatory taxation, political, social and monetary
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries.
From time to time, investments in other investment companies may be the most
effective available means by which the Master Portfolio may invest in securities
of issuers in certain countries. Investment in such investment companies may
involve the payment of management expenses and, in connection with some
purchases, sales loads, and payment of substantial premiums above the value of
such companies' portfolio securities. At the same time, the Master Portfolio
would continue to pay its own management fees and other expenses.
Investment income on certain foreign securities in which the Master Portfolio
may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the Master Portfolio would be subject.
The Master Portfolio's investments in foreign securities involve currency risks.
The U.S. dollar value of a foreign security tends to decrease when the value of
the U.S. dollar rises against the foreign currency in which the security is
denominated, and tends to increase when the value of the U.S. dollar falls
against such currency. To attempt to minimize risks to the Master Portfolio from
adverse changes in the relationship between the U.S. dollar and foreign
currencies, the Master Portfolio may engage in foreign currency transactions on
a spot (i.e., cash) basis and may purchase or sell forward foreign currency
exchange contracts ("forward contracts"). The Master Portfolio may also purchase
and sell foreign currency futures contracts (see "Purchase and Sale of Currency
Futures Contracts"). A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date that is individually
negotiated and privately traded by currency traders and their customers.
Forward contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and is traded at a net price without
commission. The Master Portfolio will direct its custodian, to the extent
required by applicable regulations, to segregate high grade liquid assets in an
amount at least equal to its obligations under each forward contract. Neither
spot transactions nor forward contracts eliminate fluctuations in the prices of
the Master Portfolio's portfolio securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Master Portfolio may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when BGFA believes that a foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Master Portfolio's securities denominated in
such foreign currency, or when BGFA believes that the U.S. dollar may suffer a
substantial decline against the foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount (a
"position hedge").
The Master Portfolio may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where BGFA
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which the portfolio securities are denominated (a
"cross-hedge").
Foreign currency hedging transactions are an attempt to protect the Master
Portfolio against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Master Portfolio's custodian will, to the extent required by applicable
regulations, segregate cash, U.S. Government securities or other high-quality
debt securities having a value equal to the aggregate amount of the Master
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Master
Portfolio's commitments with respect to such contracts.
The cost to the Master Portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange usually are conducted on a principal basis, no fees or commissions are
involved. BGFA considers on an ongoing basis the creditworthiness of the
institutions with which the Master Portfolio enters into foreign currency
transactions. The use of forward currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. If a devaluation generally
is anticipated, the Master Portfolio may not be able to contract to sell the
currency at a price above the devaluation level it anticipates.
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 adviser. Securities purchased
on a when-issued or forward commitment basis may expose the Master Portfolio to
risk because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued or forward commitment basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself.
The Master Portfolio will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Master
Portfolio's commitments to purchase when-issued securities. If the value of
these assets declines, the Master Portfolio will segregate additional liquid
assets on a daily basis so that the value of the segregated assets is equal to
the amount of such commitments.
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 Master Portfolio will provide appropriate disclosure in its prospectus.
Hedging and Related Strategies. The Master Portfolio may attempt to protect the
U.S. dollar equivalent value of one or more of its investments (hedge) by
purchasing and selling foreign currency futures contracts and by purchasing and
selling currencies on a spot (i.e., cash) or forward basis. Foreign currency
futures contracts are bilateral agreements pursuant to which one party agrees to
make, and the other party agrees to accept, delivery of a specified type of
currency at a specified future time and at a specified price. Although such
futures contracts by their terms call for actual delivery or acceptance of
currency, in most cases the contracts are closed out before the settlement date
without the making or taking of delivery. A forward currency contract involves
an obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed upon
by the parties, at a price set at the time the contract is entered into.
The Master Portfolio may enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future date either with respect
to specific transactions or with respect to portfolio positions. For example,
the Master Portfolio may enter into a forward currency contract to sell an
amount of a foreign currency approximating the value of some or all of the
Master Portfolio's securities denominated in such currency. The Master Portfolio
may use forward contracts in one currency or a basket of currencies to hedge
against fluctuations in the value of another currency when BGFA anticipates
there will be a correlation between the two and may use forward currency
contracts to shift the Master Portfolio's exposure to foreign currency
fluctuations from one country to another. The purpose of entering into these
contracts is to minimize the risk to the Master Portfolio from adverse changes
in the relationship between the U.S. dollar and foreign currencies.
BGFA might not employ any of the strategies described above, and there can be no
assurance that any strategy used will succeed. If BGFA incorrectly forecasts
exchange rates, market values or other economic factors in utilizing a strategy
for the Master Portfolio, the Master Portfolio might have been in a better
position had it not hedged at all. The use of these strategies involves certain
special risks, including (1) the fact that skills needed to use hedging
instruments are different from those needed to select the Master Portfolio's
securities, (2) possible imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the investments
being hedged, (3) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in losses,
by offsetting favorable price movements in hedged investments and (4) the
possible inability of the Master Portfolio to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Master Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Master Portfolio to maintain
"cover" or to segregate securities in connection with hedging transactions and
the possible inability of the Master Portfolio to close out or to liquidate its
hedged position.
New financial products and risk management techniques continue to be developed.
The Master Portfolio may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and tax considerations.
Illiquid Securities. 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,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the 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.
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 with respect to all such companies 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 interests of exchange-listed closed-end funds to the extent permitted
under the 1940 Act.
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 such Master Portfolio
with respect to the loan is maintained with the Master Portfolio. In determining
whether or not to lend a security to a particular broker, dealer or financial
institution, the BGFA 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 arrangements having a duration longer than one
year. Any securities that the Master Portfolio receives as collateral do not
become part of its 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 their respective total
assets. Loans of securities by the Master Portfolio are subject to termination
at the Master Portfolio's or the borrower's option. The Master Portfolio may pay
reasonable administrative and custodial fees in connection with a securities
loan and may pay a negotiated portion of the interest or fee earned with respect
to the collateral to the borrower or the placing broker. Borrowers and placing
brokers are not permitted to be affiliated, directly or indirectly, with the
Master Portfolio, BGFA or Stephens Inc., one of the Master Portfolio's
co-administrators.
Privately Issued Securities. The Master Portfolio may invest in privately issued
securities, including those which may be resold only in accordance with Rule
144A ("Rule 144A Securities") under the Securities Act of 1933, as amended (the
"1933 Act"). Rule 144A Securities are restricted securities that are not
publicly traded. Accordingly, the liquidity of the market for specific Rule 144A
Securities may vary. Delay or difficulty in selling such securities may result
in a loss to the Master Portfolio. Privately issued or Rule 144A securities that
are determined by BGFA to be "illiquid" are subject to the Master Portfolio's
policy of not investing more than 15% of its net assets in illiquid securities.
BGFA, under guidelines approved by Board of Trustees of MIP, will evaluate the
liquidity characteristics of each Rule 144A Security proposed for purchase by
the Master Portfolio on a case-by-case basis and will consider the following
factors, among others, in their evaluation: (1) the frequency of trades and
quotes for the Rule 144A Security; (2) the number of dealers willing to purchase
or sell the Rule 144A Security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the Rule 144A Security; and (4) the
nature of the Rule 144A Security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the Rule 144A Security, the method of soliciting
offers and the mechanics of transfer).
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
interestholder 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 BGFA; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of BGFA
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, BGFA 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. BGFA and/or sub-adviser
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.
BGFA and/or sub-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.
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. 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 where it is not
obligated to do so. 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.
Repurchase Agreements. The Master Portfolio may engage in 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. 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 a Master Portfolio under the 1940 Act.
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 (with the exception of the restriction on illiquid securities).
Unless indicated otherwise below, the Fund 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. This
limitation does not apply to foreign currency transactions including, without
limitation, forward currency contracts;
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 Fund may purchase and sell (i.e.,
write) options, forward contracts, futures contracts, including those relating
to indexes, and options on futures contracts or indices;
4. 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 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 Fund 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 Fund's entry into options,
forward contracts, futures contracts, including those relating to indices, and
options on futures contracts or indices shall not constitute borrowing to the
extent certain segregated accounts are established and maintained by the Fund.
6. Make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Fund 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 Fund's Board of Trustees;
7. Act as an underwriter of securities of other issuers, except to the extent
the Fund may be deemed an underwriter under the 1933 Act 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 particular industry
or group of closely related industries to the extent which companies whose
stocks comprise the EAFE Free Index belong to a particular industry or group of
closely related industries 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);
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 Investment
Restriction Nos. 3 and 5 may be deemed to give rise to a senior security; and
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:
1. 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 administration fees,
that would be in addition to those charged by the Fund.
2. 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; and
3. 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.
4. 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, except that it may invest a portion of its
assets in a money market fund for cash management purposes.
MASTER PORTFOLIO POLICIES
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 will not constitute a violation of that 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. This
limitation does not apply to foreign currency transactions including, without
limitation, forward currency contracts;
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 indices;
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 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 indices, and options on futures contracts or indices 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 MIP's Board of Trustees;
7. Act as an underwriter of securities of other issuers, except to the extent
the Master Portfolio may be deemed an underwriter under the 1933 Act 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 and 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 EAFE Free 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 Investment
Restriction Nos. 3 and 5 may be deemed to give rise to a senior security; and
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 administration 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, Inc. She joined
the company in January 1996
after serving as a consultant
to E*TRADE Group, Inc. 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(51) 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 (40) 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 Trustees 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>
Name of Person, Aggregate Total Compensation From Fund
Position Compensation from and Fund Complex Paid to
the Fund Trustees or 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 October 22, 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 September 30, 1999, Softbank America Inc. owned 26.1% 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, and is located at 4500 Menlo Park, CA 94025. The
Investment Advisor commenced operating in February 1999 and, therefore, has
limited experience as an investment advisor. As of September 30, 1999, the
Investment Advisor provided investment advisory services for over $59 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) 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 March 31, 1999, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $650 billion of assets. Barclays has been involved in banking
in the United Kingdom for over 300 years. Pursuant to an Investment Advisory
Contract (the "Advisory Contract") with the Master Portfolio, BGFA provides
investment advisory services in connection with the management of the Master
Portfolio's assets. BGFA receives a monthly fee from the Master Portfolio at an
annual rate equal to 0.15% of the first $1 billion and 0.10% thereafter, 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.
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 without penalty and will terminate automatically if assigned.
Purchase and sale orders for portfolio securities of the Master Portfolio may be
combined with those of other accounts that BGFA manages or advises, and for
which it has brokerage placement authority in the interest of seeking the most
favorable result. When BGFA determines that a particular security should be
bought or sold for the Master Portfolio and other accounts managed by BGFA, it
undertakes to allocate those transactions among the participants equally. 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. Stephens and BGI provide
the Master Portfolio with administrative services, including: (i) general
supervision of the Master Portfolio's non-investment operations, and
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.
Stephens and BGI are entitled to receive a monthly fee, in the aggregate, at an
annual rate of 0.10% of the first $1 billion, and 0.07% thereafter, of the
average daily net assets of the Master Portfolio for providing administrative
services and assuming expenses. BGI has delegated certain of its duties as
co-administrator to Investors Bank & Trust Company ("IBT"). IBT, as
sub-administrator is compensated by BGI for performing certain administrative
services.
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.
IBT currently acts as the Master Portfolio's custodian. IBT is not entitled to
receive compensation for its custodial services so long as it is entitled to
receive compensation for providing sub-administrative services to the Master
Portfolio.
Administrator of the Fund. E*TRADE Asset Management, the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management 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 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 receives a fee
equal to 0.28% of the average daily net assets of the Fund. This fee is waived
to the extent independent trustee expenses and any fees of their counsel, equal
or exceed 0.005% of the Fund's average daily net assets. E*TRADE Asset
Management is responsible under that agreement for expenses otherwise payable by
the Fund, including registration and qualification filing, transfer agency,
dividend disbursing, custody, auditing and legal (other than litigation) fees
and expenses, to the extent that those fees and expenses (together with
independent trustees' expenses and their counsel fees, if any) 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, 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.
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, 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, exchanges 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, exchange 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, exchange and
redemption orders, transfers among and changes in shareholder-designated
accounts; (vii) informing the distributor of the Fund of the gross amount of
purchase, exchange 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 the 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 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 series of the Trust. 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.
Foreign Taxes. The Fund may be subject to certain taxes imposed by the countries
in which it invests or operates. If the Fund qualifies as a regulated investment
company and if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
U.S. income tax principles as having been paid by the Fund's shareholders. For
any year for which the Fund makes such an election, each shareholder will be
required to include in its gross income an amount equal to its allocable share
of such taxes paid by the Fund and the shareholders will be entitled, subject to
certain limitations, to credit their portions of these amounts against their
U.S. federal income tax liability, if any, or to deduct their portions from
their U.S. taxable income, if any. No deduction for foreign taxes may be claimed
by individuals who do not itemize deductions. In any year in which it elects to
"pass through" foreign taxes to shareholders, the Fund will notify shareholders
within 60 days after the close of the Fund's taxable year of the amount of such
taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains (defined
below), may have to be treated as derived from U.S. sources. The limitation of
the foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals.
The foregoing is only a general description of the foreign tax credit. Because
application of the credit depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
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.
Section 988 Gains or Losses. Gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
Passive Foreign Investment Companies. The Fund may invest in shares of foreign
corporations that may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. The Fund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund would be required to include in its gross income its share of the earnings
of a PFIC on a current basis, regardless of whether distributions were received
from the PFIC in a given year. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election would involve marking to market the Fund's
PFIC shares at the end of each taxable year, with the result that unrealized
gains would be treated as though they were realized and reported as ordinary
income. Any mark-to-market losses and any loss from an actual disposition of
PFIC shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
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, exchanging 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 Declaration 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 the Fund may
purchase and the investments measured by the indices.
The historical EAFE Free 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.
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.
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 EAFE Free 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 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 certain ratings assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service,
Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff") and IBCA Inc. and IBCA Limited
("IBCA"):
S&P
Bond Ratings
"AAA"
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA"
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
"A"
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 obligations in higher rated
categories.
"BBB"
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 for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Moody's
Bond Ratings
"Aaa"
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
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa"
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
"A"
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa"
Bonds 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.
Moody's applies the numerical modifiers "1", "2" and "3" to show relative
standing within the major rating categories, except in the "Aaa" category. The
modifier "1" indicates a ranking for the security in the higher end of a rating
category; the modifier "2" indicates a mid-range ranking; and the modifier "3"
indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating ("P-1") Prime-1 is the highest commercial paper rating assigned
by Moody's. Issuers of "P-1" paper must have a superior capacity for repayment
of short-term promissory obligations, and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return on
funds employed, conservative capitalization structures with moderate reliance on
debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated ("P-2") Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions.
Ample alternate liquidity is maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
"AAA"
Bonds rated "AAA" are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA"
Bonds rated "AA" are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
"A"
Bonds rated "A" are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB"
Bonds rated "BBB" are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
"F-1+"
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1"
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
"F-2"
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
Bond Ratings
"AAA"
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
"AA"
Bonds rated AA are considered high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A"
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB"
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating "Duff-1" is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated "Duff-2" is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
IBCA
Bond and Long-Term Ratings
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations for which there
is a very low expectation of investment risk are rated AA by IBCA. Capacity for
timely repayment of principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase investment risk albeit
not very significantly.
Commercial Paper and Short-Term Ratings
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2 are
supported by a strong capacity for timely repayment, although such capacity may
be susceptible to adverse changes in business, economic or financial conditions.
International and U.S. Bank Ratings
An IBCA bank rating represents IBCA's current assessment of the strength
of the bank and whether such bank would receive support should it experience
difficulties. In its assessment of a bank, IBCA uses a dual rating system
comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns
banks Long- and Short-Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5, address the
question of whether the bank would receive support provided by central banks or
shareholders if it experienced difficulties, and such ratings are considered by
IBCA to be a prime factor in its assessment of credit risk. Individual Ratings,
which range in gradations from A through E, represent IBCA's assessment of a
bank's economic merits and address the question of how the bank would be viewed
if it were entirely independent and could not rely on support from state
authorities or its owners.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 842-2500
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.4
(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.4
(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.4
(d)(v) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
E-Commerce Index Fund.6
(d)(vi) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the
Registrant with respect to the E*TRADE E-Commerce Index Fund.6
(d)(vii) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Global Titans Index Fund.7
(d)(viii) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the
Registrant with respect to the E*TRADE Global Titans Index Fund.7
(d)(ix) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Premier Money Fund.7
(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.4
(e)(iii) Form of Amendment No. 1 to the Amended and Restated Underwriting
Agreement between E*TRADE Securities, Inc. and the Registrant
with respect to E*TRADE Global Titans Index Fund and E*TRADE
Premier Money Fund.7
(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.4
(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.4
(g)(iv) Form of Amendment No. 1 to the Custodian Services Agreement
between Registrant and PFPC Trust Company with respect to the
E*TRADE Global Titans Index Fund and E*TRADE Premier Money Fund.7
(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.4
(h)(1)(iii) Form of Amendment No. 1 of Third Party Feeder Fund Agreement
among the Registrant, E*TRADE Securities, Inc. and Master
Investment Portfolio with respect to the E*TRADE International
Index Fund.7
(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.4
(h)(2)(iii) Form of the Amended and Restated Administrative Services
Agreement between the Registrant and E*TRADE Asset Management,
Inc. with respect to the E*TRADE Global Titans Index Fund and
E*TRADE Premier Money Fund.7
(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.5
(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.4
(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.4
(h)(4)(i) Exhibit A to the Sub-Administration and Accounting Services
Agreement between E*TRADE Funds and PFPC, Inc. with respect to
the E*TRADE E-Commerce Index Fund.6
(h)(4)(ii) Form of Amendment No. 1 to the Sub-Administration and Accounting
Services Agreement between E*TRADE Funds and PFPC, Inc. with
respect to the E*TRADE Global Titans Index Fund and E*TRADE
Premier Money Fund.7
(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.4
(h)(5)(iii) Form of Amendment No. 2 to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Global Titans Index Fund and E*TRADE Premier Money Fund.7
(h)(6)(i) Form of Retail Shareholder Services Agreement between E*TRADE
Securities, Inc., the Registrant and E*TRADE Asset Management,
Inc. with respect to the E*TRADE S&P 500 Index Fund.5
(h)(6)(ii) Form of Amendment No. 1 to the Retail Shareholder Services
Agreement between E*TRADE Securities, 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.4
(h)(6)(iii) Form of Amendment No. 2 to the Retail Shareholder Services
Agreement between E*TRADE Securities, Inc., the Registrant and
E*TRADE Asset Management, Inc. with respect to the E*TRADE Global
Titans Index Fund and E*TRADE Premier Money Fund.7
(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.4
(h)(7)(i) Form of Amendment No. 1 to the State Securities Compliance
Services Agreement between E*TRADE Funds and PFPC, Inc. with
respect to E*TRADE Global Titans Index Fund and E*TRADE Premier
Money Fund.7
(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.4
(i)(3) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE E-Commerce Index Fund.6
(i)(4) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE International Index Fund.
(i)(5) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Global Titans Index Fund and E*TRADE Premier Money Fund.7
(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
*** Power of Attorney and Secretary's Certificate of Registrant for signature
on behalf of Registrant.5
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.
4 Incorporated by reference from the Registrant's Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A filed with the SEC on August 11,
1999.
5 Incorporated by reference from the Registrant's Post-Effective Amendment No. 7
to the Registration Statement on Form N-1A filed with the SEC on October 8,
1999.
6 Incorporated by reference from the Registrant's Post-Effective Amendment No. 9
to the Registration Statement on Form N-1A filed with the SEC on October 20,
1999.
7 To be filed by amendment.
Item 24. Persons Controlled by or Under Common Control With Registrant
As of September 30, 1999, Softbank America Inc. owned 26.1% 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 Sr. Manager, E*TRADE
Secretary Securities, Inc.,
1997-98
</TABLE>
Barclays Global Fund Advisors ("BGFA"), a wholly-owned subsidiary of
Barclays Global Investors, N.A. ("BGI"), is the sub-advisor for the E*TRADE
Technology Index Fund, E*TRADE E-Commerce Index Fund and E*TRADE Global Titans
Index Fund. BGFA is a registered investment adviser to certain open-end,
management investment companies and various other institutional investors. The
directors and officers of the sub-advisor and their business and other
connections are as follows:
<TABLE>
<CAPTION>
Name and Position at BGFA Other Business Connections
<S> <C>
Patricia Dunn Director of BGFA and Co-Chairman and Director of
Director BGI, 45 Fremont Street, San Francisco, CA 94105
Lawrence G. Tint, Chairman of the Board of Directors of BGFA and
Chairman and Director Chief Executive Officer of BGI, 45 Fremont
Street, San Francisco, CA 94105
Geoffrey Fletcher Chief Financial Officer of BGFA and BGI
since May 1997, 45 Fremont Street, San Francisco,
CA 94150 Managing Director and Principal Accounting
Officer at Bankers Trust Company from 1988 - 1997,
505 Market Street, San Francisco, CA 94111
</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, E*TRADE
E-Commerce Index Fund, E*TRADE Global Titans Index, and E*TRADE Premier Money
Fund, PFPC Inc. at 400 Bellevue Parkway, Wilmington, DE 19809; and
(5) the Master Portfolio's investment advisor and sub-advisor with respect
to the E*TRADE Technology Index Fund, E*TRADE E-Commerce Index Fund and E*TRADE
Global Titans Index Fund, 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. 10 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 18th
day of October, 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. 10 to the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/
- ------------------------------
Kathy Levinson Trustee October 18, 1999
/s/
- ------------------------------
Leonard C. Purkis Trustee and Treasurer October 18, 1999
(Principal Financial and
Accounting Officer)
/s/
- ------------------------------
Brian C. Murray President (Principal October 18, 1999
Executive Officer)
/s/
- ------------------------------
Shelly J. Meyers Trustee October 18, 1999
/s/
- ------------------------------
Ashley T. Rabun Trustee October 18, 1999
/s/
- ------------------------------
Steven Grenadier Trustee October 18, 1999
*By
- ------------------------------
David A. Vaughan
Attorney-In-Fact
<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 to the
Registration Statement on Form N-1A of the E*TRADE Funds with respect to the
E*TRADE International Index Fund pursuant to Rule 485(b) under the Securities
Act of 1933 and the Master Investment Portfolio has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Little Rock, and State of Arkansas on the 18th
day of October, 1999.
MASTER INVESTMENT PORTFOLIO
INTERNATIONAL 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 to the Registration Statement on Form N-1A of the
E*TRADE Funds with respect to the E*TRADE International Index Fund has been
signed below by the following persons in the capacities and on the date
indicated:
Name Title Date
*
- -------------------------
R. Greg Feltus* Chairman, President (Principal October 18, 1999
Executive Officer) and Trustee
/s/
- -------------------------
Richard H. Blank, Jr. Secretary and Treasurer October 18, 1999
(Principal Financial Officer)
*
- -------------------------
Jack S. Euphrat* Trustee October 18, 1999
*
- -------------------------
W. Rodney Hughes* Trustee October 18, 1999
*By:/s/
-------------------------
Richard H. Blank, Jr.
Attorney-in-Fact pursuant to powers of attorney as previously filed.
<PAGE>
EXHIBIT LIST
Exhibit
No. DESCRIPTION
(i)(4) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE International Index Fund.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
Telephone: 202-261-3300
October 19, 1999
E*TRADE Funds
4500 Bohannon Drive
Menlo Park, CA 94025
Re: E*TRADE Funds
Post-Effective Amendment No. 10 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
beneficial interest 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. 10 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. 10 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 October 22, 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
