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[LOGO] TRAK(R)
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Personalized Investment Advisory Service
CONSULTING GROUP
CAPITAL MARKETS FUNDS
THIS MATERIAL CONSISTS OF A DESCRIPTION OF TRAK PERSONALIZED
INVESTMENTADVISORY SERVICE AND A PROSPECTUS OF CONSULTING
GROUP CAPITAL MARKETS FUNDS. A TABLE LISTING THE COSTS AND
EXPENSES ASSOCIATED WITH AN INVESTMENTIN THE TRUST APPEARS
ON PAGES 4 AND 5 OF THE PROSPECTUS. READ THE DESCRIPTION AND
THE PROSPECTUS CAREFULLY BEFORE INVESTING.
January 1, 1996
SMITH BARNEY
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A Member of TravelersGroup [LOGO]
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[LOGO] TRAK(R)
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Personalized Investment Advisory Service
TRAK Personalized Investment Advisory Service ("TRAK") is a securities
advisory service offered by the Consulting Group (the "Consulting Group") of
Smith Barney Inc. ("Smith Barney") designed to assist a client in devising and
implementing a reasoned, systematic, long-term investment strategy tailored to
the client's financial circumstances. TRAK links the Consulting Group's
experience in evaluating an investor's investment objectives and risk
tolerances, the abilities of investment advisers to meet those objectives and
risk tolerances and the historic performance of various asset classes, with
the convenience and cost effectiveness of a broad array of investment
portfolios. TRAK consists of the following elements for programs other than
certain qualified employee benefit plans:
THE REQUEST
The core of TRAK is the Consulting Group's evaluation of the client's
financial goals and risk tolerances based on the Request, a confidential
client questionnaire that the client completes with the assistance of his
or her Financial Consultant. In reviewing and processing a client's
Request, the Consulting Group considers the client's specific investment
goals--a secure retirement, the education of children, the preservation and
growth of an inheritance or savings or the accumulation of capital for the
formation of a business--in terms of the client's time horizon for
achievement of those goals, immediate and projected financial means and
needs and overall tolerances for investment risk.
THE RECOMMENDATION
Based on its evaluation of the client's financial goals and
circumstances, the Consulting Group prepares and issues a Recommendation.
In the Recommendation, the Consulting Group provides advice as to an
appropriate mix of investment types designed to balance the client's
financial goals against his or her means and risk tolerances as part of a
long term investment strategy. Numerous financial studies, including a
study in the Financial Analysis Journal, a major publication forum for
investment research, have concluded that the single most important
component determining the performance of an investment portfolio is how
that portfolio is allocated among different types of investments. The
Recommendation draws on Smith Barney's experience in analyzing
macroeconomic events worldwide and designing asset allocation strategies as
well as the Consulting Group's experience in monitoring and evaluating the
performance of various market segments over substantial periods of time and
correlating that information with the client's financial characteristics.
The Recommendation provides specific advice about implementing investment
decisions through Consulting Group Capital Markets Funds (the "Trust"), a
series of investment portfolios (the "Portfolios") that covers a spectrum
of investments from a money market fund that limits its investment to U.S.
Government securities and repurchase agreements exclusively for those
securities, to an emerging markets fund that offers the potential for
significant returns to the client that can commit a portion of his or her
portfolio to more volatile markets. The Recommendation specifies a
combination of investments in the Portfolios considered suitable for the
client. The Recommendation employs an asset allocation theory based on a
framework discussed in "Portfolio Selection," a paper published in the
Journal of Finance that earned its author a Nobel Prize. The Financial
Consultant assists the client in evaluating the advice contained in the
Recommendation, offers interpretations in light of personal knowledge of
the client's circumstances and implements the client's investment
decisions, but has no investment discretion over the client's accounts. All
decisions on investing among the Portfolios remain with the client. The
client has the option of accepting the Recommendation or selecting an
alternative combination of investments in the Portfolios.
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THE INVESTMENTS
The Portfolios offer a convenient and economical means through which to
implement the Recommendation. The Trust consists of the following Portfolios,
which are described in greater detail in the Prospectus that accompanies this
description:
(1) Government Money Investments (7) Large Capitalization Value Equity
(2) Intermediate Fixed Income Investments
Investments (8) Large Capitalization Growth
(3) Long-Term Bond Investments Investments
(4) Municipal Bond Investments (9) Small Capitalization Value Equity
(5) Mortgage Backed Investments Investments
(6) Balanced Investments (10) Small Capitalization Growth
Investments
(11) International Equity Investments
(12) International Fixed Income
Investments
(13) Emerging Markets Equity Investments
The Trust offers investors the opportunity to invest in Portfolios that are
advised by investment firms ("Advisors") identified, retained, supervised and
compensated by the Consulting Group in its capacity as Manager to the Trust.
Shares of the Portfolios may be purchased, redeemed or exchanged daily at the
net asset value next determined without imposition of any sales or redemption
charge. As described below, participation in TRAK is subject to payment of a
quarterly fee at the maximum annual rate of 1.50% of TRAK assets held in an
account at Smith Barney (an "Account"). Financial Consultants are compensated
based on client participation in TRAK but do not receive compensation or
incentives based on which of the Portfolios are selected for investment.
THE REVIEW
TRAK is a continuing investment advisory service. Once a TRAK program is
active, the client receives, at least a Review highlighting all TRAK activity
for the preceding quarter. The Review is a monitoring report containing an
analysis and evaluation of the client's TRAK assets to ascertain whether the
client's objectives for the TRAK assets are being met and recommending, when
appropriate, changes in the allocation of assets among the Portfolios.
Information presented within the Review includes a market commentary, a record
of the client's asset performance and rates of return as compared to several
appropriate market indices (illustrated in a manner that includes any fees for
participation in TRAK actually incurred during the period), the client's
actual portfolio showing the breakdown of investments made in each Portfolio,
year-to-date and cumulative realized gains and losses in and income received
from each Portfolio, all purchase, sale and exchange activity and dividends
and interest received and/or reinvested. The information in the Review is
especially useful for tax preparation purposes.
FINANCIAL CONSULTANT SUPPORT
Integral to TRAK is the personal and confidential relationship between the
client and his or her Financial Consultant. With a Financial Consultant a
client at all times has available a registered investment professional backed
by the full resources of the Consulting Group to discuss his or her financial
circumstances and strategy. The Financial Consultant serves the client by
assisting the client in identifying his or her financial characteristics,
completing and transmitting the Request, reviewing with the client the
Recommendation and Reviews, responding to identified changes in the client's
financial circumstances and implementing investment decisions. When financial
circumstances change, the Financial Consultant can be consulted and a new
evaluation commissioned at no additional charge.
ABOUT THE CONSULTING GROUP
TRAK and the Trust build on the experience of the Consulting Group and its
related affiliate, the Consulting Services Division of Smith Barney, in
providing coordinated personalized investment advice and investment advisor
selection services. The predecessor of the Consulting Services Division was
(continued)
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established in 1973 with the primary objective of matching the investment
needs of institutional and individual clients of Smith Barney's predecessor
with appropriate and qualified money management organizations throughout the
nation. In 1989, the Consulting Services Division was restructured and its
research and investment advisory evaluation services functions were segregated
and named the Consulting Group. The Consulting Group's analysts draw on over
20 years of experience in performing asset manager searches for institutional
and individual clients. They rely on the Consulting Group's comprehensive
database of money management firms, through which it tracks the historical and
ongoing performance of over 800 registered investment advisors, and over 300
evaluations annually of investment advisors. As of December 31, 1995, the
Consulting Group and the Consulting Services Division provided services with
respect to over $85 billion in client assets representing more than 215,000
separate accounts under a variety of programs designed for individual and
institutional investors.
GETTING STARTED
Getting started is easy. Prospective clients should make an appointment to
speak with a Financial Consultant. The Financial Consultant will assist in the
preparation of a Request. After the prospective client completes the Request,
the Financial Consultant will forward this document for evaluation and
processing by the Consulting Group. When the Consulting Group completes its
review, the Financial Consultant will review the Recommendation with the
client and provide the client with a copy of this description of TRAK together
with the accompanying Prospectus of the Trust and a copy of the form of
investment advisory agreement between the Consulting Group and the client
relating to participation in TRAK, as well as a copy of that agreement for the
client's records. Upon the client's execution of the investment advisory
agreement and its acceptance by Smith Barney, the Financial Consultant will
implement the client's investment decisions. The client will be sent a
confirmation of his or her investments, which will be accompanied by a copy of
a brochure required by federal law that contains more detailed information
about the Consulting Group and TRAK.
PARTICIPATION
The annual fee for participation in TRAK is payable quarterly, partially in
advance, and varies based upon the value of the client's Portfolio shares at
the initiation of the advisory relationship and on a continuing basis at the
last day of the preceding calendar quarter as follows: 1.50% of the value of
TRAK assets up to $500,000, 1.20% of the value in excess of $500,000 up to
$1,000,000 and 1.00% of the account value in excess of $1,000,000. The annual
participation fee on TRAK assets and minimum initial investment may be subject
to negotiation. The minimum initial TRAK investment is $10,000 and there is no
minimum subsequent investment. As a shareholder in the Portfolios, the client
will also bear a proportionate share of the Portfolios' fees and expenses,
which are described in detail in the accompanying Prospectus. The TRAK fee in
respect of an initial investment will begin to accrue on the business day
following the initial investment in the Portfolios (the "Opening Date"), will
be based on the proportion of the current quarter then remaining and will be
payable on the seventh business day after the initial investment is made.
Notwithstanding the foregoing, if the initial investment is made within five
business days of the end of any quarter, the initial fee payment will cover
the period from the Opening Date through the last day of the following
quarter, and the fee will be pro-rated accordingly. Each time that additional
funds aggregating $5,000 or more are invested in Portfolios during any one
quarter, the applicable fee, pro-rated for the number of days then remaining
in the quarter and covering the amount of such additional funds, shall be
charged and shall become due two business days later. Each time that Portfolio
shares aggregating $5,000 or more are redeemed during any one quarter, the
client will receive a credit to the Account in which the Portfolio shares were
held, for the TRAK fee applicable to the Portfolio shares redeemed, based on
the proportion of the quarter remaining after the redemption is effected. Such
credit shall be applied on the day that the quarterly fee is due for the
quarter in which the Portfolio shares are redeemed, or two business days after
the Portfolio shares are redeemed, whichever is later. For purposes of
calculating additional fees or credits during a quarter, additional
investments and redemptions are netted, and accordingly may offset each other.
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In the case of individual retirement accounts, retirement plans for self-
employed individuals and employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended (collectively, "Plans"),
the minimum initial TRAK investment is $10,000 and the fee for participation
in TRAK by a Plan will be reduced by an amount equal to, for all Portfolios in
which Plan assets are invested, (A) the value of Plan assets invested in a
Portfolio on the last calendar day of the previous calendar quarter (or on the
day an initial investment is made during the calendar quarter), multiplied by
(B) the reduction factor specified below, multiplied by (C) a fraction, the
numerator of which is the number of days in the period for which the TRAK fee
is being assessed and the denominator of which is the actual number of days in
the calendar year of which that period is a part. The reduction factor for
Portfolios (1) through (4) on page (ii) above shall be 0%; for Portfolios (5)
and (12) shall be 0.05%; and for Portfolios (6) through (11) and (13) shall be
0.10%.
For subsequent investments or redemptions aggregating to $5,000 or more, the
pro-rated fee or credit for the balance of the quarter will be calculated on
the basis of the net percentage TRAK fee paid for the quarter during which the
subsequent investment or redemption was made.
TRAK participants should note that, although the Consulting Group as the
Trust's Manager receives a fee in respect of Government Money Investments, the
entire amount of that fee is paid by the Manager to that Portfolio's Advisor.
Thus, the Manager retains no management fee in respect of that Portfolio.
Once a TRAK program is active, Reviews covering all settled TRAK activity
for the preceding quarter will be mailed on or about the 20th day of April,
July, October and January of each year and will contain a debit notice
indicating the amount of the fee payable, partially in advance, for the
current calendar quarter. The fee will be payable on the tenth business day of
the month after the month in which the Review was mailed. If the client pays
this fee by check, these funds will be deposited in the client's Smith Barney
brokerage Account and may be invested in shares of a Smith Barney money market
fund designated by the client until the specified payment date. To relieve the
client of the burden of making separate payment, however, each client's
investment advisory agreement provides that fees charged by the Consulting
Group pursuant to the agreement may be paid through automatic redemption, on
the specified payment date, of a portion of the Portfolio shares held in the
client's Account. Unless otherwise specified by the client, automatic payments
will be made first from redemptions of shares of Government Money Investments;
next from free credit balances held in the client's Smith Barney brokerage
Account; next from redemptions of shares of any money market fund held in that
brokerage Account in which free credit balances are routinely and
automatically invested; and next from redemptions of shares of the other
Portfolios successively in the order listed on page (ii) above until the
payment obligation is satisfied. Clients may terminate their participation in
TRAK at any time by giving five days' notice to Smith Barney. If a termination
is effected within five business days of receipt of the confirmation and
brochure described above, any TRAK fee paid will be credited to the client's
Account or paid by check mailed to the client if the client so instructs. The
Consulting Group reserves the right to reject any investor's participation in
TRAK. Termination of a TRAK program by a client must be effected by a
redemption order for all Portfolio shares held in the Account.
The Consulting Group serves as investment advisor to each client in TRAK,
for which it receives a fee from the client that does not vary based on the
Portfolios recommended for the client's investments. At the same time, the
Consulting Group serves as the Trust's Manager with responsibility for
identifying, retaining, supervising and compensating each Portfolio's
Advisor(s) and receives a fee from each Portfolio, a varying portion of which
is retained by the Manager based on the Portfolio involved. Consequently, the
Consulting Group, when making asset allocation recommendations for TRAK
clients, may be presented with a conflict of interest as to the specific
Portfolios recommended for investment. The fee structure for Plan TRAK
programs is intended to minimize any such conflict of interest. The Consulting
Group is subject to and intends to comply fully with standards of fiduciary
duty that require that it act solely in the best interest of the client when
making investment recommendations.
CERTAIN QUALIFIED EMPLOYEE BENEFIT PLANS MAY INVEST IN THE TRAK PROGRAM ON
TERMS WHICH DIFFER FROM THOSE OUTLINED ABOVE. TO FIND OUT MORE ABOUT THIS,
PLEASE CONTACT YOUR FINANCIAL CONSULTANT.
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PROSPECTUS
CONSULTING GROUP CAPITAL MARKETS FUNDS
222 Delaware Avenue . Wilmington, Delaware 19801 . (212) 816-8725
Consulting Group Capital Markets Funds, (the "Trust"), is an open-end,
management investment company providing a convenient means of investing in
separate investment portfolios (the "Portfolios") professionally managed by
the Consulting Group (the "Manager" or the "Consulting Group") of Smith Barney
Mutual Funds Management Inc. ("SBMFM"). Each of the Portfolios benefits from
discretionary advisory services by an investment advisor (the "Advisor" or
"Advisors") identified, retained, supervised and compensated by the Manager.
The Trust is a series company that currently consists of the following
Portfolios to which this Prospectus relates:
.Government Money Investments .Large Capitalization Value Equity
.Intermediate Fixed Income Investments
Investments .Large Capitalization Growth Investments
.Long-Term Bond Investments .Small Capitalization Value Equity
.Municipal Bond Investments Investments
.Mortgage Backed Investments .Small Capitalization Growth Investments
.Balanced Investments .International Equity Investments
.International Fixed Income Investments
.Emerging Markets Equity Investments
Each of the Portfolios is a diversified Portfolio of the Trust, except
International Fixed Income Investments, which is a non-diversified Portfolio.
Shares of Government Money Investments are not guaranteed or insured by the
U.S. government and, although Government Money Investments attempts to
maintain a constant net asset value of $1.00 per share, there can be no
assurance that it will be able to do so at all times.
Shares of the Portfolios are offered exclusively to participants in TRAK (R)
Personalized Investment Advisory Service ("TRAK"), an investment advisory
service that directly provides to investors asset allocation recommendations
with respect to the Portfolios based on an evaluation of an investor's
investment objectives and risk tolerances, as well as to or for the benefit of
participants in other investment advisory services offered by qualified
investment advisors. Participation in TRAK is subject to payment of a separate
investment advisory fee at a maximum annual rate of 1.50% of assets held in a
TRAK account, which may be subject to negotiation. Other investment advisory
services purchasing Portfolio shares on behalf of their clients also may
separately impose different investment advisory fees for different levels of
services as agreed upon with their clients. The operating expenses of the
Portfolios, when combined with any investment advisory fees separately paid,
may involve greater fees and expenses than other investment companies whose
shares are purchased without the benefit of asset allocation recommendations
rendered by investment advisors.
This Prospectus sets forth concisely certain information about the Trust,
including expenses, that prospective investors will find helpful in making an
investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
Additional information about the Trust is contained in a Statement of
Additional Information which is available upon request and without charge by
calling or writing the Trust at the telephone number or address listed above
or by contacting any Smith Barney Inc. ("Smith Barney") Financial Consultant.
The Statement of Additional Information, which has been filed with the
Securities and Exchange Commission, bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety.
SHARES OF THE PORTFOLIOS ARE NOT INSURED BY THE FDIC; ARE NOT A
DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY ANY BANK; AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
January 1, 1996
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TABLE OF CONTENTS
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Summary............................. 1
TRAK Fees; Portfolio Expenses....... 4
Financial Highlights................ 6
Objectives and Policies of the Port-
folios............................. 13
Management of the Trust............. 30
Purchase of Shares.................. 37
Redemption of Shares................ 39
Net Asset Value..................... 40
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Exchange Privilege.................. 40
Dividends, Distributions and Taxes.. 41
Custodian and Transfer Agent........ 43
Performance of the Portfolios....... 43
Additional Information.............. 45
Appendix A.......................... A-1
Appendix B.......................... B-1
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
The Trust. The Trust is a management investment company providing a
convenient means of investing in separate Portfolios professionally managed by
the Manager. The assets of each of the Portfolios are managed on a
discretionary basis by one or more separate Advisors. See "Management of the
Trust." The Trust is a series company currently consisting of the following 13
Portfolios:
. Government Money Investments, whose Advisor is Standish, Ayer & Wood,
Inc.
. Intermediate Fixed Income Investments, whose Advisor is Standish, Ayer &
Wood, Inc.
. Long-Term Bond Investments, whose Advisor is Wolf, Webb, Burk & Campbell,
Inc.
. Municipal Bond Investments, whose Advisor is Smith Affiliated Capital
Corp.
. Mortgage Backed Investments, whose Advisor is Atlantic Portfolio
Analytics & Management, Inc.
. International Fixed Income Investments, whose Advisor is Julius Baer
Investment Management Inc.
. Balanced Investments, whose Advisor is Palley-Needelman Asset Management,
Inc.
. Large Capitalization Value Equity Investments, whose Advisors are
Newbold's Asset Management, Inc. and Parametric Portfolio Associates.
. Small Capitalization Value Equity Investments, whose Advisors are NFJ
Investment Group and Wells Fargo Nikko Investment Advisors.
. Large Capitalization Growth Investments, whose Advisors are Provident
Investment Counsel and Boston Structured Advisors.
. Small Capitalization Growth Investments, whose Advisors are Pilgrim
Baxter & Associates, Inc and Mellon Capital Management Corporation.
. International Equity Investments, whose Advisors are Oechsle
International Advisors, L.P. and State Street Global Advisors.
. Emerging Markets Equity Investments, whose Advisor is John Govett & Co.
Limited.
Management. The Consulting Group acts as the Portfolios' Manager. Each of the
Portfolios benefits from discretionary advisory services made available by one
or more Advisors identified, retained, supervised and compensated by the
Manager. SBMFM serves as the Portfolios' administrator and generally manages
all aspects of the Trust's administration and operation. See "Management of the
Trust."
TRAK and Other Investment Advisory Services. Shares of the Portfolios are
offered exclusively to or for the benefit of participants in TRAK and other
investment advisory services offered by qualified investment
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advisors. TRAK is an investment advisory service pursuant to which the
Consulting Group in its capacity as investment advisor to participants in TRAK,
generally directly provides to investors asset allocation recommendations and
related services with respect to the Portfolios based on an evaluation of an
investor's investment objectives and risk tolerances. The Consulting Group is
paid directly by the client a quarterly fee at the maximum annual rate of 1.50%
of assets held in a TRAK account for its services. Investors purchasing
Portfolio shares based on the recommendations of investment advisors other than
the Consulting Group, or who contract with the Consulting Group for services
other than those described above, pay, in lieu of TRAK charges, different fees
for different levels of services as agreed upon with their investment advisors.
See "Purchase of Shares--General."
Purchase and Redemption of Shares. Shares of the Portfolios are offered for
purchase and redemption at their respective net asset values next determined,
without imposition of any initial sales charge. Investors purchasing shares
through participation in TRAK will pay the fee discussed above. See "Purchase
of Shares" and "Redemption of Shares."
Risk Factors and Special Considerations. No assurance can be given that the
Portfolios will achieve their investment objectives. Investing in an investment
company that invests in securities of companies and governments of foreign
countries, particularly developing countries, involves risks that go beyond the
usual risks inherent in an investment company limiting its holdings to domestic
investments. In particular, because Emerging Markets Equity Investments will
invest in emerging markets countries, an investment in such Portfolio should be
considered more speculative than an investment in a mutual fund that invests in
securities of U.S. companies and investment in this Portfolio involves certain
risks and considerations not associated with an investment in a mutual fund
that invests in securities of countries with better developed and more stable
markets. In addition, this Portfolio is authorized to borrow for investment
purposes which will have the effect of magnifying gains and losses on the
Portfolio's investments. A substantial portion of assets of certain of the
Portfolios may be held in securities denominated in one or more foreign
currencies, which will result in the Portfolio's bearing the risk that those
currencies may lose value in relation to the U.S. dollar. Certain Portfolios
may also be subject to certain risks of using investment techniques and
strategies such as entering into forward currency contracts and repurchase
agreements and trading futures contracts and options on futures contracts. In
addition, Mortgage Backed Investments may invest in high yield, high risk
securities that are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal, and Mortgage Backed Investments,
Intermediate Fixed Income Investments and Long-Term Bond Investments may invest
in government stripped mortgage related securities and zero coupon securities,
which, due to changes in interest rates, may be more speculative and subject to
greater fluctuations in value than securities that pay interest currently. See
"Objectives and Policies of the Portfolios--Certain Securities, Investment
Techniques and Risk Factors."
Investors should be aware that the Consulting Group serves as investment
advisor to each participant in TRAK, for which it receives a fee from the
participant that does not vary based on the Portfolios recommended for the
participant's investments. At the same time, the Consulting Group serves as the
Trust's Manager with responsibility for identifying, retaining, supervising and
compensating each Portfolio's Advisor and receives a fee from each Portfolio.
The portion of such fee that is retained by the Manager varies based on the
Portfolio involved. Consequently, the Consulting Group, when making asset
allocation recommendations for TRAK participants, may be presented with a
conflict of interest as to the specific Portfolios recommended for investment.
The Consulting Group, however, is subject to and intends to comply fully with
standards of fiduciary duty that require that it act solely in the best
interest of the participants when making investment recommendations. Investors
also should be aware that the Manager may be subject to a conflict of interest
when making decisions regarding the retention and compensation of particular
Advisors. However, the Manager's decisions, including the identity of an
Advisor and the specific amount of the Manager's compensation to be paid to the
Advisor, are subject to review and approval by a majority of the Board of
Trustees and separately by a majority of the Trustees who are not affiliated
with the Manager or any of its affiliates. See "Management of the Trust--
Investment Manager" and "Purchase of Shares--General--TRAK."
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The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through investment advisory programs, such
as TRAK, that are based on an evaluation of an investor's investment objectives
and risk tolerances. Because these asset allocation strategies are designed to
spread investment risk across the various segments of the securities markets
through investment in a number of Portfolios, each individual Portfolio
generally intends to be substantially fully invested in accordance with its
investment objectives and policies during most market conditions. Although an
Advisor of a Portfolio may, upon the concurrence of the Manager, take a
temporary defensive position during adverse market conditions, it can be
expected that a defensive posture will be adopted less frequently than it would
be by other mutual funds. This policy may impede an Advisor's ability to
protect a Portfolio's capital during declines in the particular segment of the
market to which the Portfolio's assets are committed. Consequently, no single
Portfolio should be considered a complete investment program and an investment
among the Portfolios should be regarded as a long-term commitment that should
be held through several market cycles. In addition, although the Consulting
Group intends to recommend adjustments in the allocation of assets among the
Portfolios based on, among other things, anticipated market trends, there can
be no assurance that these recommendations can be developed, transmitted and
acted upon in a manner sufficiently timely to avoid market shifts, which can be
sudden and substantial. TRAK participants should recognize that TRAK is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, TRAK participants are urged
strongly to adhere to the Consulting Group's asset allocation recommendations
and to act promptly upon any recommended reallocation of assets among the
Portfolios. Investors intending to purchase Portfolio shares through different
investment advisory services should evaluate carefully whether the service is
ongoing and continuous, as well as their investment advisors' ability to
anticipate and respond to market trends. See "Objectives and Policies of the
Portfolios--Certain Securities, Investment Techniques and Risk Factors--
Temporary Investments."
Dividends and Distributions. Each Portfolio intends to distribute annually to
its shareholders substantially all of its net investment income and its net
realized long- and short-term capital gains. Dividends from the net investment
income of Government Money Investments are declared daily and paid monthly.
Dividends from the net investment income of Intermediate Fixed Income
Investments, Long-Term Bond Investments, Mortgage Backed Investments, Municipal
Bond Investments, International Fixed Income Investments and Balanced
Investments are declared and paid monthly. Dividends from the net investment
income of the remaining Portfolios are declared and paid annually.
Distributions of any net realized long-term and short-term capital gains earned
by a Portfolio will be made annually. See "Dividends, Distributions and Taxes."
Taxation. Each of the Portfolios has qualified and intends to continue to
qualify as a regulated investment company for U.S. federal income tax purposes.
As such, the Trust anticipates that no Portfolio will be subject to U.S.
federal income tax on income and gains that are distributed to shareholders. It
is expected that certain capital gains and certain dividends and interest
earned by International Equity Investments and Emerging Markets Equity
Investments will be subject to foreign withholding taxes. These taxes may be
deductible or creditable in whole or in part by shareholders of the Portfolio
for U.S. federal income tax purposes. Although any foreign withholding taxes
paid by International Fixed Income Investments are not expected to be
creditable by its shareholders for U.S. federal income tax purposes, the
Portfolio will be managed in a manner so as to minimize, to the extent
practicable, the payment of any foreign withholding taxes. See "Dividends,
Distributions and Taxes."
Custodian and Transfer Agent. PNC Bank, National Association ("PNC") and
Morgan Guaranty and Trust Company ("Morgan") serve as the custodians of the
Trust's assets and may employ sub-custodians outside the United States approved
by the Trustees of the Trust in accordance with regulations of the Securities
and Exchange Commission (the "SEC"). PNC provides services for Portfolios
predominately comprised of domestic securities, whereas Morgan provides
services for international Portfolios. First Data Investor Services Group, Inc.
(the "Transfer Agent"), a subsidiary of First Data Corporation, serves as the
transfer agent for the Portfolios' shares. See "Custodian and Transfer Agent."
3
<PAGE>
TRAK FEES; PORTFOLIO EXPENSES
The following table lists the costs and expenses, including fees for TRAK
(but not those for different investments advisory services paid separately),
that an investor will incur either directly or indirectly as a shareholder of
each Portfolio based on the Portfolio's operating expenses for the most recent
fiscal year, with the exception of Large Capitalization Investments and Large
Capitalization Growth Investments, which reflect partial management fee waivers
that took effect on the date of this Prospectus, and Balanced Investments and
Emerging Markets Equity Investments, which are based on the Portfolio's
projected annual operating expenses.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES+
------------------------------------------
MAXIMUM MANAGEMENT
SHAREHOLDER ANNUAL FEES (NET DISTRIBUTION TOTAL
TRANSACTIONS TRAK OF FEE (RULE 12B-1) OTHER OPERATING
EXPENSES FEE* WAIVERS) EXPENSES EXPENSES EXPENSES
------------ ------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Government Money
Investments............ None 1.50% 0.08% None 0.52% 0.60%
Intermediate Fixed
Income Investments..... None 1.50% 0.60% None 0.20% 0.80%
Long-Term Bond
Investments............ None 1.50% 0.46% None 0.34% 0.80%
Municipals Bond
Investments............ None 1.50% 0.48% None 0.32% 0.80%
Mortgage Backed
Investments............ None 1.50% 0.46% None 0.34% 0.80%
Balanced Investments.... None 1.50% 0.00% None 1.00% 1.00%
Large Capitalization
Value Equity
Investments............ None 1.50% 0.76% None 0.07% 0.83%
Large Capitalization
Growth Investments..... None 1.50% 0.76% None 0.11% 0.83%
Small Capitalization
Value Equity
Investments............ None 1.50% 0.80% None 0.31% 1.11%
Small Capitalization
Growth Investments..... None 1.50% 0.80% None 0.34% 1.14%
International Equity
Investments............ None 1.50% 0.90% None 0.29% 1.19%
International Fixed
Income Investments..... None 1.50% 0.59% None 0.36% 0.95%
Emerging Markets
Equity Investments..... None 1.50% 0.44% None 1.31% 1.75%
</TABLE>
Management Fees; Expenses. Each Portfolio pays the Manager a fee for the
services that is computed daily and paid monthly at the annual rate ranging
from 0.15% to 0.90% of the value of the average daily net assets of the
Portfolio. The fees of each Advisor are paid by the Manager. Each Portfolio
pays SBMFM a fee for administration services that is computed daily and paid
monthly at an annual rate of 0.20% of the value at the Portfolio's average
daily net assets. The nature of the services provided to, and the management
fees paid by, each services, custodial fees, legal and accounting fees,
printing costs, registration fees, the costs of regulatory and the costs
involved in the Trust's communications with shareholders. The Manager and SBMFM
may voluntarily waive a portion or all of their respective fees otherwise
payable to them and the "Total Operating Expenses" without fee waivers and/or
expenses reimbursed by Agents would have been 0.74%, 0.93%, 1.09%, 1.04%,
1.75%, 0.93%, 0.98%, 1.13%, 1.16%, 1.18% and 1.96% for Government Money
Investments, Long-Term Bond Investments, Municipal Bond Investments, Mortgage
Backed Investments, Balanced Investments, Large Capitalization, Value Equity
Investments, Large Capitalization Growth Investments, Small Capitalization
Growth Investments, International Fixed Income Investments, and Emerging
Markets Equity Investments, respectively.
- --------
+As a percentage of average net asset.
*As a percentage of the value of Portfolio shares held on the last calendar day
of the previous quarter.
4
<PAGE>
A shareholder would pay the following expenses on a $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at the end of each period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Government Money Investments......... 21 66 113 243
Intermediate Fixed Income
Investments......................... 23 72 123 264
Long-Term Bond Investments........... 23 72 123 264
Municipals Bond Investments.......... 23 72 123 264
Mortgage Backed Investments.......... 23 72 123 264
Balanced Investments................. 25 78 133 284
Large Capitalization Value Equity
Investments......................... 24 73 125 267
Large Capitalization Growth
Investments......................... 24 74 127 272
Small Capitalization Value Equity
Investments......................... 26 81 139 294
Small Capitalization Growth
Investments......................... 27 82 140 297
International Equity Investments..... 27 84 142 302
International Fixed Income
Investments......................... 25 76 131 279
Emerging Markets Equity Investments.. 33 100 170 355
</TABLE>
The purpose of this example is to assist an investor in understanding various
costs and expenses that an investor in a Portfolio will bear directly or
indirectly. This example should not be considered to be a representation of the
past or future expenses; actual expenses may be greater or less than those
shown. Moreover, although the table assumes a 5% annual return, a Portfolio's
actual performance will vary and may result in an actual return greater or less
than 5%.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended August 31, 1995 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Trust's Annual Report dated August 31, 1995. This information
should be read in conjunction with the financial statements and related notes
that appear in the Trust's Annual Report dated August 31, 1995, which is
available upon request and incorporated by reference into the Statement of
Additional Information. The following information for the fiscal year ended
August 31, 1992 through August 31, 1994 has been audited by Coopers & Lybrand
L.L.P.
GOVERNMENT MONEY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- -------
Net investment income#............. 0.05 0.03 0.03 0.03
Dividends from net investment in-
come.............................. (0.05) (0.03) (0.03) (0.03)
-------- -------- ------- -------
NET ASSET VALUE, end of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= =======
Total return++..................... 5.24 % 3.10 % 2.76 % 2.72 %
======== ======== ======= =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's). $241,590 $184,656 $84,034 $30,353
Ratio of operating expenses to av-
erage net assets+................. 0.60 % 0.55 % 0.50 % 0.49 %**
Ratio of net investment income to
average net assets................ 5.14 % 3.16 % 2.71 % 3.37 %**
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994, and 1993 and the period ended August 31, 1992 were 0.74%, 0.84%,
1.39% and 2.48%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Service Providers for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were $0.05, $0.03, $0.02, and $0.01,
respectively.
INTERMEDIATE FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
year............................. $ 7.92 $ 8.58 $ 8.25 $ 8.00
-------- -------- -------- -------
Income from investment operations:
Net investment income#............ 0.50 0.47 0.51 0.34
Net realized and unrealized
gain/(loss) on investments....... 0.16 (0.56) 0.33 0.25
-------- -------- -------- -------
Total from investment operations.. 0.66 (0.09) 0.84 0.59
Less Distributions:
Distributions from net investment
income........................... (0.48) (0.50) (0.48) (0.34)
Distributions from net realized
capital gains.................... -- (0.05) (0.03) --
Distributions in excess of net re-
alized gains..................... -- (0.01) -- --
Distributions from capital........ -- (0.01) -- --
-------- -------- -------- -------
Total Distributions............... (0.48) (0.57) (0.51) (0.34)
-------- -------- -------- -------
NET ASSET VALUE; end of year...... $ 8.10 $ 7.92 $ 8.58 $ 8.25
======== ======== ======== =======
Total return++.................... 8.70 % (1.13)% 10.59 % 7.53 %
======== ======== ======== =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in
000's)........................... $246,323 $223,548 $140,580 $58,545
Ratio of operating expenses to av-
erage net assets+................ 0.80 % 0.80 % 0.80 % 0.79 %**
Ratio of net investment income to
average net assets............... 6.40 % 5.77 % 5.94 % 6.00 %**
Portfolio turnover rate........... 98 % 86 % 92 % 169 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized
+ Annualized operating expense ratios before fees waived by the Service
Providers for the year ended August 31, 1993 and the period ended August
31, 1992 were 0.88% and 1.30%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived by the Service Providers for the
year ended August 31, 1993 and the period ended August 31, 1992 was $0.50
and $0.31, respectively.
6
<PAGE>
FINANCIAL HIGHLIGHTS
LONG-TERM BOND INVESTMENTS (FORMERLY TOTAL
RETURN FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year. $ 7.86 $ 8.70 $ 8.26 $ 8.00
-------- ------- ------- -------
Income from investment operations:
Net investment income#............. 0.45 0.38 0.47 0.31
Net realized and unrealized
gain/(loss) on investments........ 0.36 (0.75) 0.42 0.26
-------- ------- ------- -------
Total from investment operations... (0.81) (0.37) 0.89 0.57
Less Distributions:
Distribution from net investment
income............................ (0.44) (0.41) (0.45) (0.31)
Distribution from net realized cap-
ital gains........................ -- (0.01) -- --
Distribution in excess of net real-
ized gains........................ -- (0.05) -- --
Distribution from capital.......... -- (0.00)@ -- --
-------- ------- ------- -------
Total Distributions................ (0.44) (0.47) (0.45) (0.31)
-------- ------- ------- -------
NET ASSET VALUE, end of year....... $ 8.23 $ 7.86 $ 8.70 $ 8.26
======== ======= ======= =======
Total return++..................... 10.71 % (3.93) % 11.08 % 7.37 %
======== ======= ======= =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's). $137,545 $94,628 $64,734 $34,986
Ratio of operating expenses to av-
erage net assets+................. 0.80 % 0.80 % 0.80 % 0.79 %**
Ratio of net investment income to
average net assets................ 5.80 % 5.34 % 5.40 % 5.69 %**
Portfolio turnover rate............ 62 % 43 % 35 % 4 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994 and 1993 and the period ended August 31, 1992 were 0.93%, 0.95%, 1.09%
and 1.91%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expense reimbursed by the
Service Providers for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were $0.44, $0.37, $0.44 and $0.25,
respectively.
@ Amount represents less than $0.01 per portfolio share.
MUNICIPAL BOND INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year.. $ 8.06 $ 8.85 $ 8.25 $ 8.00
------- ------- ------- -------
Income from investment operations: --
Net investment income#.............. 0.61 0.40 0.41 0.30
Net realized and unrealized
gain/(loss) on investments......... 0.21 (0.71) 0.62 0.25
------- ------- ------- -------
Total from investment operations.... (0.31) 1.03 0.55
Less Distributions:
Distributions from net investment
income............................. (0.40) (0.40) (0.41) (0.30)
Distributions in excess of net in-
vestment income.................... (0.00)@ -- -- --
Distributions from net realized cap-
ital gains......................... -- (0.05) (0.02) --
Distributions in excess of net real-
ized capital gains................. -- (0.03) -- --
------- ------- ------- -------
Total Distributions................. (0.40) (0.48) (0.43) (0.30)
------- ------- ------- -------
NET ASSET VALUE, end of year........ $ 8.27 $ 8.06 $ 8.85 $ 8.25
======= ======= ======= =======
Total return++...................... 7.86 % (3.78) % 12.94 % 7.06 %
======= ======= ======= =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's).. $45,356 $56,625 $47,811 $21,795
Ratio of operating expenses to aver-
age net assets+.................... 0.80 % 0.80 % 0.80 % 0.79 %**
Ratio of net investment income to
average net assets................. 4.99 % 4.59 % 4.76 % 4.71 %**
Portfolio turnover rate............. 49 % 132 % 15 % 76 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994 and 1993 and the period ended August 31, 1992 were 1.04%, .93%, 1.02%
and 1.66%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Service Providers for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were $0.38, $0.39, $0.39 and $0.24,
respectively.
@ Amount represents less than $0.01 per portfolio share.
7
<PAGE>
FINANCIAL HIGHLIGHTS
MORTGAGE BACKED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year.. $ 7.69 $ 8.21 $ 8.19 $ 8.00
------- -------- ------- -------
Income from investment operations:
Net investment income#.............. 0.51 0.41 0.53 0.40
Net realized and unrealized
gain/(loss) on investments......... 0.22 (0.41) 0.00@ 0.19
------- -------- ------- -------
Total from investment operations.... 0.73 0.00 0.53 0.59
Less distributions:
Distributions from net investment
income............................. (0.49) (0.41) (0.42) (0.40)
Distributions from net realized cap-
ital gains......................... -- (0.01) -- --
Distributions in excess of net real-
ized capital gains................. -- -- (0.04) --
Distributions from capital.......... (0.02) (0.10) (0.05) --
------- -------- ------- -------
Total Distributions................. (0.51) (0.52) (0.51) (0.40)
------- -------- ------- -------
NET ASSET VALUE, end of year........ $ 7.91 $ 7.69 $ 8.21 $ 8.19
======= ======== ======= =======
Total return++...................... 9.96% (0.20)% 6.68 % 7.56 %
======= ======== ======= =======
Ratios to average net assets/ Sup-
plemental Data:
NET ASSETS, end of year (in 000's).. 104,789 $120,427 $94,421 $35,694
Ratio of operating expenses to aver-
age net assets+.................... 0.80% 0.80 % 0.80 % 0.79 %**
Ratio of net investment income to
average net assets................. 6.85% 6.38 % 6.53 % 6.55 %**
Portfolio turnover rate............. 30 % 53 % 93 % 35 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994 and 1993 and the period ended August 31, 1992 were 1.09%, 1.06%, 1.13%
and 1.66%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Service Providers for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were $0.49, $0.39, $0.49 and $0.35,
respectively.
@ Amount represents less than $0.01 per Portfolio share.
BALANCED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993
- --------------------- ------- ------- ------
<S> <C> <C> <C>
NET ASSET VALUE, beginning of year............... $ 8.63 $ 8.41 $ 8.00
------- ------- ------
Income from investment operations:
Net investment income#........................... 0.26 0.21 0.09
Net realized and unrealized gain on investments.. 0.81 0.16 0.42
------- ------- ------
Total from investment operations................. 1.07 0.37 0.51
Less distributions:
Distributions from net investment income......... (0.29) (0.15) (0.10)
Distribution from net realized capital gains..... (0.04) -- --
Distributions from capital....................... -- -- (0.00)@
------- ------- ------
Total Distributions.............................. (0.33) (0.15) (0.10)
------- ------- ------
NET ASSET VALUE, end of year..................... $ 9.33 $ 8.63 $ 8.41
======= ======= ======
Total return++................................... 12.76% 4.62 % 6.35 %
======= ======= ======
Ratios to average net assets/ Supplemental Data:
NET ASSETS, end of year (in 000's)............... $30,268 $14,940 $5,258
Ratio of operating expenses to average net as-
sets+........................................... 1.00% 1.00 % 1.00 %**
Ratio of net investment income to average net as-
sets............................................ 3.28% 2.66 % 2.67 %**
Portfolio turnover rate.......................... 47% 43 % 10 %
</TABLE>
- --------
* The Portfolio commenced operations on February 16, 1993.
** Annualized.
+ Annualized operating expense ratio before fees waived and/or expenses
reimbursed by the Service Providers for the year ended August 31, 1995, and
1994 and the period ended August 31, 1993 were 1.75%, 2.01%, 5.55%,
respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income/(loss) before fees waived and/or expenses reimbursed by
the Service Providers for the years ended August 31, 1995 and 1994 and the
period ended August 31, 1993 were $0.20, $0.13 and $(0.06), respectively.
@ Amount represents less than $0.01 per portfolio share.
8
<PAGE>
FINANCIAL HIGHLIGHTS
LARGE CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
year........................... $ 9.39 $ 9.35 $ 8.77 $ 8.00
---------- -------- -------- --------
Income from investment
operations:
Net investment income#.......... 0.27 0.17 0.25 0.09
Net realized and unrealized gain
on investments................. 1.16 0.02 0.54 0.68
---------- -------- -------- --------
Total from investment
operations..................... 1.43 0.19 0.79 0.77
Less Distributions:
Distributions from net
investment income.............. (0.24) (0.15) (0.14) --
Distributions from net realized
capital gains.................. (0.16) 0.00@ (0.07) --
---------- -------- -------- --------
Total Distributions............. (0.40) (0.15) (0.21) --
---------- -------- -------- --------
NET ASSET VALUE, end of year.... $ 10.42 $ 9.39 $ 9.35 $ 8.77
========== ======== ======== ========
Total return+................... 16.14 % 2.09 % 9.25 % 9.63%
========== ======== ======== ========
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in
000's)......................... $1,070,037 $832,138 $562,507 $197,695
Ratio of operating expenses to
average net assets+++.......... 0.83 % 0.88 % 0.95 % 1.24%**
Ratio of net investment income
to average net assets.......... 2.93 % 2.57 % 2.88 % 3.24%**
Portfolio turnover rate......... 21 % 108 % 47 % 12%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
+++ Annualized operating expense ratio before fee waivers by the Service
Providers for the years ended August 31, 1995 and 1994 were 0.93% and
0.92%, respectively.
@ Amount represents less than $0.01 per portfolio share.
# Net investment income before fees waived by the Service Providers for the
years ended August 31, 1995 and 1994 were $0.26 and $0.17, respectively.
LARGE CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year.. $ 10.00 $ 9.76 $ 8.88 $ 8.00
-------- -------- -------- -------
Income from investment operations:
Net investment income#.............. 0.09 0.03 0.00@ 0.01
Net realized and unrealized gain on
investments........................ 2.13 0.21 0.89 0.87
-------- -------- -------- -------
Total from investment operations.... 2.22 0.24 0.89 0.88
Less Distributions:
Distributions from net investment
income............................. (0.08) -- (0.00)@ --
Distributions in excess of net in-
vestment income.................... -- -- (0.01) --
Distributions from net realized cap-
ital gains......................... (0.01) -- -- --
Distributions from capital.......... -- -- (0.00)@ --
-------- -------- -------- -------
Total Distributions................. (0.09) -- (0.01) --
-------- -------- -------- -------
NET ASSET VALUE, end of year ....... $ 12.14 $ 10.00 $ 9.76 $ 8.88
======== ======== ======== =======
Total return++...................... 22.30 % 2.46% 10.00 % 11.00%
======== ======== ======== =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's) . $782,394 $457,588 $238,256 $85,401
Ratio of operating expenses to aver-
age net assets+.................... 0.88 % 0.98% 1.12 % 1.24%**
Ratio of net investment
income/(loss) to average net as-
sets............................... 0.98 % 0.39% (0.04)% 0.31%**
Portfolio turnover rate............. 38 % 104% 47 % 19%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratio before fees waived by the Service
Providers for the years ended August 31, 1995 and 1994 and period ended
August 31, 1992 were 0.98%, 1.02% and 1.42%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
# Net investment income before fees waived by the Service Providers for the
years ended August 31, 1995 and 1994 and for the period ended August 31,
1992 were $0.09, $0.03 and $0.00, respectively.
@ Amount represents less than $0.01 per portfolio share.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year. $ 9.03 $ 9.94 $ 8.68 $ 8.00
-------- -------- -------- -------
Income from investment operations:
Net investment income#............. 0.15 0.08 0.06 0.03
Net realized and unrealized
gain/(loss) on investments........ 0.95 (0.40) 1.31 0.65
-------- -------- -------- -------
Total from investment operations... 1.10 (0.32) 1.37 0.68
Less distributions:
Distributions from net investment
income............................ (0.12) (0.07) (0.03) --
Distributions from net realized
capital gains..................... (0.00)@ (0.51) (0.08) --
Distributions in excess of net
realized capital gains............ -- (0.01) -- --
-------- -------- -------- -------
Total Distributions................ (0.12) (0.59) (0.11) --
-------- -------- -------- -------
NET ASSET VALUE, end of year....... $ 10.01 $ 9.03 $ 9.94 $ 8.68
======== ======== ======== =======
Total return++..................... 12.50 % (3.30)% 15.74 % 8.50%
======== ======== ======== =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's). $340,306 $342,388 $183,051 $93,458
Ratio of operating expenses to
average net assets................ 1.11 % 1.06 % 1.11 % 1.24%**
Ratio of net investment income to
average net assets................ 1.54 % 1.12 % 0.82 % 0.99%**
Portfolio turnover rate............ 115 % 65 % 70 % 20%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratio before fees waived by the Service
Providers for the year ended August 31, 1995 and for the period ended
August 31, 1992 were 1.13% and 1.40% respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived by the Service Providers for the
year ended August 31, 1995 and for the period ended August 31, 1992 were
$0.15 and $0.02 respectively.
@ Amount represents $0.01 per portfolio share.
SMALL CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of year. $ 12.50 $ 11.21 $ 7.99 $ 8.00
-------- -------- ------- -------
Income from investment operations:
Net investment loss#............... (0.05) (0.09) (0.07) (0.01)
Net realized and unrealized gain on
investments....................... 4.81 1.56 3.29 --
-------- -------- ------- -------
Total from investment operations... 4.76 1.47 3.22 (0.01)
Less distributions:
Distributions from net realized
capital gains..................... (0.07) (0.04) -- --
Distributions in excess of net
realized capital gains............ -- (0.10) -- --
Distributions from capital......... -- (0.04) -- --
-------- -------- ------- -------
Total Distributions................ (0.07) (0.18) -- --
-------- -------- ------- -------
NET ASSET VALUE, end of year....... $ 17.19 $ 12.50 $ 11.21 $ 7.99
======== ======== ======= =======
Total return++..................... 38.25 % 13.18 % 40.30 % (0.13)%
======== ======== ======= =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in 000's). $315,033 $180,175 $75,498 $22,145
Ratio of operating expenses to
average net assets+............... 1.14 % 1.20 % 1.25 % 1.24 %**
Ratio of net investment loss to
average net assets................ (0.35)% (0.78)% (0.72)% (0.25)%**
Portfolio turnover rate............ 174 % 94 % 97 % 35 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994 and 1993 and the period ended August 31, 1992 were 1.16%, 1.49% and
2.61%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
# Net investment loss before fees waived and/or expenses reimbursed by the
Service Providers for the year ended August 31, 1995, and 1993 and the
period ended August 31, 1992 were $0.05, $0.09 and $0.05, respectively.
10
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of
year............................ $ 10.86 $ 9.57 $ 7.76 $ 8.00
Income from investment opera-
tions:
Net investment income#........... 0.05 0.02 0.05 0.03
Net realized and unrealized
gain/(loss) on investments...... (0.09) 1.54 1.79 (0.27)
-------- -------- -------- --------
Total from investment operations. (0.04) 1.56 1.84 (0.24)
Less distributions:
Distributions from net investment
income.......................... -- (0.03) (0.03) --
Distributions from net realized
capital gains................... (0.32) (0.24) -- --
-------- -------- -------- --------
Total Distributions.............. (0.32) (0.27) (0.03) --
-------- -------- -------- --------
NET ASSET VALUE, end of year (in
000's).......................... $ 10.50 $ 10.86 $ 9.57 $ 7.76
======== ======== ======== ========
Total return++................... (0.18)% 16.74 % 23.73 % (3.00)%
======== ======== ======== ========
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in
000's).......................... $663,130 $594,965 $270,302 $115,779
Ratio of operating expenses to
average net assets+............. 1.19 % 1.19 % 1.32 % 1.50 %**
Ratio of net investment income to
average net assets.............. 0.43 % 0.23 % 0.61 % 1.08 %**
Portfolio turnover rate.......... 28 % 33 % 46 % 10 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
**Annualized.
+ Annualized operating expense ratio before fees waived by the Service
Providers for the period ended August 31, 1992 was 1.52%.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed net investment income method does not accord
with results of operations.
# Net investment income before fees waived by the Service Providers for the
period ended August 31, 1992 was $0.03.
INTERNATIONAL FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994 1993 1992
- --------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
NET ASSETS VALUE, beginning of
year............................. $ 8.17 $ 8.86 $ 8.71 $ 8.00
-------- -------- -------- -------
Income from investment operations:
Net investment income#............ 0.56 0.40 0.51 0.39
Net realized and unrealized
gain/(loss) on investments....... 0.84 (0.32) 0.20 0.69
-------- -------- -------- -------
Total from investment operations.. 1.40 0.08 0.71 1.08
Less Distributions:
Distributions from net investment
income........................... (0.56) (0.65) (0.55) (0.37)
Distributions from net realized
capital gains.................... -- (0.07) (0.01) --
Distributions in excess of net re-
alized capital gains............. -- (0.05) -- --
Distributions from capital........ -- (0.00)@ -- --
-------- -------- -------- -------
Total Distributions............... (0.56) (0.77) (0.56) (0.37)
-------- -------- -------- -------
NET ASSET VALUE, end of year...... $ 9.01 $ 8.17 $ 8.86 $ 8.71
======== ======== ======== =======
Total return++.................... 17.66 % 1.00 % 8.67 % 13.93 %
======== ======== ======== =======
Ratios to average net
assets/Supplemental Data:
NET ASSETS, end of year (in
000's)........................... $105,884 $116,929 $100,362 $39,182
Ratio of operating expenses to av-
erage net assets+................ 0.95 % 0.95 % 0.95 % 0.95 %**
Ratio of net investment income to
average net assets............... 6.50 % 5.54 % 6.03 % 6.34 %**
Portfolio turnover rate........... 307 % 358 % 251 % 106 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Service Providers for the years ended August 31, 1995,
1994 and 1993 and the period ended August 31, 1992 were 1.18%, 1.08%, 1.22%
and 1.87%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Service Providers for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were $0.54, $0.39, $0.49 and $0.33,
respectively.
@ Amount represents less than $0.01 per Portfolio share.
11
<PAGE>
FINANCIAL HIGHLIGHTS
EMERGING MARKETS EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 1994
- --------------------- ------ -------
<S> <C> <C>
NET ASSET VALUE, begin-
ning of year........... $ 9.49 $ 8.00
Income from investment
operations:
Net investment
gain/(loss)#........... 0.01 (0.02)
Net realized and
unrealized gain on in-
vestments.............. (1.45) 1.51
------ -------
Total from investment
operations............. (1.44) 1.49
------ -------
Total Distribution...... (0.20)
------ -------
NET ASSET VALUE, end of
year................... $ 7.85 $ 9.49
====== =======
Total return++.......... (15.13)% 18.63 %
====== =======
Ratios to average net
assets/Supplemental Da-
ta:
NET ASSET, end of year
(in 000's)............. 59,333 $36,365
Ratio of operating ex-
penses to average net
assets+................ 1.75 % 1.72 %**
Ratio of net investment
gain/(loss) to average
net assets............. 0.15 % (0.42)%**
Portfolio turnover rate. 89 % 16 %
</TABLE>
- --------
* The Portfolio commenced operations on April 21, 1994.
** Annualized.
+ Annualized operating expense ratios before fees waived by the Service
Providers for the year ended August 31, 1995 and for the period ended
August 31, 1994 was 1.96% and 2.56%.
++ Total return represents aggregate total return for the period indicated.
# Net investment loss per share before fees waived by the Service Providers
for the year ended August 31, 1995 and for the period ended August 31, 1994
was $0.01 and $0.04.
12
<PAGE>
OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Set forth below is a description of the investment objectives and policies of
each Portfolio. There can be no assurance that any Portfolio will achieve its
investment objectives. Further information about the investment policies of
each Portfolio, including a list of those restrictions on its investment
activities that cannot be changed without shareholder approval, appears in the
Statement of Additional Information.
GOVERNMENT MONEY INVESTMENTS
Government Money Investments is advised by Standish, Ayer & Wood, Inc. The
Portfolio's investment objective is to provide maximum current income to the
extent consistent with the maintenance of liquidity and the preservation of
capital by investing exclusively in short-term securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities ("U.S. Government
Securities") and repurchase agreements with respect to those securities. The
Portfolio may purchase securities on a when-issued or delayed-delivery basis
and may lend its portfolio securities. See "Certain Securities, Investment
Techniques and Risk Factors." The Portfolio will invest only in securities that
are purchased with and payable in U.S. dollars and that have remaining
maturities of 397 days or less at the time of purchase. The Portfolio maintains
a dollar-weighted average portfolio maturity of 90 days or less. All securities
purchased by the Portfolio, including repurchase agreements, will present
minimal credit risks in the opinion of the Advisor acting under the supervision
of the Trustees. The Portfolio follows these policies in order to maintain a
constant net asset value of $1.00 per share, although there can be no assurance
it can do so on a continuing basis. The Portfolio is not insured or guaranteed
by the U.S. government. The yield attained by the Portfolio may not be as high
as that of other funds that invest in lower quality or longer term securities.
INTERMEDIATE FIXED INCOME INVESTMENTS
Intermediate Fixed Income Investments is advised by Standish, Ayer & Wood,
Inc. The Portfolio seeks, as its investment objectives, current income and
reasonable stability of principal. The Portfolio seeks to achieve its
objectives through investment in high quality fixed income securities. The
average maturity of the securities held by the Portfolio may be shortened, but
not below three years, in order to preserve capital if the Advisor anticipates
a rise in interest rates. Conversely, the average maturity may be lengthened,
but not beyond ten years, to maximize returns if interest rates are expected to
decline.
The Portfolio invests in U.S. Government Securities, corporate bonds,
debentures, non-convertible fixed income preferred stocks, mortgage related
securities including collateralized mortgage obligations ("CMOs") and
government stripped mortgage related securities, Eurodollar certificates of
deposit, Eurodollar bonds and Yankee bonds. The securities held by the
Portfolio are actively managed. The Portfolio limits its investments to
investment grade securities, which are securities rated within the four highest
categories established by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), and unrated securities determined by the
Advisor to be of comparable quality. See the Appendix to the Statement of
Additional Information for a description of Moody's and S&P ratings and
"Certain Securities, Investment Techniques and Risk Factors--Medium and Lower
Rated and Unrated Securities" for a description of certain risks associated
with securities in the fourth highest rating category. The Portfolio also may
attempt to hedge against unfavorable changes in interest rates by entering into
interest rate futures contracts and purchasing and writing put and call options
thereon. The Portfolio will not invest more than 25% of its assets in privately
issued mortgage related securities. The Portfolio also may engage in repurchase
agreements, purchase temporary investments, purchase securities on a when-
issued basis and lend its portfolio securities. See "Certain Securities,
Investment Techniques and Risk Factors."
LONG-TERM BOND INVESTMENTS
Long-Term Bond Investments, is advised by Wolf, Webb, Burk & Campbell, Inc.
The Portfolio seeks, as its investment objective, total return consisting of
current income and appreciation of capital through investments in fixed income
securities without regard to remaining maturity. The average maturity of the
13
<PAGE>
Portfolio's holdings may be shortened in order to preserve capital if the
Advisor anticipates a rise in interest rates, but, under normal circumstances,
at least 65% of the value of the Portfolio's net assets is invested in bonds or
debentures so that the average maturity of the portfolio is at least 10 years
or more. Conversely, the maturity may be lengthened to maximize returns if
interest rates are expected to decline.
The Portfolio invests in U.S. Government Securities, corporate bonds,
debentures, non-convertible fixed income preferred stocks, mortgage related
securities including CMOs and government stripped mortgage related securities
and other domestic asset backed securities, Eurodollar certificates of deposit
and Eurodollar bonds. The Portfolio may invest up to 15% of its assets in
"Yankee Bonds" or dollar-denominated bonds sold in the United States by non-
U.S. issuers. The securities held by the Portfolio are actively managed. The
Portfolio limits its investments to securities that are considered to be
"investment grade," that is securities that are rated at least Bbb by Moody's
or BBB by S&P and unrated securities determined to be of comparable quality by
the Advisor. The Portfolio will not invest more than 25% of its assets in
privately issued mortgage related securities. The Portfolio may engage in
repurchase agreements, purchase temporary investments, purchase securities on a
when-issued basis and lend its portfolio securities. The Portfolio may attempt
to hedge against unfavorable changes in interest rates by entering into
interest rate futures contracts and purchasing and writing put and call options
thereon. See "Certain Securities, Investment Techniques and Risk Factors."
MUNICIPAL BOND INVESTMENTS
Municipal Bond Investments is advised by Smith Affiliated Capital Corp. The
Portfolio seeks, as its investment objective, a high level of interest income
that is excluded from federal income taxation to the extent consistent with
prudent investment management and the preservation of capital. The Portfolio
seeks to achieve its objectives through investment in a diversified portfolio
of general obligation, revenue and private activity bonds and notes that are
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, or multi-state agencies or authorities, the interest on
which, in the opinion of counsel to the issuer of the instrument, is excluded
from gross income for federal income tax purposes ("Municipal Obligations").
Portfolio composition generally covers a full range of maturities with broad
geographic and issuer diversification. The Portfolio may invest in private
activity bonds collateralized by letters of credit issued by banks having
stockholders' equity in excess of $100 million as of the date of their most
recent published statement of financial condition. The Portfolio may also
invest in variable rate Municipal Obligations, most of which permit the holder
thereof to receive the principal amount on demand upon seven days' notice. The
Portfolio limits its investments to Municipal Obligations that are rated at
least A, MIG-2 or Prime 2 by Moody's or A, SP-2 or A-2 by S&P and unrated
securities determined to be of comparable quality by the Advisor.
It is a fundamental policy of the Portfolio that under normal circumstances
at least 80% of its assets will be invested in Municipal Obligations and at
least 65% of its assets will be invested in bonds. The Portfolio will not
invest more than 25% of its total assets in Municipal Obligations whose issuers
are located in the same state or more than 25% of its total assets in Municipal
Obligations that are secured by revenues from entities in any one of the
following categories: hospitals and health facilities; ports and airports; or
colleges and universities. The Portfolio will also not invest more than 25% of
its assets in private activity bonds of similar projects. The Portfolio may,
however, invest more than 25% of its total assets in Municipal Obligations of
one or more of the following types: turnpikes and toll roads; public housing
authorities, general obligations of states and localities; state and local
housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the U.S. Treasury or other U.S. government guaranteed
securities; and pollution control bonds.
The Portfolio may invest without limit in private activity bonds, although it
does not currently expect to invest more than 20% of its total assets in
private activity bonds. Dividends attributable to interest income
14
<PAGE>
on certain types of private activity bonds issued after August 7, 1986 to
finance nongovernmental activities are a specific tax preference item for
purposes of the federal individual and corporate alternative minimum taxes.
Dividends derived from interest income on all Municipal Obligations are a
component of the "current earnings" adjustment item for purposes of the federal
corporate alternative minimum tax.
When the Portfolio is maintaining a temporary defensive position, it may
invest in short-term investments, some of which may not be tax exempt.
Securities eligible for short-term investment by the Portfolio are tax exempt
notes of municipal issuers having, at the time of purchase, a rating within the
three highest grades of Moody's or S&P or, if not rated, having an issue of
outstanding Municipal Obligations rated within the three highest grades by
Moody's or S&P, and taxable short-term instruments having quality
characteristics comparable to those for Municipal Obligations. The Portfolio
may invest in temporary investments for defensive reasons in anticipation of a
market decline. At no time will more than 20% of the Portfolio's total assets
be invested in temporary investments unless the Portfolio has adopted a
defensive investment policy. The Portfolio will purchase tax exempt temporary
investments pending the investment of the proceeds from the sale of the
securities held by the Portfolio or from the purchase of the Portfolio's shares
by investors or in order to have highly liquid securities available to meet
anticipated redemptions. To the extent that the Portfolio holds temporary
investments, it may not achieve its investment objective. The Portfolio may
purchase securities on a when-issued basis. See "Certain Securities, Investment
Techniques and Risk Factors."
MORTGAGE BACKED INVESTMENTS
Mortgage Backed Investments is advised by Atlantic Portfolio Analytics &
Management, Inc. The primary investment objective of the Portfolio is high
current income and its secondary objective is capital appreciation, each to the
extent consistent with the protection of capital. The Portfolio seeks to
achieve these objectives by investing, under normal circumstances, at least 65%
of its assets in mortgage related securities.
The mortgage related securities in which the Portfolio invests represent
pools of mortgage loans assembled for sale to investors by various governmental
agencies, such as the Government National Mortgage Association ("GNMA") and
government related organizations, such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
as well as by private issuers, such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies. The
Portfolio may also invest in government stripped mortgage related securities
and CMOs collateralized by mortgage loans or mortgage pass-through
certificates. Under current market conditions, the Portfolio's holdings of
mortgage related securities may be expected to consist primarily of securities
issued by GNMA, FNMA and FHLMC. However, the composition of the Portfolio's
assets will vary from time to time based upon a determination by the Advisor of
how best to achieve the Portfolio's investment objectives taking into account
such factors as the liquidity, yield and creditworthiness of various mortgage
related securities. Mortgage related securities held by the Portfolio will
generally be rated no lower than A by Moody's or S&P or, if not rated, will be
of equivalent investment quality as determined by the Advisor. Although up to
20% of the Portfolio's assets may be invested in securities rated as low as B
by Moody's or S&P (or, if unrated, judged by the Advisor to be of comparable
quality), a program of investments in securities rated below A will only be
made upon the concurrence of the Manager. In order to enhance current income,
the Portfolio may enter into forward roll transactions with respect to mortgage
related securities issued by GNMA, FNMA and FHLMC. The Portfolio may invest in
government stripped mortgage related securities issued and guaranteed by GNMA,
FNMA or FHLMC. The Portfolio will not invest more than 25% of its assets in
privately issued mortgage related securities. The Portfolio may engage in
repurchase agreements, purchase temporary investments, purchase securities on a
when-issued basis and lend its portfolio securities. The Portfolio may attempt
to hedge against unfavorable changes in interest rates by entering into
interest rate futures contracts and purchasing and writing put and call options
thereon. See "Certain Securities, Investment Techniques and Risk Factors."
15
<PAGE>
BALANCED INVESTMENTS
Balanced Investments is advised by Palley-Needelman Asset Management, Inc.
The investment objective of the Portfolio is total return through a combination
of current income and capital appreciation. The Portfolio seeks to achieve its
objective through investment in common stocks and in fixed income senior
securities rated within the four highest categories established by Moody's or
S&P and unrated securities determined to be of comparable quality by the
Portfolio's Advisor. See the Appendix to the Statement of Additional
Information for a description of Moody's and S&P ratings and "Certain
Securities, Investment Techniques and Risk Factors--Medium and Lower Rated and
Unrated Securities" in this Prospectus for a description of certain risks
associated with securities in the fourth highest rating category. It is the
Portfolio's policy not to purchase a security if as a result of the purchase
less than 25% of the Portfolio's total assets would be invested in fixed-income
senior securities, including short- and long-term debt securities, preferred
stocks and convertible debt securities and convertible preferred stocks to the
extent their value is attributable to their fixed income characteristics.
Subject to this policy, the Portfolio's assets will be invested in each type of
security in such proportions as are deemed appropriate by the Advisor under
prevailing economic and market conditions.
Shares of Balanced Investments are intended for purchase by investors that
participate in TRAK through employee benefit plans, the sponsors of which have
elected to make available less than the full range of Portfolios offered by the
Trust. Consequently, the Consulting Group does not intend to advise the
purchase of these shares to other TRAK participants as part of a recommended
asset allocation strategy.
Balanced Investments may purchase American Depositary Receipts ("ADRs"),
which are dollar-denominated receipts issued generally by domestic banks and
represent the deposit with the bank of a security of a foreign issuer. ADRs are
publicly traded on exchanges or over-the-counter in the United States.
LARGE CAPITALIZATION VALUE EQUITY INVESTMENTS
Large Capitalization Value Equity Investments is advised by Newbold's Asset
Management, Inc. and Parametric Portfolio Associates. It is currently
anticipated that Newbold's Asset Management, Inc. and Parametric Portfolio
Associates will manage twenty percent (20%) and eighty percent (80%),
respectively, of the Portfolio's current assets and will be allocated for
management twenty percent (20%) and eighty percent (80%), respectively, of the
Portfolio's future assets. The Trust's Board of Trustees, may, upon the advice
of the Consulting Group, reallocate the management of the Portfolio's assets
between the investment advisers in its discretion from time to time. The
Portfolio seeks, as its investment objective, total return consisting of
capital appreciation and dividend income by investing primarily in a
diversified portfolio of highly liquid common stocks that, in the Advisor's
opinion, have above average price appreciation potential at the time of
purchase. In general, these securities are characterized as having above
average dividend yields and below average price earnings ratios relative to the
stock market in general, as measured by the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"). Other factors, such as earnings and dividend
growth prospects as well as industry outlook and market share, also are
considered. Under normal conditions, at least 80% of the Portfolio's assets
will be invested in common stocks and at least 65% of the Portfolio's assets
will be invested in common stocks that, at the time of investment, will be
expected to pay regular dividends. No less than 65% of the Portfolio's assets
will be invested in common stocks of issuers with total market capitalization
of $1 billion or greater at the time of purchase. The Portfolio may purchase
temporary investments, lend its portfolio securities and purchase stock index
futures contracts and purchase and write options thereon. See "Certain
Securities, Investment Techniques and Risk Factors."
LARGE CAPITALIZATION GROWTH INVESTMENTS
Large Capitalization Growth Investments is advised by Provident Investment
Counsel and Boston Structured Advisors. Currently, Provident Investment Counsel
and Boston Structured Advisors manage twenty percent (20%) and eighty percent
(80%), respectively, of the Portfolio's current assets and will be allocated
for management twenty percent (20%) and eighty percent (80%), respectively, of
the Portfolio's
16
<PAGE>
future assets. The Trust's Board of Trustees may, upon the advice of the
Consulting Group, reallocate the management of the Portfolio's assets between
the investment advisers in its discretion from time to time.
The Portfolio seeks substantial capital appreciation by investing primarily
in a diversified portfolio of common stocks that, in the Advisor's opinion, are
characterized by a growth of earnings at a rate faster than that of the S&P
500. Dividend income is an incidental consideration in the selection of
investments. The securities held by the Portfolio can be expected to experience
greater volatility than those of Large Capitalization Value Equity Investments.
In selecting securities for the Portfolio, the Advisor evaluates factors
believed to be favorable to long-term capital appreciation including specific
financial characteristics of the issuer such as historical earnings growth,
sales growth, profitability and return on equity. The Advisor also analyzes the
issuer's position within its industry as well as the quality and experience of
the issuer's management. Under normal conditions, at least 80% of the
Portfolio's assets will be invested in common stocks and at least 65% of the
Portfolio's assets will be invested in common stocks of issuers with total
market capitalization of $1 billion or greater at the time of purchase. The
Portfolio may purchase temporary investments, lend its portfolio securities and
purchase stock index futures contracts and purchase and write options thereon.
See "Certain Securities, Investment Techniques and Risk Factors."
SMALL CAPITALIZATION VALUE EQUITY INVESTMENTS
Small Capitalization Value Equity Investments is advised by NFJ Investment
Group and Wells Fargo Nikko Investment Advisors. It is currently anticipated
that NFJ Investment Group and Wells Fargo Nikko Investment Advisors will each
manage approximately fifty percent (50%) of the Portfolio's current and future
assets. The Trust's Board of Trustees may, upon the advice of the Consulting
Group, allocate and reallocate the management of the Portfolio's assets between
the investment advisors in its discretion from time to time.
The Portfolio seeks above average capital appreciation. With respect to the
portion of the Portfolio allocated to Wells Fargo Nikko Investment Advisors,
the Advisor seeks to track the performance of the Russell 2000 Value Index.
With respect to the remainder of the Portfolio, the Advisor will invest
primarily in a diversified portfolio of common stocks that, in the Advisor's
opinion, are undervalued or "neglected" in the marketplace at the time of
purchase. In general, these securities are characterized as having below
average price earnings ratios and a small number of shares outstanding relative
to the stock market in general and enjoy below average industry analyst
coverage. Other factors, such as earnings and dividend growth prospects as well
as industry outlook and market share, also are considered. Current dividend
income is only an incidental consideration in the selection of investments.
Under normal conditions, at least 80% of the Portfolio's assets will be
invested in common stocks, at least 65% of the Portfolio's assets will be
invested in common stocks of issuers with total market capitalization of less
than $1 billion and at least one third of the Portfolio's assets will be
invested in common stocks of companies with total market capitalization of $550
million or less at the time of purchase. The Portfolio may purchase temporary
investments, lend its portfolio securities and purchase stock index futures
contracts and purchase and write options thereon. See "Certain Securities,
Investment Techniques and Risk Factors."
SMALL CAPITALIZATION GROWTH INVESTMENTS
Small Capitalization Growth Investments is advised by Pilgrim Baxter &
Associates, Inc. and Mellon Capital Management Corporation. It is currently
anticipated that Pilgrim Baxter & Associates, Inc. and Mellon Capital
Management Corporation will each manage approximately fifty percent (50%) of
the Portfolio's current and future assets. The Trust's Board of Trustees may,
upon the advice of the Consulting Group, allocate and reallocate the management
of the Portfolio's assets between the investment advisors in its discretion
from time to time.
17
<PAGE>
The Portfolio seeks, as its investment objective, maximum capital
appreciation. With respect to the portion of the Portfolio allocated to Mellon
Capital Management Corporation, the Advisor seeks to track the performance of
the Russell 2000 Growth Index. With respect to the remainder of the Portfolio,
the Advisor attempts to achieve its objective through investment of at least
65% of the Portfolio's assets in the common stock of "emerging growth"
companies with total market capitalization of less than $1 billion and at least
one third of the Portfolio's assets allocated to it will be invested in common
stocks of companies with total market capitalization of $550 million or less.
Dividend income is not a consideration in the selection of investments. Pilgrim
Baxter & Associates Inc. seeks to invest in small capitalization companies that
it believes are undervalued in the marketplace, or have earnings that may be
expected to grow faster than the U.S. economy in general. These companies
typically possess a relatively high rate of return on invested capital so that
future growth can be financed from internal sources. The Advisor may also
invest in companies that offer the possibility of accelerating earnings growth
because of management changes, new products or structural changes in the
economy. Companies in which the Advisor is likely to invest may have limited
product lines, markets or financial resources and may lack management depth.
The securities of these companies may have limited marketability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. The Portfolio may
purchase temporary investments, lend its portfolio securities and purchase
stock index futures contracts and purchase and write options thereon. See
"Certain Securities, Investment Techniques and Risk Factors."
INTERNATIONAL EQUITY INVESTMENTS
International Equity Investments is advised by Oechsle International
Advisors, L.P. and State Street Global Advisors. It is currently anticipated
that Oechsle International Advisors, L.P. and State Street Global Advisors will
each manage approximately fifty percent (50%) of the Portfolio's current and
future assets. The Trust's Board of Trustees may, upon the advice of the
Consulting Group, allocate and reallocate the management of the Portfolio's
assets between the investment advisors in its discretion from time to time.
The investment objective of the Portfolio is capital appreciation. The
Portfolio ordinarily invests at least 80% of its assets in equity securities of
companies domiciled outside the United States. For purposes of the Portfolio's
investment policies, equity securities consist of common and preferred stock
and securities such as bonds, rights and warrants that are convertible into
common stock.
Under normal market conditions, at least 65% of the Portfolio's assets will
be invested in securities of issuers domiciled in at least three foreign
countries. Investments may be made in companies in developed as well as
developing countries. Investing in the equity markets of developing countries
involves exposure to economies that are generally less diverse and mature, and
to political systems that can be expected to have less stability, than those of
developed countries. With respect to that portion of the Portfolio allocated to
State Street Global Advisors, the Advisor seeks to track the performance of the
Morgan Stanley Capital International Europe, Australia and Far East ("EAFE")
Index. With respect to the remainder of the Portfolio, the Advisor attempts to
limit exposure to investments in developing countries where both liquidity and
sovereign risks are high. Although there is no established definition, a
developing country is generally considered to be a country that is in the
initial stages of its industrialization cycle with per capita gross national
product of less than $5,000. Historical experience indicates that the markets
of developing countries have been more volatile than the markets of developed
countries, although securities traded in the former markets have provided
higher rates of return to investors. For a discussion of the risks associated
with investing in foreign securities, see "Certain Securities, Investment
Techniques and Risk Factors--Foreign Securities."
The Portfolio intends to invest in non-U.S. companies whose securities are
traded on exchanges located in the countries in which the issuers are
principally based. The Portfolio may invest in securities of foreign issuers in
the form of ADRs. European Depositary Receipts ("EDRs"), which are sometimes
referred to as Continental Depositary Receipts ("CDRs"), may also be purchased
by the Portfolios. EDRs and CDRs are
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generally issued by foreign banks and evidence ownership of either foreign or
domestic securities. The Portfolio may attempt to hedge against unfavorable
changes in currency exchange rates by engaging in forward currency
transactions, purchasing and writing put and call options on foreign currencies
and trading currency futures contracts and options thereon. The Portfolio may
purchase temporary investments, lend its portfolio securities and purchase
stock index futures contracts and purchase and write options thereon. See
"Certain Securities, Investment Techniques and Risk Factors."
INTERNATIONAL FIXED INCOME INVESTMENTS
International Fixed Income Investments is advised by Julius Baer Investment
Management Inc. The Portfolio seeks, as its investment objective, to maximize
current income consistent with protection of principal by investing primarily
in a managed portfolio of non-U.S. dollar debt securities issued by foreign
governments and supranational entities. Under normal market conditions, at
least 65% of the Portfolio's assets will be invested in fixed income securities
of issuers domiciled in at least three foreign countries. The Portfolio will
not invest more than 25% of its assets in the securities of governments in any
one country. The Portfolio limits its purchases of debt securities to those
that are rated within the four highest categories established by S&P or Moody's
or, if unrated, are deemed by the Advisor to be of comparable quality. See the
Appendix to the Statement of Additional Information for a description of
Moody's and S&P's ratings and "Certain Securities, Investment Techniques and
Risk Factors--Medium and Lower Rated and Unrated Securities" for a description
of certain risks associated with securities in the fourth highest rating
category. The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and
trading currency futures contracts and options thereon. The Portfolio may
purchase temporary investments, purchase securities on a when-issued basis and
lend its portfolio securities.
The Portfolio is classified as a "non-diversified" investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), which means
that it is not limited by the 1940 Act in the proportion of its assets that it
may invest in the securities of a single issuer. The Portfolio, as a non-
diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company. Thus, an investment in the
Portfolio may, due to changes in the financial condition or in the market's
assessment of those issuers, present greater risk to an investor than an
investment in a diversified investment company. However, the Portfolio intends
to conduct its operations so as to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which will relieve the Portfolio of any liability for federal income tax to the
extent that its earnings are distributed to shareholders. In order to so
qualify, among other things, the Portfolio must ensure that, at the close of
each quarter of the taxable year, (i) not more than 25% of the market value of
the Portfolio's total assets is invested in the securities (other than U.S.
Government Securities) of a single issuer or of two or more issuers that the
Portfolio controls and that are engaged in the same, similar or related trades
or businesses and (ii) at least 50% of the market value of the Portfolio's
total assets is represented by (a) cash and cash items, (b) U.S. Government
Securities and (c) other securities limited in respect of any one issuer to an
amount not greater in value than 5% of the market value of the Portfolio's
total assets and to not more than 10% of the outstanding voting securities of
the issuer.
EMERGING MARKETS EQUITY INVESTMENTS
Emerging Markets Equity Investments is advised by John Govett & Co. Limited.
The Portfolio seeks to achieve long-term capital appreciation through
investment primarily in a diversified portfolio of equity securities of issuers
in countries having "emerging markets." For this purpose, a country with an
emerging market is generally one in which the per capita income is in the low
to middle ranges, as determined by the International Bank for Reconstruction
and Development (World Bank). The Portfolio currently expects to invest in the
following emerging markets countries: Argentina, Austria (as a "gateway" into
Czech Republic and Hungary), Brazil, Chile, China, Colombia, Greece, Hong Kong
(as a "gateway" into China), India, Indonesia, Israel, South Korea, Malaysia,
Mexico, Pakistan, Philippines, Portugal, Singapore, Sri Lanka,
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Taiwan, Thailand, Turkey and Venezuela. The Portfolio may from time to time
discontinue investments in any of the above-mentioned countries and/or begin
investing in other countries with emerging markets.
The Portfolio anticipates normally investing at least 65% of its total assets
in securities of issuers located in at least three different countries, other
than the United States. At least 65% of the Portfolio's total assets typically
will be invested in equity securities and equity derivative securities such as
preferred stocks and warrants. Most of the equity securities in which the
Portfolio will invest will be listed on recognized foreign securities
exchanges, although the Portfolio may also invest in over-the-counter
securities. Under normal market conditions, not more than 5% of the Portfolio's
net assets will be invested in the securities of any one issuer (excluding the
United States government and its agencies and instrumentalities) and not more
than 25% of the Portfolio's total assets will be invested in issuers in the
same industry.
In choosing the issuers in whose securities the Portfolio will invest, the
Portfolio's Advisor first analyzes the economic factors and background of each
emerging markets country and estimates the rate of Gross Domestic Product
growth, the rate of inflation and currency exchange rates for the following six
months. Anticipated returns for each country are then determined based on
prospective price earnings ratios relative to bond yields and other relevant
historical interest rate measures, and asset allocation decisions are made
among the different emerging markets countries. Within each market chosen for
investment, the Portfolio's Advisor will then choose the issuers offering the
best relative value, based on relative price earnings ratios, dividend yields,
dividend and interest cover and balance sheets.
The Portfolio may enter into forward currency contracts, use options and
options on futures contracts to hedge against movements in currency exchange
rates, purchase temporary investments and enter into reverse repurchase
agreements. The Portfolio, which is designed for investors who do not require
regular current income and who can accept a high degree of risk in their
investment, may be viewed as speculative in nature. Investing in the securities
of issuers in emerging markets countries involves certain risks and special
considerations not inherent in investments in securities of U.S. companies. See
"Certain Securities, Investment Techniques and Risk Factors."
CERTAIN SECURITIES, INVESTMENT TECHNIQUES AND RISK FACTORS
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when
the Advisor of a Portfolio, other than Government Money Investments, believes,
in consultation with the Manager, that pursuing the Portfolio's basic
investment strategy may be inconsistent with the best interests of its
shareholders, the Portfolio may invest its assets in the following money market
instruments: U.S. Government Securities (including those purchased in the form
of custodial receipts), repurchase agreements, certificates of deposit and
bankers' acceptances issued by U.S. banks or savings and loan associations
having assets of at least $500 million as of the end of their most recent
fiscal year and high quality commercial paper. Each of these Portfolio's U.S.
dollar-denominated temporary investments are managed by SBMFM. See "Management
of the Trust--Administrator." In addition, for the same purposes the Advisors
of Emerging Markets Equity Investments, International Fixed Income Investments
and International Equity Investments may invest in obligations issued or
guaranteed by foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated at least AA by S&P or
Aa by Moody's or, if unrated, are determined by the Advisor to be of equivalent
quality. Emerging Markets Equity Investments may also invest in obligations
issued by foreign banks, but will limit its investments in such obligations to
U.S. dollar-denominated obligations of foreign banks which at the time of
investment (i) have assets with a value of more than $10 billion; (ii) are
among the 75 largest foreign banks in the world, based on amount of assets;
(iii) have branches in the United States; and (iv) are of comparable quality to
obligations issued by United States banks in which the Portfolio may invest, in
the opinion of the Portfolio's Advisor. See "Foreign Securities" below. Each
Portfolio also may hold a portion of its assets in money market instruments or
cash in amounts designed to pay expenses, to meet anticipated redemptions or
pending investment in accordance with its objectives and policies. Any
temporary investments may be purchased on a when-issued basis. A Portfolio's
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investment in any other short-term debt instruments would be subject to the
Portfolio's investment objectives and policies, and to approval by the Trust's
Board of Trustees.
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through investment advisory programs, such
as TRAK, that are based on an evaluation of an investor's investment objectives
and risk tolerances. Because these asset allocation strategies are designed to
spread investment risk across the various segments of the securities markets
through investment in a number of Portfolios, each individual Portfolio
generally intends to be substantially fully invested in accordance with its
investment objectives and policies during most market conditions. Although the
Advisor of a Portfolio may, upon the concurrence of the Manager, take a
temporary defensive position during adverse market conditions, it can be
expected that a defensive posture will be adopted less frequently than it would
be by other mutual funds. This policy may impede an Advisor's ability to
protect a Portfolio's capital during declines in the particular segment of the
market to which the Portfolio's assets are committed. Consequently, no single
Portfolio should be considered a complete investment program and an investment
among the Portfolios should be regarded as a long-term commitment that should
be held through several market cycles. In addition, although the Consulting
Group intends to recommend adjustments in the allocation of assets among the
Portfolios based on, among other things, anticipated market trends, there can
be no assurance that these recommendations can be developed, transmitted and
acted upon in a manner sufficiently timely to avoid market shifts, which can be
sudden and substantial. TRAK participants should recognize that TRAK is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, TRAK participants are urged
strongly to adhere to the Consulting Group's asset allocation recommendations
and to act promptly upon any recommended reallocation of assets among the
Portfolios. Investors intending to purchase Portfolio shares through different
investment advisory services should evaluate carefully whether the service is
ongoing and continuous, as well as their investment advisors' ability to
anticipate and respond to market trends.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Portfolios may engage in repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Portfolio's holding period. This arrangement results in a
fixed rate of return that is not subject to market fluctuations during the
Portfolio's holding period. A Portfolio may enter into repurchase agreements
with respect to U.S. Government Securities with member banks of the Federal
Reserve System and certain non-bank dealers approved by the Board of Trustees.
Under each repurchase agreement, the selling institution is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Portfolio's Advisor, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis the value of
the collateral and the creditworthiness of those non-bank dealers with whom the
Portfolio enters into repurchase agreements. A Portfolio will not invest in a
repurchase agreement maturing in more than seven days if the investment,
together with illiquid securities held by the Portfolio, exceeds 10% of the
Portfolio's total assets. See "Certain Investment Policies." In entering into a
repurchase agreement, a Portfolio bears a risk of loss in the event that the
other party to the transaction defaults on its obligations and the Portfolio is
delayed or prevented from exercising its rights to dispose of the underlying
securities, including the risk of a possible decline in the value of the
underlying securities during the period in which the Portfolio seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or a part of the income from the
agreement.
Emerging Markets Equity Investments may enter into reverse repurchase
agreements with the financial institutions with which it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Portfolio
would sell securities to a financial institution and agree to repurchase them
at a mutually agreed upon date, price and rate of interest. During the period
between the sale and repurchase, the Portfolio would not be entitled to
principal and interest paid on the securities sold by the Portfolio. The
Portfolio, however,
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would seek to achieve gains derived from the difference between the current
sales price and the forward price for the future purchase as well as the
interest earned on the proceeds on the initial sale. Reverse repurchase
agreements will be viewed as borrowings by the Portfolio for the purpose of
calculating the Portfolio's indebtedness and will have the effect of leveraging
the Portfolio's assets.
BORROWING. Leverage increases investment risk as well as investment
opportunity. If the income and investment gains on securities purchased with
borrowed money exceed the interest paid on the borrowing, the net asset value
of the Portfolio's shares will rise faster than would otherwise be the case. On
the other hand, if the income and investment gains fail to cover the cost,
including interest, of the borrowings, or if there are losses, the net asset
value of the Portfolio's shares will decrease faster than otherwise would be
the case.
U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Government
Securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government
Securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds,
which differ only in their interest rates, maturities and times of issuance,
are supported by the full faith and credit of the United States. Others are
supported by: (i) the right of the issuer to borrow from the U.S. Treasury,
such as securities of the Federal Home Loan Banks; (ii) the discretionary
authority of the U.S. Government to purchase the agency's obligations, such as
securities of the FNMA; or (iii) only the credit of the issuer, such as
securities of the Student Loan Marketing Association. No assurance can be given
that the U.S. Government will provide financial support in the future to U.S.
Government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities include: (i) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participations in loans made to foreign governments
or other entities that are so guaranteed. The secondary market for certain of
these participations is limited and, therefore, may be regarded as illiquid.
U.S. Government Securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity.
Zero coupon U.S. Government Securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. Government Securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government Securities
that make regular payments of interest. A Portfolio accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the
Portfolio's distribution obligations, in which case the Portfolio will forego
the purchase of additional income producing assets with these funds. Zero
coupon U.S. Government Securities include STRIPS and CUBES, which are issued by
the U.S. Treasury as component parts of U.S. Treasury bonds and represent
scheduled interest and principal payments on the bonds.
As part of its investments in U.S. Government Securities, a Portfolio, other
than Government Money Investments, may invest up to 5% of its net assets in
exchange rate-related U.S. Government Securities, which are described in the
Statement of Additional Information.
CUSTODIAL RECEIPTS. Each Portfolio other than Government Money Investments
may acquire custodial receipts or certificates, such as CATS, TIGRs and FICO
Strips, underwritten by securities dealers or banks that evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
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issued by the U.S. Government, its agencies, authorities or instrumentalities.
The underwriters of these certificates or receipts purchase a U.S. Government
Security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government Securities, described above. Although typically under the terms
of a custodial receipt a Portfolio is authorized to assert its rights directly
against the issuer of the underlying obligation, the Portfolio may be required
to assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Portfolio may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Portfolio had purchased a direct obligation of the issuer. In addition, in
the event that the trust or custodial account in which the underlying security
has been deposited is determined to be an association taxable as a corporation,
instead of a non-taxable entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping
to meet its operating expenses, each Portfolio other than Municipal Bond
Investments may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 30% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized at least 100% by cash, letters of credit or U.S. Government
Securities, which will be marked to market daily. The cash or instruments
collateralizing a Portfolio's loans of securities will be maintained at all
times in a segregated account with the Portfolio's custodian, or with a
designated sub-custodian, in an amount at least equal to the current market
value of the loaned securities. In lending securities to brokers, dealers and
other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery
and possible loss of rights in the collateral should the borrower fail
financially.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under
which the issuance of the securities depends on the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization or debt
restructuring. The Portfolio will establish with its custodian, or with a
designated sub-custodian, a segregated account consisting of cash, U.S.
Government Securities or other liquid high grade debt obligations in an amount
equal to the amount of its when-issued or delayed-delivery purchase
commitments.
Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction
itself.
FIXED INCOME SECURITIES. The market value of fixed income obligations of the
Portfolios will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Portfolios. The market value of the obligations held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
also should recognize that, in periods of declining interest rates, a
Portfolio's yield will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will tend to be
invested in
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instruments producing lower yields than the balance of its portfolio, thereby
reducing the Portfolio's current yield. In periods of rising interest rates,
the opposite can be expected to occur. In addition, securities in which a
Portfolio may invest may not yield as high a level of current income as might
be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by S&P and Moody's are relative and subjective and are
not absolute standards of quality. Although these ratings are initial criteria
for selection of portfolio investments, a Portfolio also will make its own
evaluation of these securities. Among the factors that will be considered are
the long-term ability of the issuers to pay principal and interest and general
economic trends.
MUNICIPAL OBLIGATIONS. The term "Municipal Obligations" generally is
understood to include debt obligations issued to obtain funds for various
public purposes, the interest on which is, in the opinion of bond counsel to
the issuer, excluded from gross income for federal income tax purposes. In
addition, if the proceeds from private activity bonds are used for the
construction, repair or improvement of privately operated industrial or
commercial facilities, the interest paid on such bonds may be excluded from
gross income for federal income tax purposes, although current federal tax laws
place substantial limitations on the size of these issues.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizable investments in these obligations could involve an
increased risk to the Portfolio should any of the related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and do not generally carry the pledge of the credit of the issuing
municipality. There are, of course, variations in the security of Municipal
Obligations, both within a particular classification and between
classifications.
MORTGAGE RELATED SECURITIES. Intermediate Fixed Income Investments, Long-Term
Bond Investments and Mortgage Backed Investments may invest in mortgage related
securities without limit. There are several risks associated with mortgage
related securities generally. One is that the monthly cash inflow from the
underlying loans may not be sufficient to meet the monthly payment requirements
of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life
of a pool. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yield of a Portfolio.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Portfolio will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, a Portfolio's yield will correspondingly
decline. Thus, mortgage related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that a Portfolio purchases mortgage related securities at a
premium, unscheduled prepayments, which are made at par, will result in a loss
equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the
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same schedule as they are received, although certain classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which a Portfolio
invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage related securities.
Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of the Advisor,
the investment restriction limiting a Portfolio's investment in illiquid
instruments to not more than 10% of the value of its net assets will apply. See
"Certain Investment Policies."
GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. Each of Intermediate Fixed
Income Investments, Long-Term Bond Investments and Mortgage Backed Investments
may invest up to 25% of its total assets in certain government stripped
mortgage related securities issued and guaranteed by GNMA, FNMA or FHLMC. These
securities represent beneficial ownership interests in either periodic
principal distributions ("principal-only") or interest distributions
("interest-only") on mortgage related certificates issued by GNMA, FNMA or
FHLMC, as the case may be. The certificates underlying the government stripped
mortgage related securities represent all or part of the beneficial interest in
pools of mortgage loans. A Portfolio will invest in government stripped
mortgage related securities in order to enhance yield or to benefit from
anticipated appreciation in value of the securities at times when its Advisor
believes that interest rates will remain stable or increase. In periods of
rising interest rates, the expected increase in the value of government
stripped mortgage related securities may offset all or a portion of any decline
in value of the securities held by a Portfolio.
Investing in government stripped mortgage related securities involves the
risks normally associated with investing in mortgage related securities issued
by government or government related entities. See "Mortgage Related Securities"
above. In addition, the yields on government stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only government
stripped mortgage related securities and increasing the yield to maturity on
principal-only government stripped mortgage related securities. Sufficiently
high prepayment rates could result in a Portfolio not fully recovering its
initial investment in an interest-only government stripped mortgage related
security. Under current market conditions, the Portfolios expect that
investments in government stripped mortgage related securities will consist
primarily of interest-only securities. Government stripped mortgage related
securities are currently traded in an over-the-counter market maintained by
several large investment banking firms. There can be no assurance that the
Portfolios will be able to effect a trade of a government stripped mortgage
related security at a time when it wishes to do so. The Portfolios will acquire
government stripped mortgage related securities only if a secondary market for
the securities exists at the time of acquisition. Except for government
stripped mortgage related securities based on fixed rate FNMA and FHLMC
mortgage certificates that meet certain liquidity criteria established by the
Board of Trustees, a Portfolio will treat government stripped mortgage related
securities as illiquid and will limit its investments in these securities,
together with other illiquid investments, to not more than 10% of its net
assets.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, Mortgage
Backed Investments may enter into forward roll transactions with respect to
mortgage related securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, a Portfolio sells a mortgage related security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage related securities that are repurchased will
bear the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Portfolio will not
be entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in short-term instruments, particularly
repurchase agreements, and the
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income from these investments, together with any additional fee income received
on the sale, is intended to generate income for the Portfolio exceeding the
yield on the securities sold. Forward roll transactions involve the risk that
the market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities. At the time the Portfolio enters into a
forward roll transaction, it will place in a segregated custodial account cash,
U.S. Government Securities or high quality debt obligations having a value
equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to insure that the equivalent value is
maintained. Forward roll transactions are considered to be borrowings by the
Portfolio.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth
highest category by S&P or Moody's, although considered investment grade, may
possess speculative characteristics, and changes in economic or other
conditions are more likely to impair the ability of issuers of these securities
to make interest and principal payments than is the case with respect to
issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as junk bonds, offer a higher current
yield than is offered by higher rated securities, but also (i) will likely have
some quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The market values of certain of these securities also
tend to be more sensitive to individual corporate developments and changes in
economic conditions than higher quality bonds. In addition, medium and lower
rated securities and comparable unrated securities generally present a higher
degree of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. In light of these
risks, the Board of Trustees has instructed the Advisors, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue,
the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is more
volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading
market may restrict the availability of securities for the Portfolios to
purchase and may also have the effect of limiting the ability of a Portfolio to
sell securities at their fair value either to meet redemption requests or to
respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell
its higher rated bonds, resulting in a decline in the overall credit quality of
the securities held by the Portfolio and increasing the exposure of the
Portfolio to the risks of lower rated securities. Investments in zero coupon
bonds may be more speculative and subject to greater fluctuations in value due
to changes in interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of these securities
by the Portfolio, but the Advisor will consider this event in its determination
of whether the Portfolio should continue to hold the securities.
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NON-PUBLICLY TRADED SECURITIES. Each Portfolio may invest in non-publicly
traded securities, which may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid
by the Portfolios. In addition, companies whose securities are not publicly
traded are not subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
SUPRANATIONAL ENTITIES. International Fixed Income Investments, subject to
applicable diversification requirements of the Code, may invest up to 25% of
its total assets in debt securities issued by supranational organizations such
as the International Bank for Reconstruction and Development (commonly referred
to as the World Bank), which was chartered to finance development projects in
developing member countries; the European Community, which is a twelve-nation
organization engaged in cooperative economic activities; the European Coal and
Steel Community, which is an economic union of various European nations' steel
and coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions. As
supranational entities do not possess taxing authority, they are dependent upon
their members' continued support in order to meet interest and principal
payments.
FOREIGN SECURITIES. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically
associated with investing in obligations issued by the U.S. government and
domestic corporations. Substantially less information may be available about
foreign companies, particularly emerging market country companies, than about
domestic companies and, even when public information about such companies is
available, it may be less reliable than information concerning U.S. companies.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards and such standards may differ, in some cases
significantly, from standards in other countries, including the United States.
The values of foreign investments are affected by changes in currency rates or
exchange control regulations, restrictions or prohibitions on the repatriation
of foreign currencies, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy
(in the United States or abroad) or changed circumstances in dealings between
nations. Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions and custody fees are
generally higher than those charged in the United States, and foreign
securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
INVESTING IN EMERGING MARKETS COUNTRIES. Investing in securities of issuers
in emerging markets countries involves exposure to economic structures that are
generally less diverse and mature than, and to political systems that can be
expected to have less stability than, those of developed countries. Other
characteristics of emerging markets countries that may affect investment in
their markets include certain national policies that may restrict investment by
foreigners and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities issued by issuers located in emerging markets countries
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
Included among the emerging markets in which Emerging Markets Equity
Investments may invest are the formerly communist countries of Eastern Europe
and the People's Republic of China (collectively, "Communist Countries"). Upon
the accession to power of Communist regimes approximately 40 to 70 years ago,
the governments of a number of Communist Countries expropriated a large amount
of property. The claims of many property owners against those governments were
never finally settled. There can be no assurance that the Portfolio's
investments in Communist Countries, if any, would not also be expropriated,
nationalized or otherwise confiscated, in which case the Portfolio could lose
its entire investment in the
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Communist Country involved. In addition, any change in the leadership or
policies of Communist Countries may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring.
CURRENCY EXCHANGE RATES. A Portfolio's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Portfolio's
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries as seen from an international perspective. Currency
exchange rates can also be affected unpredictably by intervention by U.S. or
foreign governments or central banks or by currency controls or political
developments in the United States or abroad.
FORWARD CURRENCY CONTRACTS. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another--for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be
negotiated with a currency trader and fixed for the term of the contract at the
time that the Portfolio enters into the contract. To assure that a Portfolio's
forward currency contracts are not used to achieve investment leverage, the
Portfolio will segregate cash or high grade securities with its custodian in an
amount at all times equal to or exceeding the Portfolio's commitment with
respect to these contracts.
In hedging specific portfolio positions, a Portfolio may enter into a forward
contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio's Advisor.
The amount the Portfolio may invest in forward currency contracts is limited to
the amount of the Portfolio's aggregate investments in foreign currencies.
Risks associated with entering into forward currency contracts include the
possibility that the market for forward currency contracts may be limited with
respect to certain currencies and, upon a contract's maturity, the inability of
a Portfolio to negotiate with the dealer to enter into an offsetting
transaction. Forward currency contracts may be closed out only by the parties
entering into an offsetting contract. In addition, the correlation between
movements in the prices of those contracts and movements in the price of the
currency hedged or used for cover will not be perfect. There is no assurance
that an active forward currency contract market will always exist. These
factors will restrict a Portfolio's ability to hedge against the risk of
devaluation of currencies in which a Portfolio holds a substantial quantity of
securities and are unrelated to the qualitative rating that may be assigned to
any particular security. See the Statement of Additional Information for
further information concerning forward currency contracts.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio other than Government
Money Investments, Balanced Investments and Municipal Bond Investments may
enter into futures contracts and purchase and write (sell) options on these
contracts, including but not limited to interest rate, securities index and
foreign currency futures contracts and put and call options on these futures
contracts. These contracts will be entered into only upon the concurrence of
the Manager that such contracts are necessary or appropriate in the management
of the Portfolio's assets. These contracts will be entered into on exchanges
designated by the Commodity Futures Trading Commission ("CFTC") or, consistent
with CFTC regulations, on foreign exchanges. These transactions may be entered
into for bona fide hedging and other permissible risk management purposes
including protecting against anticipated changes in the value of securities a
Portfolio intends to purchase.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits
and unrealized losses on any contracts it has entered into. All futures and
options on futures
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<PAGE>
positions will be covered by owning the underlying security or segregation of
assets. With respect to long positions in a futures contract or option (e.g.,
futures contracts to purchase the underlying instrument and call options
purchased or put options written on these futures contracts or instruments),
the underlying value of the futures contract at all times will not exceed the
sum of cash, short-term U.S. debt obligations or other high quality obligations
set aside for this purpose.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to an Advisor's
ability to predict correctly movements in the direction of the securities
markets generally, which ability may require different skills and techniques
than predicting changes in the prices of individual securities. Moreover,
futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may
realize a loss on a futures contract or option that is not offset by an
increase in the value of its portfolio securities that are being hedged or a
Portfolio may not be able to close a futures or options position without
incurring a loss in the event of adverse price movements.
CERTAIN INVESTMENT POLICIES
The Trust on behalf of each Portfolio has adopted certain investment
restrictions that are enumerated in detail in the Statement of Additional
Information. Among other restrictions, each Portfolio except International
Fixed Income Investments may not, with respect to 75% of its total assets taken
at market value, invest more than 5% of its total assets in the securities of
any one issuer, except U.S. Government Securities, or acquire more than 10% of
any class of the outstanding voting securities of any one issuer. In addition,
except as described above with respect to Municipal Bond Investments, each
Portfolio may not invest more than 25% of its total assets in securities of
issuers in any one industry. The Trust on behalf of a Portfolio may borrow
money as a temporary measure from banks in an aggregate amount not exceeding
one-third of the value of the Portfolio's total assets to meet redemptions and
for other temporary or emergency purposes not involving leveraging. Forward
roll transactions, which may be entered into by Mortgage Backed Investments,
will be aggregated with bank borrowings for purposes of this calculation. A
Portfolio (other than Mortgage Backed Investments to the extent that forward
roll transactions are deemed to be borrowings) may not purchase securities
while borrowings exceed 5% of the value of the Portfolio's assets. A Portfolio
will not invest more than 10% of the value of its net assets in securities that
are illiquid, including certain government stripped mortgage related
securities, repurchase agreements maturing in more than seven days that cannot
be liquidated prior to maturity and securities that are illiquid by virtue of
the absence of a readily available market. Securities that have legal or
contractual restrictions on resale but have a readily available market are
deemed not illiquid for this purpose.
The investment restrictions listed above as well as the Portfolios'
investment objectives are fundamental policies and accordingly may not be
changed with respect to any Portfolio without the approval of a majority of the
outstanding shares of that Portfolio, as defined in the 1940 Act. Unless
otherwise specifically stated, however, the investment policies and practices
of each Portfolio are not fundamental and may be changed by the Board of
Trustees.
PORTFOLIO TURNOVER
Generally, a Portfolio, other than Small Capitalization Growth Investments
and International Equity Investments, will not trade in securities for short-
term profits but, when circumstances warrant, securities may be sold without
regard to the length of time held. The Portfolios specified in the previous
sentence may engage in active short-term trading to benefit from yield
disparities among different issues of securities, to
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seek short-term profits during periods of fluctuating interest rates or for
other reasons. Active trading will increase a Portfolio's rate of turnover,
certain transaction expenses and the incidence of short-term capital gain
taxable as ordinary income. An annual turnover rate of 100% would occur when
all the securities held by the Portfolio are replaced one time during a period
of one year.
Increased portfolio turnover may result in greater brokerage commissions
paid and in realization of net short-term capital gains which, when
distributed, are taxed to shareholders (other than retirement plans) at
ordinary income tax rates.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons and companies that
furnish services to the Trust and the Portfolios, including agreements with
the Trust's distributor, custodian, transfer agent, the Manager, Advisors and
administrator. One of the Trustees and four of the Trust's executive officers
are affiliated with Smith Barney and/or its affiliates. The Statement of
Additional Information contains background information regarding each Trustee
and executive officer of the Trust as well as the Portfolios' investment
officers.
INVESTMENT MANAGER
The Consulting Group, located at 222 Delaware Avenue, Wilmington, Delaware
19801, serves as the Trust's Manager. The Consulting Group is a division of
SBMFM, a registered investment advisor whose principal executive offices are
located at 388 Greenwich Street, New York, New York 10013. SBMFM is a wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is in turn
a wholly owned subsidiary of The Travelers Group Inc. ("Travelers").
The Trust has entered into an investment management agreement (the
"Management Agreement") with the Manager which, in turn, has entered into an
advisory agreement ("Advisory Agreement") with each Advisor selected for the
Portfolios. It is the Manager's responsibility to select, subject to the
review and approval of the Board of Trustees, the Advisors who have
distinguished themselves by able performance in their respective areas of
expertise in asset management and to review their continued performance.
Although the Manager does not serve as investment manager for any other
registered investment company, the Manager and its related office, the
Consulting Services Division of Smith Barney, have over 20 years of experience
in evaluating investment advisers for individuals and institutional investors.
As of January 31, 1995, the Manager rendered advisory services with respect to
assets with a value in excess of $67 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager provides to the Trust investment management evaluation services
principally by performing initial due diligence on prospective Advisors for
each Portfolio and thereafter monitoring Advisor performance through
quantitative and qualitative analysis as well as periodic in-person,
telephonic and written consultations with Advisors. In evaluating prospective
Advisors, the Manager considers, among other factors, each Advisor's level of
expertise; relative performance and consistency of performance over a minimum
period of five years; level of adherence to investment discipline or
philosophy; personnel, facilities and financial strength; and quality of
service and client communications. The Manager has responsibility for
communicating performance expectations and evaluations to Advisors and
ultimately recommending to the Board of Trustees of the Trust whether
Advisors' contracts should be renewed, modified or terminated. The Manager
provides written reports to the Board of Trustees regarding the results of its
evaluation and monitoring functions. The Manager is also responsible for
conducting all operations of the Trust except those operations contracted to
the Advisors, custodian, transfer agent or administrator. Each Portfolio pays
the Manager a fee for its services that is computed daily and paid monthly at
the annual rate specified below of the value of the average net
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assets of the Portfolio, and the Manager in turn pays each Advisor a fee for
its services provided to the Portfolio that is computed daily and paid monthly
at the annual rate specified below of the value of the Portfolio's average
daily net assets:
<TABLE>
<CAPTION>
TOTAL
MANAGER'S FEE ADVISOR'S FEES
(PAID BY THE (PAID BY THE
PORTFOLIO PORTFOLIOS) MANAGER)
--------- ------------- --------------
<S> <C> <C>
Government Money Investments.................... 0.15% 0.15%
Intermediate Fixed Income Investments........... 0.40% 0.20%
Long-Term Bond Investments...................... 0.40% 0.20%
Municipal Bond Investments...................... 0.40% 0.20%
Mortgage Backed Investments..................... 0.50% 0.25%
Balanced Investments............................ 0.60% 0.30%
Large Capitalization Value Equity Investments... * *
Large Capitalization Growth Investments......... ** **
Small Capitalization Value Equity Investments... *** ***
Small Capitalization Growth Investments......... **** ****
International Equity Investments................ ***** *****
International Fixed Income Investments.......... 0.50% 0.25%
Emerging Markets Equity Investments............. 0.90% 0.60%
</TABLE>
- --------
* With respect to the portion of the assets of Large Capitalization Value
Equity Investments allocated to Newbold's Asset Management ("NAM"), that
Portfolio pays fees to the Manager at the annual rate of 0.60% of the
average daily value of such assets. The Manager, in turn, pays fees to
NAM at the annual rate of 0.30% of such assets. With respect to that
portion of Large Capitalization Value Equity Investments allocated by
the Manager to Parametric Portfolio Associates. ("PPA"), the Manager has
agreed to waive a portion of the fees it otherwise would receive so that
such Portfolio will pay fees to the Manager at the annual rate of 0.50%
of the first $300 million of its average daily net assets allocated to
PPA and 0.45% of the average daily net assets allocated to PPA
thereafter. The Manager in turn pays PPA a fee at the annual rate of
0.20% of the first $300 million of the Portfolio's average daily net
assets allocated to PPA and 0.15% of the average daily net assets
allocated to PPA thereafter.
** With respect to the portion of the assets of Large Capitalization Growth
Investments allocated to Provident Investment Counsel ("PIC"), that
Portfolio pays fees to the Manager at the annual rate of 0.60% of the
average daily value of such assets. The Manager, in turn, pays fees to
PIC at the annual rate of 0.30% of such assets. With respect to that
portion of Large Capitalization Growth Investments allocated by the
Manager to Boston Structured Advisors ("BSA"), the Manager has agreed to
waive a portion of the fees it otherwise would receive so that such
Portfolio will pay fees to the Manager at the annual rate of 0.50% of
the first $300 million of its average daily net assets allocated to BSA
and 0.45% of the average daily net assets allocated to BSA thereafter.
The Manager in turn pays BSA a fee at the annual rate of 0.20% of the
first $300 million of the Portfolio's average daily net assets allocated
to BSA and 0.15% of the average daily net assets allocated to BSA
thereafter.
*** With respect to the portion of the assets of Small Capitalization Value
Equity Investments allocated to NFJ Investment Group ("NFJ"), that
Portfolio pays fees to the Manager at the annual rate of 0.60% of the
average daily value of such assets. The Manager, in turn, pays fees to
NFJ at the annual rate of 0.30% of such assets. With respect to that
portion of Small Capitalization Value Equity Investments allocated by
the Manager to Wells Fargo Nikko Investment Advisors ("WFNIA"), the
Manager has agreed to waive a portion of the fees it otherwise would
receive so that such Portfolio will pay fees to the Manager at the
annual rate of 0.45% of the first $200 million of its average daily net
assets allocated to WFNIA, 0.40% of the next $100 million of its average
daily net assets allocated to WFNIA and 0.35% of the average daily net
assets allocated to WFNIA thereafter. The Manager in turn pays WFNIA a
fee at the annual rate of 0.15% of the first $200 million of the
Portfolio's average daily net assets allocated to WFNIA, 0.10% of the
next $100 million of the Portfolio's average daily net assets allocated
to WFNIA and 0.05% of the average daily net assets allocated to WFNIA
thereafter.
**** With respect to the portion of the assets of Small Capitalization Growth
Investments allocated to Pilgrim Baxter & Associates, Inc. ("PBA"), that
Portfolio pays fees to the Manager at the annual rate of 0.60% of the
average daily value of such assets. The Manager, in turn, pays fees to
PBA at the annual rate of 0.30% of such assets. With respect to that
portion of Small Capitalization Growth Investments allocated by the
Manager to Mellon Capital Management Corporation ("MCM"), the Manager
has agreed to
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waive a portion of the fees it otherwise would receive so that such
Portfolio will pay fees to the Manager at the annual rate of 0.45% of the
first $200 million of its average daily net assets allocated to MCM, 0.40%
of the next $100 million of its average daily net assets allocated to MCM
and 0.35% of the average daily net assets allocated to MCM thereafter. The
Manager in turn pays MCM a fee at the annual rate of 0.15% of the first
$200 million of the Portfolio's average daily net assets allocated to MCM,
0.10% of the next $100 million of the Portfolio's average daily net assets
allocated to MCM and 0.05% of the average daily net assets allocated to
MCM thereafter.
***** With respect to the portion of the assets of International Equity
Investments allocated to Oechsle International Advisors, L.P. ("OIA"),
that Portfolio pays fees to the Manager at the annual rate of 0.70% of
the average daily value of such assets. The Manager, in turn, pays fees
to OIA at the annual rate of 0.40% of such assets. With respect to that
portion of International Equity Investments allocated by the Manager to
State Street Global Advisors ("SSGA"), the Manager has agreed to waive a
portion of the fees it otherwise would receive so that such Portfolio
will pay fees to the Manager at the annual rate of 0.37%. The Manager in
turn pays SSGA a fee at the annual rate of 0.07% of the Portfolio's
average daily net assets allocated to SSGA.
Investors should be aware that the Manager may be subject to a conflict of
interest when making decisions regarding the retention and compensation of
particular Advisors. However, the Manager's decisions, including the identity
of an Advisor and the specific amount of the Manager's compensation to be paid
to the Advisor, are subject to review and approval by a majority of the Board
of Trustees and separately by a majority of the Trustees who are not
affiliated with the Manager or any of its affiliates.
The Trust has received an exemption (the "Exemption") from certain
provisions of the 1940 Act which would otherwise require the Manager to obtain
formal shareholder approval prior to engaging and entering into investment
advisory agreements with Advisors. The requested relief is based on the
conditions set forth in the Exemption that, among other things: (1) the
Manager will select, monitor, evaluate and allocate assets to, the Advisors
and ensure that the Advisors comply with the relevant Portfolio's investment
objective, policies and restrictions; (2) before a Portfolio may rely on the
Exemption, the Exemption must be approved by the shareholders of the
Portfolios operating under the Exemption; (3) shares of the Portfolios relying
on the Exemption will not be subject to any sales loads or redemption fees or
other charges for redeeming shares; (4) the Trust will provide to shareholders
certain information about a new Advisor and its investment advisory contract
within 90 days of the engagement of a new Advisor; (5) the Trust will disclose
in this Prospectus the terms of the Exemption; and (6) the Trustees, including
a majority of the "non-interested" Trustees, must approve each investment
advisory contract in the manner required under the 1940 Act. Any changes to
the Investment Management Agreement between the Trust and the Consulting Group
would still require shareholder approval. As required by the Exemption, the
shareholders of each Portfolio have to permit the Trust to replace or add
Advisors and to enter into investment advisory agreements with Advisors upon
approval of the Board of Trustees but without formal shareholder approval.
ADVISORS
The Advisors have agreed to the foregoing fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment advisor, and perform all administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. By
virtue of the management, supervisory and administrative functions performed
by the Manager and SBMFM, and the fact that Advisors are not required to make
decisions regarding the allocation of assets among the major sectors of the
securities markets, the Advisors serve in a sub-advisory capacity to the
Portfolios. Subject to the supervision and direction of the Manager and,
ultimately, the Board of Trustees, each Advisor's responsibilities are limited
to managing the securities held by the Portfolio it serves in accordance with
the Portfolio's stated investment objective and policies, making investment
decisions for the Portfolio and placing orders to purchase and sell securities
on behalf of the Portfolio.
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The following sets forth certain information about each of the Advisors:
Standish, Ayer & Wood, Inc. ("SAW") serves as Advisor to Intermediate Fixed
Income Investments and Government Money Investments. SAW is owned by 23
individuals, each of whom is an active employee of SAW. No individual owns more
than 20% of the voting securities of SAW. SAW is registered as a commodity
trading adviser with the National Futures Association. SAW has been registered
as an investment advisor under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), since 1940. SAW provides investment advisory services to
individual and institutional clients. As of December 31, 1994, SAW had assets
under management of approximately $28.8 billion. SAW's principal executive
offices are located at One Financial Center, Boston, Massachusetts 02111.
Richard Doll has been a Vice President since joining the firm in November 1984
and a Director of SAW since January 1, 1987 and has been responsible for the
day-to-day management of Intermediate Fixed Income Investments since its
inception. Prior to that time, he served as Vice President of Bank of New
England. Jennifer Pline has been a Vice President of SAW since January 4, 1990
and has been responsible for the day-to-day management of Government Money
Investments since its inception. She completed her MBA at Boston College in
1987 and then joined SAW.
Wolf, Webb, Burk & Campbell, Inc. ("WWBC") serves as Advisor to Long-Term
Bond Investments. WWBC is a wholly owned subsidiary of Consolidated Asset
Management Inc. ("CAM"). WWBC has been a registered investment advisor under
the Advisers Act since 1980 and provides investment advisory services to
individuals and institutional clients. As of September 30, 1995 WWBC had assets
under management of approximately $490 million. WWBC's principal executive
offices are located at 1525 Locust Street, 11th floor, Philadelphia,
Pennsylvania 19102. Raymond Munsch, a Vice President of WWBC since 1989, has
been responsible for the day-to-day management of the Portfolio since
inception.
Smith Affiliated Capital Corp. ("SACC") serves as Advisor to Municipal Bond
Investments. Of the outstanding voting securities of SACC, 80% is owned by
Robert G. Smith, an officer and director of SACC. SACC has been a registered
investment advisor under the Advisers Act since April 1982. In addition to
serving as investment advisor to individuals and institutions, SACC is a
general partner of, and investment advisor to, a limited partnership primarily
invested in municipal bonds. As of September 30, 1995, SACC had assets under
management of approximately $1.4 billion. SACC's principal executive offices
are located at 880 Third Avenue, New York, New York 10022. John Pandolfino,
Vice President has been a Portfolio Manager of SACC since 1989 and has been
responsible for the day-to-day management of Municipal Bond Investments since
its inception.
Atlantic Portfolio Analytics & Management, Inc. ("APAM") serves as Advisor to
Mortgage Backed Investments. Registered as an investment advisor under the
Advisers Act since 1984, APAM is controlled by J. Anthony Huggins, Jon M.
Knight and Ali Alp Kerestecioglu, each a director of APAM. APAM serves as an
investment advisor to institutional investors including banks, insurance
companies, foundations and tax-exempt funds. As of September 30, 1995, APAM had
assets under management of approximately $5 billion. APAM's principal executive
offices are located at 201 East Pine Street, Suite 600, Orlando, Florida 32801.
A team management approach is employed for the management of Mortgaged Backed
Investments whose direct oversight is closely monitored by a Risk Management
Committee consisting of the Chief Financial Officer, Chief Executive Officer,
and Director of Valuation Technology.
Palley-Needelman Asset Management, Inc. ("PNAM") serves as Advisor to
Balanced Investments. The outstanding shares of capital stock of PNAM are owned
by Roger B. Palley and Chet J. Needelman. PNAM, the predecessor of which has
been registered as an investment advisor under the Advisers Act since 1974,
provides investment advisory services to individuals and institutions,
including retirement plans, foundations and endowments. As of September 30,
1995, PNAM had assets under management of approximately $3.2 billion. PNAM's
principal executive offices are located at 800 Newport Center Drive, Suite 450,
Newport Beach, California 92660. Roger Palley has been the President of PNAM
since 1985 and has been responsible for the day-to-day management of Balanced
Investments since its commencement of operations on February 16, 1993.
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NAM serves as an Advisor to Large Capitalization Value Equity Investments.
Registered as an investment advisor under the Advisers Act since 1943, NAM is a
wholly owned subsidiary of United Asset Management Corporation, a professional
services holding company listed on the NYSE. NAM provides investment advisory
services to individual and institutional clients. As of January 31, 1995, NAM
had assets under management of approximately $6.8 billion, and United Asset
Management Corporation, its parent corporation, had assets under management of
approximately $119 billion. NAM's principal executive offices are located at
937 Haverford Road, Bryn Mawr, Pennsylvania 19010. Denise B. Taylor has been a
Senior Vice President of NAM since January, 1991 and has been responsible for
the day-to-day management of Large Capitalization Value Equity Investments
since its inception. Prior to that time, she served as a Portfolio Manager of
NAM with analytical responsibilities.
PPA also serves as an Advisor to Large Capitalization Value Equity
Investments. PPA is an investment management firm organized as a general
partnership. PPA is the successor to Parametric Portfolio Associates, Inc.,
formerly a wholly owned subsidiary of Pacific Financial Asset Management
Corporation ("PFAMCo"), which became a subsidiary partnership of PIMCO Advisors
L.P. as a part of the consolidation of the investment advisory and other
businesses of PFAMCo and certain of its subsidiaries with Thomson Advisory
Group L.P. ("Consolidation"). The Consolidation closed on November 15, 1994.
PPA has two partners, PIMCO Advisors as the supervisory partner, and Parametric
Management, Inc. as the managing partner. Parametric Portfolio Associates,
Inc., the predecessor to Parametric, commenced operations in 1987. PPA is a
registered investment adviser and as of October 31, 1995 had assets under
management of $1.52 billion. PPA's principal executive offices are located at
7310 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104. Linda Mauzy
is primarily responsible for the day-to-day management of those assets of the
Portfolio allocated to PPA for management. Ms. Mauzy has been a Portfolio
Manager with PPA or its predecessor since 1988.
PIC serves as Advisor to Large Capitalization Growth Investments. Registered
as an investment advisor under the Advisers Act since 1951, PIC is a wholly
owned subsidiary of United Asset Management Corporation, a professional
services holding company listed on the NYSE. PIC provides investment advisory
services to individual and institutional clients. As of September 30, 1995, PIC
had assets under management of approximately $17.9 billion, and United Asset
Management Corporation, its parent corporation, had assets under management of
approximately $104 billion. PIC's principal executive offices are located at
300 North Lake Avenue, Pasadena, California 91101. Thomas J. Condon is a
managing director of PIC and has been with PIC for thirteen years. Paula B.
Blacher, CFA, has been a Vice President of PIC, and has been responsible for
the day-to-day management of Large Capitalization Growth Investments, since
November 1991. Prior to that time, she served as a Portfolio Manager of PIC.
BSA also serves as an Advisor to Large Capitalization Growth Investments. BSA
is a division of PanAgora Asset Management, Inc. ("PanAgora Boston"), which was
formed on September 22, 1989 as a wholly owned subsidiary of The Boston Company
Inc. PanAgora Boston is owned 50% by Nippon Life Insurance Company and 50% by
Lehman Brothers Holdings, Inc. As of September 30, 1995, PanAgora Boston had
$14.9 billion in assets under management. The principal offices of both BSA and
PanAgora Boston are located at 260 Franklin Street, Boston, Massachusetts
02110. Paul Samuelson is primarily responsible for the day-to-day management of
those assets of the Portfolio allocated to BSA for management. Mr. Samuelson
has been Director of Fixed Income and Equity at PanAgora Boston since
September, 1993. Prior to that time, he was a partner at the investment
management firm of Hagler, Mastrovita and Hewitt.
NFJ Investment Group ("NFJ") serves as an Adviser to Small Capitalization
Value Equity Investments. NFJ is an investment management firm organized as a
general partnership. NFJ is the successor to NFJ Investment Group, Inc.,
formerly a wholly owned subsidiary of PFAMCo, which became a subsidiary
partnership of PIMCO Advisors as a part of the Consolidation described above.
NFJ has two partners, PIMCO Advisors as the supervisory partner, and NFJ
Management, Inc. as the managing partner. NFJ Investment Group, Inc., the
predecessor to NFJ, commenced operations in 1989. NFJ is registered with the
SEC as an investment advisor and, as of October 31, 1995, it had assets under
management of
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approximately $1.3 billion. NFJ's principal executive offices are located at
2121 San Jacinto Street, Suite 1440, Dallas, Texas 75201. Benno Fischer has
been a Managing Director and Portfolio Manager of NFJ or its predecessors since
January, 1989 and has been responsible for the day-to-day management of those
assets of the Portfolio allocated to NFJ or its predecessor for management
since August 1, 1993, the date on which NFJ's predecessor began serving as an
Advisor to the Portfolio.
Wells Fargo Nikko Investment Advisors ("WFNIA") serves as an Advisor to Small
Capitalization Value Equity Investments. WFNIA is a general partnership owned
50% by Wells Fargo Investment Advisors, a wholly owned subsidiary of Wells
Fargo Bank, and 50% by The Nikko Building USA, Inc., a wholly owned subsidiary
of The Nikko Securities Co., Ltd., a Japanese securities firm. WFNIA also
serves as the investment adviser or sub-investment adviser to several other
registered open-end management investment companies. As of December 31, 1994,
WFNIA was responsible for managing or providing investment advice for assets of
approximately $160 billion. WFNIA's principal executive offices are located at
45 Fremont Street, San Francisco, California 94105. WFNIA uses a team-
management approach to manage indexed portfolios. The investment group of WFNIA
will be responsible for the day-to-day management of those assets of the
Portfolio allocated to WFNIA. WFNIA has announced its agreement with Barclay
Bank PLC for the acquisition of WFNIA. The Board of Trustees has approved a new
Advisory Agreement with the successor entity to be effective upon closing of
the acquisition.
Pilgrim Baxter & Associates, Inc. ("PBA") serves as an Advisor to Small
Capitalization Growth Investments. PBA is an autonomous wholly-owned subsidiary
of United Asset Management Inc., a financial services holding company. PBA has
been a registered investment advisor under the Advisers Act since November
1982. PBA is the investment advisor of various institutional clients. As of
December 31, 1994, PBA had assets under management of approximately $4.1
billion. PBA's principal executive offices are located at 1255 Drummers Lane,
Wayne, Pennsylvania 19087. Since June 1995, John Force and Michael Jones have
shared the day to day management of those assets of the Small Capitalization
Growth Investments allocated to PBA. Mr. Force has managed this allocation
since January 1993. Prior to January 1993, Mr. Force served as Vice President
and Portfolio Manager for a Chicago-based investment advisory firm. Mr. Jones
joined PBA in February 1995. Previously, Mr. Jones was a portfolio manager for
a New York bank.
Mellon Capital Management Corporation ("MCM") also serves as an Advisor to
Small Capitalization Growth Investments. MCM is a wholly owned subsidiary of
MBC Investment Corporation, which itself is a subsidiary of Mellon. MCM is a
professional counseling firm which manages well-diversified stock and bond
portfolios for institutional clients. As of September 30, 1995, 1994, MCM had
assets under management of approximately $40.2 billion. MCM's principal
executive offices are located at 595 Market Street, Suite 3000, San Francisco,
California 94105. MCM will use a team-management approach to manage indexed
portfolios. The investment group of MCM will be responsible for the day-to-day
management of those assets of the Portfolio allocated to MCM.
Oechsle International Advisors, L.P. ("OIA") serves as an Advisor to
International Equity Investments. Oechsle Group, L.P. holds 100% of the voting
securities of OIA. Oechsle Group, L.P. is a limited partnership whose business
consists exclusively of global investment management services. The general
partners of Oechsle Group, L.P. are individuals who also serve as officers of
OIA. OIA has been a registered investment advisor under the Advisers Act since
1986. OIA provides investment advisory services to individual and institutional
clients. As of December 31, 1994, OIA had assets under management of
approximately $6.5 billion. OIA's principal executive offices are located at
One International Place, Boston, Massachusetts 02110. Walter Oechsle is the
General Managing Partner and a Portfolio Manager of OIA, and has been
responsible for the day-to-day management of those assets of International
Equity Investments allocated to OIA, since November, 1991. Mr. Oechsle has been
General Managing Partner of OIA since its inception in 1986.
State Street Global Advisors ("SSGA") serves as an Advisor to International
Equity Investments. SSGA is a division of State Street Bank and Trust Company.
SSGA provides investment advisory services to a wide variety of institutional
clients world-wide. As of January 31, 1995, SSGA had assets under management of
approximately $140 billion. SSGA's principal executive offices are located at
Two International Place, Boston, Massachusetts 02110. Peter G. Leahy and
Jeffrey P. Davis will be primarily responsible for the day-to-day management of
SSGA's portion of International Equity Investments. Mr. Leahy has been with
SSGA since
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1991 and Mr. Davis has been with SSGA since 1992. Prior to 1991, Mr. Leahy was
a Portfolio Manager at Bankers Trust Investment Management. Prior to 1992, Mr.
Davis was a Senior Portfolio Manager at PanAgora Asset Management.
Julius Baer Investment Management Inc. ("JBIM") serves as Advisor to
International Fixed Income Investments. JBIM is a majority owned subsidiary of
Julius Baer Securities Inc., a registered broker-dealer and investment advisor,
which in turn is a wholly owned subsidiary of Baer Holding Ltd. Julius Baer
Securities Inc. owns 95% of the outstanding stock of JBIM and 5% is owned by an
employee of JBIM. JBIM has been registered as an investment advisor under the
Advisers Act since April 1983. Directly and through Julius Baer Securities
Inc., JBIM provides investment management services to a wide variety of
individual and institutional clients, including registered investment
companies. As of September 30, 1995, JBIM had assets under management of
approximately $3.1 billion and Julius Baer Securities Inc. had assets under
management of approximately $100 million. JBIM's principal executive offices
are located at 330 Madison Avenue, New York, New York 10017. Edward Dove, a
Director Fixed-Income Portfolio Manager of JBIM, has been employed by JBIM
since 1992, and has been responsible for the day-to-day management of
International Fixed Income Investments since that time. Prior to that time, he
was employed as a fixed-income manager by Chemical Global Investors Limited in
London.
John Govett & Co. Limited ("JGC") serves as Advisor for Emerging Markets
Equity Investments. JGC was organized in 1920's and is registered with the SEC
as an investment advisor. JGC is a wholly owned subsidiary of Govett & Company
Limited (formerly known as Berkeley Govett & Company Limited), a financial
services company whose shares are listed on the London Stock Exchange and on
NASDAQ in the U.S. JGC's sole business is the provision of investment advice
and services on behalf of institutions, private clients, investment trusts and
open-ended funds. As of January 31, 1995, JGC had approximately $4.2 billion in
assets under management. Rachael Maunder is primarily responsible for the day-
to-day management of the Portfolio's assets. Ms. Maunder has been a Manager of
emerging markets funds of JGC since 1991. Prior to that time, she served as
Assistant Director of Invesco Mim Management in London. On December 8, 1995 JGC
announced its agreement with Allied Irish Bank PLC for the acquisition of JGC.
The Board of Trustees has approved a new Advisory Agreement with the successor
entity to be effective upon closing of the acquisition.
ADMINISTRATOR
SBMFM serves as the Trust's administrator and generally oversees all aspects
of the Trust's administration and operations. SBMFM provides investment
management and administration services to investment companies that had
aggregate assets under management as of December 31, 1994, in excess of $50.4
billion. Each Portfolio pays SBMFM a fee for these services that is computed
daily and paid monthly at the annual rate of 0.20% of the value of the
Portfolio's average daily net assets.
EXPENSES OF THE PORTFOLIOS
Each Portfolio bears its own expenses, which generally include all costs not
specifically borne by the Manager, the Advisors, and SBMFM. Included among a
Portfolio's expenses are: costs incurred in connection with the Portfolio's
organization; investment management and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
regulatory compliance; and costs associated with maintaining the Trust's legal
existence and shareholder relations. The Trust's agreement with the Manager
provide that it will reduce its fees to a Portfolio to the extent required by
applicable state laws for certain expenses that are described in the Statement
of Additional Information.
PORTFOLIO TRANSACTIONS
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the Board of
Trustees of the Trust has determined that transactions for a Portfolio may be
executed through Smith Barney and other affiliated broker-dealers if, in the
judgment of the Advisor, the use of an affiliated broker-dealer is likely to
result in price and execution at least as favorable as those of other qualified
broker-dealers.
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PURCHASE OF SHARES
GENERAL
Purchases of shares of a Portfolio by a TRAK participant must be made through
a brokerage account maintained with Smith Barney. Payment for Portfolio shares
must be made by check directly to Smith Barney or to a broker that clears
securities transactions through Smith Barney (an "Introducing Broker"). No
brokerage account or inactivity fee is charged in connection with a brokerage
account through which an investor purchases shares of a Portfolio.
Shares of the Portfolios are available exclusively to participants in TRAK
and to or for the benefit of participants in different investment advisory
services offered by qualified investment advisors. TRAK and different
investment advisory services and the Trust are designed to relieve investors of
the burden of devising an asset allocation strategy to meet their individual
needs as well as selecting individual investments within each asset category
among the myriad choices available.
TRAK. The Consulting Group, in its capacity as investment advisor to
participants in TRAK, provides advisory services in connection with investments
among the Portfolios by identifying the investor's risk tolerances and
investment objectives through evaluation of a Request, an investor
questionnaire; identifying and recommending in writing an appropriate
allocation of assets among the Portfolios that conform to those tolerances and
objectives in a Recommendation; and providing on a periodic basis, at least
quarterly, a Review, which is a monitoring report to the investor containing an
analysis and evaluation of the investor's TRAK account and recommending any
appropriate changes in the allocation of assets among the Portfolios. The
Consulting Group will not, however, have any investment discretion over the
investor's TRAK account, all investment decisions ultimately resting with the
investor.
Under TRAK, Financial Consultants provide services to the investor by
assisting the investor in identifying his or her financial characteristics and
completing the Consulting Group's investor questionnaire. Financial Consultants
are also responsible for reviewing the Consulting Group's Recommendation and
Reviews with the investor, providing any interpretations of his or her own,
monitoring identified changes in the investor's financial characteristics and
communicating these to the Consulting Group for reevaluation and implementing
investment decisions.
The Consulting Group is paid a quarterly fee at the maximum annual rate of
1.50% of assets held in a TRAK account for the services comprising TRAK
directly by each advisory client participating in TRAK, either by redemption of
Portfolio shares or by separate payment. This fee may be reduced or waived at
various levels of assets, for participation by employees of Travelers and its
subsidiaries and for participation by certain individual retirement accounts,
retirement plans for self-employed individuals and employee benefit plans
subject to the Employee Retirement Income Security Act of 1974, as amended
(collectively "Plans"). When the client is a Plan, the Consulting Group may
provide different services than those described above for different fees. Fees
may be subject to negotiation and fees may differ based upon a number of
factors, including, but not limited to, the type of account, the size of the
account, the amount of TRAK assets and the number and range of supplemental
advisory services to be provided by Financial Consultants. Financial
Consultants receive a portion of any TRAK fee paid in consideration of
providing services to clients participating in TRAK.
Investors should be aware that the Consulting Group serves as investment
advisor to each participant in TRAK, for which it receives a fee from the
participant that does not vary based on the Portfolios recommended for the
participant's investments. At the same time, the Consulting Group serves as the
Trust's Manager with responsibility for identifying, retaining, supervising and
compensating each Portfolio's Advisor and receives a fee from each Portfolio,
the portion of which that is retained by the Manager varies based on the
Portfolio involved. Consequently, the Consulting Group, when making asset
allocation recommendations for TRAK participants, may be presented with a
conflict of interest as to the specific Portfolios recommended
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for investment. The Consulting Group, however, is subject to and intends to
comply fully with standards of fiduciary duty that require that it act solely
in the best interest of the participant when making investment recommendations.
Other Advisory Programs. Shares of the Portfolios are also available for
purchase by or for the benefit of clients of certain investment advisors as a
means of implementing asset allocation recommendations based on an investor's
investment objectives and risk tolerances. In order to qualify to purchase
shares on behalf of its clients, the investment advisor must be approved by the
Consulting Group. Investors purchasing shares through investment advisory
programs other than TRAK will bear different fees for different levels of
services as agreed upon with the investment advisors offering the programs.
Investment advisors interested in utilizing the Portfolios for the purposes
described above should call (302) 888-4104.
Payment for shares of the Trust is due at Smith Barney or at an Introducing
Broker no later than the third business day after the order is placed (the
"Settlement Date"). No order of a participant in TRAK may be placed until the
investor has completed a Request, reviewed the analysis contained in the
Recommendation and executed an investment advisory agreement with the
Consulting Group. Investors who make payment prior to the Settlement Date may
permit the payment to be held in their brokerage accounts or may designate a
temporary investment (such as a money market fund) for the payment until the
Settlement Date. When an investor makes payment before the Settlement Date, the
funds will be held as a free credit balance in the investor's brokerage account
and Smith Barney will benefit from the temporary use of the funds. If the
investor instructs Smith Barney to invest the funds in a Smith Barney money
market fund, the amount of the investment will be included as part of the
average daily net assets of both the Portfolio and the Smith Barney money
market fund. Affiliates of Smith Barney that serve these funds in an investment
advisory or administrative capacity will benefit by receiving fees from both of
the funds, computed on the basis of their average daily net assets. The Board
of Trustees has been advised of the benefits to Smith Barney resulting from
these settlement procedures and will take these benefits into consideration
when reviewing the Management Agreement, the Advisory Agreements and the
Administration Agreement.
Systematic Investment Plan. The Trust offers shareholders a Systematic
Investment Plan under which shareholders may authorize Smith Barney to place a
purchase order each month or quarter for Portfolio shares in an amount not less
than $100 per month or quarter. The purchase price is paid automatically from
cash held in the shareholder's Smith Barney brokerage account, through the
automatic redemption of the shareholder's shares of a Smith Barney money market
fund, or through the liquidation of other securities held in the investor's
Smith Barney brokerage account. If the TRAK assets are held in a Smith Barney
FMA(R) account, the shareholder may arrange for pre-authorized automatic fund
transfers, on a regular basis, from the shareholder's bank account to the
shareholder's FMA account. Shareholders may utilize this service in conjunction
with the Systematic Investment Plan to facilitate regular TRAK investments. For
further information regarding the Systematic Investment Plan, the FMA account
or the automatic funds transfer service, shareholders should contact their
Financial Consultants.
Minimum Investment. The minimum initial investment in the Trust is $10,000
and the minimum investment in any individual Portfolio is $100. There is no
minimum subsequent investment. TRAK Programs for employees of Smith Barney,
accounts of their immediate families and individual retirement accounts and
certain employee benefit plans for those persons will be subject to a $5,000
minimum investment. The Trust reserves the right at any time to vary the
initial and subsequent investment minimums.
Purchase orders for shares of a Portfolio received by Smith Barney or by an
Introducing Broker prior to the close of regular trading on the New York Stock
Exchange, Inc. (the "NYSE") (currently 4:00 p.m., New York time) on any day
that a Portfolio's net asset value is calculated are priced according to the
net asset value determined on that day. Purchase orders received after the
close of the NYSE are priced as of the time
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the net asset value per share is next determined. See "Net Asset Value" below
for a description of the times at which a Portfolio's net asset value per share
is determined.
REDEMPTION OF SHARES
REDEMPTIONS IN GENERAL
Shares of a Portfolio may be redeemed at no charge on any day that the
Portfolio calculates its net asset value as described below under "Net Asset
Value." Redemption requests received in proper form prior to the close of
regular trading on the NYSE will be effected at the net asset value per share
determined on that day. Redemption requests received after the close of regular
trading on the NYSE will be effected at the net asset value next determined. A
Portfolio is required to transmit redemption proceeds for credit to the
shareholder's account at Smith Barney or at an Introducing Broker at no charge
within seven days after receipt of a redemption request. Generally, these funds
will not be invested for the shareholder's benefit without specific instruction
and the Introducing Broker will benefit from the use of temporarily uninvested
funds. A shareholder who pays for Portfolio shares by personal check will be
credited with the proceeds of a redemption of those shares when the purchase
check has been collected, which may take up to 15 days or more. Shareholders
who anticipate the need for more immediate access to their investment should
purchase shares with Federal funds or bank wire or by a certified or cashier's
check. Redemption proceeds held by investors either in the form of uninvested
cash balances in their Smith Barney brokerage accounts or as unnegotiated
checks from the Trust's Transfer Agent will generally not earn any income for
those investors, who should discuss alternative investments with their
Financial Consultants or other advisors.
Redemption requests may be given to Smith Barney or to an Introducing Broker.
Smith Barney or the Introducing Broker will transmit all properly received
redemption requests to the Transfer Agent. In order to be effective, a
redemption request of a shareholder other than an individual may require the
submission of documents commonly required to assure the safety of a particular
account. A redemption request received by Smith Barney or an Introducing Broker
will be deemed to have been received by the Transfer Agent for purposes of
determining the time when the redemption becomes effective.
Each investor's investment advisory agreement with the Consulting Group
relating to participation in TRAK provides that, absent separate payment by the
participant, fees charged by the Consulting Group pursuant to that agreement
may be paid through automatic redemptions of a portion of the participant's
account. Termination of a TRAK account must be effected by a redemption order
for the participant's entire Trust account.
Automatic Cash Withdrawal Plan. The Trust offers shareholders an automatic
cash withdrawal plan, under which shareholders who own shares with a value of
at least $10,000 may elect to receive cash payments of at least $100 monthly or
quarterly. The withdrawal plan will be carried over on exchanges between
Portfolios of the Trust. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Financial Consultant.
INVOLUNTARY REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Trust may
redeem an account having a current value of $7,500 or less as a result of
redemptions, but not as a result of a fluctuation in a Portfolio's net asset
value or redemptions to pay TRAK fees, after the shareholder has been given at
least 30 days in which to increase the account balance to more than that
amount. Proceeds of an involuntary redemption will be deposited in the
shareholder's brokerage account unless Smith Barney is instructed to the
contrary. Investors should be aware that involuntary redemptions may result in
the liquidation of Portfolio holdings at a time when the value of those holdings
is lower than the investor's cost of the investment or may result in the
realization of taxable capital gains.
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NET ASSET VALUE
Each Portfolio's net asset value per share is calculated by SBMFM on each
day, Monday through Friday, except on days on which the NYSE is closed. The
NYSE is currently scheduled to be closed on New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday when one of those holidays falls on a
Saturday or on the subsequent Monday when one of those holidays falls on a
Sunday.
Net asset value per share is determined for each of the Portfolios, except
Emerging Markets Equity Investments, as of the close of trading on the NYSE and
is computed by dividing the value of a Portfolio's net assets by the total
number of its shares outstanding. The net asset value per share for Emerging
Markets Equity Investments is determined as of noon each day and is computed in
the same manner as the other Portfolios. Generally, a Portfolio's investments
are valued at market value or, in the absence of a market value, at fair value
as determined by or under the direction of the Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued for purposes of calculating a Portfolio's net asset value at the
preceding closing values of the securities on their respective exchanges,
except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees. A security that is primarily
traded on a domestic or foreign stock exchange is valued at the last sale price
on that exchange or, if no sales occurred during the day, at the current quoted
bid price. All portfolio securities held by Government Money Investments and
short-term dollar-denominated investments of the other Portfolios that mature
in 60 days or less are valued on the basis of amortized cost (which involves
valuing an investment at its cost and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the effect
of fluctuating interest rates on the market value of the investment) when the
Board of Trustees has determined that amortized cost represents fair value. An
option that is written by a Portfolio is generally valued at the last sale
price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Portfolio is generally valued at the last sale
price or, in the absence of the last sale price, the last bid price. The value
of a futures contract is equal to the unrealized gain or loss on the contract
that is determined by marking the contract to the current settlement price for
a like contract on the valuation date of the futures contract. A settlement
price may not be used if the market makes a limit move with respect to a
particular futures contract or if the securities underlying the futures
contract experience significant price fluctuations after the determination of
the settlement price. When a settlement price cannot be used, futures contracts
will be valued at their fair market value as determined by or under the
direction of the Board of Trustees.
All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the
rate of exchange will be determined in good faith by the Board of Trustees. In
carrying out the Board's valuation policies, SBMFM may consult with an
independent pricing service retained by the Trust. Further information
regarding the Portfolios' valuation policies is contained in the Statement of
Additional Information.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged without payment of any exchange fee
for shares of another Portfolio at their respective net asset values. Portfolio
shares are not exchangeable with shares of other Smith Barney Mutual Funds.
An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder, and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange. Shareholders exchanging shares of a Portfolio for
shares of another Portfolio
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should review the disclosure provided herein relating to the exchanged-for
shares carefully prior to making an exchange. The exchange privilege is
available to shareholders residing in any state in which Portfolio shares being
acquired may be legally sold.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to a Portfolio's performance and its
shareholders. Each Portfolio's investment adviser may determine that a pattern
of frequent exchanges is excessive and contrary to the best interests of the
Portfolio's other shareholders. In this event, the Portfolio's investment
adviser will notify Smith Barney, and Smith Barney may, at its discretion,
decide to limit additional purchases and/or exchanges by the shareholder. Upon
such a determination, Smith Barney will provide notice in writing or by
telephone to the shareholder at least 15 days prior to suspending the exchange
privilege and during the 15-day period the shareholder will be required to (a)
redeem his or her shares in the Portfolio or (b) remain invested in the
Portfolio or exchange into any of the other Portfolios, which position the
shareholder would expect to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
For further information regarding the exchange privilege, investors should
contact their Financial Consultants. Smith Barney reserves the right to reject
any exchange request and the exchange privilege may be modified or terminated
after 60 days' written notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income (i.e., income other than long- and short-term capital
gains) and net realized long- and short-term capital gains will be determined
separately for each Portfolio. Dividends derived from net investment income and
distributions of net realized long- and short-term capital gains paid by a
Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (which will be deposited in
the shareholder's account) unless the shareholder instructs the Trust, in
writing, to pay all dividends and/or distributions in cash. Dividends
attributable to substantially all the net investment income of Government Money
Investments will be declared daily and paid monthly. Shareholders of those
Portfolios receive dividends from the day following the purchase up to and
including the date of redemption. Dividends attributable to the net investment
income of Intermediate Fixed Income Investments, Long-Term Bond Investments,
Mortgage Backed Investments, Municipal Bond Investments, Balanced Investments
and International Fixed Income Investments are declared and paid monthly.
Dividends attributable to the net investment income of the remaining Portfolios
are declared and paid at least annually. Distributions of any net realized
long-term and short-term capital gains earned by a Portfolio will be made
annually.
TAXES
As each Portfolio is treated as a separate entity for federal income tax
purposes, the amounts of net investment income and net realized capital gains
subject to tax will be determined separately for each Portfolio (rather than on
a Trust-wide basis).
Each Portfolio separately has qualified and intends to qualify each year as a
regulated investment company for federal income tax purposes. The requirements
for qualification (i) may cause a Portfolio, among other things, to restrict
the extent of its short-term trading or its transactions in warrants,
currencies, options, futures or forward contracts and (ii) will cause each of
the Portfolios to maintain a diversified asset portfolio.
A regulated investment company will not be subject to federal income tax on
its net investment income and its capital gains that it distributes to
shareholders, so long as it meets certain overall distribution requirements and
other conditions under the Code. Each Portfolio intends to satisfy these
overall distribution requirements and any other required conditions. In
addition, each Portfolio is subject to a 4% nondeductible
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excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gains. The Trust intends to have each Portfolio pay
additional dividends and make additional distributions as are necessary in
order to avoid application of the excise tax, if such payments and
distributions are determined to be in the best interest of the Portfolio's
shareholders. Dividends declared by a Portfolio in October, November or
December of any calendar year and payable to shareholders of record on a
specified date in such a month shall be deemed to have been received by each
shareholder on December 31 of such calendar year and to have been paid by the
Portfolio not later than such December 31 provided that such dividend is
actually paid by the Portfolio during January of the following year.
Dividends derived from a Portfolio's taxable net investment income and
distributions of a Portfolio's net realized short-term capital gains (including
short term gains from investments in tax exempt obligations) will be taxable to
shareholders as ordinary income for federal income tax purposes, regardless of
how long shareholders have held their Portfolio shares and whether the
dividends or distributions are received in cash or reinvested in additional
shares. Distributions of net realized long-term capital gains (including long-
term gains from investments in tax exempt obligations) will be taxable to
shareholders as long-term capital gains for federal income tax purposes,
regardless of how long a shareholder has held his Portfolio shares and whether
the distributions are received in cash or reinvested in additional shares.
Dividends and distributions paid by Government Money Investments, Municipal
Bond Investments and Mortgage Backed Investments and distributions of capital
gains paid by all the Portfolios will not qualify for the dividend received
deduction for corporations. As a general rule, dividends paid by a Portfolio,
to the extent derived from dividends attributable to certain types of stock
issued by U.S. corporations, will qualify for the dividend received deduction
for corporations. Some states, if certain asset and diversification
requirements are satisfied, permit shareholders to treat their portions of a
Portfolio's dividends that are attributable to interest on U.S. Treasury
securities and certain U.S. Government Securities as income that is exempt from
state and local income taxes. Dividends attributable to repurchase agreement
earnings are, as a general rule, subject to state and local taxation.
Dividends paid by Municipal Bond Investments that are derived from interest
earned on qualifying tax-exempt obligations are expected to be "exempt-
interest" dividends that shareholders may exclude from their gross incomes for
federal income tax purposes if the Portfolio satisfies certain asset percentage
requirements. To the extent that the Portfolio invests in bonds, the interest
on which is a specific tax preference item for federal income tax purposes
("AMT-Subject Bonds"), any exempt-interest dividends derived from interest on
AMT-Subject Bonds will be a specific tax preference item for purposes of the
federal individual and corporate alternative minimum taxes. In any event, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the federal corporate alternative minimum
income tax and corporate shareholders may incur a larger federal environmental
tax liability through the receipt of Portfolio dividends and distributions.
Net investment income or capital gains earned by the Portfolios investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Portfolios to a reduced rate of tax or exemption
from tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount of these Portfolios'
assets to be invested within various countries is not known. The Portfolios
intend to operate so as to qualify for treaty-reduced rates of tax where
applicable. Furthermore, if a Portfolio qualifies as a regulated investment
company, if certain distribution requirements are satisfied, and if more than
50% of the value of the Portfolio's assets at the close of the taxable year
consists of stocks or securities of foreign corporations, the Portfolio may
elect, for U.S. federal income tax purposes, to treat foreign income taxes paid
by the Portfolio that can be treated as income taxes under U.S. income tax
principles as paid by its shareholders. The Trust anticipates that
International Equity Investments and Emerging Markets Equity Investments will
qualify for and make this election in most, but not necessarily all, of its
taxable years. If a Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio would be included in the income of
its shareholders and the shareholders would be entitled to credit their portions
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of this amount against their U.S. tax liabilities, if any, or to deduct such
portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, a Portfolio will report to its shareholders, in
writing, the amount per share of foreign tax that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Certain limitations will be imposed on the extent
to which the credit (but not the deduction) for foreign taxes may be claimed.
As noted above, shareholders, out of their own assets, will pay a TRAK or
different investment advisory fee. For most shareholders who are individuals,
this fee will be treated as a "miscellaneous itemized deduction" for federal
income tax purposes. Under current federal income tax law, an individual's
miscellaneous itemized deductions for any taxable year shall be allowed as a
deduction only to the extent that the aggregate of these deductions exceeds 2%
of adjusted gross income. Such deductions are also subject to the general
limitation on itemized deductions for individuals having, in 1995, adjusted
gross income in excess of $111,800 ($55,900 for married individuals filing
separately).
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
Shareholders should consult with their own tax advisors with specific reference
to their own tax situations.
CUSTODIAN AND TRANSFER AGENT
PNC is located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103
and Morgan is located at 60 Wall Street, New York, New York 19103, and serving
as the Trust's Custodian.
First Data Investors Services Group Inc. is located at Exchange Place,
Boston, Massachusetts 02109, and serves as the Trust's transfer agent.
PERFORMANCE OF THE PORTFOLIOS
YIELD
The Trust may, from time to time, include the yield and effective yield of
Government Money Investments in advertisements or reports to shareholders or
prospective investors. Current yield for Government Money Investments will be
based on income received by a hypothetical investment over a given 7-day period
(less expenses accrued during the period and the maximum fee for participation
in TRAK during the period), and then "annualized" (i.e., assuming that the 7-
day yield would be received for 52 weeks, stated in terms of an annual
percentage return on the investment). "Effective yield" for Government Money
Investments will be calculated in a manner similar to that used to calculate
yield, but will reflect the compounding effect of earnings on reinvested
dividends.
For Intermediate Fixed Income Investments, Long-Term Bond Investments,
Mortgage Backed Investments and Municipal Bond Investments, from time to time,
the Trust may advertise the 30-day "yield" and, with respect to Municipal Bond
Investments, an "equivalent taxable yield." The yield of a Portfolio refers to
the income generated by an investment in the Portfolio over the 30-day period
identified in the advertisement and is computed by dividing the net investment
income per share earned by the Portfolio during the period (less the maximum
fee for participation in TRAK during the period) by the net asset value
per share on the last day of the period. This income is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as
a percentage of the net asset value.
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EQUIVALENT TAXABLE YIELD
The equivalent taxable yield of Municipal Bond Investments demonstrates the
yield on a taxable investment necessary to produce an after-tax yield equal to
the Portfolio's tax-exempt yield. It is calculated by increasing the yield
shown for the Portfolio, calculated as described above, to the extent necessary
to reflect the payment of specified tax rates. Thus, the equivalent taxable
yield always will exceed the Portfolio's yield.
The table below shows individual taxpayers how to translate the tax savings
from investments such as the Portfolio into an equivalent return from a taxable
investment. The yields used below are for illustration only and are not
intended to represent current or future yields for the Portfolio, which may be
higher or lower than those shown.
<TABLE>
<CAPTION>
SAMPLE FEDERAL
TAXABLE MARGINAL TAX-EXEMPT YIELDS
INCOME RATE* 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
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EQUIVALENT TAXABLE YIELD
SINGLE JOINT RETURN -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 23,500 $ 39,000 15 4.71 5.88 7.06 8.24 9.41 10.59
56,550 94,250 28 5.56 6.94 8.33 9.72 11.11 12.50
117,950 143,600 31 5.80 7.25 8.70 10.14 11.59 13.04
256,500 256,500 36 6.25 7.81 9.38 10.94 12.50 14.06
over $256,500 over $256,500 39.60 6.62 8.28 9.93 11.59 13.25 14.90
</TABLE>
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* The federal tax rates shown are those currently in effect for 1995 and are
subject to change. The calculations assume that no income will be subject to
the federal individual alternative minimum tax.
TOTAL RETURN
From time to time, the Trust may advertise a Portfolio's (other than
Government Money Investments') "average annual total return" over various
periods of time. This total return figure shows the average percentage change
in value of an investment in the Portfolio from the beginning date of the
measuring period to the ending date of the measuring period and is reduced by
the maximum fee for participation in TRAK during the measuring period. The
figure reflects changes in the price of the Portfolio's shares and assumes that
any income, dividends and/or capital gains distributions made by the Portfolio
during the period are reinvested in shares of the Portfolio. Figures will be
given for recent one-, five- and ten-year periods (if applicable) and may be
given for other periods as well (such as from commencement of the Portfolio's
operations or on a year-by-year basis). When considering average total return
figures for periods longer than one year, investors should note that a
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period. A Portfolio also may
use aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in the Portfolio's share price, the effect of
the maximum fee for participation in TRAK during the period and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs, and may indicate subtotals of
the various components of total return (that is, the change in value of initial
investment, income dividends and capital gains distributions).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine a
Portfolio's yield and total return. Shareholders may make inquiries regarding a
Portfolio, including current yield quotations or total return figures, to his
or her Financial Consultant.
In reports or other communications to shareholders or in advertising
material, a Portfolio may quote total figures that do not reflect fees for
participation in TRAK (provided that these figures are accompanied
by standardized total return figures calculated as described above), as well as
compare its performance with that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds or with other appropriate
indices of
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<PAGE>
investment securities, such as the Salomon Brothers World Government Bond
Index, Lehman Brothers Government Bond Index and Lehman Brothers Mortgage-
Backed Securities Index. The performance information also may include
evaluations of the Portfolios published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance Magazine, Money, Morningstar Mutual Fund Values, The New York Times,
USA Today and The Wall Street Journal.
ADDITIONAL INFORMATION
The Trust was organized under the laws of the Commonwealth of Massachusetts
pursuant to a Master Trust Agreement dated April 12, 1991, as amended, and is a
business entity commonly known as a "Massachusetts business trust." Each of the
Portfolios offers shares of beneficial interest of separate series with a par
value of $0.001 per share. When matters are submitted for shareholder vote,
shareholders of each of the Portfolios will have one vote for each full share
held and proportionate, fractional votes for fractional shares held. Generally,
shares of the Trust vote by individual Portfolio on all matters except (i)
matters affecting all of the Portfolios, or (ii) when the 1940 Act requires
that shares of the Portfolios be voted in the aggregate. Normally, no meetings
of shareholders will be held for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. Shareholders of
record of no less than two-thirds of the outstanding shares of a Portfolio may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. A meeting will be called upon
the written request of holders of 10% of the Portfolio's outstanding shares.
Shareholders who satisfy certain criteria will be assisted by the Trust in
communicating with other shareholders in seeking the holding of such meeting.
Smith Barney has received an exemption from the Department of Labor from
certain provisions of the Employee Retirement Income Security Act of 1974
relating to the purchase of Trust Shares, and participation in TRAK, by certain
retirement plans. This exemption replaced an exemption previously received by
Shearson Lehman Brothers, Inc., the former distributor of the Trust.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Portfolios. Shareholders may seek information regarding a Portfolio,
including the current performance of the Portfolio, from their Financial
Consultants.
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement
of Additional Information or the Trust's official sales literature in
connection with the offering of shares, and if given or made, such other
information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be made.
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Consulting Group Capital Markets Funds
Government Money Investments
Intermediate Fixed Income Investments
Long-Term Bond Investments
Municipal Bond Investments
Mortgage Backed Investments
Balanced Investments
Large Capitalization Value Equity Investments
Large Capitalization Growth Investments
Small Capitalization Value Equity Investments
Small Capitalization Growth Investments
International Equity Investments
International Fixed Income Investments
Emerging Markets Equity Investments
-----------------
PROSPECTUS
January 1, 1996
-----------------
Smith Barney Inc.
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<PAGE>
CONSULTING GROUP CAPITAL MARKETS FUNDS
Supplement dated January 17, 1996 to the Prospectus dated January 1, 1996
On January 16, 1996 the Board of Trustees approved the termination of Wolf,
Webb, Burk & Campbell ("Wolf, Webb") as investment adviser with respect to
Long-Term Bond Investments (the "Portfolio"). Pursuant to the agreement with
Wolf, Webb, the Consulting Services Division of Smith Barney Mutual Funds
Management Inc. (the "Manager") has notified Wolf, Webb that its services will
be terminated effective March 15, 1996. The Trustees have approved a new
investment advisory agreement for the Portfolio with National Asset Management
Corporation ("National Asset Management"). The terms of the agreement with
National Asset Management are substantially similar to the terminated agreement
with Wolf, Webb. National Asset Management was founded in 1979 and currently
manages approximately $5.2 billion in assets. Shareholders will soon receive
detailed information concerning National Asset Management.
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TK 0403 1/96
<PAGE>
CONSULTING GROUP CAPITAL MARKETS FUNDS (THE "TRUST")
to Shareholders of
Small Capitalization Value Equity Investments
and
Emerging Markets Equity Investments
Supplement dated February 9, 1996 to the Prospectus dated January 1, 1996
On December 14, 1995, the Board of Trustees approved a new advisory agreement
with the successor entity to Wells Fargo Nikko Investment Advisors ("WFNIA"),
adviser to a portion of the assets of Small Capitalization Value Equity
Investments. The Board's action was necessitated by the anticipated sale of
WFNIA to Barclays Bank PLC ("Barclays"). The new advisory agreement is
identical in all material respects and there is no change in fees with respect
to the management of the assets. Further, the Board of Trustees was assured
there would be no dilution in the scope and quality of advisory services. The
sale of WFNIA to Barclays has been completed and the successor entity, BZW
Barclays Global Fund Advisors, is now responsible for the day-to-day management
of the Portfolio's assets.
On December 14, 1995 the Board of Trustees approved a new advisory agreement
with the successor entity to John Govett & Co. Limited ("JG&C"), adviser to the
assets of Emerging Markets Equity Investments. The Board's action was
necessitated by the anticipated sale of JG&C to Allied Irish Bank PLC ("AIB").
The new Advisory agreement is identical in all material respects and there is
no change in fees with respect to the management of the assets. Further, the
Board of Trustees was assured there would be no dilution in the scope and
quality of advisory services. The sale of JG&C to AIB has been completed and
the successor entity (which has retained its previous corporate name) is now
responsible for the day-to-day management of the Portfolio.
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TK0404 2/96
<PAGE>
APPENDIX A
INVESTMENT INDICES
Following are definitions of indicies that are utilized in the Client's
Recommendation.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Composed of publicly issued, fixed rate, non-convertible domestic debt in three
major classifications: industrial, utility, financial as well as the domestic
debt of the U.S. Government or any agency thereof. All issues have at least one
year to maturity, or an outstanding par value of at least $100 million for U.S.
Government issues and $50 million for corporate issues. All corporate issues
have a minimum rating of Baa by Moody's or BBB by Standard & Poor's.
LEHMAN BROTHERS LONG TERM GOVERNMENT/CORPORATE BOND INDEX
Includes all bonds covered by the Lehman Brothers Government/Corporate Bond
Index, with maturities of 10 years or longer. Total return includes income and
appreciation/ depreciation as a percentage of original investment.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX
A subset of the Lehman Brothers Government/Corporate Bond Index covering issues
with maturities up to ten years.
LEHMAN BROTHERS MORTGAGE BACKED SECURITIES BOND INDEX
Contains all fixed securities issued and backed by mortgage pools of GNMA's,
FHLMC's, FNMA's, Graduated Payment Mortgage (GPM's), but not Graduated Equity
Mortgages (GEM).
LEHMAN BROTHERS MUNICIPAL BOND INDEX
A composite measure of the total return performance of the municipal bond
market, which includes more than two million different bond issues. For
simplicity, the market is divided into seven major sectors, with the
performance of each sector weighted according to issue volume (adjusted
annually).
MORGAN STANLEY EAFE (CAPITALIZATION WEIGHTED)
A composite portfolio of equity (stock market) total returns for the countries
of Europe, Australia, New Zealand and the Far East. The return for each country
is weighted on the basis of its market capitalization.
MORGAN STANLEY EMERGING EQUITY MARKETS FREE GROSS DIVIDEND INDEX
A composite portfolio consisting of equity total returns for countries with low
to middle per capita income, as determined by the World Bank. Some of these
countries include: Argentina, Greece, India, Malaysia, Portugal and Turkey. The
return for each country is weighted on the basis of its total market
capitalization.
90-DAY TREASURY BILL INDEX
Unweighted average of weekly auction offering rates of 90-Day Treasury Bills.
Treasury Bills are backed by the full faith and credit of the U.S. Government.
RUSSELL 1000 INDEX
The 1,000 largest U.S. companies by market capitalization, the smallest of
which has about $457 million in market capitalization. The average market
capitalization for a company in this index is $3.42 billion.
RUSSELL 1000 VALUE INDEX
Contains those Russell 1000 securities with less-than-average growth
orientation. Companies in this index generally have low price-to-book and
earnings ratios and higher dividend yields than stocks in the Russell 1000
Growth Index.
RUSSELL 1000 GROWTH INDEX
Contains those Russell 1000 securities with greater-than-average growth
orientation. Companies in this index tend to exhibit high price-to-book and
earnings ratios and lower dividend yields than stocks in the Russell 1000 Value
Index.
RUSSELL 2000 INDEX
Composed of the 2,000 smallest U.S. securities as determined by total market
capitalization, representing about 7.1% of the U.S. equity market
capitalization. The average market capitalization for a company in this index
is $155 million, with the largest being $457 million.
RUSSELL 2000 VALUE INDEX
Contains those Russell 2000 securities with less-than-average growth
orientation. Companies in this index generally have low price-to-book and
earnings ratios and higher dividend yields than stocks in the Russell 2000
Growth Index.
RUSSELL 2000 GROWTH INDEX
Contains those Russell 2000 securities with greater-than-average growth
orientation. Companies in this index tend to exhibit high price-to-book and
earnings ratios and lower dividend yields than stocks in the Russell 2000 Value
Index.
STANDARD & POOR'S 500 INDEX
Tracks the total return of 500 of the largest stocks (400 industrial, 40
utility, 20 transportation and 40 financial companies) in the United States,
which represent about 78% of the New York Stock Exchange's total market
capitalization. The return of each stock is weighted on the basis of the
stock's capitalization.
SALOMON BROTHERS NON-U.S. GOVERNMENT BOND INDEX
A market capitalization-weighted index consisting of government bond markets of
Austria, France, Spain, Australia, Germany, Sweden, Belgium, Italy, United
Kingdom, Canada, Japan, Denmark and the Netherlands.
A-1
<PAGE>
APPENDIX B
The following are copies of the proposed and final exemptions from the
Department of Labor from certain provisions of the Employee Retirement Income
Security Act of 1974 relating to the purchase of shares and participation in
TRAK by certain retirement plans.
PROPOSED EXEMPTION
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PENSION AND WELFARE BENEFITS ADMINISTRATION
[APPLICATION NO. D-8723]
PROPOSED EXEMPTIONS; SHEARSON LEHMAN BROTHERS, INC.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the Department of
Labor (the Department) of proposed exemptions from certain of the prohibited
transaction restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
WRITTEN COMMENTS AND HEARING REQUESTS: All interested persons are invited to
submit written comments or request for a hearing on the pending exemptions,
unless otherwise stated in the Notice of Proposed Exemption, within 45 days
from the date of publication of this FEDERAL REGISTER Notice. Comments and
request for a hearing should state: (1) The name, address, and telephone number
of the person making the comment or request, and (2) the nature of the person's
interest in the exemption and the manner in which the person would be adversely
affected by the exemption. A request for a hearing must also state the issues
to be addressed and include a general description of the evidence to be
presented at the hearing. A request for a hearing must also state the issues to
be addressed and include a general description of the evidence to be presented
at the hearing.
ADDRESSES: All written comments and request for a hearing (at least three
copies) should be sent to the Pension and Welfare Benefits Administration,
Office of Exemption Determinations, room N-5649, U.S. Department of Labor, 200
Constitution Avenue NW., Washington, DC 20210. Attention: Application No.
stated in each Notice of Proposed Exemption. The applications for exemption and
the comments received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S. Department
of Labor, room N-5507, 200 Constitution Avenue N.W., Washington, DC 20210.
NOTICE TO INTERESTED PERSONS: Notice of the proposed exemptions will be
provided to all interested persons in the manner agreed upon by the applicant
and the Department within 15 days of the date of publication in the FEDERAL
REGISTER. Such notice shall include a copy of the notice of proposed exemption
as published in the FEDERAL REGISTER and shall inform interested persons of
their right to comment and to request a hearing (where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor. Therefore,
these notices of proposed exemption are issued solely by the Department.
The applications contain representations with regard to the proposed
exemptions which are summarized below. Interested persons are referred to the
applications on file with the Department for a complete statement of the facts
and representations.
SHEARSON LEHMAN BROTHERS, INC. (SHEARSON LEHMAN), LOCATED IN NEW YORK, NY
[Application No. D-8723]
PROPOSED EXEMPTION
Section I. Covered Transactions
The Department is considering granting an exemption under the authority of
section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions of
section 406(a) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) shall
not apply to the proposed purchase or redemption of shares by an employee
benefit plan, an individual retirement account (the IRA) or a retirement plan
for a self-employed individual (the Keogh Plan; collectively, the Plans) in the
Shearson Lehman-established Trust for TRAK Investments (the Trust) in
connection with such Plans' participation in the TRAK Personalized Investment
Advisory Service (the TRAK Program). In addition, the restrictions of section
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code by reason of section 4975(c)(1)(E)
shall not apply to the provision, by the Consulting Group Division of Shearson
Lehman (the Consulting Group), investment advisory services to an independent
fiduciary of a participating Plan (the Independent Plan Fiduciary) which may
result in such fiduciary's selection of a portfolio grouping (the Portfolio-
Type) in the TRAK Program for the investment of Plan assets.
This proposed exemption is subject to the following conditions that are set
forth below in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be approved by a Plan
fiduciary which is independent of Shearson Lehman.
(2) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(7) The Consulting Group will generally give investment advice to an
Independent Plan Fiduciary with respect to Portfolio-Types. However, in the
case of a Plan providing for participant-directed investments (the Section
404(c) Plan), the Consulting Group will provide investment advice that is
limited to the Portfolios made available under the Plan.
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(8) Any sub-adviser (the Sub-Adviser) that is appointed by the Consulting
Group to exercise investment discretion over a Portfolio will be independent of
Shearson Lehman and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any securities
that are issued by Shearson Lehman and/or its affiliates, the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent.
(10) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio which contains
investments attributable to the Plan investor.
(11) The Consulting Group will not retain an investment advisory or management
fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(a) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(1) A copy of the prospectus (the Prospectus) for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the policies
employed to achieve these objectives, the corporate affiliation existing
between the Consulting Group, Shearson Lehman and its subsidiaries and the
compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and strategies that the Portfolios may utilize and certain
risks attendant to those investments, policies and strategies.
(3) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(4) A copy of the respective investment advisory agreement between the
Consulting Group and the Sub-Advisers upon written request to Shearson Lehman.
(5) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by a
Shearson Lehman Financial Consultant (the Financial Consultant) to eligible
participants in such Plan, of the services offered under the TRAK Program and
the operation and objectives of the Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, will be required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received copies of
such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to Shearson Lehman that such fiduciary is (1) independent of
Shearson Lehman and its affiliates and (2) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary will be required to acknowledge, in
writing, receipt of such documents and represent to Shearson Lehman that such
fiduciary is (1) independent of Shearson Lehman and its affiliates, (2) capable
of making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(13) Each Plan will receive the following written or oral disclosures with
respect to its ongoing participation in the TRAK Program.
(a) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio.
(b) A written quarterly monitoring report containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(c) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing Plan level asset allocations, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the performance monitoring
report as well as with eligible participants to review their accounts'
performance.
(d) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all Plans of the
(1) percentage of each Portfolio's brokerage commissions that are paid to
Shearson Lehman and its affiliates and (2) the average brokerage commission per
share paid by each Portfolio to Shearson Lehman and its affiliates, as compared
to the average brokerage commission per share paid by the Trust to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
(14) Shearson Lehman shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (15) of this section to
determine whether the conditions of this exemption have been met, except that
(a) a prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of Shearson Lehman and/or its affiliates, the
records are lost or destroyed prior to the end of the six year period, and (b)
no party in interest other than Shearson Lehman shall be subject to the civil
penalty that may be assessed under section 502(1) of the Act, or the taxes
imposed by section 4975(a) and (b) of the Code, if the records are not
maintained, or are not available for examination as required by paragraph (15)
below.
(15) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2)and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section shall be
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or the
Internal Revenue Service (the Service):
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary:
(3) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
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(4) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (15) shall be authorized to examine the trade secrets of Shearson
Lehman or commercial or financial information which is privileged or
confidential.
The availability of this exemption is subject to the express condition that
the material facts and representations contained in the application are true
and complete, and that the application accurately describes all material facts
which are the subject of this exemption.
SUMMARY OF FACTS AND REPRESENTATIONS
1. Shearson Lehman, whose principal executive offices are located in New York,
New York, is a wholly owned subsidiary of Shearson Lehman Brothers Holdings,
Inc. (Shearson Holdings). Shearson Holdings is one of the leading full-line
securities firms servicing institutions, governments and individual investors
in the United States and throughout the world. Shearson Holdings conducts its
principal businesses through two divisions--Shearson Lehman Brothers (referred
to herein as Shearson Lehman) and Lehman Brothers. Shearson Lehman is
responsible for individual investor services and asset management while Lehman
Brothers is responsible for securities underwriting, financial advisory,
investment and merchant banking services and securities and commodities trading
as principal and agent. Shearson Holdings is a member of all principal
securities and commodities exchanges in the United States and the National
Association of Securities Dealers, Inc. In addition, it holds memberships or
associate memberships on several principal foreign securities and commodities
exchanges.
Shearson Holdings was incorporated in Delaware on December 29, 1983. The
American Express Company owns 100 percent of Shearson Holdings' issued and
outstanding common stock, which represents 92 percent of its issued and
outstanding voting stock. The 8 percent remaining shares of Shearson Holdings'
issued and outstanding voting stock is preferred stock which is owned by Nippon
Life Insurance Company. Although Shearson Holdings is not an operating company
and, as such, it maintains no assets under management, as of December 31, 1991,
Shearson Lehman and its subsidiaries rendered investment advisory services with
respect to $91 billion in assets.
2. On April 12, 1991, Shearson Lehman formed the Trust, a no load, open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Trust is organized as a Massachusetts
business trust and it has an indefinite duration. As of January 17, 1992, the
Trust had net assets of $132,608,001.
The Trust consists of twelve different portfolios which range from Government
Money Investments to International Fixed Income Investments and which pay
monthly or annual dividends to investors. The Portfolios currently have a per
share value ranging from $0 per share for Balanced Investments to $9.45 per
share for Small Capitalization Growth Equity Investments. The composition of
the Portfolios covers a spectrum of investments which include U.S. Government-
related securities of equity or debt securities issued by foreign or domestic
corporations. The Portfolios are further categorized under four major
Portfolio-Types./1/
3. Shares in the Trust are offered by Shearson Lehman, as distributors, at no
load, to participants in the TRAK Program./2/ Although investors in the Trust
currently consist of institutions and individuals, it is proposed that
prospective investors will include plans for which Shearson Lehman may or may
not currently maintain investment accounts. A majority of these Plans will be
IRAs or Keogh Plans. In addition, it is proposed that Plans for which Shearson
Lehman or an affiliate serves as a prototype sponsor and/or a nondiscretionary
trustee or custodian be permitted to invest in the Trust./3/
The applicant represents that the initial purchase of shares in the Trust by a
Plan may give rise to a prohibited transaction where Shearson Lehman or an
affiliate has a party in interest relationship with the Plan. Shearson Lehman
also acknowledges that a prohibited transaction could arise upon a subsequent
purchase or redemption of shares in the Trust by a participating Plan inasmuch
as the party in interest relationship between Shearson Lehman and the Plan may
have been established at that point. Accordingly, Shearson Lehman has requested
prospective exemptive relief from the Department with respect to the purchase
and redemption of shares in the Trust by participating Plans which it does not
sponsor or have discretionary investment authority over the Plan's assets which
would be invested in Trust shares./4/ Such shares will be held in a brokerage
account maintained by the Plan with Shearson Lehman. No commissions or fees
will be paid with respect to such transactions.
According to the applicant, the minimum initial investment in the Trust is set
at $20,000, and may be reduced periodically to $10,000. Effectively, therefore,
a Plan with less than $20,000 in assets ($10,000 when the minimum has been
reduced) would not be able to participate in the TRAK Program. The minimum
investment in a Portfolio is $100.
4. Overall responsibility for the management and supervision of the Trust and
the Portfolios rests with the Trust's Board of Trustees (The Trustees) which is
comprised of twelve members. The Trustees approve all significant agreements
involving the Trust and the persons and companies that provide services to the
Trust and the Portfolios. Three of the Trustees and all of the Trust's
executive officers are affiliated with Shearson Lehman and/or its affiliates.
The nine remaining Trustees are not affiliated with Shearson Lehman.
5. Boston Advisors, located in Boston, Massachusetts, is a wholly owned
subsidiary of The Boston Company, a financial services holding company which
is, in turn, wholly owned by Shearson Lehman. Boston Advisors provides
investment management, investment advisory and/or administrative services to
investment companies with total assets in excess of $83 billion as of July 31,
1991. Boston Advisors serves as the Trust's administrator. In
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/1/ Because a Portfolio is not precluded from investing in securities that are
issued by Shearson Lehman or its affiliates, Shearson Lehman represents that,
as a limitation, the percentage of that Portfolio's net assets invested in
these securities will never exceed one percent.
/2/ According to the Statement of Additional Information which accompanies the
Prospectus for the TRAK Program, shares in the Trust are not certificated for
reasons of economy and convenience. Boston Safe Deposit and Trust Company, the
Trust's custodian, however, maintains a record of each investor's ownership of
shares. Although Trust shares are transferable and accord voting rights to
their owners, they do not confer pre-emptive rights (i.e., the privilege of a
shareholder to maintain a proportionate share of ownership of a company by
purchasing a proportionate share of any new stock issues). Shearson Lehman
represents that in the context of an open-end investment company, that
continuously issues and redeems shares, a pre-emptive right would make the
normal operations of the Trust impossible. Therefore, such right is precluded
in the charter documents of the Trust's Master Trust Agreement as well as those
of other open-end investment companies.
As for voting rights, Shearson Lehman states that they are accorded to
recordholders of Trust shares. Shearson Lehman notes that a recordholder of
Trust shares may determine to seek the submission of proxies by Plan
participants and vote Trust shares accordingly. In the case of individual
account plans such as Section 404(c) Plans. Shearson Lehman notes that most
Plans will pass-through the vote to participants on a pro-rata basis.
/3/ The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the TRAK Program
by an Independent Plan Fiduciary. Section 404 of the Act requires that a
fiduciary discharge his duties respecting a plan solely in the interest of the
plan's participants and beneficiaries and in a prudent fashion. Accordingly, an
Independent Plan Fiduciary must act prudently with respect to the decision to
enter into the TRAK Program with the Consulting Group as well as with respect
to the negotiation of services that will be performed thereunder and the
compensation that will be paid to Shearson Lehman and its affiliates. The
Department expects that an Independent Plan Fiduciary, prior to entering in the
TRAK Program, to understand fully all aspects of such arrangement following
disclosure by Shearson Lehman of all relevant information.
/4/ The applicant represents that employee benefit plans for are maintained by
Shearson Lehman may purchase or redeem shares in the Trust under the provisions
of Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977).
The applicant further represents that, although the exemptive relief proposed
above would not permit Shearson Lehman or an affiliate, while serving as a Plan
fiduciary with discretionary authority over the management of a Plan's assets,
to invest a Plan's assets in the Trust shares, a purchase or redemption of
Trust shares under such circumstances will comply with the terms and conditions
of class PTE 77-4 (42 FR 18732, April 8, 1977). The Department expresses no
opinion herein as to whether such transactions will comply with the terms and
conditions of PTEs 77-3 and 77-4.
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<PAGE>
particular, Boston Advisors calculates the net asset value/5/ of the
Portfolios' shares and manages all aspects of the Portfolios' administration
and operation. In addition, Boston Advisors is responsible for managing each
Portfolio's temporary investments in money market instruments, as well as
making arrangements for, and managing collateral received with respect to, the
lending of securities by each Portfolio.
6. Organized within Shearson Lehman, is the Consulting Group, which is located
in Wilmington, Delaware. The Consulting Group serves as the investment manager
of the Trust and the underlying Portfolios. Although the Consulting Group has
not previously served as investment manager for a registered investment
company, it and its related division, the Consulting Services Division of
Shearson Lehman (Consulting Services), have over eighteen years of experience
in evaluating investment advisers for individual and institutional investors.
Together the Consulting Group and Consulting Services provide various financial
consulting services to over 30,000 accounts, representing more than $30 billion
in client assets. Account sizes range from institutional accounts in excess of
$1 billion to individual accounts with $100,000 minimum investments. As of July
31, 1991, the Consulting Group rendered advisory services with respect to
assets with a value in excess of $42.7 billion.
7. Under its investment management agreement, the Consulting Group is required
to make recommendations to the Trustees regarding (a) the investment policies
of each Portfolio and (b) the selection and retention of certain Sub-Advisers
which exercise investment discretion over each Portfolio./6/ In addition,
through the TRAK Program, the Consulting Group provides investors with non-
binding, generalized asset allocation recommendations with respect to such
investors' investments in the Portfolios. For example, the Consulting Group
evaluates an investor's risk tolerances and financial goals, provides investment
advice as to the appropriate mix of investment types designed to balance the
investor's risk tolerances as part of a long-term investment strategy and
provides the investor with advice about implementing its investment decisions
through the Trust. However, the applicant states that the Consulting Group does
not have any discretionary authority or control with respect to the allocation
of an investor's assets among the Portfolios. In the case of an IRA, a Keogh
Plan or a Title I Plan, the applicant represents that all of the Consulting
Group's recommendations and evaluations will be presented to a Plan fiduciary
which is independent of Shearson Lehman and will be implemented only if accepted
and acted upon by such Independent Plan Fiduciary. In the case of a Section
404(c) Plan, Shearson Lehman represents that participants in such Plan will be
presented with the Consulting Group's recommendations and evaluations only to
the extent agreed to by Shearson Lehman and the Plan sponsor. Shearson Lehman
expects that some sponsors of Section 404(c) Plans will elect to have the
Consulting Group's recommendations and evaluations passed-through to
participants, while others will elect to have the Independent Plan Fiduciary
responsible for selecting the Portfolios made available to Plan participants
receive such advice./7/ 8. As stated above, the Consulting Group is responsible
for selecting the Sub-Advisers which provide discretionary advisory services
with respect to the investment of the assets of the individual Portfolios on the
basis of their "able" performance in their respective areas of expertise in
asset management. The applicant represents that there are presently eleven Sub-
Advisers, all of which are independent of, and will remain independent of,
Shearson Lehman and/or its affiliates./8/ The Sub-Advisers are registered
investment advisers under the Investment Adviser's Act of 1940. They maintain
their principal executive offices in the eastern and western regions of the
United States. As of June 30, 1991, the Sub-Advisers had assets under
management ranging from $62 million to $51 billion.
9. In order for a Plan to participate in the TRAK Program, Shearson Lehman or
the Consulting Group will provide an Independent Plan Fiduciary with a copy of
the Trust Prospectus discussing the investment objectives of the Portfolios
comprising the Trust, the policies employed to achieve these objectives, the
corporate affiliation existing between the Consulting Group, Shearson Lehman
and its subsidiaries and the compensation paid to such entities. In addition,
upon written or oral request to Shearson Lehman, the Independent Plan Fiduciary
will be given a Statement of Additional Information supplementing the
Prospectus which describes the types of securities and other instruments in
which the Portfolios may invest, the investment policies and strategies that
the Portfolios may utilize and certain risks attendant to those investments,
policies and strategies./9/ Further, each Plan will be given a copy of the
investment advisory agreement between the Consulting Group and such Plan
relating to participation in the TRAK Program, and upon written request to
Shearson Lehman, with a copy of the respective investment advisory agreement
between the Consulting Group and the Sub-Advisers.
With respect to a Section 404(c) Plan, Financial Consultants affiliated with
Shearson Lehman will explain the services offered under the TRAK Program to
eligible Section 404(c) Plan participants as well as the operation and
objectives of the Portfolios, if required by the arrangement negotiated between
the Consulting Group and the Plan./10/
If accepted as a Trust investor, an Independent Plan Fiduciary will be
required by
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/5/ Each Portfolio's net asset value per share is calculated by Boston
Advisors on each weekday, except on days on which the New York Stock Exchange
(the NYSE) is closed. In general, the net asset value for securities is
determined as of the close of trading on the NYSE or a foreign exchange by
dividing the value of a Portfolio net assets by the total number of its shares
outstanding. Typically, a Portfolio's investments are valued at market value.
However, in the absence of a market value, Portfolio investments are valued at
fair market value as determined by, or under the direction of, the Trustees.
/6/ Subject to the supervision and direction of the Trustees, the Consulting
Group was required to perform initial "due diligence" on prospective Sub-
Advisers for each Portfolio and thereafter to monitor each Sub-Adviser's
performance through qualitative and quantitative analysis as well as through
periodic, in person, telephonic and written consultations. The Consulting Group
is also required to communicate its performance expectations and evaluations to
the Sub-Advisers and ultimately recommend whether a Sub-Adviser's contract
should be renewed, modified or terminated. In this regard, the Consulting Group
is further obligated to provide written reports to the Trustees of its
evaluation and monitoring functions.
/7/ If the Independent Plan Fiduciary of a Section 404(c) Plan is the
recipient of the Consulting Group's investment advice, the applicant explains
that the Consulting Group will work with the Independent Plan Fiduciary by
identifying and drafting investment objectives, selecting investment categories
or actual Portfolios to be offered to Plan participants. In addition to these
services (and as described above), the applicant explains that the Consulting
Group will provide an Independent Plan Fiduciary with a detailed investment
performance monitoring report on a quarterly basis. Furthermore, a Financial
Consultant affiliated with Shearson Lehman will meet periodically with the
Independent Plan Fiduciary to discuss the investment performance monitoring
report.
However, if investment advisory services are provided directly to a
participant in a Section 404(c) Plan, the applicant explains (as also described
herein above) that a Financial Consultant will provide a participant with pre-
enrollment meetings and ongoing communications regarding the TRAK Program. In
addition, the applicant notes that the Consulting Group will recommend long
term investment allocations to the participant and provide the participant with
a written, quarterly performance monitoring report.
/8/ Although there are presently twelve Portfolios comprising the Trust, there
are only eleven Sub-Advisers. One Sub-Adviser, Standish, Ayer and Wood, Inc.
advises both the Government Money Investments Portfolio and the Intermediate
Fixed Income Investments Portfolio.
/9/ In the case of a Section 404(c) Plan, the applicant represents that the
Plan administrator, trustee or named fiduciary, as the recordholder of Trust
shares, will make available the Trust's Prospectus to Section 404(c) Plan
participants. In addition, Shearson Lehman will make available to such
Independent Plan Fiduciaries sufficient quantities of Prospectuses for this
purpose, as well as provide Statements of Additional Information to any party
upon request.
/10/ The Department is expressing no opinion as to whether the information
provided under the TRAK Program is sufficient to enable a participant to
exercise independent control over assets in his or her account as contemplated
by section 404(c) of the Act.
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<PAGE>
Shearson Lehman to acknowledge, in writing, prior to purchasing Trust shares
that such fiduciary has received copies of the aforementioned documents. With
respect to a Plan that is covered by Title I of the Act (e.g., a defined
contribution plant), where investment decisions will be made by a trustee,
investment manager or a named fiduciary. Shearson Lehman will require (except
if relying on Class PTE 77-3) that such Independent Plan Fiduciary acknowledge
in writing receipt of such documents and represent to Shearson Lehman that such
fiduciary is (a) independent of Shearson Lehman and its affiliates, (b) capable
of making an independent decision regarding the investment of Plan assets and
(c) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
With respect to Section 404(c) Plan, written acknowledgment of the receipt of
such documents will be provided by the Independent Plan Fiduciary (i.e., the
Plan administrator, trustee or named fiduciary, as the recordholder of Trust
shares). Such Independent Plan Fiduciary will be required to represent, in
writing, to Shearson Lehman that such fiduciary is (a) independent of Shearson
Lehman and its affiliates and (b) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and able to make an
informed decision concerning participation in the TRAK Program.
10. The books of the Trust will be audited annually by independent public
accountants selected by the Trustees and approved by the investors. All
investors will receive copies of an audited financial report no later than 60
days after the close of each Trust fiscal year. The books and financial records
of the Trust will be open for inspection by any investor, as well as the
Department and the Service, at all times during regular business hours.
11. As noted under the TRAK Program, the Consulting Group will provide the
Independent Plan Fiduciary with asset allocation advice related to the
Portfolios. In this regard, the applicant states that the Consulting Group's
asset allocation advice will not focus on recommendations that a Plan's assets
be allocated to a specific Portfolio. Rather, the applicant represents that the
Consulting Group will recommend only that Plan assets be allocated among
particular types of Portfolios (e.g., Growth, Fixed Income, etc.)
After the selection of specific Portfolios by an Independent Plan Fiduciary,
the Consulting Group will continue to render general Portfolio-Type selection
advice to Plans or Plan fiduciaries relating to asset allocations among the
selected Portfolios. However, in the case of a Section 404(c) Plan in which at
least three to five Portfolios may be selected by the Plan sponsor, the
Consulting Group's initial asset allocation advice will be limited to the
suggested Portfolio-Types offered under the Plan. The Consulting Group may also
work with the Independent Plan Fiduciary to identify and draft investment
objectives, select investment categories or actual Portfolios to be offered to
Plan participants, if such fiduciary is the recipient of the Consulting Group's
asset allocation advice, or recommend appropriate long-term investment
allocations to an individual participant, if the participant receives such
advice.
12. The Consulting Group will also identify a Plan's risk tolerances and
investment objectives, the performance of each Portfolio in which assets are
invested, and recommend, in writing, an appropriate allocation of assets among
the Portfolio-Types that conform to these tolerances and objectives. The
Consulting Group will not have the authority to implement its advice or
recommendations and will not participate in the deliberations regarding the
decision by an investor of whether or not to act upon such advice. As noted
earlier, the applicant represents that the decision of a Plan to invest in the
TRAK Program will be made by an unrelated Plan fiduciary acting on the basis of
his or her own investigation into the advisability of participating in the TRAK
Program.
13. The Consulting Group will provide, at least quarterly, monitoring reports
to a Title I, IRA or Keogh Plan containing an analysis and evaluation of the
Plan's account to ascertain whether the investor's objectives are being met and
recommending, when appropriate, changes in the allocation among the Portfolios.
If required by the arrangement negotiated with the Independent Plan Fiduciary,
the Consulting Group will provide an Independent Plan Fiduciary of a Section
404(c) Plan with a written, detailed investment performance monitoring report,
that will contain Plan level asset allocations showing the performance of the
Plan's investment vehicles and the performance of relevant indices for
evaluating the performance of each Portfolio, a Plan cash flow analysis and
annualized risk adjusted rates of return for Plan investment vehicles. Such
report will be provided on a quarterly basis.
In addition, to the extent required by the arrangement negotiated with the
Consulting Group, a Section 404(c) Plan participant will receive a written,
quarterly performance monitoring report with his or her quarterly benefit
statement which includes the investment performance of the Portfolios, the
investment performance for the participant's account, and specifies market
commentary and toll-free numbers for such participant to call Shearson Lehman
in order to obtain more information about the TRAK Program or to amend the
participant's investment allocations. Further, if required by such arrangement,
a Financial Consultant will meet periodically with an Independent Plan
Fiduciary of a Section 404(c) Plan to review and discuss the investment
performance monitoring report. The Financial Consultant may also meet
periodically with an eligible participant to review the performance of the
participant's account. The applicant notes that this intermittent contact will
not prevent the participant from contacting the Financial Consultant at any
time to inquire about his or her participation in the TRAK Program.
Finally, on a quarterly and annual basis, the Consulting Group will provide
written disclosures to all Plans with respect to (1) the percentage of each
Trust Portfolio's brokerage commissions that are paid to Shearson Lehman and
its affiliates and (2) the average brokerage commission per share paid by each
Portfolio to Shearson Lehman as compared to the average brokerage commission
per share paid by each Portfolio to brokers other than Shearson Lehman and its
affiliates, both expressed as cents per share.
14. Shares of a Portfolio will be redeemed by Shearson Lehman, at no charge,
and generally on a daily basis (weekends and holidays excepted) when the
Portfolio calculates its net asset value. Redemption requests received in
proper form prior to the close of trading on the NYSE will be affected at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE will be effected at the net
asset value at the close of business of the next day, except on weekends or
holidays when the NYSE is closed. A Portfolio is required to transmit
redemption proceeds for credit to an investor's account with Shearson Lehman or
to an "introducing" broker/11/ within 7 days after receipt of the redemption
request. In the case of an IRA or Keogh Plan investor, Shearson Lehman will not
hold redemption proceeds as free credit balances and will, in the absence of
receiving investment instructions, place all such assets in
- -------
/11/ According to the applicant, Shearson Lehman provides clearance,
settlement and other back office services to other broker-dealers. The
applicant notes that Shearson Lehman may also provide confirmations and account
statements to clients of brokers who have "introduced" clients to Shearson
Lehman such as The Robinson Humphrey Company, Inc. a wholly-owned broker-dealer
subsidiary of Shearson Lehman.
B-5
<PAGE>
a money market fund that is not affiliated with Shearson Lehman. In the case of
Plans that are covered by title I of the Act, the redemption proceeds will be
invested by Shearson Lehman in accordance with the investment directions of the
Independent Plan Fiduciary responsible for the management of the Plan's assets.
With respect to a Section 404(c) Plan, the treatment of such investment assets
will depend upon the arrangement for participant investment instructions
selected by the Plan sponsor./12/ In the event that the Independent Plan
Fiduciary does not give other investment directions, such assets will be swept
weekly into a money market fund that is not affiliated with Shearson Lehman for
the benefit of the Plan.
Due to the high costs of maintaining small accounts, the Trust may also redeem
an account having a current value of $7,500 or less, after the investor has
been given at least 30 days in which to increase the account balance to more
than the $7,500 amount. Proceeds of an involuntary redemption will be deposited
in the investor's brokerage account unless Shearson Lehman is otherwise
instructed.
15. Shares of a Portfolio may be exchanged by an investor with another
investor in the TRAK Program without payment of any exchange fee for shares of
another Portfolio at their respective net asset values. However, Portfolio
shares are not exchangeable with shares of other funds within the Shearson
Lehman Group of funds or portfolio families.
16. With respect to brokerage transactions that are entered into under the
TRAK Program for a Portfolio, such transactions may be executed through
Shearson-Lehman and other affiliated broker-dealers, if in the judgment of the
Sub-Adviser, the use of such broker-dealer is likely to result in price and
execution at least as favorable, and at a commission charge at least as
comparable to those of other qualified broker-dealers. In addition, Shearson
Lehman may not execute transactions for a Portfolio on the floor of any
national securities exchange but it may effect transactions by transmitting
orders to other brokers for execution. In this regard, Shearson Lehman is
required to pay fees charged by those persons performing the floor brokerage
elements out of the brokerage compensation it receives from a Portfolio.
17. Each Portfolio bears its own expenses, which generally include all costs
that are not specifically borne by the Consulting Group, the Sub-Advisers or
Boston Advisors. Included among a Portfolio's expenses are costs incurred in
connection with the Portfolio's organization, investment management and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining the Trust's legal existence and shareholder
relations. No Portfolio, however, will impose sales charges on purchases,
reinvested dividends, deferred sales charges, redemption fees, nor will any
Portfolio incur distribution expenses.
18. The total fees that are paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation. In this regard, for its
asset allocation and related services, the Consulting Group charges an investor
a quarterly investment advisory fee. This "outside fee" is negotiated between
the Consulting Group and the investor and it varies up to an annual maximum of
1.50 percent of the net asset value of the investor's Trust shares computed
each quarter based on the value determined on the last calendar day of the
previous calendar quarter. The outside fee is charged directly to an investor
and it is not affected by the allocation of assets among the Portfolios nor by
whether an investor follows or ignores the Consulting Group's advice./13/ For
Plan investors, the outside fee for a calendar quarter will be reduced by an
amount equal to, for all Portfolios in which Plan assets are invested (a) the
value of Plan assets invested in a Portfolio on the last calendar day of the
previous calendar quarter (or the value of an initial investment in the
Portfolio, as of the day such initial investment is made during the calendar
quarter) multiplied by (b) a reduction factor (the Reduction Factor) which is
described in below, multiplied by (c) a fraction, the numerator of which is the
number of days in the period for which the outside fee is being assessed and
the denominator of which is the actual number of days in the calendar year of
which that period is a part. For subsequent investments or redemptions
aggregating to more than $5,000, the pro-rated fee for credit
for the balance of the quarter will be calculated on the basis of the net
percentage of the outside fee paid for the quarter during which the subsequent
investment or redemption is made.
In addition, for investment management and related services provided to the
Trust, the Consulting Group is paid, from each Portfolio, a management fee
which computed daily and paid monthly at an annual rate ranging from .15
percent to .70 percent of the value of the Portfolio's average daily net assets
depending upon the Portfolio's objective. From these management fees, the
Consulting Group compensates the Sub-Adviser. This "inside fee," which is the
difference between the individual Portfolio's total management fee and the fee
paid by the Consulting Group to the Sub-Adviser, varies from 20 to 30 basis
points depending on the Portfolio (except for the Government Money Investments
Portfolio which, for competitive purposes, pays a management fee equal to the
Sub-Adviser's fee). Each Portfolio also pays Boston Advisors a management fee
that is computed daily and paid monthly for the services it performs as
administrator to the Trust at an annual fixed rate of .20 percent of the value
of the Portfolio's average daily net assets. Such fee is also included in the
total management fee.
The management fees that are paid at the Portfolio level to Boston Advisors,
the Consulting Group and the Sub-Advisers are set forth in the table below. For
purposes of the table, Boston Advisors is referred to as "BA", the Consulting
Group as "CG" and the Sub-Advisers as "SA." As noted in the table, the sum of
the management fees paid by a Portfolio to Boston Advisors plus the fees
retained by the Consulting Group and the Sub-Advisers equals the total
management fee paid by that Portfolio.
- -------
/12/ Shearson Lehman explains that, under one alternative, Plan participants
who give instructions to redeem shares of a Portfolio must give corresponding
instructions to reinvest proceeds in another investment vehicle made available
under the Plan, thus ensuring that a participant's investment assets are
continually invested. Under a second alternative which is described above,
Shearson Lehman represents that participants will not be required to give
corresponding instructions and all investment assets for which no investment
instructions have been given will be swept into a money market fund that is not
affiliated with Shearson Lehman. In this regard, the Department is expressing
no opinion regarding whether any of the arrangements described above comply
with the requirements of section 404(c) of the Act.
/13/ The applicant represents that the outside fee is not imposed on
accounts of employees of American Express and its subsidiaries, including
Shearson Lehman, accounts of their immediate families and IRAs and certain
employee pension benefit plans for these persons. The applicant states that
this fee is waived to encourage employees to invest in Shearson Lehman. With
respect to IRAs or Plans maintained by Shearson Lehman and its affiliates, the
applicant asserts that such waiver would be required by PTE 77-3.
B-6
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
TOTAL TOTAL FEE SA RETAINED CG RETAINED
MANAGE- BA FEE SA/CG FEE FEE
PORTFOLIO MENT FEE (PERCENT) (PERCENT) (PERCENT) (PERCENT)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Money Invest-
ments..................... 0.35 0.20 0.15 0.15 0.00
Intermediate Fixed Income
Investments............... .60 .20 .40 .20 .20
Total Return Fixed Income
Investments............... .60 .20 .40 .20 .20
Municipal Bond Invest-
ments..................... .60 .20 .40 .20 .20
Mortgage Backed Invest-
ments..................... .70 .20 .50 .25 .25
Balanced Investments...... .80 .20 .60 .30 .30
Large Capitalization Value
Equity Investments........ .80 .20 .60 .30 .30
Large Capitalization
Growth Investments........ .80 .20 .60 .30 .30
Small Capitalization Value
Equity Investments........ .80 .20 .60 .30 .30
Small Capitalization
Growth Investments........ .80 .20 .60 .30 .30
International Equity In-
vestments................. .90 .20 .70 .40 .30
International Fixed Income
Investments............... .70 .20 .50 .25 .25
- --------------------------------------------------------------------------------
</TABLE>
Shearson Lehman proposes to offset, quarterly, against the outside fee such
amount as is necessary to assure that the Consulting Group retains no more than
20 basis points from any Portfolio on investment of assets attributable to any
Plan./14/ In this way, the aggregate of the inside fees and the outside fees
retained by the Consulting Group will remain constant regardless of the
distribution of a Plan's assets among the Portfolio.
Shearson Lehman has developed the following example to demonstrate how the fee
offset mechanism would work:
Assume that as of March 31, 1992, the average daily value of Trust Portfolio
shares held by a Plan investor was $1,000. Investment assets attributable to
the Plan were distributed among five Trust Portfolios: (1) Government Money
Investments in which the Plan made a $50 investment and from which the
Consulting Group would not retain an inside fee; (2) Total Return Fixed Income
investments in which the Plan made a $200 investment and the Consulting Group
would retain an inside fee of .20 percent; (3) Small Capitalization Growth
Investments in which the Plan made a $250 investment and the Consulting Group
would be entitled to receive an inside fee of .30 percent; (4) Large
Capitalization Growth Investments in which the Plan made a $250 investment and
the Consulting Group would retain an inside fee of .30 percent; and (5)
International Equity Investments in which the Plan made a $250 investment and
the Consulting Group would be entitled to receive an inside fee of .30 percent.
Assume that the Plan investor pays the maximum annual outside fee of 1.50
percent so that the total outside fee for the calendar quarter April 1 through
June 30, prior to the fee offset would be ($1,000) 1.50% (.25)=$3.75. Under the
proposed fee offset, the outside fee charged to the Plan must be reduced by a
Reduction Factor to ensure that the Consulting Group retains an inside fee of no
more than .20% from each of the Portfolios on investment assets attributable to
the Plan. The following table shows the Reduction Factor as applied to each of
the Portfolios comprising the Trust:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CG REDUC-
RETAINED FEE TION
FEE OFFSET FACTOR
(PER- (PER- (PER-
PORTFOLIO CENT) CENT) CENT)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Investments............................. 0.00 0.20 0.00
Intermediate Fixed Income Investments.................... .20 .20 .00
Total Return Fixed Income Investments.................... .20 .20 .00
Municipal Bond Investments............................... .20 .20 .00
Mortgage Backed Investments.............................. .25 .20 .05
Balanced Investments..................................... .30 .20 .10
Large Capitalization Value Equity Investments............ .30 .20 .10
Large Capitalization Growth Investments.................. .30 .20 .10
Small Capitalization Value Equity Investments............ .30 .20 .10
Small Capitalization Growth Investments.................. .30 .20 .10
International Equity Investments......................... .30 .20 .10
International Fixed Income Investments................... .25 .20 .05
- --------------------------------------------------------------------------------
</TABLE>
Under the proposed fee offset, a Reduction Factor of .10% is applied against
the quarterly outside fee with respect to the value of Plan assets that have
been invested in Portfolios (3), (4) and (5) only. As noted above Portfolios
(1) and (2) do not involve a Reduction Factor because the fee retained by the
Consulting Group for these Portfolios does not exceed 20 basis points.
Therefore, the quarterly offset for the plan investor is computed as follows:
(.25) [($250) .10%+($250) .10%+($250) .10%]=$0.1875.
In the foregoing example, the Plan investor, like all other investors in the
TRAK Program, would receive a statement for its TRAK account on or about April
15, 1992. This statement would show the outside fee to be charged for the
calendar quarter April 1, through June 30 (i.e., $3.75-$0.1875=$3.5625). The
Plan investor would be asked to pay the outside fee for that quarter by May 3,
1992 (i.e., the third day of the second month of the calendar quarter). If the
outside fee were not paid by that date, Shearson Lehman would debit the account
of the Plan investor (as with other investors) for the amount of the outside
fee (pursuant to the authorization contained in the TRAK Investment Advisory
Agreement, and as described in the Statement of Additional Information appended
to the Prospectus)./15/
Because the Consulting Group will retain no inside fee with respect to assets
invested in the
- -------
/14/ Shearson Lehman asserts that it chose 20 basis points as the maximum
net fee retained for management services rendered to the Portfolios because
this amount represents the lowest percentage management fee charged by Shearson
Lehman among the Portfolios (excluding the Government Money Investments
Portfolio for which Shearson Lehman charges no management fee).
/15/ The applicant explains that the foregoing example illustrates the fact
that the outside fee and the fee offset are computed contemporaneously and that
Plan investors will get the benefit of the fee offset contemporaneously upon
the payment of the outside fee. Because the inside fee is paid monthly and the
fee offset is computed quarterly, the applicant also explains that Shearson
Lehman does not receive the benefit of a "float" as a result of such
calculations because the fee offset will always be realized no later than the
time that the outside fee is paid (i.e., on or about the third day of the
second month of the calendar quarter). Since the inside fee is paid at the end
of each calendar month, the applicant further explains that Plan investors will
realize the full benefit of the offset before the time that the inside fee is
paid for the second and third months of the calendar quarter.
B-7
<PAGE>
Government Money Investment Portfolio, Shearson Lehman notes that a potential
conflict may exist by reason of the variance in net inside fees among the
Government Money Investments Portfolio and the other Portfolios. Shearson
Lehman also recognizes that this factor could result in the Consulting Group's
recommendation of a higher-fee generating Portfolio-Type to an investing Plan.
To address this potential conflict, Shearson Lehman will disclose to all
participants in the TRAK Program that the Consulting Group will retain no
inside fee for assets invested in the Government Money Investments Portfolio.
19. In summary, it is represented that the proposed transactions will meet the
statutory criteria for an exemption under section 408(a) of the Act because:
(a) The investment of a Plan's assets in the TRAK Program will be made and
approved by a Plan fiduciary which is independent of Shearson Lehman and its
affiliates such that Independent Plan Fiduciaries will maintain complete
discretion with respect to participating in the TRAK Program; (b) Independent
Plan Fiduciaries will have an opportunity to redeem their shares in the Trust
in such fiduciaries' individual discretion; (c) no Plan will pay a fee or
commission by reason of the acquisition or redemption of shares in the Trust;
(d) prior to making an investment in TRAK, each Independent Plan Fiduciary will
receive offering materials and disclosures from either Shearson Lehman or the
Consulting Group which disclose all material facts concerning the purpose,
structure, operation and investment in the TRAK Program; (e) the Consulting
Group will provide written documentation to an Independent Plan Fiduciary of
its recommendations or evaluations, including the reasons and objective
criteria forming the basis for such recommendations or evaluations; (f) any
sub-Adviser that is appointed by the Consulting Group to exercise investment
discretion over a Portfolio will always be independent of Shearson Lehman and
its affiliates; (g) the annual investment advisory fee that is paid by a Plan
to the Consulting Group for investment advisory services rendered to such Plan
will be offset by such amount as is necessary to assure that the Consulting
Group retains no more than 20 basis points from any Portfolio on investment
assets attributable to the Plan investor; (h) the Consulting Group or Shearson
Lehman will make periodic written disclosures to participating Plans with
respect to the financial condition of the TRAK Program, the total fees that it
and its affiliates will receive from such Plan investors and the value of the
Plan's interest in the TRAK Program; and (i) on a quarterly and annual basis,
the Consulting Group will provide written disclosures to all Plans with respect
to (1) the percentage of each Trust Portfolio's brokerage commissions that are
paid to Shearson Lehman and its affiliates and (2) the average brokerage
commission per share paid by each Portfolio to Shearson Lehman as compared to
the average brokerage commission per share paid by each Portfolio to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
FOR FURTHER INFORMATION CONTACT:
Ms. Jan D. Broady of the Department, telephone (202) 523-8881. (This is not a
toll-free number.)
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under section
408(a) of the Act and/or section 4975(c)(20) of the Code does not relieve a
fiduciary or other party in interest of disqualified person from certain other
provisions of the Act and/or the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which among other things
require a fiduciary to discharge his duties respecting the plan solely in the
interest of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(b) of the act, nor does it affect
the requirement of section 401(a) of the Code that the plan must operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the Act and/or
section 4975(c)(2) of the Code, the Department must find that the exemption is
administratively feasible, in the interests of the plan and of its participants
and beneficiaries and protective of the rights of participants and
beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to, and not in
derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional rules.
Furthermore, the fact that a transaction is subject to an administrative or
statutory exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the express
condition that the material facts and representations contained in each
application are true and complete, and that each application accurately
describes all material terms of the transaction which is the subject to the
exemption.
Signed at Washington, DC, this 31st day of March 1992.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
(FR Doc. 92-7712 Filed 4-2-92; 8:45 am)
BILLING CODE 4510-29-M
FINAL EXEMPTION
SHEARSON LEHMAN BROTHERS, INC. (SHEARSON LEHMAN), LOCATED IN NEW YORK, NY
[Prohibited Transaction Exemption 92-77; Exemption Application No. D-8723]
EXEMPTION
Section I. Converted Transactions
The restrictions of section 406(a) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section 4975(c)(1)
(A) through (D) shall not apply to the proposed purchase or redemption of
shares by an employee benefit plan, an individual retirement account (the IRA)
or a retirement plan for a self-employed individual (the Keogh Plan;
collectively, the Plans) in the Shearson Lehman-established Trust for TRAK
Investments (the Trust) in connection with such Plans' participation in the
TRAK Personalized Investment Advisory Service (the TRAK Program). In addition,
the restrictions of section 406 (b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) shall not apply to the provision, by the Consulting Group
Division of Shearson Lehman (the Consulting Group), of investment advisory
services to an independent fiduciary of a participating Plan (the Independent
Plan Fiduciary) which may result in such fiduciary's selection of a portfolio
grouping (the Portfolio-Type) in the TRAK Program for the investment of Plan
assets.
This exemption is subject to the following conditions that are set forth below
in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Shearson Lehman and/or its affiliates covered by an IRA
not subject to title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
B-8
<PAGE>
(2) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(7) The Consulting Group will generally give investment advice to an
Independent Plan Fiduciary with respect to Portfolio-Types. However, in the
case of a Plan providing for participant-directed investments (the Section
404(c) Plan), the Consulting Group will provide investment advice that is
limited to the Portfolios made available under the Plan.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Shearson Lehman
and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any securities
that are issued by Shearson Lehman and/or its affiliates, the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent.
(10) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio which contains
investments attributable to the Plan investor.
(11) The Consulting Group will not retain an investment advisory or management
fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior to purchasing
Trust shares
(a) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(1) A copy of the prospectus (The Prospectus) for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the policies
employed to achieve these objectives, the corporate affiliation existing
between the Consulting Group, Shearson Lehman and its subsidiaries and the
compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and strategies that the Portfolios may utilize and certain
risks attendant to those investments, policies and strategies.
(3) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(4) Upon written request of Shearson Lehman, copy of the respective investment
advisory agreement between the Consulting Group and the Sub-Advisers.
(5) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by a
Shearson Lehman Financial Consultant (the Financial Consultant) to eligible
participants in such Plan, of the services offered under the TRAK Program and
the operation and objectives of the Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, will be required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received copies of
such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to Shearson Lehman that such fiduciary is (1) independent of
Shearson Lehman and its affiliates and (2) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under Title 1 of the Act, where
investment decisions are made by a trustee, investment manager or named
fiduciary, and Independent Plan Fiduciary will be required to acknowledge, in
writing, receipt of such documents and represent to Shearson Lehman that such
fiduciary is (1) independent of Shearson Lehman and its affiliates, (2) capable
of making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(13) Each Plan will receive the following: written or oral disclosures with
respect to its ongoing participation in the TRAK Program;
(a) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio.
(b) A written quarterly monitoring report containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(c) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing Plan level asset allocations. Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the performance monitoring
report as well as with eligible participants to review their accounts'
performance.
(d) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all Plans of the
(1) percentage of each Portfolio's brokerage commissions that are paid to
Shearson Lehman and its affiliates and (2) the average brokerage commission per
share paid by each Portfolio to Shearson Lehman and its affiliates, as compared
to the average brokerage commission per share paid by the Trust to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
(14) Shearson Lehman shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (10) of this section to
determine whether the conditions of this exemption have been met, except that
(a) a prohibited transaction will not
B-9
<PAGE>
be considered to have occurred if, due to circumstances beyond the control of
Shearson Lehman and/or its affiliates, the records are lost or destroyed prior
to the end of the six year period, and (b) no party in interest other than
Shearson Lehman shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act, or to the taxes imposed by section 4975 (a)
and (b) of the Code, if the records are not maintained, or are not available
for examination as required by paragraph (15) below.
(15) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section shall be
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or the
Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (15) shall be authorized to examine the trade secrets of Shearson
Lehman or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this exemption:
(1) An "affiliate" of Shearson Lehman includes--
(a) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Shearson Lehman. (For
purposes of this subsection, the term "control" means the power to exercise a
controlling influence over the management or policies of a person other than an
individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of Shearson Lehman and its affiliates and is either
(a) A Plan administrator, trustee or named fiduciary, as the recordholder of
Trust shares of a Section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in Trust
shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by Section 404(c) of the Act.
For a more complete statement of the facts and representations supporting the
Department's decision to grant this exemption, refer to the notice of proposed
exemption (the Notice) published on April 3, 1992 at 57 FR 11514.
EFFECTIVE DATE: This exemption is effective as of April 3, 1992.
WRITTEN COMMENTS
The Department received one comment letter with respect to the Notice and no
requests for a public hearing. The letter, which was submitted by Shearson
Lehman, addresses certain clarifications to the Notice, including
clarifications to the General Conditions and the Summary of Facts and
Representations. Discussed below are the changes suggested by Shearson Lehman
and the Department's responses thereto. In addition, the Department has made
several clarifying changes to the final exemption which are also discussed
below.
With respect to the General Conditions that are set forth in Section II of the
Notice. Shearson Lehman wishes to make several clarifications. In this regard,
Shearson Lehman notes that, in general, in the case of IRAs that are maintained
by employees of Shearson Lehman or its affiliates, such employees should be
considered "Independent Plan Fiduciaries." In addition, Shearson Lehman
requests that Condition (1) should read as follows in order that it will
conform to the other General Conditions:
The participation of plans in the TRAK Program will be approved by an
Independent Plan Fiduciary.
To clarify that Sub-Advisers act for the Trust after having been approved by
the Trust in accordance with the terms of section 15(a) and (c) of the
Investment Company Act of 1940, as amended (the 1940 Act), or any exemption
granted by the Securities and Exchange Commission, Shearson Lehman recommends
that Condition (8) of the General Conditions be modified to read as follows:
Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Shearson Lehman
and its affiliates.
In the case of a Plan covering one or more employees of the Plan sponsor (such
as a Section 404(c) Plan), Shearson Lehman notes that Condition (10) requires
only that the investment advisory fee paid by the Plan be offset in the manner
described in the condition (i.e., the offset will be determined based on the
aggregate investment of the Plan accounts). Shearson Lehman represents that it
does not have control over how the Plan, for internal expenses, allocates the
offset among individual accounts. As long as the fee is offset at the Plan
level, Shearson Lehman represents that it cannot be construed to have any
economic incentive to provide investment allocation advice favoring one
Portfolio over another.
Shearson Lehman observes that several of the General Conditions refer to
"Shearson Lehman and its affiliates" but the Notice does not define the term
"affiliate." After giving due consideration to this comment, the Department has
determined to add a new Section III to the exemption titled "Definitions" in
which the terms "affiliate," and "Independent Plan Fiduciary" are defined as
follows:
An "affiliate" of Shearson Lehman includes (a) any person directly or
indirectly through one or more intermediaries, controlling, controlled by, or
under common control with Shearson Lehman (For purposes of this subsection, the
term "control" means the power to exercise a controlling influence over the
management of policies of a person other than an individual.) (b) any officer,
director or partner in such person, and (c) any corporation or partnership of
which such person is an officer, director or a 5 percent partner or owner.
An "Independent Plan Fiduciary" is a Plan fiduciary which is independent of
Shearson Lehman and its affiliates and is either (a) a Plan administrator,
trustee or named fiduciary, as the recordholder of Trust shares of a Section
404(c) Plan, (b) a participant in a Keogh Plan, (c) an individual covered under
a self-directed IRA which invests in Trust shares, or (d) a trustee, investment
manager or named fiduciary responsible for investment decisions in the case of
a Title I Plan that does not permit individual direction as contemplated by
section 404(c) of the Act.
With respect to modifications to the Summary of Facts and Representations,
Shearson Lehman represents that the first paragraph of Item 1 of the Notice
which was based on the application for exemption confuses the descriptions of
Shearson Holdings, Shearson Lehman and Shearson Lehman Brothers. Accordingly,
Shearson Lehman requests that the third, fourth and fifth sentences of that
paragraph be amended to read as follows:
B-10
<PAGE>
Shearson Holdings conducts its principal businesses through two divisions of
Shearson Lehman--Shearson Lehman Brothers and Lehman Brothers. Shearson Lehman
Brothers is responsible for individual investor services and asset management
while Lehman Brothers is responsible for securities underwriting, financial
advisory, investment and merchant banking services and securities and
commodities trading as principal and agent. Shearson Lehman is a member of all
principal securities and commodities exchanges in the United States and the
National Association of Securities Dealers, Inc.
Shearson Lehman also wishes to update the second sentence of the second
paragraph under Item 2 of the Notice by noting that the Balanced Investments
Portfolio is expected to be offered in July 1992 at an initial per share value
of $8.00.
In order that Footnote 1 of the Notice more closely tracks the language of
Condition (9). Shearson Lehman suggests the following modification:
Because a Portfolio is not precluded from investing in securities that are
issued by Shearson Lehman or its affiliates. Shearson Lehman represents that,
as a limitation, immediately following the acquisition by a Portfolio of any
securities that are issued by Shearson Lehman and/or its affiliates, the
percentage of that Portfolio's net assets invested in such securities will not
exceed one percent.
Since Shearson Lehman cannot assure that Section 404(c) Plans participating in
the TRAK Program will pass through voting rights to participants on a pro rata
basis, it recommends that the second paragraph of Footnote 2 of the Notice be
amended to read as follows:
In the case of individual account plans such as Section 404(c) Plans, Shearson
Lehman believes that most Plans will pass-through the vote to participants on a
pro rata basis.
Shearson Lehman also represents that it may serve as prototype sponsor for
Plans participating in the TRAK Program. Therefore, the third sentence of the
second paragraph under Item 3 of the Notice should be amended by adding the
following language:
Accordingly, Shearson Lehman has requested prospective exemptive relief from
the Department with respect to the purchase and redemption of shares in the
Trust by participating Plans which it does not sponsor (other than only as
prototype sponsor) of have discretionary investment authority over the Plan's
assets which would be invested in Trust shares.
To clarify that Plans for which Shearson Lehman has a pre-existing
relationship will be able to participate in TRAK, Shearson Lehman asks that the
second sentence of Footnote 4 be amended to read as follows:
The applicant further represents that although the exemptive relief proposed
above would not permit Shearson Lehman or an affiliate, while serving as a Plan
fiduciary with discretionary authority over the management of a Plan's assets,
to invest in Trust shares those assets over which it exercises discretionary
authority, a purchase or redemption of Trust shares under such circumstances
would be permissible if made in compliance with the terms and conditions of
Class Prohibited Transaction Exemption (PTE) 77-4 [42 FR 16732. April 8, 1977).
Shearson Lehman represents that the Trust's Board of Directors consists of
seven members, four of whom are not affiliated with Shearson Lehman and three
of whom are affiliated with Shearson Lehman, all in accordance with the
provisions of section 10(b) of the 1940 Act. Accordingly, Shearson Lehman
recommends that Item 4 of the Notice be amended to read as follows:
Overall responsibility for the management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees (the Trustees) which
currently is comprised of seven members. The Trustees approve all significant
agreements involving the Trust and the persons and companies who provide
services to the Trust and the Portfolios. Three of the Trustees and all of the
Trust's executive officers are affiliated with Shearson Lehman and/or its
affiliates. The four remaining Trustees are not affiliated with Shearson
Lehman.
Because the applicant now represents that not all services described in
Footnote 7 of the Notice will be provided to every Section 404(c) Plan.
Shearson Lehman believes that an updated, clarifying paragraph should be added
to the footnote which would read as follows:
The applicant notes that not all of the services described in the preceding
two paragraphs will be provided to every Section 404(c) Plan. The services
provided to each Plan will depend on the arrangement negotiated between
Shearson Lehman and the Independent Plan Fiduciary.
Shearson Lehman represents that it cannot assure that the Plan administrator,
trustee or named fiduciary of a Section 404(c) Plan will make available a copy
of the Trust Prospectus to each participant. Therefore, it requests that
Footnote 8 of the Notice be amended to read as follows:
In the case of a Section 404(c) Plan, the applicant represents that the Plan
administrator, trustee or named fiduciary, as the recordholder of Trust shares,
will receive a copy of the Trust Prospectus. If requested by such Plan
administrator, trustee or named fiduciary, Shearson Lehman will make available
to such Independent Plan Fiduciary sufficient quantities of Prospectuses for a
distribution to Plan participants, as well as provide Statements of Additional
Information to any party upon request.
Item 15 of the Notice inadvertently states that investors in the TRAK Program
may exchange Portfolio shares with one another. Shearson Lehman wishes to
clarify that the first sentence of Item 15 should be amended to read as
follows:
Shares of a Portfolio may be exchanged by an investor, without any exchange
fee, for shares of another Portfolio at their respective net asset values.
Shearson Lehman states that PTE 77-3 applies only to employee benefit plans
and is, therefore, inapplicable to IRAs maintained by employees of Shearson
Lehman or its affiliates. In addition, Shearson Lehman states that it does not
currently charge an outside fee for such IRA accounts but it may do so in the
future. Accordingly, Shearson Lehman recommends that the first and last
sentences of Footnote 13 of the Notice be amended to read as follows:
The applicant represents that the outside fee is not currently imposed on
accounts of American Express and its subsidiaries, including Shearson Lehman,
accounts of their immediate families and IRAs and certain employee pension
benefit plans for these persons * * * With respect to employee pension benefit
plans maintained by Shearson Lehman or its affiliates for their employees, the
applicant asserts that such waiver would be required by PTE 77-3.
With respect to the TRAK fee structure described in the Notice in Item 18 and
the accompanying example, Shearson Lehman wishes to make two clarifications.
First, because the TRAK fee and corresponding fee offset for a calendar quarter
are based on the "net asset value" of Trust Portfolio shares at the end of the
immediately preceding calendar quarter rather than the "average daily value" of
Trust Portfolio shares, Shearson Lehman requests that the first sentence of the
example be amended to read as follows:
Assume that as of March 31, 1992, the net asset value of Trust Portfolio
shares held by a Plan Investor was $2,000.
Second, Shearson Lehman has updated its submission by representing that the
last parenthetical of the last paragraph of the example should not refer to the
"Statement of Additional Information" but should instead refer to the "TRAK
Program Description."
B-11
<PAGE>
Therefore, Shearson Lehman recommends that the parenthetical read as follows:
(pursuant to the authorization contained in the TRAK Investment Advisory
Agreement, and as described in the TRAK Program Description appended to the
Prospectus)
Finally, Shearson Lehman suggests that Clause (e) under Item 19 should be
modified to track the language of Condition (5) as follows:
the Consulting Group will provide written documentation to an Independent Plan
Fiduciary of its recommendations or evaluations based on objective criteria.
The Department has reviewed the clarifications and amendments as described
above, and concurs with these changes. Accordingly, upon consideration of the
entire record, including the written comment received, the Department has
determined to grant the exemption subject to the aforementioned changes.
B-12
<PAGE>
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[APPLICATION NOS. D-9337 AND D-9415]
SMITH BARNEY SHEARSON (SBS), LOCATED IN NEW YORK, NY
NEW AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, Inc.
(Shearson Lehman).
- --------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed individual exemption which, if granted,
would replace PTE 92-77 (55 FR 45833, October 5, 1992). PTE 92-77 permits the
purchase or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA) or a retirement plan for a self-employed
individual (the Keogh Plan; collectively the Plans) in the Trust for TRAK
Investments (the Trust) established by Shearson Lehman, in connection with such
loans' participation in the TRAK Personalized Investment Advisory Service (the
TRAK Program). In addition, PTE 92-77 permits the provision, by the Consulting
Group Division of Shearson Lehman (the Consulting Group), of investment
advisory services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's selection of a
portfolio (the Portfolio) in the TRAK Program for the investment of Plan
assets. These transactions are described in a notice of pendency that was
published in the Federal Register on April 3, 1992 at 57 FR 11514. PTE 92-77 is
effective as of April 3, 1992.
If granted, the proposed exemption would replace PTE 92-77, which as discussed
below, expired by operation of the law. The new proposed exemption would permit
the replacement of Shearson Lehman with a newly-merged entity known as "Smith
Barney Shearson, Inc." It would also permit the adoption of a daily-traded
collective investment fund (the GIC Fund) for Plans providing for participant
directed investments (the Section 404(c) Plans). The proposed exemption would
provide conditional relief that is identical to that provided by PTE 92-77. In
addition, the proposed exemption would affect participants and beneficiaries
of, and fiduciaries with respect to, Plans participating in the TRAK Program.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before the expiration of 60 days from the publication of
this proposed exemption in the Federal Register. If granted, the proposed
exemption will be effective July 31, 1993 for transactions that are covered by
PTE 92-77. With respect to transactions involving the GIC Fund, the proposed
exemption will be effective as of the date the grant notice is published in the
Federal Register.
ADDRESSES: All written comments and requests for a public hearing (preferably,
three copies) should be sent to the Office of Exemption Determinations, Pension
and Welfare Benefits Administration, Room N-5849, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210. Attention: Application Nos. D-
9337 and D-9415. The applications pertaining to the proposed exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration. U.S.
Department of Labor, Room N-3307, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S. Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency before the
Department of a proposed exemption that would replace PTE 92-77. PTE 92-77
provides an exemption from certain prohibited transaction restrictions of
section 406 of the Employee Retirement Income Security Act of 1974 (the Act)
and from the sanctions resulting from the application of section 4975 of the
Internal Revenue Code of 1986 (the Code), as amended, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an application
filed by SBS pursuant to section 408(a) of the Act and section 4975(c)(2) of
the Code, and in accordance with the procedures (the Procedures) set forth in
29 CFR Part 2570, Subpart 3 (55 FR 32836, August 10, 1990). Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor. Accordingly,
this proposed replacement exemption is being issued solely by the Department.
As stated briefly above, PTE 92-77 allows Shearson Lehman to make the TRAK
Program available to Plans that acquire shares in the Trust subject to certain
conditions. Specifically, PTE 92-77 provides exemptive relief from section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of the Code,
with respect to the purchase or redemption of shares in the Trust by Plans
investing therein. In addition, PTE 92-77 provides exemptive relief from the
restrictions of section 408(b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason of
section 4975(c)(1)(E) of the Code, with respect to the provision, by the
Consulting Group of Shearson Lehman, of investment advisory services to an
Independent Plan Fiduciary of a Plan participating in the TRAK Program which
may result in such fiduciary's selection of a Portfolio in the TRAK Program for
the investment of Plan assets.
Subsequent to the granting of PTE 92-77, Shearson Lehman informed the
Department that it had signed an asset purchase agreement with Primerica
Corporation (Primerica) and Smith Barney Harris Upham & Company, Inc. (Smith
Barney), an indirect wholly owned subsidiary. The terms of the agreement
provided for the sale of substantially all of the assets of Shearson Lehman and
its Asset Management Divisions (collectively, the Shearson Divisions) to Smith
Barney./1/ The transaction was completed on July 31, 1993. As a result of the
transaction, most of the assets and business of the Shearson Divisions were
transferred to Smith Barney which, upon merger with Shearson Lehman, was
renamed "Smith Barney Shearson." (Smith Barney Shearson is denoted herein as
SBS.) Shearson Lehman received cash and an interest-bearing note from SBS. As
further consideration for the asset sale, SBS agreed to pay future contingent
amounts based upon the combined performance of SBS and certain other Shearson
Divisions acquired from Shearson Lehman. Shearson Lehman also assigned to the
American Express Company (American Express) the right to receive 2.5 million
shares of certain convertible preferred stock issued by Primerica and a
warrant. As consideration for the assignment, American Express agreed to pay
Shearson Lehman for the stock and the warrant based on their value as of March
12, 1993, the date of the Asset Purchase Agreement. At present, SBS offers the
TRAK Program to investors through one or more of its subsidiaries or divisions.
Since PTE 92-77 was granted, SBS informed the Department that it wished to
modify the exemption in order to improve the TRAK Program and make it more
responsive to the needs of investors. Specifically, SBS proposes to add to the
Portfolios currently available under
- -------
/1/ Shearson Lehman's other primary division, Lehman Brothers, which is
responsible for securities underwriting, financial advisory, investment and
merchant banking services and commodities trading as a principal and agent has
been retained by Shearson Lehman it has been renamed "Lehman Brothers Inc."
B-13
<PAGE>
the TRAK Program, the GIC Fund, which is designed to invest primarily in
guaranteed investment contracts (the GIC's), synthetic GIC products and/or
units of other GIC collective funds. The GIC Fund will not differ in any
material respects from the Government Money Investments Portfolio which
generally permits daily redemptions of its shares. In addition, the GIC Fund
will operate in a manner that is consistent with the requirements of PTE 92-77.
SBS believes it is important to offer the GIC Fund to Section 404(c) Plans
because these Plans may prefer to offer participants this type of investment
option instead of the Government Money Investments Portfolio presently offered
to such Plans under the TRAK Program. Therefore, SBS requests exemptive relief
in order that the GIC Fund may be added to the Portfolios that are available
under the Trust.
The proposed GIC Fund will be a collective trust fund established and
maintained by Smith Barney Shearson Trust Company (SBS Trust), a wholly owned
subsidiary of Primerica. The GIC Fund will invest primarily in a portfolio of
GICs with varying maturities issued by highly-rated insurance companies, and/or
units of other collective funds invested in GICs. The GIC Fund may also invest
in asset-backed investment products designed to offer risk and return
characteristics similar to those of GICs (i.e., synthetic GIC products). In
addition, the GIC Fund may hold short-term, low risk securities where the
investment of all fund assets in GICs and/or units of other GIC collective
funds is not feasible.
SBS Trust will serve as the trustee of the GIC Fund. SBS Trust will employ a
sub-adviser (the Sub-Adviser) which is independent of SBS and its affiliates to
make recommendations on purchases of GICs and/or units of other GIC collective
funds. Currently, SBS Trust employs Morley Capital Management (Morley Capital)
of Lake Oswego, Oregon as the Sub-Adviser of the GIC Fund. SBS Trust will also
employ Boston Company Investors Services Group (ISG), a business group of The
Boston Company to provide custody and valuation services and The Shareholder
Services Group, Inc. (TSSG), an entity which is indirectly owned by American
Express, as transfer agent. Both ISG and TSSG are not affiliated with SBS.
SBS represents that the GIC Fund will not pay a management or other similar
fee to it or SBS Trust. (SBS Trust's fees for general trust services provided
to a Section 404(c) Plan is included in such plan's investment advisory or
"outside" fee.) A management fee may be paid to Morley Capital or any other
Sub-Adviser which is independent of SBS and its affiliates. The GIC Fund will
pay ISG, as custodian and provider of fund valuation services, a fee for such
services, and TSSG, as transfer agent, a fee of $8.50 to $9.50 per Section
404(c) Plan, plus out-of-pocket expenses. With respect to the fees paid to SBS
and its affiliates, the GIC Fund will not differ materially from the Government
Money Investments Portfolio in that it will not pay a management or other
similar fee to SBS or SBS Trust.
SBS will describe the GIC Fund, in the prospectus (the Prospectus) and
promotional materials it furnishes to Section 404(c) Plan participants who are
interested in investing in the GIC Fund. Such disclosures will reflect, in all
material respects, the information discussed above.
Because of the foregoing material changes to the factual representations
supporting PTE 92-77, the Department has determined that the prior exemption
was no longer effective as of July 31, 1993, the date Shearson Lehman sold the
assets described above to SBS. Thus, the Department is of the view that PTE 92-
77 would be unavailable for use by SBS and its subsidiaries with respect to the
subject transactions.
Accordingly, the Department has decided to publish a new exemption which, if
granted, would replace PTE 92-77. Under the replacement exemption, all
references to Shearson Lehman would be replaced with references to SBS. In
addition, the replacement exemption would incorporate the new GIC Fund, SBS
Trust, ISG and TSSG. Further, the replacement exemption would have an effective
date of July 31, 1993 for transactions described in PTE 92-77. With respect to
transactions involving the GIC Fund, the replacement exemption would become
effective as of the date of the grant of the notices of pendency.
NOTICE TO INTERESTED PERSONS
Notice of the proposed exemption will be mailed by first class mail to each
Plan which invests in the TRAK Program. The notice will contain a copy of the
notice of proposed exemption as published in the Federal Register and an
explanation of the rights of interested persons to comment on and/or request
such a hearing with respect thereto. Such notice will be sent to the above-
named parties within 30 days of the publication of the proposed exemption in
the Federal Register. Written comments and hearing request are due within 60
days of the publication of the proposed exemption in the Federal Register.
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) This fact that a transaction is the subject of an exemption under section
408(a) of the Act and section 4973(c)(2) of the Code does not relieve a
fiduciary or other party in interest or disqualified person from certain other
provisions of the Act and the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting the plan solely
in the interest of the participants and beneficiaries of the plan and in a
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the Plan operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) Before an exemption can be granted under section 408(a) of the Act and
section 4975(c)(2) of the Code, the Department must find that the exemption is
administratively feasible, in the interest of the plan and of its participants
and beneficiaries and protective of the rights of participants and
beneficiaries of the plan; and
(3) The proposed exemption, if granted, will be supplemental to, and not in
derogation of, any other provisions of the Act and the Code, including
statutory or administrative exemptions. Furthermore, the fact that a
transaction is subject to an administrative or statutory exemption is not
dispositive of whether the transaction is in fact a prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the proposed
exemption, if granted, will be applicable to the transactions previously
described in PTE 92-77 only if the conditions specified therein are met.
WRITTEN COMMENTS AND HEARING REQUESTS
All interested persons are invited to submit written comments or requests for
a hearing on the proposed replacement exemption to the address above, within
the time period set forth above. All comments will be made a part of the
record. Comments and requests for a hearing should state the reasons for the
writer's interest in the proposed exemption. Comments received will be
available for public inspection with the referenced applications at the address
set forth above.
PROPOSED EXEMPTION
Under the authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the Procedures cited above,
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<PAGE>
the Department proposes to replace PTE 92-77 as follows:
Section 1. Covered Transactions
(a) The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by Plans in the SBS-established Trust in connection with
such Plans' participation in the TRAK Personalized Investment Advisory Service.
(b) The restrictions of action 406(b) of the Act and the sanctions resulting
from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) and (F) of the Code, shall not apply to the provision, by the
Consulting Group, of investment advisory services to an Independent Plan
Fiduciary of a participating Plan which may result in such fiduciary's
selection of a Portfolio in the TRAK Program for the investment of Plan assets.
The proposed exemption is subject to the following conditions that are set
forth in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of SBS and/or its affiliates covered by an IRA not subject
to Title I of the Act will be considered an Independent Plan Fiduciary with
respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(f) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(g) The Consulting Group will generally give investment advice in writing to
an Independent Plan Fiduciary with respect to all available Portfolios.
However, in the case of a Section 404(c) Plan, the Consulting Group will
provide investment advice that is limited to the Portfolios made available
under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment discretion
over a Portfolio will be independent of SBS and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any securities
that are issued by SBS and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will not exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio (with the exception of
the Government Money Investments Portfolio and the GIC Fund Portfolio for which
the Consulting Group and SBS Trust will retain no investment management fee)
which contains investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(1) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the investment
objectives of the Portfolios comprising the Trust, the policies employed to
achieve these objectives, the corporate affiliation existing between the
Consulting Group, SBS and its subsidiaries and the compensation paid to such
entities.
(B) Upon written or oral request to SBS, a Statement of Additional Information
supplementing the Prospectus which describes the types of securities and other
instruments in which the Portfolios may invest, the investment policies and
strategies that the Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(D) Upon written request of SBS, a copy of the respective investment advisory
agreement between the Consulting Group and the Sub-Advisers.
(E) In the case of a section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by an SBS
Financial Consultant (the Financial Consultant) to eligible participants in
such Plan, of the services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the proposed replacement
exemption.
(2) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, is required to acknowledge in writing, prior
to purchasing Trust shares that such fiduciary has received copies of the
documents described above in subparagraph (k)(1) of this section.
(3) With respect to a section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to SBS that such fiduciary is (a) independent of SBS and its
affiliates and (b) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to SBS that such fiduciary is
(a) independent of SBS and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets and (c) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan receives
the following written or oral disclosures with respect to its ongoing
participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include financial
statement for the Trust and investment management fees paid by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(3) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing, Plan level asset allocation, Plan cash flow analysis and
B-15
<PAGE>
annualized risk adjusted rates of return for Plan investments. In addition, if
required by such arrangement, Financial Consultants will meet periodically with
Independent Plan Fiduciaries of section 404(c) Plans to discuss the report as
well as with eligible participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all Plans of the
(a) percentage of each Portfolio's brokerage commissions that are paid to SBS
and its affiliates and (b) the average brokerage commission per share paid by
each Portfolio to SBS and its affiliates; as compared to the average brokerage
commission per share paid by the Trust to brokers other than SBS and its
affiliates, both expressed as cents per share.
(m) SBS shall maintain, for a period of six years, the records necessary to
enable the persons described in paragraph (n) of this section to determine
whether the conditions of this exemption have been met, except that (1) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of SBS and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (2) no party in
interest other than SBS shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this section shall be unconditionally
available at their customary location during normal business hours by:
(A) Any duly authorized employee or representative of the Department or the
Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of SBS or
commercial or financial information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) An "affiliate" of SBS includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with SBS. (For purposes of
this subsection, the term "control" means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(b) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of SBS and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan.
(2) A participant in a Keogh Plan.
(3) An individual covered under a self-directed IRA which invests in Trust
shares, or
(4) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a Title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for transactions
involving the GIC Fund. The exemption will be effective upon its grant with
respect to the inclusion of the GIC Fund in the TRAK Program.
The availability of this proposed exemption is subject to the express
condition that the material facts and representations contained in the
applications for exemption are true and complete and accurately describe all
material terms of the transactions. In the case of continuing transactions, if
any of the material facts or representations described in the applications
change, the exemption will cease to apply as of the date of such change. In the
event of any such change, an application for a new exemption must be made to
the Department.
For a more complete statement of the facts and representations supporting the
Department's decision to grant PTE 92-77, refer to the proposed exemption and
grant notice which are cited above.
Signed at Washington, D.C. this 23rd day of March, 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-7271 Filed 3-28-94; 8:45 am]
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<PAGE>
- --------------------------------------------------------------------------------
[PROHIBITED TRANSACTION EXEMPTION 94-45; APPLICATION NOS. D-9337 AND D-9415]
SMITH BARNEY, INC. (SBI) LOCATED IN NEW YORK, NY
AGENCY: Pension and Welfare Benefits Administration.
ACTION: Grant of individual exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, Inc.
(Shearson Lehman).
- --------------------------------------------------------------------------------
SUMMARY: This document contains an individual exemption which supersedes PTE
92-77 (57 FR 45833, October 5, 1992)./1/ This exemption permits the replacement
of Shearson Lehman with an entity known as "Smith Barney Inc."/2/ It also
allows SBI to adopt a daily-traded collective investment fund (the GIC Fund)
for Plans investing in the Consulting Group Capital Markets Funds (the Trust).
The exemption provides conditional relief that is identical to that provided by
PTE 92-77 and it will affect participants and beneficiaries of, and fiduciaries
with respect to, Plans participating in the Trust.
EFFECTIVE DATE: This exemption is effective July 31, 1993 for transactions that
are covered by PTE 92-77. With respect to transactions involving the GIC Fund,
the exemption is effective March 29, 1994.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S. Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: On March 29, 1994, the Department of Labor (the
Department) published a notice of proposed exemption (the Notice) in the
FEDERAL REGISTER (59 FR 14680) that would replace PTE 92-77. PTE 92-77 provides
an exemption from certain prohibited transaction restrictions of section 406 of
the Employee Retirement Income Security Act of 1974 (the Act) and from the
sanctions resulting from the application of section 4975 of the Internal
Revenue Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of
the Code. The proposed exemption was requested in an application filed by SBI
pursuant to section 408(a) of the Act and section 4975(c)(2) of the Code, and
in accordance with the procedures (the Procedures) set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990). Effective December 31, 1978,
section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978) transferred the authority of the Secretary of the Treasury to issue
exemptions of the type requested to the Secretary of Labor. Accordingly, this
replacement exemption is being issued solely by the Department.
The Notice gave interested persons an opportunity to comment on the proposed
exemption and to request a public hearing. The only written comments submitted
to the Department during the comment period were made by SBI. These comments
expressed SBI's substantive concerns about the Notice and offered suggestions
for clarifying certain language of the Notice. Discussed below are SBI's
comments and the Department's responses thereto. Also discussed is a comment
made by the Department.
SBI's Comments
SBI notes that there is an ambiguity regarding the effective date of the GIC
Fund. SBI represents that the Notice provides in the last paragraph under the
heading "Supplementary Information," that with respect to transactions
involving the GIC Fund, the exemption "would become effective as of the date of
the grant of the notice of pendency." However, under the captions EFFECTIVE
DATES and DATES, SBI explains that the Notice states that the exemption will be
effective "upon its grant," or "as of the date the grant notice is published."
Because it was the intention of the parties that the effective date for
transactions involving the GIC Fund would be March 29, 1994, the date of
publication of the Notice in the FEDERAL REGISTER, SBI requests that the
Department make the exemption retroactive to this date for the GIC Fund.
The Department has considered SBI's comment and has made the requested
modification.
SBI wishes to modify the exemption in order that it may offer the GIC Fund to
both fiduciary-directed Plans as well as Plans providing for participant-
directed investments (the Section 404(c) Plans). The Department believes this
comment has merit and that it would be potentially beneficial to participants
and beneficiaries since it provides different types of Plans participating in
the TRAK Program with the opportunity to invest in the GIC Fund.
SBI explains that in the preamble to the Notice there is a statement to the
effect that it will "describe the GIC Fund in a prospectus (the Prospectus) and
promotional materials that will be furnished to Section 404(c) Plan
participants." SBI represents that interests in the GIC Fund are not subject to
the registration and Prospectus delivery requirements of the Securities Act of
1933. Also, SBI points out that the conditions of PTE 92-77 require it to
deliver copies of the Trust Prospectus only to the Plan administrator and not
to the individual participants. Because it has no practical means of delivering
Prospectuses or other disclosures to participants, SBI indicates that the
responsibility for providing these materials to participants rests with the
Plan administrator. In this regard, SBI represents that the disclosure
information it will make available to all Plans proposing to invest in the GIC
Fund will include copies of the Trust Prospectus and a separate description of
the GIC Fund's investment objectives, policies and processes. SBI explains that
its description of the GIC Fund will be designed to provide a participant with
sufficient information in order that the participant can make an informed
investment decision.
The Department concurs with these comments.
In addition to principal comments discussed above, SBI has made certain
technical clarifications and updates to the Notice in the following areas:
(1) General.
a. Redesignations. SBI explains that effective December 31, 1993, Primerica
Corporation changed its name to "The Travelers Inc." and that effective May 9,
1994, the "Trust for TRAK Investments" was renamed "Consulting Group Capital
Markets Funds." Also effective June 1, 1994, "Smith Barney Shearson Inc." was
renamed "Smith Barney Inc."
(2) Supplementary Information.
a. Asset Sale Transaction. SBI explains that the transaction by which Smith
Barney Harris Upham & Company, Inc. (Smith Barney) acquired Shearson Lehman and
its Asset Management Divisions was an asset sale and not a merger. Accordingly,
SBI suggests that the fourth sentence of the third paragraph under the heading
"Supplementary Information," read as follows: "As a result of the transaction,
most of the assets and business of the Shearson divisions were transferred to
- -------
/1/ PTE 92-77 provides exemptive relief from section 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (D) of the Code, with respect to the purchase
or redemption of shares in the Trust for TRAK Investments (which has been
redesignated as the "Consulting Group Capital Markets Funds" and is referred to
herein as the Trust) by Plans investing therein. In addition, PTE 92-77
provides exemptive relief from the restrictions of section 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(E) of the Code, with respect to the
provision, by the Consulting Group of Shearson Lehman, of investment advisory
services to an Independent Plan Fiduciary of a Plan participating in the TRAK
Personalized Investment Advisory Service (the TRAK Program) which may result in
such fiduciary's selection of a Portfolio in the TRAK Program for the
investment of Plan assets.
/2/ Effective June /1/, /1//9//9//4/, Smith Barney Shearson, Inc. (SBS) was
renamed "Smith Barney Inc." Hereinafter, SBS is referred to in this grant
notice as either "Smith Barney Inc." or "SBI."
B-17
<PAGE>
Smith Barney, which was renamed "Smith Barney Shearson Inc.' "
b. Fees Paid to Transfer Agent. SBI represents that in the seventh paragraph
under the heading "Supplementary Information," the Notice states that The
Shareholder Services Group (TSSG), as transfer agent, will charge a fee of
$8.50 to $9.50 per plan for its transfer agency services. While these are the
current expected fee levels, SBI notes that such fees may increase or decrease
in the future. Because TSSG is no longer an affiliate, SBI requests that the
paragraph be amended to provide that TSSG as transfer agent will receive a
reasonable fee for its services rather than specifying a precise dollar amount.
(3) General Conditions.
a. Written Disclosures. Section II(k)(1)(F) of the General Conditions of the
Notice states that SBI will provide copies of PTE 92-77 and documents
pertaining to the proposed replacement exemption to each Plan participating in
the TRAK Program. SBI wishes to clarify that the "documents pertaining to the
proposed replacement exemption" refer to copies of the Notice and, when issued,
the final exemption.
The Department concurs with the above supplemental clarifications to the
Notice that have been made by SBI and hereby incorporates these changes, as
well as the substantive changes also described above, by reference into the
Notice and, where applicable, into this final exemption.
Department's Comment
Section III of the Notice, which is captioned "Definitions," provides several
meanings of the term "Independent Plan Fiduciary" in subparagraph (b). For
purposes of the exemption, the term "Independent Plan Fiduciary" may include a
Plan administrator, a participant in a Keogh Plan, an individual covered under
a self-directed IRA or a trustee of a Title I Plan that does not permit
participant-directed investments as contemplated under section 404(c) of the
Act. However, due to an oversight, the definition does not extend to a
participant in a Section 404(c) Plan. Because the TRAK Program is being
marketed as an investment alternative to Section 404(c) Plans and the
individual participant of such Plan makes the decision on whether to invest
therein, the Department has amended the definition of the term "Independent
Plan Fiduciary" by providing a new subparagraph (b)(5) which includes a Section
404(c) Plan participant.
Accordingly, after consideration of the entire exemption record, including the
written comments, the Department has determined to grant the replacement
exemption as modified herein.
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under section
408(a) of the Act and section 4975(c)(2) of the Code does not relieve a
fiduciary or other party in interest or disqualified person from certain other
provisions of the Act and the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting the plan solely
in the interest of the participants and beneficiaries of the plan and in a
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) In accordance with section 408(a) of the Act and section 4975(c)(2) of the
Code, the Department has found that the exemption is administratively feasible,
in the interest of the Plans and their participants and beneficiaries and
protective of the rights of participants and beneficiaries of the Plans; and
(3) The exemption is supplemental to, and not in derogation of, any other
provisions of the Act and the Code, including statutory or administrative
exemptions. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the exemption is
applicable to the transactions previously described in PTE 92-77 only if the
conditions specified therein are met.
EXEMPTION
Under the authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the Procedures cited above, the Department hereby
replaces PTE 92-77 as follows:
Section I. Covered Transactions
(a) The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by Plans in the SBI-established Trust in connection with
such Plans' participation in the TRAK Personalized Investment Advisory Service.
(b) The restrictions of section 406(b) of the Act and the sanctions resulting
from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) and (F) of the Code, shall not apply to the provision, by the
Consulting Group, of investment advisory services to an Independent Plan
Fiduciary of a participating Plan which may result in such fiduciary's
selection of a Portfolio in the TRAK Program for the investment of Plan assets.
The exemption is subject to the following conditions that are set forth in
Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of SBI and/or its affiliates covered by an IRA not subject
to Title I of the Act will be considered an Independent Plan Fiduciary with
respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(f) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(g) The Consulting Group will generally give investment advice in writing to
an Independent Plan Fiduciary with respect to all available Portfolios.
However, in the case of a Section 404(c) Plan, the Consulting Group will
provide investment advice that is limited to the Portfolios made available
under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment discretion
over a Portfolio will be independent of SBI and its affiliates.
(i) immediately following the acquisition by a Portfolio of any securities
that are issued by SBI and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will not exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to
B-18
<PAGE>
such Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any Portfolio (with
the exception of the Government Money Investments Portfolio and the GIC Fund
Portfolio for which the Consulting Group and SBI Trust will retain no
investment management fee) which contains investments attributable to the Plan
investor.
(k) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(1) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the investment
objectives of the Portfolios comprising the Trust, the policies employed to
achieve these objectives, the corporate affiliation existing between the
Consulting Group, SBI and its subsidiaries and the compensation paid to such
entities./3/
(B) Upon written or oral request to SBI, a Statement of Additional Information
supplementing the Prospectus which describes the types of securities and other
instruments in which the Portfolios may invest, the investment policies and
strategies that the Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(D) Upon written request of SBI, a copy of the respective investment advisory
agreement between the Consulting Group and the Sub-Advisers.
(E) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by an SBI
Financial Consultant (the Financial Consultant) to eligible participants in
such Plan, of the services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the replacement exemption.
(2) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received
copies of the documents described above in subparagraph (k)(1) of this Section.
(3) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to SBI that such fiduciary is (a) independent of SBI and its
affiliates and (b) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to SBI that such fiduciary is
(a) independent of SBI and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets and (c) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan receives
the following written or oral disclosures with respect to its ongoing
participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include financial
statement for the Trust and investment management fees paid by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(3) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing, Plan level asset allocations, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the report as well as with
eligible participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all Plans of the
(a) percentage of each Portfolio's brokerage commissions that are paid to SBI
and its affiliates and (b) the average brokerage commission per share paid by
each Portfolio to SBI and its affiliates, as compared to the average brokerage
commission per share paid by the Trust to brokers other than SBI and its
affiliates, both expressed as cents per share.
(m) SBI shall maintain, for a period of six years, the records necessary to
enable the persons described in paragraph (n) of this Section to determine
whether the conditions of this exemption have been met, except that (1) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of SBI and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (2) no party in
interest other than SBI shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this Section shall be unconditionally
available at their customary location during normal business hours by:
(A) Any duly authorized employee or representative of the Department or the
Internal Revenue Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
- -------
/3/ The fact that certain transactions and fee arrangements are the subject of
an administrative exemption does not relieve the Independent Plan Fiduciary
from the general fiduciary responsibility provisions of section 404 of the Act.
In this regard, the Department expects the Independent Plan Fiduciary to
consider carefully the totality of fees and expenses to be paid by the Plan
including the fees paid directly to SBI or to other third parties and paid
directly through the Trust to SBI.
B-19
<PAGE>
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of SBI or
commercial or financial information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) An "affiliate" of SBI includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with SBI. (For purposes of
this subsection, the term "control" means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(b) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of SBI and its affiliates and is either
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,
(2) A participant in a Keogh Plan,
(3) An individual covered under a self-directed IRA which invests in Trust
shares,
(4) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a Title I Plan that does not permit
individual direction as contemplated by Section 404(c) of the Act, or
(5) A participant in a Section 404(c) Plan.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for transactions
involving the GIC Fund. The exemption will be effective March 29, 1994 with
respect to the inclusion of the GIC Fund in the TRAK Program.
The availability of this exemption is subject to the express condition that
the material facts and representations contained in the applications for
exemption are true and complete and accurately describe all material terms of
the transactions. In the case of continuing transactions, if any of the
material facts or representations described in the applications change, the
exemption will cease to apply as of the date of such change. In the event of
any such change, an application for a new exemption must be made to the
Department.
For a more complete statement of the facts and representations supporting the
Department's decision to grant PTE 92-77, refer to the proposed exemption and
grant notice which are cited above.
Signed at Washington, DC, this 16th day of June 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-15006 Filed 6-20-94; 8:45 am]
BILLING CODE 4510-28-P
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<PAGE>
SMITH BARNEY PROVIDES A BROAD RANGE OF INVESTMENT
SERVICES TO INDIVIDUALS, FINANCIAL INSTITUTIONS,
GOVERNMENT AND CORPORATIONS IN THE UNITED STATES AND
AROUND THE WORLD. THE FIRM IS A MEMBER OF TRAVELERS
GROUP, A LEADING DIVERSIFIED FINANCIAL SERVICE COMPANY
LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
TRV.
(C)1996 SMITH BARNEY INC.
TK2088 1/96
29XXX C5
