<PAGE>
CONSULTING GROUP
CAPITAL MARKETS FUNDS
SALOMON SMITH BARNEY
--------------------
a member of citigroup[LOGO]
<PAGE>
TRAK(R)
----------------------------------
Personalized Investment Advisory Service
TRAK Personalized Investment Advisory Service ("TRAK") is a securities
advisory service offered by the Consulting Group (the "Consulting Group") of
Mutual Management Corp. ("MMC") 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.
- --------
* Salomon Smith Barney, through the Consulting Group, also offers TRAK in
connection with investments in mutual funds offered by a variety of no-load
fund families, including Smith Barney funds in load-waived Class A shares,
which cover a spectrum of investments. For more information about investing
in TRAK with funds from select no-load fund families, you should contact
your Salomon Smith Barney Financial Consultant. The fees and other
compensation received by Salomon Smith Barney in connection with TRAK with
funds from select no-load fund families may be different from the fees and
other compensation received by Salomon Smith Barney in connection with TRAK
with the Consulting Group Capital Markets Funds.
i
<PAGE>
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:
<TABLE>
<S> <C>
(1) Government Money Investments (8) Large Capitalization Value Equity
(2) Intermediate Fixed Income Investments
Investments (9) Large Capitalization Growth Investments
(3) Long-Term Bond Investments (10) Small Capitalization Value Equity Investments
(4) Municipal Bond Investments (11) Small Capitalization Growth Investments
(5) Mortgage Backed Investments (12) International Equity Investments
(6) High Yield Investments (13) International Fixed Income Investments
(7) Balanced Investments (14) Emerging Markets Equity Investments
</TABLE>
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 Salomon 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 a periodic Review highlighting all TRAK activity
for the preceding period. 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, in
providing coordinated personalized investment advice and investment advisor
selection services. The predecessor of the Consulting Group was established in
1973 with the primary objective of matching the investment needs of
(continued)
ii
<PAGE>
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 Mutual
Management Corp. ("MMC"). Each of the Portfolios benefits from discretionary
advisory services from an investment adviser (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:
<TABLE>
<S> <C>
.Government Money Investments .Large Capitalization Value Equity
.Intermediate Fixed Income Investments Investments
.Long-Term Bond Investments .Large Capitalization Growth
.Municipal Bond Investments Investments
.Mortgage Backed Investments .Small Capitalization Value Equity
.High Yield Investments Investments
.Balanced Investments .Small Capitalization Growth
Investments
.International Equity Investments
.International Fixed Income
Investments
.Emerging Markets Equity Investments
</TABLE>
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 to participants in advisory programs
sponsored by Salomon Smith Barney Inc. ("Salomon Smith Barney"), including the
TRAK (R) Personalized Investment Advisory Service ("TRAK"), which 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 (collectively, "Salomon Smith Barney Advisory Services"). The
Portfolios may also be offered to participants in other investment advisory
services offered by qualified investment advisers not affiliated with
Salomon Smith Barney (each an "Advisory Service" and collectively with
Salomon Smith Barney Advisory Services the "Advisory Services").
Participation in an Advisory Service is subject to payment of a separate
investment advisory fee at rates that may be subject to negotiation based
on levels of services as agreed upon with clients. Currently the maximum
annual rate for assets invested in the
Portfolios under a Salomon Smith Barney Advisory Service is 1.50%. 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
an Advisory Service.
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.
High Yield Investments may invest up to 100% of its net assets in non-
investment grade securities, commonly referred to as "junk bonds." Junk bonds
are high risk and considered speculative with regard to payment of interest
and return of principal. Purchasers should carefully consider the risks
associated with an investment in this Portfolio prior to investing.
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 Salomon 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.
November 27, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................. 2
Advisory Service Fees; Portfolio
Expenses........................... 5
Financial Highlights................ 7
Objectives and Policies of the Port-
folios............................. 15
Management of the Trust............. 33
Purchase of Shares.................. 40
Redemption of Shares................ 42
Net Asset Value..................... 43
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Exchange Privilege.................................................... 44
Dividends, Distributions and Taxes.................................... 44
Custodian and Transfer Agent.......................................... 46
Distributor........................................................... 46
Performance of the Portfolios......................................... 46
Additional Information................................................ 48
Appendix A............................................................ A-1
Appendix B............................................................ B-1
</TABLE>
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 14
Portfolios:
. Government Money Investments, whose Advisor is Standish, Ayer & Wood,
Inc. ("Standish, Ayer").
. Intermediate Fixed Income Investments, whose Advisor is Standish, Ayer.
. Long-Term Bond Investments, whose Advisor is National Asset Management
Corp. ("National Asset Mgmt.").
. Municipal Bond Investments, whose Advisor is Smith Affiliated Capital
Corp. ("Smith Affiliated").
. Mortgage Backed Investments, whose Advisor is Atlantic Portfolio
Analytics & Management, Inc. ("APAM").
. High Yield Investments, whose Advisor is Alliance Capital Management L.P.
("Alliance Capital").
. Balanced Investments, whose Advisor is Palley-Needelman Asset Management,
Inc. ("Palley-Needelman").
. Large Capitalization Value Equity Investments, whose Advisors are The
Boston Company Asset Management, Inc. ("TBCAM") and Parametric Portfolio
Associates ("Parametric").
. Small Capitalization Value Equity Investments, whose Advisors are NFJ
Investment Group ("NFJ"), David L. Babson & Co. Inc. ("Babson") and
Mellon Capital Management Corporation ("Mellon Capital").
. Large Capitalization Growth Investments, whose Advisors are Provident
Investment Counsel Inc. ("Provident") and Barclays Global Fund Advisors
("BGFA").
. Small Capitalization Growth Investments, whose Advisors are Wall Street
Associates ("WSA"), Westpeak Investment Advisors, L.P. ("Westpeak") and
Mellon Capital.
. International Equity Investments, whose Advisors are Oechsle
International Advisers, LLC ("Oechsle LLC") and State Street Global
Advisors ("State Street").
. International Fixed Income Investments, whose Advisor is Julius Baer
Investment Management Inc. ("Julius Baer").
. Emerging Markets Equity Investments, whose Advisors are AIB Govett, Inc.
("Govett"), State Street and Baring Asset Management, Inc. ("Baring").
Management. The Consulting Group, a division of MMC, 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. MMC serves as the Portfolios' administrator and
generally manages all aspects of the Trust's administration and operation. See
"Management of the Trust."
2
<PAGE>
Advisory Services, Purchase and Redemption of Shares. Shares of the
Portfolios are offered to or for the benefit of participants in Advisory
Services. TRAK is one such investment advisory service pursuant to which the
Consulting Group in its capacity as investment adviser 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. Shares of the Portfolios
are offered for purchase and redemption at their respective net asset values
next determined, without imposition of any initial or contingent deferred
sales charge except that 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 advisers. 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
Portfolios' 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, High Yield Investments and 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 through TRAK should be aware that while the Consulting Group
receives a fee as investment adviser from each participant, the Consulting
Group also receives a fee from each Portfolio for its service as the Trust's
Manager with responsibility for identifying, retaining, supervising and
compensating each Portfolio's Advisor. 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."
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through Advisory Services that are based
on an evaluation of an investor's investment objectives
3
<PAGE>
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. Participants in TRAK should recognize that it is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, such 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 other
Advisory Services should evaluate carefully whether the service is ongoing and
continuous, as well as their investment advisers' 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, High Yield
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 The
Chase Manhattan Bank ("Chase") 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 Chase 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."
4
<PAGE>
ADVISORY SERVICE FEES; PORTFOLIO EXPENSES
The following table lists the costs and expenses, including fees for TRAK
(but not those for other 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
unless otherwise noted.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES+
---------------------------------------------
MAXIMUM
SHAREHOLDER ANNUAL MANAGEMENT/1/ DISTRIBUTION TOTAL
TRANSACTION TRAK FEES (NET OF (RULE 12B-1) OTHER OPERATING
EXPENSES FEE* FEE WAIVERS) EXPENSES EXPENSES EXPENSES
----------- ------- ------------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Government Money
Investments............ None 1.50% 0.29% None 0.31% 0.60%
Intermediate Fixed
Income Investments..... None 1.50 0.60 None 0.13 0.73
Long-Term Bond
Investments............ None 1.50 0.60 None 0.22 0.82
Municipal Bond
Investments............ None 1.50 0.60 None 0.20 0.80
Mortgage Backed
Investments............ None 1.50 0.57 None 0.23 0.80
High Yield Investments.. None 1.50 0.90/2/ None 0.30 1.20
Balanced Investments.... None 1.50 0.80 None 0.20 1.00
Large Capitalization
Value Equity
Investments............ None 1.50 0.69 None 0.11 0.80
Large Capitalization
Growth Investments..... None 1.50 0.64 None 0.12 0.76
Small Capitalization
Value Equity
Investments............ None 1.50 0.75 None 0.19 0.94
Small Capitalization
Growth Investments++... None 1.50 0.79 None 0.22 1.01
International Equity
Investments............ None 1.50 0.73 None 0.17 0.90
International Fixed
Income Investments..... None 1.50 0.70 None 0.27 0.97
Emerging Markets
Equity Investments..... None 1.50 1.10 None 0.59 1.69
</TABLE>
- --------
+ As a percentage of average net assets.
++ The management fee has been restated to reflect a management fee increase
for the fiscal year ending August 31, 1998.
* As a percentage of the value of Portfolio shares held on the last calendar
day of the previous quarter per annum.
/1/The management fee includes a fee each Portfolio pays MMC for
administration services of 0.20% of the value of the Portfolio's average
daily net assets.
/2/"Management fees" have been restated to reflect the management fee
currently in effect for High Yield Investments. Management fees were
waived to a greater extent during the last fiscal year.
Management Fees; Expenses. Each Portfolio pays the Manager a fee for its
services that is computed daily and paid monthly at an 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. The Manager and
MMC (the "Agents") may voluntarily waive a portion or all of their respective
fees otherwise payable to them and the "Total Operating Expenses" without fee
waivers would have been 0.66%, and 0.93% for Government Money Investments and
Mortgage Backed Investments, respectively. In addition, High Yield Investments
would have incurred "Total Operating Expenses" of 2.42% which includes
reimbursement of other fees by the Manager of 0.35%.
5
<PAGE>
Based on the Portfolio expenses set forth above, including an Advisory
Service fee of 1.50%, 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 70 119 253
Long-Term Bond Investments........... 24 72 124 266
Municipal Bond Investments........... 23 72 123 264
Mortgage Backed Investments.......... 23 72 123 264
High Yield Investments............... 27 84 143 303
Balanced Investments................. 25 78 133 284
Large Capitalization Value Equity
Investments......................... 23 72 123 264
Large Capitalization Growth
Investments......................... 23 71 121 260
Small Capitalization Value Equity
Investments......................... 25 76 130 278
Small Capitalization Growth
Investments......................... 25 78 134 285
International Equity Investments..... 24 75 128 274
International Fixed Income
Investments......................... 25 77 132 281
Emerging Markets Equity Investments.. 32 98 167 349
</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%.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the four years ended August 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Trust's Annual Report dated August 31, 1998. The following
information for each of the fiscal years or periods in the three-year period
ended August 31, 1994 has been audited by other independent auditors. This
information should be read in conjunction with the financial statements and
related notes that also appear in the Trust's Annual Report dated August 31,
1998, which is available upon request and incorporated by reference into the
Statement of Additional Information.
GOVERNMENT MONEY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
Net investment in-
come#................. 0.05 0.05 0.05 0.05 0.03 0.03 0.03
Dividends from net in-
vestment income....... (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.03)
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 5.10% 4.98% 5.02% 5.24% 3.10% 2.76% ++2.72%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $375,761 $388,713 $278,162 $241,590 $184,656 $84,034 $30,353
Ratios to Average Net
Assets:
Expenses+.............. 0.60% 0.60% 0.60% 0.60% 0.55% 0.50% 0.49%**
Net investment income.. 4.99 4.91 4.93 5.14 3.16 2.71 3.37 **
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1998, 1997, 1996, 1995, 1994,
and 1993 and the period ended August 31, 1992 were 0.66%, 0.64%, 0.72%,
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 for the
years ended August 31, 1998, 1997, 1996, 1995, 1994 and 1993 and the period
ended August 31, 1992 were $0.05, $0.04, $0.04, $0.00, $0.00, $0.01 and
$0.02, respectively.
++Total return is not annualized, as it may not be representative of the
total return for the year.
INTERMEDIATE FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.06 $ 7.92 $ 8.10 $ 7.92 $ 8.58 $ 8.25 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income (loss) from oper-
ations:
Net investment
income#............... 0.48 0.50 0.50 0.50 0.47 0.51 0.34
Net realized and
unrealized
gain/(loss)........... 0.15 0.14 (0.17) 0.16 (0.56) 0.33 0.25
-------- -------- -------- -------- -------- -------- -------
Total Income (Loss) From
Operations............. 0.63 0.64 0.33 0.66 (0.09) 0.84 0.59
-------- -------- -------- -------- -------- -------- -------
Less Distributions From:
Net investment income.. (0.50) (0.50) (0.51) (0.48) (0.50) (0.48) (0.34)
Net realized gains..... -- -- -- -- (0.06) (0.03) --
Capital................ -- -- -- -- (0.01) -- --
-------- -------- -------- -------- -------- -------- -------
Total Distributions..... (0.50) (0.50) (0.51) (0.48) (0.57) (0.51) (0.34)
======== ======== ======== ======== ======== ======== =======
NET ASSET VALUE, End of
Year................... $ 8.19 $ 8.06 $ 7.92 $ 8.10 $ 7.92 $ 8.58 $ 8.25
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 8.00% 8.23% 4.08% 8.70% (1.13)% 10.59% ++7.53%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $574,998 $384,094 $296,053 $246,323 $223,548 $140,580 $58,545
Ratios to Average Net
Assets:
Expenses+.............. 0.73% 0.73% 0.73% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 5.95 6.19 5.78 6.40 5.77 5.94 6.00 **
Portfolio turnover
rate................... 63% 118% 98% 98% 86 % 92% 169%
</TABLE>
- --------
++Total return is not annualized, as it may not be representative of the total
return for the year.
* The Portfolio commenced operations on November 18, 1991.
+ Annualized operating expense ratios before fees waived 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 Agents, for the year ended
August 31, 1993 and the period ended August 31, 1992 was $0.50 and $0.31,
respectively.
** Annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LONG-TERM BOND INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.26 $ 7.87 $ 8.23 $ 7.86 $ 8.70 $ 8.26 $ 8.00
-------- -------- -------- -------- ------- ------- -------
Income (Loss) From Oper-
ations:
Net investment income#. 0.52 0.53 0.51 0.45 0.38 0.47 0.31
Net realized and
unrealized
gain/(loss)........... 0.78 0.46 (0.41) 0.36 (0.75) 0.42 0.26
-------- -------- -------- -------- ------- ------- -------
Total Income (Loss) from
Operations............. 1.30 0.99 0.10 0.81 (0.37) 0.89 0.57
Less Distributions From:
Net investment income.. (0.51) (0.59) (0.46) (0.44) (0.41) (0.45) (0.31)
Net realized gains..... -- -- -- -- (0.06) -- --
Capital................ -- (0.01) -- -- (0.00)@ -- --
-------- -------- -------- -------- ------- ------- -------
Total Distributions..... (0.51) (0.60) (0.46) (0.44) (0.47) (0.45) (0.31)
-------- -------- -------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year................... $ 9.05 $ 8.26 $ 7.87 $ 8.23 $ 7.86 $ 8.70 $ 8.26
======== ======== ======== ======== ======= ======= =======
Total Return++.......... 16.22% 12.93% 1.11% 10.71% (3.93)% 11.08% ++7.37%
======== ======== ======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............. $157,612 $183,051 $155,910 $137,545 $94,628 $64,734 $34,986
Ratios to Average Net
Assets:
Expenses+.............. 0.82% 0.78% 0.80% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 5.96 6.54 6.18 5.80 5.34 5.40 5.69**
Portfolio turnover rate. 63% 34% 125% 62% 43 % 35% 4%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, 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
Agents, for the years ended August 31, 1995, 1994 and 1993 and the period
ended August 31, 1992 were $0.44, $0.37, $0.45 and $0.25, respectively.
@ Amount represents less than $/0/./01/ per portfolio share.
++Total return is not annualized as it may not be representative of the total
return for the year.
** Annualized.
MUNICIPAL BOND INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.62 $ 8.26 $ 8.27 $ 8.06 $ 8.85 $ 8.25 $ 8.00
------- -------- -------- -------- ------- ------- -------
Income (Loss) From Oper-
ations:
Net investment income#. 0.36 0.38 0.38 0.40 0.40 0.41 0.30
Net realized and
unrealized
gain/(loss)........... 0.32 0.34 -- 0.21 (0.71) 0.62 0.25
------- -------- -------- -------- ------- ------- -------
Total Income (Loss) From
Operations............. 0.68 0.72 0.38 0.61 (0.31) 1.03 0.55
Less Distributions From:
Net investment income.. (0.38) (0.36) (0.39) (0.40) (0.40) (0.41) (0.30)
Net realized gains..... -- -- -- (0.00)@ (0.05) (0.02) --
Capital................ -- -- -- -- (0.03) -- --
------- -------- -------- -------- ------- ------- -------
Total Distributions..... (0.38) (0.36) (0.39) (0.40) (0.48) (0.43) (0.30)
------- -------- -------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year................... $ 8.92 $ 8.62 $ 8.26 $ 8.27 $ 8.06 $ 8.85 $ 8.25
======= ======== ======== ======== ======= ======= =======
Total Return++.......... 8.09% 8.88% 4.62% 7.86% (3.78)% 12.94% ++7.06%
======= ======== ======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............. $72,511 $ 52,024 $ 46,485 $ 45,356 $56,625 $47,811 $21,795
Ratios to Average Net
Assets:
Expenses+.............. 0.80% 0.80% 0.80% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 4.20 4.50 4.59 4.99 4.59 4.76 4.71**
Portfolio turnover rate. 160% 31% 29% 49% 132 % 15% 76%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1997, 1996, 1995, 1994 and 1993
and the period ended August 31, 1992 were 0.83%, 1.02%, 1.04%, 0.93%, 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
Agents, for the years ended August 31, 1997, 1996, 1995, 1994 and 1993 and
the period ended August 31, 1992 were $0.38, $0.36, $0.38, $0.39, $0.39 and
$0.24, respectively.
@ Amount represents less than $/0/./01/ per portfolio share.
++Total return is not annualized, as it may not be representative of the total
return for the year.
** Annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
MORTGAGE BACKED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 7.96 $ 7.74 $ 7.91 $ 7.69 $ 8.21 $ 8.19 $ 8.00
-------- -------- -------- ------- -------- ------- -------
Income From Operations:
Net investment income#. 0.46 0.48 0.48 0.51 0.41 0.53 0.40
Net realized and
unrealized
gain/(loss)........... 0.19 0.25 (0.14) 0.22 (0.41) 0.00@ 0.19
-------- -------- -------- ------- -------- ------- -------
Total Income From Opera-
tions.................. 0.65 0.73 0.34 0.73 0.00 0.53 0.59
Less Distributions From:
Net investment income.. (0.48) (0.51) (0.48) (0.49) (0.41) (0.42) (0.40)
Net realized gains..... -- -- -- -- (0.04) (0.04) --
Capital................ -- -- (0.03) (0.02) (0.10) (0.05) --
-------- -------- -------- ------- -------- ------- -------
Total Distributions..... (0.48) (0.51) (0.51) (0.51) (0.55) (0.51) (0.40)
-------- -------- -------- ------- -------- ------- -------
NET ASSET VALUE, End of
Year................... $ 8.13 $ 7.96 $ 7.74 $ 7.91 $ 7.69 $ 8.21 $ 8.19
======== ======== ======== ======= ======== ======= =======
Total Return++.......... 8.37 % 9.69 % 4.37 % 9.96 % (0.20)% 6.68 % ++7.56 %
======== ======== ======== ======= ======== ======= =======
NET ASSETS, End of Year
(in 000's)............. $156,043 $136,586 $120,945 104,789 $120,427 $94,421 $35,694
Ratios to Average Net
Assets:
Expenses+.............. 0.80 % 0.80 % 0.80 % 0.80 % 0.80 % 0.80 % 0.79 %**
Net investment income.. 5.69 6.08 6.09 6.85 6.38 6.53 6.55 **
Portfolio turnover rate. 214 % 94 % 23 % 30 % 53 % 93 % 35 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1998, 1997, 1996, 1995, 1994
and 1993 and the period ended August 31, 1992 were 0.93%, 0.93%, 0.94%,
1.09%, 1.06%, 1.13% and 1.66%, respectively.
# Net investment income before fees waived and/or expenses reimbursed by the
Agents, for the years ended August 31, 1998, 1997, 1996, 1995, 1994 and
1993 and the period ended August 31, 1992 were $0.45, $0.47, $0.47, $0.49,
$0.39, $0.49 and $0.35, respectively.
@ Amount represents less than $0.01 per Portfolio share.
++ Total return represents aggregate total return for the period indicated.
** Annualized.
++Total return is not annualized, or it may not be representative of the
total return for the year.
BALANCED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------
1998 1997 1996 1995 1994 1993*
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 12.01 $ 10.00 $ 9.37 $ 8.63 $ 8.41 $ 8.00
------- ------- ------- ------- ------- ------
Income (Loss) From Oper-
ations:
Net investment income#. 0.26 0.27 0.29 0.26 0.21 0.09
Net realized and
unrealized gain
(loss)................ (0.53) 2.27 0.95 0.81 0.16 0.42
------- ------- ------- ------- ------- ------
Total Income (Loss) From
Operations............. (0.27) 2.54 1.24 1.07 0.37 0.51
Less Distributions From:
Net investment income.. (0.30) (0.27) (0.28) (0.29) (0.15) (0.10)
Net realized gains..... (0.57) (0.26) (0.33) (0.04) -- --
Capital................ -- -- -- -- -- (0.00)@
------- ------- ------- ------- ------- ------
Total Distributions..... 0.87 (0.53) (0.61) (0.33) (0.15) (0.10)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, End of
Year................... $ 10.87 $ 12.01 $ 10.00 $ 9.37 $ 8.63 $ 8.41
======= ======= ======= ======= ======= ======
Total Return++.......... (2.85) % 26.05 % 13.60 % 12.76 % 4.62 % ++6.35 %
======= ======= ======= ======= ======= ======
NET ASSETS, End of Year
(in 000's)............. $68,470 $89,789 $50,281 $30,268 $14,940 $5,258
Ratios to Average Net
Assets:
Expenses+.............. 1.00 % 1.00 % 1.00 % 1.00 % 1.00 % 1.00 %**
Net investment income.. 1.92 2.49 2.85 3.28 2.66 2.67 **
Portfolio turnover rate. 57 % 67 % 47 % 47 % 43 % 10 %
</TABLE>
- --------
* The Portfolio commenced operations on February 16, 1993.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the year ended August 31, 1997, 1996, 1995, and 1994 and
the period ended August 31, 1993 were 1.02%, 1.26%, 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 Agents, for the years ended August 31, 1997, 1996, 1995 and 1994 and
the period ended August 31, 1993 were $0.27, $0.26, $0.20, $0.13 and
$(0.06), respectively.
@ Amount represents less than $0.01 per Portfolio share.
** Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
1998(2)
HIGH YIELD INVESTMENTS -------
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<S> <C>
NET ASSET VALUE, Beginning of Period.................................. $8.00
-------
Income (Loss) From Operations:
Net investment income(1)............................................ 0.05
Net realized and unrealized loss.................................... (0.16)
-------
Total Income (Loss) From Operations................................... (0.11)
-------
Less Distributions From:
Net investment income............................................... --
Net unrealized gains................................................ --
-------
Total Distributions................................................... --
-------
NET ASSET VALUE, End of Period........................................ $7.89
=======
Total Return++........................................................ (1.38)%
=======
Net Assets, End of Period (000s)...................................... $76,557
-------
Ratios to Average Net Assets+......................................... %
Expenses(1)......................................................... 1.20%
Net investment income............................................... 7.37
-------
Portfolio Turnover Rate............................................... 13%
</TABLE>
- --------
(/1/Expense)ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME EXPENSE RATIOS WITHOUT WAIVERS
PER SHARE DECREASE AND REIMBURSEMENTS
--------------------- ------------------------------
1998 1998
--------------------- ------------------------------
<S> <C> <C>
High Yield Investments..... $0.01 2.42%+
</TABLE>
- --------
(/2/)For the period from July 13, 1998 (commencement of operations) to August
31 ,1998.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LARGE CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995++ 1994 1993 1992*
---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 14.91 $ 11.55 $ 10.42 $ 9.39 $ 9.35 $ 8.77 $ 8.00
---------- ---------- ---------- ---------- -------- -------- --------
Income From Operations:
Net investment income#. 0.16 0.23 0.26 0.27 0.17 0.25 0.09
Net realized and
unrealized gain....... 0.08 4.09 1.25 1.16 0.02 0.54 0.68
---------- ---------- ---------- ---------- -------- -------- --------
Total Income From
Operations............. 0.24 4.32 1.51 1.43 0.19 0.79 0.77
Less Distributions From:
Net investment income.. (0.11) (0.34) (0.24) (0.24) (0.15) (0.14) --
Net realized gains..... (2.76) (0.62) (0.14) (0.16) 0.00@ (0.07) --
---------- ---------- ---------- ---------- -------- -------- --------
Total Distributions..... (2.87) (0.96) (0.38) (0.40) (0.15) (0.21) --
---------- ---------- ---------- ---------- -------- -------- --------
NET ASSET VALUE, End of
Year................... $ 12.28 $ 14.91 $ 11.55 $ 10.42 $ 9.39 $ 9.35 $ 8.77
========== ========== ========== ========== ======== ======== ========
Total Return+........... 0.03 % 38.98 % 14.75 % 16.14 % 2.09 % 9.25 % ++9.63 %++
========== ========== ========== ========== ======== ======== ========
NET ASSETS, End of Year
(in 000's)............. $1,712,244 $1,934,747 $1,512,451 $1,070,037 $832,138 $562,507 $197,695
Ratios to Average Net
Assets:
Expenses+++............ 0.80 % 0.78 % 0.80 % 0.83 % 0.88 % 0.95 % 1.24 %**
Net investment income.. 1.18 1.70 2.31 2.93 2.57 2.88 3.24 **
Portfolio turnover rate. 57 % 70 % 24 % 21 % 108 % 47 % 12 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ 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 ratios before fee waivers by the Agents, 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 fee waived by the Agents, for the years ended
August 31, 1995 and 1994 were $0.26 and $0.17, respectively.
++Total return is not annualized, as it may not be representative of the
total return for the year.
** Annualized.
LARGE CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993+++ 1992*
---------- ---------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 17.27 $ 13.10 $ 12.13 $ 10.00 $ 9.76 $ 8.88 $ 8.00
---------- ---------- ---------- -------- -------- -------- -------
Income From Operations:
Net investment income#. 0.04 0.07 0.07 0.09 0.03 0.00 @ 0.01
Net realized and
unrealized gain....... 1.31 4.72 1.46 2.13 0.21 0.89 0.87
---------- ---------- ---------- -------- -------- -------- -------
Total Income From Opera-
tions.................. 1.35 4.79 1.53 2.22 0.24 0.89 0.88
Less Distributions From:
Net investment income.. (0.08) (0.08) (0.06) (0.08) -- (0.01) --
Net realized gains..... (1.24) (0.54) (0.50) (0.01) -- -- --
Capital................ -- -- -- -- -- (0.00)@ --
---------- ---------- ---------- -------- -------- -------- -------
Total Distributions..... (1.32) (0.62) (0.56) (0.09) -- (0.01) --
---------- ---------- ---------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year .................. $ 17.30 $ 17.27 $ 13.10 $ 12.13 $ 10.00 $ 9.76 $ 8.88
========== ========== ========== ======== ======== ======== =======
Total Return++.......... 7.81 % 37.47 % 12.89 % 22.30 % 2.46 % 10.00 % ++11.00 %++
========== ========== ========== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's) ............ $1,793,446 $1,844,817 $1,205,417 $782,394 $457,588 $238,256 $85,401
Ratios to Average Net
Assets:
Expenses+.............. 0.76 % 0.69 % 0.83 % 0.88 % 0.98 % 1.12 % 1.24 %**
Net investment
income/(loss)......... 0.16 0.50 0.63 0.98 0.39 (0.04) 0.31 **
Portfolio turnover rate. 39 % 65 % 40 % 38 % 104 % 47 % 19 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized operating expense ratios before fees waived by the Agents, for
the years ended August 31, 1995 and 1994 were 0.98%, 1.02%, respectively.
+++ 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 Agents, 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.
++Total return is not annualized, as it may not be representative of the
total return for the year.
** Annualized.
++ Total return represents aggregate total return for the period indicated.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 14.45 $ 11.11 $ 10.01 $ 9.03 $ 9.94 $ 8.68 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income (Loss) from
Operations:
Net income#............ 0.17 0.19 0.16 0.15 0.08 0.06 0.03
Net realized and
unrealized
gain/(loss)........... (1.66) 4.22 1.08 0.95 (0.40) 1.31 0.65
-------- -------- -------- -------- -------- -------- -------
Total Income (Loss) From
Operations............. (1.49) 4.41 1.24 1.10 (0.32) 1.37 0.68
Less Distributions From:
Net investment income.. (0.13) (0.19) (0.14) (0.12) (0.07) (0.03) --
Net realized gains..... (1.72) (0.88) -- (0.00)@ (0.52) (0.08) --
-------- -------- -------- -------- -------- -------- -------
Total Distributions..... (1.85) (1.07) (0.14) (0.12) (0.59) (0.11) --
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year................... $ 11.11 $ 14.45 $ 11.11 $ 10.01 $ 9.03 $ 9.94 $ 8.68
======== ======== ======== ======== ======== ======== =======
Total Return++.......... (12.84)% 42.40 % 12.48 % 12.50 % (3.30)% 15.74 % ++8.50%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $740,340 $622,372 $478,884 $340,306 $342,388 $183,051 $93,458
Ratios to Average Net
Assets
Expenses............... 0.94 % 0.90 % 0.95 % 1.11 % 1.06 % 1.11 % 1.24%**
Net investment income.. 1.45 1.62 1.52 1.54 1.12 0.82 0.99**
Portfolio turnover rate. 59 % 53 % 39 % 115 % 65 % 70 % 20%
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized operating expense ratios before fees waived by the Agents, for
the year ended August 31, 1995 and for the period ended August 31, 1992
were 1.13% and 1.40%, respectively.
# Net investment income before fees waived by the Agents, 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.
++Total return is not annualized, as it may not be representative of total
return for the year.
++ Total return represents aggregate total return for the period indicated.
** Annualized.
SMALL CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
1998 1997 1996 1995+++ 1994+++ 1993+++ 1992*
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 18.29 $ 17.79 $ 17.19 $ 12.50 $ 11.21 $ 7.99 $ 8.00
-------- -------- -------- -------- -------- ------- -------
Income (Loss) From
Operations:
Net investment loss#... (0.07) (0.06) (0.08) (0.05) (0.09) (0.07) (0.01)
Net realized and
unrealized gain....... (4.23) 2.87 3.36 4.81 1.56 3.29 --
-------- -------- -------- -------- -------- ------- -------
Total Income (Loss) From
Operations............. (4.30) 2.81 3.28 4.76 1.47 3.22 (0.01)
Less Distributions From:
Net realized capital
gains................. (1.16) (2.31) (2.68) (0.07) (0.14) -- --
Capital................ -- -- -- -- (0.04) -- --
-------- -------- -------- -------- -------- ------- -------
Total Distributions..... (1.16) (2.31) (2.68) (0.07) (0.18) -- --
-------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, End of
Year................... $ 12.83 $ 18.29 $ 17.79 $ 17.19 $ 12.50 $ 11.21 $ 7.99
======== ======== ======== ======== ======== ======= =======
Total Return++.......... (25.10)% 17.53 % 21.33 % 38.25 % 13.18 % 40.30 % ++(0.13)%++
======== ======== ======== ======== ======== ======= =======
NET ASSETS, End of Year
(in 000's)............. $858,510 $777,321 $494,323 $315,033 $180,175 $75,498 $22,145
Ratios to Average Net
Assets:
Expenses+.............. 1.01 % 0.90 % 1.00 % 1.14 % 1.20 % 1.25 % 1.24 %**
Net investment loss.... (0.43)% (0.39)% (0.49)% (0.35)% (0.78)% (0.72)% (0.25)%**
Portfolio turnover rate. 91 % 81 % 83 % 174 % 94 % 97 % 35 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Agents, for the years ended August 31, 1995 and 1994 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
Agents, for the years ended August 31, 1995, and 1994 and the period ended
August 31, 1992 were $0.05, $0.09 and $0.05, respectively.
** Annualized.
++Total return is not annualized, as it may be representative of total return
for the year.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994+++ 1993 1992*
---------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 10.63 $ 10.49 $ 10.50 $ 10.86 $ 9.57 $ 7.76 $ 8.00
---------- ---------- -------- -------- -------- -------- --------
Income (Loss) From
Operations:
Net investment income#. 0.14 0.09 -- 0.05 0.02 0.05 0.03
Net realized and
unrealized
gain/(loss)........... 0.21 0.87 0.44 (0.09) 1.54 1.79 (0.27)
---------- ---------- -------- -------- -------- -------- --------
Total Income (Loss) From
Operations............. 0.35 0.96 0.44 (0.04) 1.56 1.84 (0.24)
---------- ---------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income.. (0.17) (0.12) (0.17) -- (0.03) (0.03) --
Net realized gains..... (0.12) (0.70) (0.28) (0.32) (0.24) -- --
---------- ---------- -------- -------- -------- -------- --------
Total Distributions..... (0.29) (0.82) (0.45) (0.32) (0.27) (0.03) --
---------- ---------- -------- -------- -------- -------- --------
NET ASSET VALUE, End of
Year................... $ 10.69 $ 10.63 $ 10.49 $ 10.50 $ 10.86 $ 9.57 $ 7.76
========== ========== ======== ======== ======== ======== ========
Total Return++.......... 3.53 % 9.53 % 4.23 % (0.18)% 16.74 % 23.73 % ++(3.00)%
========== ========== ======== ======== ======== ======== ========
NET ASSETS.............. $1,331,187 $1,136,444 $843,730 $663,130 $594,965 $270,302 $115,779
Ratios to Average Net
Assets:
Expenses(/1/).......... 0.90 % 0.97 % 1.00 % 1.19 % 1.19 % 1.32 % 1.50 %**
Net investment income.. 1.23 0.70 (0.12) 0.43 0.23 0.61 1.08 **
Portfolio turnover rate. 45 % 32 % 50 % 28 % 33 % 46 % 10 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
++ 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 Agents, for the period
ended August 31, 1992 was $0.03.
(/1/During)the year ended August 31, 1996, the portfolios earned credits from
the custodian which reduced service fees incurred. If the credits were
taken into consideration, the ratio of expenses to average net assets for
International Equity Investments would be 1.00%; prior year numbers have
not been restated to reflect these numbers.
** Annualized.
++Total return is not annualized, as it may not be representative of the
total return for the year.
INTERNATIONAL FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year....... $ 8.21 $ 9.11 $ 9.01 $ 8.17 $ 8.86 $ 8.71 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income (Loss) From
Operations:
Net investment income#.. 0.51 0.51 0.55 0.56 0.40 0.51 0.39
Net realized and
unrealized gain/(loss). 0.31 (0.62) 0.49 0.84 (0.32) 0.20 0.69
-------- -------- -------- -------- -------- -------- -------
Total Income/(Loss) From
Operations.............. 0.82 (0.11) 1.04 1.40 0.08 0.71 1.08
Less Distributions From:
Net investment income... (0.27) (0.55) (0.94) (0.56) (0.65) (0.55) (0.37)
Net realized gains...... (0.34) (0.24) -- -- (0.12) (0.01) --
Capital................. (0.08) -- -- -- (0.00)@ -- --
-------- -------- -------- -------- -------- -------- -------
Total Distributions...... (0.69) (0.79) (0.94) (0.56) (0.77) (0.56) (0.37)
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year.................... $ 8.34 $ 8.21 $ 9.11 $ 9.01 $ 8.17 $ 8.86 $ 8.71
======== ======== ======== ======== ======== ======== =======
Total Return++........... 10.45 % (1.52)% 12.05 % 17.66 % 1.00 % 8.67 % ++13.93 %
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's).............. $192,068 $125,610 $129,410 $105,884 $116,929 $100,362 $39,182
Ratios to Average Net
Assets:
Expenses+(/1/).......... 0.97 % 0.99 % 1.02 % 0.95 % 0.95 % 0.95 % 0.95 %**
Net investment income... 5.39 5.87 6.34 6.50 5.54 6.03 6.34**
Portfolio turnover rate.. 211 % 251 % 211 % 307 % 358 % 251 % 106 %
</TABLE>
- --------
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, 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
Agents, 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.
++Total return is not annualized, as it may not be representative of the
total return for the year.
(/1/During)the years ended August 31, 1997 and August 31, 1996 the portfolios
earned credits from the custodian which reduced service fees incurred. If
the credits were taken into consideration, the ratio of expenses to
average net assets for International Equity Investments would have been
0.97% and 0.97%; respectively; prior year numbers have not been restated
to reflect these numbers.
** Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
EMERGING MARKETS EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING
THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1998 1997 1996 1995+++ 1994*
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, Beginning
of Year.................. $ 9.31 $ 8.50 $ 7.85 $ 9.49 $ 8.00
Income (Loss) From
Operations:
Net investment
income/(loss)#......... 0.06 0.04 0.03 0.01 (0.02)
Net realized and
unrealized gain (loss). (4.44) 0.79 0.62 (1.45) 1.51
-------- -------- ------- ------- -------
Total Income (Loss) From
Operations............... (4.38) 0.83 0.65 (1.44) 1.49
-------- -------- ------- ------- -------
Less Distributions From:
Net investment income... (0.10) (0.01)
Net realized gains...... (0.46) (0.01) -- (0.20) --
-------- -------- ------- ------- -------
Total Distributions....... (0.56) (0.02) -- (0.20) --
-------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year..................... $ 4.37 $ 9.31 $ 8.50 $ 7.85 $ 9.49
======== ======== ======= ======= =======
Total Return++............ (49.49)% 9.88 % 8.28% (15.13)% ++18.63 %+
======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............... $230,526 $226,280 $97,489 $59,333 $36,365
Ratios to average net
assets:
Expenses+(1)............ 1.69 % 1.60 % 1.84% 1.75 % 1.72 %**
Net investment
income/(loss).......... 0.80 0.39 0.26 0.15 (0.42)**
Portfolio turnover rate... 139 % 105 % 106% 89 % 16 %
</TABLE>
- --------
*
The Portfolio commenced operations on April 21, 1994.
**
Annualized.
+
Annualized expense ratios before fees waived by the Agents for the years
ended August 31, 1996 and 1995 and for the period ended August 31, 1994
were 1.97%, 1.96% and 2.56%, respectively.
++
Total return represents the 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 the results of operations.
Net investment income (loss) per share before fees waived by the Agents for
the years ended August 31, 1996 and 1995 and for the period ended August
31, 1994 was $0.02, ($0.01) and ($0.04), respectively.
#
@@
Amount represents less than $0.01 per share.
++
Total return is not annualized, as it may not be reresentative of the total
return for the year.
(/1/)
During the year ended August 31, 1996, the portfolio earned credits from
the custodian which reduced service fees incurred. If the credits were
taken into consideration, the ratio to expenses to average net assets for
emerging markets Equity Investments would have been 1.80%; prior year
numbers have not been restated to reflect these numbers.
14
<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 seeks, as its investment objective, 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 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, asset-backed securities
("ABS"), 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 two or more
nationally recognized statistical rating organizations ("NRSROs"), such as
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("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 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 Portfolio's holdings may be shortened in order to preserve
capital if the Advisor
15
<PAGE>
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.
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,
ABSs, Eurodollar certificates of deposit, Eurodollar bonds and Yankee 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 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 objective 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 or short-term note 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 investment grade by NRSROs, such as
Moody's or S&P (BBB or better), 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; tax-
free prefunded 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 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.
16
<PAGE>
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 four highest grades by
NRSROs, such as 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
The primary investment objective of Mortgage Backed Investments 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 an equivalent
rating by other NRSROs 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."
HIGH YIELD INVESTMENTS
High Yield Investments seeks as its investment objective a high level of
current income by investing primarily in below investment grade debt
securities. Debt securities of less than investment grade, commonly referred
to as junk bonds, are considered "high risk" securities.
The Portfolio invests under normal market conditions at least 65% of its
assets in a diversified portfolio of fixed-income securities rated below
investment grade by NRSROs (i.e. such as rated lower than Baa by Moody's
17
<PAGE>
or lower than BBB or lower by S&P) or unrated but deemed by the Advisor to be
equivalent to such lower-rated securities. The remainder of the Portfolio's
assets may be invested in investment grade fixed-income securities (i.e. such
as securities rated at least Baa by Moody's or BBB by S&P, or if unrated,
deemed by the advisor to be of comparable quality). The average duration of
the Portfolio will vary within a two to six year time frame depending on the
Advisor's view of the potential for total return offered by a particular
strategy. The Portfolio may also engage in hedging strategies involving equity
options. See "Certain Securities and Investment Techniques and Risk Factors--
Purchasing Put and Call Options on Securities."
An amount up to 10% of the Portfolio's assets may be invested in common
stock or other equity or equity-related securities, including convertible
securities, preferred stock, warrants and rights.
In addition, an amount up to 10% of the Portfolio's assets may be invested
in foreign securities and the Portfolio may buy and sell foreign currencies
principally for the purpose of preserving the value of foreign securities or
in anticipation of purchasing foreign securities. See "Certain Securities,
Investment Techniques and Risk Factors--Foreign Securities."
Investments in high yield securities, while generally providing greater
potential opportunity for capital appreciation and higher yields than
investments in higher rated securities, also entail greater risk, including
the possibility of default or bankruptcy of the issuer of such securities.
Risk of default or bankruptcy may be greater in periods of economic
uncertainty or recession, as the issuers of high yield securities may be less
able to withstand general economic downturns. The Advisor seeks to reduce risk
through diversification, credit analysis and attention to developments and
trends in both the economy and financial markets. The value of all fixed-
income securities, including those held by the Portfolio, can be expected to
change inversely with interest rates. See "Certain Securities, Investment
Techniques and Risk Factors--High Yield Securities."
The Portfolio has reserved the right if approved by the Board of Trustees,
to convert in the future to a "master/feeder" fund that would invest all of
its assets in a master/feeder fund having substantially the same investment
objective, policies and restrictions. At least 30 days written notice of any
such action would be given to all shareholders if, and when, such a proposal,
is approved.
BALANCED INVESTMENTS
The investment objective of Balanced Investments 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
NRSROs, such as 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 the TRAK Advisory Service 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 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.
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LARGE CAPITALIZATION VALUE EQUITY INVESTMENTS
Large Capitalization Value Equity Investments is advised by Parametric and
TBCAM which manage approximately eighty percent (80%) and twenty percent
(20%), respectively, of the Portfolio's assets although it is expected that
the percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
The Portfolio seeks, as its investment objective, total return, consisting
of capital appreciation and income. Parametric seeks the Portfolio's
investment objective by tracking the performance of the Russell 1000 Value
Index. 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. TBCAM seeks total return consisting of capital appreciation and
dividend income by investing primarily in a diversified portfolio of highly
liquid common stocks that, in its opinion, have above average price
appreciation potential at the time of purchase. 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 BGFA and Provident
which manage approximately twenty percent (80%) and eighty percent (20%),
respectively, of the Portfolio's assets although it is expected that the
percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
The Portfolio's investment objective is capital appreciation. Provident
seeks substantial capital appreciation by investing primarily in a diversified
portfolio of common stocks that, in its opinion, are characterized by a growth
of earnings at a rate faster than that of the S&P 500. In selecting securities
for the Portfolio, Provident 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. Provident also analyzes the issuer's position within its
industry as well as the quality and experience of the issuer's management.
BGFA seeks to fully replicate the Russell 1000 Growth Index. 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. 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, Babson and
Mellon Capital which each manage approximately thirty five percent (35%),
fifteen percent (15%) and fifty percent (50%), respectively of the Portfolio's
assets although it is expected that the percentage allocation will vary from
time to time. Changes of the above allocation among the Advisors that are less
than 10% will be made by the Manager. The Trust's Board of Trustees, upon the
advice of the Manager, will make changes in the above allocation among the
Advisors which are greater than 10%.
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The Portfolio seeks above average capital appreciation. With respect to the
portion of the Portfolio allocated to it, Mellon Capital seeks to fully
replicate of the Russell 2000 Value Index. With respect to the remainder of
the Portfolio, NFJ will invest primarily in a diversified portfolio of common
stocks that, in NFJ'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. With respect to the portion of the assets
allocated to it, Babson employs a strong valuation discipline that strives for
companies that are not widely followed by the investment community. Babson's
research staff seeks superior, but neglected companies, possessing significant
market share, sustainable competitive advantage in their primary business,
solid finances and improving margins. The target companies are thought to
possess above average growth potential that is underestimated by the market,
providing attractive valuation. 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 in the common stocks of "Value" companies with total market
capitalization at the time of purchase that are below the maximum market
capitalization permitted for a stock in the Russell 2000 Value Index. As of
June 30, 1998, the market capitalization permitted for a stock in the Russell
2000 Value Index was $1.73 billion. In addition, 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.
Companies in which the Advisors are likely to invest may have limited product
lines, markets or financial resources and may lack management depth. The
securities of these companies 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."
SMALL CAPITALIZATION GROWTH INVESTMENTS
Small Capitalization Growth Investments seeks as its investment objective
maximum capital appreciation. The Portfolio is advised by Mellon Capital, WSA
and Westpeak which manage approximately fifty percent (50%), twenty five
percent (25%) and twenty five percent (25%), respectively, of the Portfolio's
assets. Changes of the above allocation among the Advisors that are less than
10% will be made by the Manager. The Trust's Board of Trustees, upon the
advice of the Manager, will make changes in the above allocation among the
Advisors which are greater than 10%.
With respect to the portion of the Portfolio allocated to it, Mellon Capital
seeks to track the performance of the Russell 2000 Growth Index. With respect
to the portion of the Portfolio allocated to, WSA, and Westpeak (collectively
the "Active Advisors") each will attempt to achieve the Portfolio's objective
by investing at least 65% of the Portfolio's assets in the common stocks of
"emerging growth" companies with total market capitalization at the time of
purchase that are below the maximum market capitalization permitted for a
stock in the Russell 2000 Growth Index. As of June 30, 1998, the market
capitalization permitted for a stock in the Russell 2000 Growth Index was
$1.667 billion. In addition, at least one third of the Portfolio's assets
allocated to the Active Advisors will be invested in common stocks of
companies with a total market capitalization of $550 million or less at the
time of purchase. Dividend income is not a consideration in the selection of
investments. Companies in which the Advisors are likely to invest may have
limited product lines, markets or financial resources and may lack management
depth. The securities of these companies 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.
INTERNATIONAL EQUITY INVESTMENTS
International Equity Investments is advised by State Street and Oechsle
which manage approximately sixty percent (60%) and forty percent (40%),
respectively, of the Portfolio's assets although it is expected that the
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percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
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 it, State Street 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, Oechsle 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 Portfolio. EDRs and CDRs are 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. 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,
corporations 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 NRSROs, such as S&P or Moody's or, if unrated, are deemed by
Julius Baer 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
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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 Govett, State Street and
Baring which manage approximately forty percent (40%), thirty percent (30%)
and thirty percent (30%), respectively, of the Portfolio's assets. 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, Brazil, Chile, China,
Colombia, Croatia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia,
Israel, South Korea, Jordan, Lebanon, Malaysia, Mexico, Pakistan, Peru,
Philippines, Poland, Russia, South Africa, Sri Lanka, Taiwan, Thailand,
Turkey, Venezuela and Zimbabwe. 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 such as common stocks,
preferred stocks and warrants including ADRs, EDRs and GDRs or other
securities convertible into securities of foreign issuers. 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 to invest, Govett 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, Govett 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.
State Street seeks to identify markets and securities that are misvalued
relative to their growth potential by identifying inefficiencies in the
emerging markets. State Street employs an investment process that is primarily
quantitatively driven that combines top-down country selection with bottom-up
stock selection to determine an optimal country and security mix. Baring seeks
to identify unrecognized growth investment opportunities through a
comprehensive investment framework in the emerging markets. Baring also
employs an investment process that combines top-down country allocation with
bottom-up stock selection to determine an optimal country and security mix but
also employs structured fundamental research at both the country and stock
level.
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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 MMC.
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 an equivalent rating by other
NRSROs 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 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 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. Participants in TRAK should recognize that it is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, such participants are urged
strongly to adhere to the Consulting Group's asset allocation recommendations
and to act promptly upon any recommended
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reallocation of assets among the Portfolios. Investors intending to purchase
Portfolio shares through other Advisory Services should evaluate carefully
whether the service is ongoing and continuous, as well as their investment
advisers' 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, 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
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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
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. Consistent with applicable regulatory
requirements, each Portfolio other than Municipal Bond Investments may lend
securities to brokers, dealers and other financial organizations. 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
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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, debt securities of any grade or equity securities, having
a value equal to or greater than the Fund's purchase commitments, provided
such securities have been determined by MMC to be liquid and unencumbered, and
are marked to market daily, pursuant to guidelines established by the
trustees.
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 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 NRSROs, such as 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
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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 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.
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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.
ASSET-BACKED SECURITIES. Intermediate Fixed-Income Investments and Long-Term
Bond Investments may invest in ABSs. ABSs are well established and have become
increasingly prevalent in the fixed income market. ABSs may enhance a
Portfolio's performance; however, their use involves certain risks that may
not be found in other mutual fund investments. Both Advisors are only
authorized to invest in those ABSs that have received a AAA rating from both
Moody's and S&P or an equivalent rating from other NRSROs and may invest only
up to 5% of the Portfolio's new assets in this type of security.
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 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.
HIGH YIELD SECURITIES. High Yield Investments and to a lesser extent
Intermediate Fixed Income Investments and Long-Term Bond Investments invest in
medium or lower rated securities and unrated securities of comparable quality,
sometimes referred to as "junk bonds."
Generally, medium or lower rated securities and unrated securities of
comparable quality 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.
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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 a Portfolio. Neither event will require sale of these securities
by the Portfolio, but the Advisor will consider the event in its determination
of whether the Portfolio should continue to hold the securities.
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.
REAL ESTATE INVESTMENT TRUSTS. Each Portfolio may invest in real estate
investment trusts ("REITs"). REITs are entities which either own properties or
make construction or mortgage loans. Equity REITs own real estate directly and
the value of, and income earned by, the trust depends upon the income of the
underlying properties and the rental income they earn. Equity REITs may also
include operating or finance companies. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs can
make construction, development or long-term mortgage loans, and are sensitive
to the credit quality of the borrower. Mortgage REITs derive their income from
interest payments. Hybrid REITs combine the characteristics of both equity and
mortgage REITs, generally by holding both ownership interests and mortgage
interests in real estate. The value of securities issued by REITs are affected
by tax and regulatory requirements and by perceptions of management skill.
They are also subject to heavy cash flow dependency, defaults by borrowers or
tenants, self-liquidation, the possibility of failing to qualify for tax-free
status under the Internal Revenue Code of 1986, as amended, and failing to
maintain exemption from the 1940 Act.
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.
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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 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
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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.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. Each Portfolio may purchase
put options on securities owned by the Portfolio and on securities which the
Portfolio may acquire in the future. The Portfolio may purchase only put
options that are traded on a regulated exchange. By buying a put, the
Portfolio limits its risk of loss from a decline in the market value of the
security until the put expires. Any appreciation in the value of the
underlying security, however, will be partially offset by the amount of the
premium paid for the put option and any related transaction costs. The
Portfolio may purchase call options on a security it intends to purchase in
the future to avoid the additional cost that would result from a substantial
increase in the market price of the security. Prior to their expiration, put
and call options may be sold in closing sale transactions (sales by the
Portfolio, prior to the exercise of options it has purchased, of options of
the same series), and profit or loss from the sale will depend on whether the
amount received is more or less than the premium paid for the option plus the
related transaction costs.
STOCK INDEX OPTIONS. Each Portfolio may purchase and write put and call
options on domestic and foreign stock indexes to hedge against risks of
market-wide price movements affecting that portion of its assets invested in
the country whose stocks are subject to the hedge. A stock index measures the
movement of a certain group of stocks by assigning relative values to the
common stocks included in the index. Examples of domestic stock indexes are
the Standard & Poor's 500 Stock Index and the New York Stock Exchange
Composite Index, and examples of foreign stock indexes are the Canadian Market
Portfolio Index (Montreal Stock Exchange), the Financial Times--Stock Exchange
100 (International Stock Exchange) and the Toronto Stock Exchange Composite
300 (Toronto Stock Exchange). Options on stock indexes are similar to options
on securities. Because no underlying security can be delivered, however, the
option represents the holder's right to obtain from the writer, in cash, a
fixed multiple of the amount by which the exercise price exceeds (in the case
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. Options on foreign stock indexes are
similar to options on domestic stock indexes. Like domestic stock index
options, foreign stock index options are subject to position and exercise
limits and other regulations imposed by the exchange on which they are traded.
Unlike domestic stock index options, foreign stock index options carry risks
associated with investing in foreign securities, as described above. The
advisability of using stock index options to hedge against the risk of market-
wide movements will depend on the extent of diversification of the Portfolio's
stock investments and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock index options as a hedging technique will depend upon the extent to
which price movements in the Portfolio's securities investments correlate with
price movements in the stock index selected. In addition, successful use by
the Portfolio of options will be subject to the ability of the Portfolio's
Advisor to predict correctly movements in the direction of the underlying
index.
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When the Portfolio writes an option on a stock index, it will establish a
segregated account with the Portfolio's custodian, or with a foreign
subcustodian with which the Portfolio will deposit cash or cash equivalents or
a combination of both in an amount equal to the market value of the option,
and will maintain the account while the option is open.
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 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.
SWAPS. Emerging Markets Equity Investments, with respect to 15% of the total
assets allocated to State Street, may enter into index swaps. A swap
transaction is an agreement between the Portfolio and a counterparty to act in
accordance with the terms of the swap contract. Index swaps involve the
exchange by the Portfolio with another party of the respective amounts payable
with respect to a notional principal amount related to one or more indexes.
The Portfolio may enter into these transactions to preserve a return or spread
on a particular investment or portion of its assets, as a duration management
technique or to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio may also use
these transactions for speculative purposes, such as to obtain the price
performance of a security without actually purchasing the security in
circumstances where, for example, the subject security is illiquid, is
unavailable for direct investment or available only on less attractive terms.
Swaps have risks associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Swaps do not involve
the delivery of securities,
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other underlying assets or principal. Accordingly, the risk of loss with
respect to swaps is limited to the net amount of payments that the Portfolio
is contractually obligated to make. If the counterparty to a swap defaults,
the Portfolio's risk of loss consists of the net amount of payments that the
Portfolio is contractually entitled to receive. Where swaps are entered into
for good faith hedging purposes, the Portfolio believes such obligations do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to the Portfolio's borrowing restrictions. Where
swaps are entered into for other than hedging purposes, the Portfolio will
segregate an amount of cash or liquid securities having a value equal to the
accrued excess of its obligations over its entitlements with respect to each
swap on a daily basis.
YEAR 2000. The investment management services provided to the Trust by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the Trust's
operations, including the handling of securities trades, pricing and account
services. The Manager and Salomon Smith Barney have advised the Trust that
they have been reviewing all of their computer systems and actively working on
necessary changes to their systems to prepare for the year 2000 and expect
that their systems will be compliant before that date. In addition, the
Manager has been advised by the Trust's custodian, transfer agent and
accounting service agent that they are also in the process of modifying their
systems with the same goal. There can, however, be no assurance that the
Manager, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Trust services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as
widespread or as affecting trading markets.
PORTFOLIO TURNOVER
Generally, a Portfolio, other than Municipal Bond Investments, Mortgage
Backed Investments, International Fixed Income Investments and Emerging Market
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 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. 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
MMC, a registered investment adviser whose principal executive offices are
located at 388 Greenwich Street, New York, New York 10013. MMC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which is
in turn a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
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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 Group of Salomon Smith Barney, have over 20 years of
experience in evaluating investment advisers for individuals and institutional
investors. As of September 30, 1998, MMC rendered advisory services with
respect to assets with a value in excess of $108 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 based on the value of the average net assets of the
Portfolio at a rate as follows: Government Money Investments, 0.15%;
Intermediate Fixed Income Investments, 0.40%; Long-Term Bond Investments,
0.40%; Municipal Bond Investments, 0.40%; Mortgage Backed Investments, 0.50%;
High Yield Investments, 0.70%; Balanced Investments, 0.60%; Large
Capitalization Value Equity Investments, with respect to the portion of the
portfolio managed by TBCAM, 0.60% and with respect to the balance allocated to
Parametric, the Manager has agreed to waive fees so that the rate is 0.50% of
the first $300 million and 0.45% thereafter; Large Capitalization Growth
Investments, with respect to the portion of the portfolio managed by
Provident, 0.60% and with respect to the balance allocated to BGFA, the
Manager has agreed to waive fees so that the rate is 0.32%; Small
Capitalization Value Equity Investments, with respect to the portion of the
portfolio managed by Babson, 0.80% and with respect to the portion managed by
NFJ, the Manager has agreed to waive fees so that the rate is 0.80% for the
first $450 million and 0.75% thereafter, and with respect to the balance
allocated to Mellon Capital, the Manager has agreed to waive fees so that the
rate is 0.36% thereafter; Small Capitalization Growth Investments, with
respect to the portion managed by WSA and WestPeak, 0.80% and with respect to
the balance allocated to Mellon Capital, the Manager has agreed to waive fees
so that the rate is 0.36%; International Equity Investments, with respect to
the portion of the portfolio managed by Oechsle, 0.70% and with respect to the
balance allocated to State Street, the Manager has agreed to waive fees so
that the rate is 0.37%; International Fixed Income Investments, 0.50%; and
Emerging Markets Equity Investments, 0.90%.
The Manager in turn pays each Advisor a fee for its services provided to
each Portfolio that is computed daily and paid monthly based on the value of
the average net assets of the Portfolio at a rate as follows: Government Money
Investments, 0.15% of the first $100 million and 0.10% thereafter;
Intermediate Fixed Income Investments, 0.20% of the first $500 million and
0.15% thereafter; Long-Term Bond Investments, 0.20%; Municipal Bond
Investments, 0.20%; Mortgage Backed Investments, 0.25%; High Yield
Investments, 0.45%; Balanced Investments, 0.30%; Large Capitalization Value
Equity Investments, with respect to the portion of the portfolio managed by
TBCAM, 0.30% of the first $350 million and 0.25% thereafter and with respect
to the balance allocated to Parametric, the rate is 0.20% of the first $300
million and 0.15% thereafter; Large Capitalization Growth Investments, with
respect to the portion of the portfolio managed by Provident, 0.30% and with
respect to the balance allocated to BGFA, 0.02%; Small Capitalization Value
Equity Investments, with
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respect to the portion of the portfolio managed by NFJ, 0.50% on the first
$450 million and 0.45% thereafter; with respect to the portion managed by
Babson, 0.50% of the first $100 million and 0.45% thereafter; and with respect
to the balance allocated to Mellon Capital, the rate is 0.06%; Small
Capitalization Growth Investments, with respect to the portion of the
Portfolio managed by WestPeak and WSA, 0.50% and with respect to the balance
allocated to Mellon Capital, the rate is 0.06%; International Equity
Investments, with respect to the portion of the portfolio managed by Oechsle,
0.40% and with respect to the balance allocated to State Street, the rate is
0.06%; International Fixed Income Investments, 0.25%; and Emerging Markets
Equity Investments, 0.60% with respect to the portion of the assets managed by
Govett, State Street and Baring.
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 Exemption is based on, 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) 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; (3) 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; (4) the
Trust will disclose in this Prospectus the terms of the Exemption; and (5) 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 Management Agreement between the Trust and the Manager
still require shareholder approval. In accordance with the terms of the
Exemption, a majority of the shareholders of each Portfolio have approved the
operation of the Trust in accordance with the Exemption.
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 adviser, 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 MMC, 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.
The following sets forth certain information about each of the Advisors:
Standish, Ayer serves as Advisor to Intermediate Fixed Income Investments
and Government Money Investments. Standish, Ayer is owned by 24 individuals,
each of whom is an active employee of Standish, Ayer. No individual owns more
than 20% of the voting securities of Standish, Ayer. Standish, Ayer has been
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), since 1940 and is also registered as a
commodity trading adviser with the National Futures Association. Standish,
Ayer provides investment advisory services to individual and institutional
clients. As of September 30, 1998, Standish, Ayer had assets under management
of approximately $46 billion. Standish, Ayer'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 Standish, Ayer since January 1, 1987 and has been
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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
Standish, Ayer 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 Standish, Ayer.
National Asset Mgmt. serves as Advisor to Long-Term Bonds Investments.
National Asset Mgmt. has been a registered investment adviser under the
Advisers Act since 1979 and provides investment advisory services primarily to
institutions such as charitable trusts and pensions plans. As of September 30,
1998, National Asset Mgmt. had assets under management of $9.1 billion.
National Asset Mgmt.'s principal executive offices are located at 101 South
Fifth Street, Louisville, Kentucky. Michael C. Heyman, a principal with the
firm, is responsible for the day-to-day management of Long-Term Bond
Investments.
Smith Affiliated serves as Advisor to Municipal Bond Investments. Of the
outstanding voting securities of Smith Affiliated, 80% is owned by Robert G.
Smith, CEO and President of Smith Affiliated with 20% minority owned. Smith
Affiliated has been a registered investment adviser under the Advisers Act
since April 1982, serving as investment advisor to individuals and
institutions. As of September 30, 1998, Smith Affiliated had assets under
management of approximately $800 million. Smith Affiliated's principal
executive offices are located at 880 Third Avenue, New York, New York 10022.
Nancy J. Noto, Vice President, has been a Portfolio Manager of Smith
Affiliated since 1998 and with Erwin Tonogbanua, is responsible for the day-
to-day management of Municipal Bond Investments.
APAM serves as Advisor to Mortgage Backed Investments. Registered as an
investment adviser under the Advisers Act since 1984, APAM is controlled by J.
Anthony Huggins and Jon M. Knight, each a principal of APAM. APAM serves as an
investment adviser to institutional investors including banks, insurance
companies, foundations and tax-exempt funds. As of September 30, 1998, APAM
and International Portfolio Analytics Ltd., an affiliate of APAM, had assets
under management exceeding $2.5 billion. Atlantic Analytic's principal
executive offices are located at 201 East Pine Street, Suite 600, Orlando,
Florida 32801. John L. Cassidy, III is responsible for the day-to-day
management of Mortgage Backed Investments under the direction of William W.
Lynch, Jr. who has been involved with the Portfolio since its commencement.
Alliance Capital serves as Advisor to High Yield Investments. Alliance
Capital is an international investment manager with assets under management as
of September 30, 1998 totaling approximately $241.9 billion. Alliance
Capital's clients are primarily major corporate benefit funds, public employee
retirement systems, investment companies, foundations and endowment funds.
Alliance Capital Management Corporation ("ACMC") is the general partner of
Alliance Capital. As of September 30, 1998, The Equitable Life Assurance
Society of the United States ("Equitable"), ACMC and Equitable Capital
Management Corporation ("ECMC") were the beneficial owners of approximately
57.0% of the outstanding units of Alliance Capital. ACMC, ECMC and ACMC, Inc.
are wholly owned subsidiaries of Equitable. Equitable, a New York life
insurance company, had total assets as of June 30, 1998 of approximately $85
billion. Equitable is a wholly owned subsidiary of The Equitable Companies
Incorporated, a Delaware corporation ("ECI"). As of September 30, 1998, AXA-
UAP, a French insurance holding company, owned approximately 59% of the issued
and outstanding shares of the common stock of ECI. Nelson R. Jantzen and
Sheryl A. Rothman are primarily responsible for the day-to-day management of
High Yield Investments. Mr. Jantzen, a Senior Vice President and Co-Head of
the High Yield Group, has been with Alliance Capital for 25 years. Ms. Rothman
is a Vice President and Portfolio Manager and has been with Alliance Capital
for 13 years.
Palley-Needelman serves as Advisor to Balanced Investments. The outstanding
shares of capital stock of Palley-Needelman are owned by Roger B. Palley and
Chet J. Needelman. Palley-Needelman, the predecessor of which has been
registered as an investment adviser under the Advisers Act since 1974,
provides investment advisory services to individuals and institutions,
including retirement plans, foundations and endowments. As of September 30,
1998, Palley-Needelman had assets under management of approximately $4.3
billion. Palley-
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Needelman's principal executive offices are located at 800 Newport Center
Drive, Suite 450, Newport Beach, California 92660. Roger Palley has been the
President of Palley-Needelman since 1985 and has been responsible for the day-
to-day management of Balanced Investments since its commencement of operations
on February 16, 1993.
TBCAM serves as an Advisor to Large Capitalization Value Equity Investments.
Registered as an investment advisor under the Advisers Act since 1970, TBCAM
is a wholly owned indirect subsidiary of Mellon Bank Corporation. As of
September 30, 1998, TBCAM had assets under management of approximately $21
billion. TBCAM's principal executive offices are located at One Boston Place,
Boston, Massachusetts. Robert J. Eastman has been a Vice President of TBCAM
since 1991 and has been responsible for the day-to-day management of Large
Capitalization Value Equity Investments since December 31, 1996. Prior to
joining TBCAM in 1991, Mr. Eastman served as a Portfolio Manager/Quantitative
Analyst with Trinity Investment Management Corp.
Parametric also serves as an Advisor to Large Capitalization Value Equity
Investments. Parametric is an investment management firm organized as a
general partnership. Parametric 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. on November 15, 1994 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 in November 1994. Parametric 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. Parametric is a registered
investment adviser and as of September 30, 1998 had assets under management of
$2.8 billion. Parametric's principal executive offices are located at 7310
Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104. David Stein and
Tom Seto are primarily responsible for the day-to-day management of those
assets of the Portfolio allocated to Parametric for management. Mr. Stein has
been a Managing Director with Parametric since 1996. Mr. Seto has been a
portfolio manager with Parametric since October 1, 1998. Prior to joining
Parametric, Mr. Seto served as head of U.S. equity index investments for BGFA.
Provident serves as Advisor to Large Capitalization Growth Investments.
Registered as an investment adviser under the Advisers Act since 1951,
Provident is a wholly owned subsidiary of UAM. Provident provides investment
advisory services to individual and institutional clients. As of September 30,
1998, Provident had assets under management of approximately $17.6 billion.
Provident's principal executive offices are located at 300 North Lake Avenue,
Pasadena, California 91101. Thomas J. Condon is a managing director of
Provident and has been with Provident for seventeen years. Harlan Thompson,
CFA, is a Senior Vice President of Provident, and has been responsible for the
day-to-day management of Large Capitalization Growth Investments, since March
1992.
BGFA also serves as an Adviser to Large Capitalization Growth Investments.
BGFA is a wholly-owned subsidiary of Barclays Global Investors ("BGI"). As of
August 31, 1998, BGI was responsible for managing or providing investment
advice for assets exceeding $505 billion represented in part by other open-end
management investment companies. BGI and BGFA's principal executive offices
are located at 45 Fremont Street, San Francisco, California 94105. BGFA uses a
team-management approach to manage indexed portfolios. The investment group of
BGFA is responsible for the day-to-day management of those assets of the
Portfolio allocated to BGFA.
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,
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commenced operations in 1989. NFJ is registered with the SEC as an investment
advisor and, as of September 30, 1998, had assets under management of
approximately $2.2 billion. NFJ's principal executive offices are located at
2121 San Jacinto Street, Suite 1840, Dallas, Texas 75201. Since June 1996,
Benno Fischer and Paul Magnuson have shared the day-to-day management of those
assets allocated to NFJ. Mr. 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.
Mr. Magnuson has been a Senior Research Analyst and Portfolio Manager since he
joined NFJ in August, 1992. Prior to that time, Mr. Magnuson was a Portfolio
Manager at NationsBank.
Babson also serves as an Adviser to Small Capitalization Value Equity
Investments. Babson, a subsidiary of Mass Mutual Holding Company, has been in
the investment advisory business since 1940 and has assets under management as
of March 31, 1998, of $20 billion. Babson's executive offices are located at
One Memorial Drive, Cambridge, Massachusetts 02142-1300. Peter C. Schliemann
is primarily responsible for the day-to-day management of the assets allocated
to Babson. Mr. Schliemann has been a portfolio manager with Babson since 1979.
Mellon Capital serves as an Advisor to Small Capitalization Growth
Investments and Small Capitalization Value Equity Investments. Mellon Capital
is a wholly owned subsidiary of MBC Investment Corporation, which itself is a
subsidiary of Mellon Bank Corporation, a publicly held corporation. Mellon
Capital is an investment management firm which manages diversified stock and
bond portfolios for institutional clients. As of September 30, 1998, Mellon
Capital had assets under management exceeding $63 billion. Mellon Capital's
principal executive offices are located at 595 Market Street, Suite 3000, San
Francisco, California 94105. Mellon Capital uses a team-management approach to
manage indexed portfolios. The investment group of Mellon Capital will be
responsible for the day-to-day management of those assets of the Portfolios
allocated to Mellon Capital.
WSA also serves as an Advisor to Small Capitalization Growth Investments.
Registered as an investment adviser since October 1987, WSA is wholly owned by
its employees. WSA provides investment advisory services to various
institutional clients and as of September 30, 1998, had assets under
management of approximately $1.25 billion. WSA's executive office is located
at 1200 Prospect Street, Suite 100, La Jolla, California 92037. William
Jeffery III, the President of WSA along with Kenneth F. McCain and Richard S.
Coons are primarily responsible for the day-to-day management of the portion
of the Portfolio's assets allocated to WSA. Messrs. Jeffery and McCain are
founding partners of the firm, having worked together since 1974. Mr. Coons
joined the firm in 1989.
Westpeak also serves as an Advisor of Small Capitalization Growth
Investments. Registered as an investment advisor since July 1991, Westpeak is
a wholly-owned subsidiary of Nvest Companies, L.P. Westpeak provides
investment advisory services primarily to various institutional clients; and
as of September 30, 1998, had assets under management of approximately $4.5
billion. Westpeak's principal executive offices are located at 1011 Walnut
Street, Boulder, Colorado 80302. Gerald H. Scriver is President, CIO and CEO
and a Portfolio Manager at Westpeak and is responsible for the day-to-day
management of the assets of Small Capitalization Growth Investments allocated
to Westpeak. Mr. Scriver has been President, CIO and CEO of Westpeak since its
inception in 1991.
Oechsle LLC, a Delaware limited liability company, serves as an Advisor to
International Equity Investments. Oechsle Group, LLC, also a Delaware limited
liability company, is the Member Manager of Oechsle LLC. Oechsle LLC's
business consists exclusively of global investment management services. The
Managing Principals of Oechsle Group, LLC, are individuals who also serve as
officers of Oechsle LLC. The Managing Principals are: Walter Oechsle; L. Sean
Roche; Singleton Dewey Keesler, Jr.; Stephen Langer; Steven Schaefer; Warren
Walker; and Andrew Parlin. Oechsle LLC was established on October 8, 1998 and
is the successor entity to Oechsle International Advisors, L.P. ("Oechsle
L.P.") which has been a registered investment adviser under the Advisers Act
since 1986. Oechsle LLC provides investment advisory services to individual
and institutional clients. As of September 30, 1998, Oechsle L.P. had assets
under management of approximately $10.5 billion.
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Oechsle LLC's principal executive offices are located at One International
Place, Boston, Massachusetts 02110. Walter Oechsle has been responsible for
the day-to-day management of those assets of International Equity Investments
allocated to Oechsle L.P. since November 1991. Mr. Oechsle was the managing
General Partner of Oechsle L.P. since its inception in 1986. In addition,
since November 1997, Kathleen Harris has shared responsibility for the day-to-
day management of these assets. Ms. Harris has been employed by Oechsle L.P.
since January 1995. Prior to her employment with Oechsle L.P., she was a
Portfolio Manager and Investment Director for the State of Wisconsin
Investment Board, where she managed international equity assets. Mr. Oechsle
and Ms. Harris manage the assets with the assistance of Oechsle LLC's entire
investment team, which contributes to country asset allocations, stock
selection, and currency decisions.
State Street serves as an Advisor to International Equity Investments and
Emerging Markets Equity Investments. State Street is a division of State
Street Bank and Trust Company. State Street provides investment advisory
services to a wide variety of institutional clients world-wide and, as of June
30, 1998, had assets under management of approximately $450 billion. State
Street's principal executive offices are located at Two International Place,
Boston, Massachusetts 02110. Peter G. Leahy and Eric Brandhorst are primarily
responsible for the day-to-day management of State Street's portion of
International Equity Investments. Mr. Leahy has been with State Street since
1991 and Mr. Brandhorst has been with State Street since 1994. Prior to 1991,
Mr. Leahy was a Portfolio Manager at Bankers Trust Investment Management.
Prior to 1994, Mr. Brandhorst was an Analyst with Wellington Management Co.
Joshua Feuerman is primarily responsible for the day-to-day management of
State Street's portion of Emerging Markets Equity Investments. Mr. Feuerman
has been a portfolio manager with State Street for 11 years.
Julius Baer serves as Advisor to International Fixed Income Investments.
Julius Baer is a majority owned subsidiary of Julius Baer Securities Inc., a
registered broker-dealer and investment adviser, which in turn is a wholly
owned subsidiary of Baer Holding Ltd. Julius Baer Securities Inc. owns 93% of
the outstanding stock of Julius Baer and 7% is owned by three employees.
Julius Baer has been registered as an investment adviser under the Advisers
Act since April 1983. Directly and through Julius Baer Securities Inc., Julius
Baer provides investment management services to a wide variety of individual
and institutional clients, including registered investment companies. As of
September 30, 1998, Julius Baer had assets under management of approximately
$5.0 billion and Julius Baer Securities Inc. had assets in safe custody of
approximately $441 million. Julius Baer's principal executive offices are
located at 330 Madison Avenue, New York, New York 10017. Edward Dove, a
Director of Fixed-Income and Portfolio Manager of Julius Baer, has been
employed by Julius Baer 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.
Govett serves as Advisor to Emerging Markets Equity Investments. Govett is
registered under the Advisers Act and is a wholly owned subsidiary of AIB
Asset Management Holdings Limited ("AIBAMH"). AIBAMH is majority-owned by
Allied Irish Banks plc. The AIBAMH Group has been managing assets in emerging
markets since the 1920's. Govett's sole business is providing investment
management and client services for the North American operations of AIBAMH
group. As of September 30, 1998, AIBAMH Group has approximately $15 billion in
assets under management. Rachel Maunder is primarily responsible for the day-
to-day management of the Portfolio's assets. Ms. Maunder, a dual employee of
Govett and its London affiliate, AIB Govett Asset Management Limited, is
Deputy Managing Director of Investments and Director, Emerging Markets for AIB
Govett Asset Management Limited. Prior to that time, she served as Assistant
Director with Invesco Management in London.
Baring also serves as an Advisor to Emerging Markets Equity Investments.
Baring is a member of the ING Group and has been in the investment advisory
business since 1967. Baring and its affiliated entities has assets under
management as of June 30, 1998 of approximately $43 billion. Baring's North
American offices are located at 125 High Street in Boston, Massachusetts
02110. Nancy Curtin, Matt Linsey and Kate Munday are primarily responsible for
the day-to-day management of the portion of the Portfolio's assets allocated
to Baring. Ms. Curtin
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and Ms. Linsey are respectively, the global head and deputy head of emerging
markets for Baring and its affiliated entities. Ms. Munday is the deputy head
of Latin American equities. Ms. Curtin and Ms. Munday have been with Baring
since 1992 and 1993, respectively. Mr. Linsey has been with Baring since 1997.
ADMINISTRATOR
MMC serves as the Trust's administrator and generally oversees all aspects
of the Trust's administration and operations. MMC provides investment
management and administration services to investment companies that had
aggregate assets under management as of September 30, 1998, in excess of $108
billion. Each Portfolio pays MMC 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 MMC. 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 provides 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 Salomon 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.
PURCHASE OF SHARES
GENERAL
Purchases of shares of a Portfolio through an Advisory Service must be made
through a brokerage account maintained with Salomon Smith Barney. Payment for
Portfolio shares must be made by check directly to Salomon Smith Barney or to
a broker that clears securities transactions through Salomon 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
Advisory Services and are generally 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. Advisory Services generally provide investment
advice in connection with investments among the Portfolios by identifying the
investor's risk tolerances and investment objectives through evaluation of an
investment questionnaire; identifying and recommending in writing an
appropriate allocation of assets among the Portfolios that conform to those
tolerances and objectives in a written recommendation; and providing on a
periodic basis, a written monitoring report to the investor containing an
analysis and evaluation of an investor's account and recommending any
appropriate changes in the allocation of assets among the Portfolios. Usually
under an Advisory Service, all investment decisions ultimately rest with the
investor and investment discretion is not given to the investment adviser.
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Under an Advisory Service an investor typically pays a periodic fee at rates
that may vary based upon a variety of factors. Currently the maximum annual
rate for assets invested in the Portfolios under a Smith Barney Advisory
Service is 1.50%. The fee may be paid 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"). Advisory Services may provide different services than those
described above and, accordingly, fees may be subject to negotiation. 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 Advisory Service assets and
the number and range of supplemental advisory services to be provided under
the Advisory Service. Financial Consultants receive a portion of any fee paid
in consideration of providing services to clients participating in a Salomon
Smith Barney Advisory Service.
Investors should be aware that through Salomon Smith Barney Advisory
Services, the Consulting Group serves as investment advisor to each
participant in such service and receives a fee from each 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 participants in Salomon Smith Barney Advisory
Services, 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 participant when making
investment recommendations.
Other Advisory Services. Shares of the Portfolios are also available for
purchase by or for the benefit of clients of certain investment advisers 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 adviser must be approved by
the Consulting Group. Investors purchasing shares through investment advisory
services other than Salomon Smith Barney Advisory Services may bear different
fees for different levels of services as agreed upon with the investment
advisers 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 Salomon Smith Barney or at an
Introducing Broker no later than the third business day after the order is
placed (the "Settlement Date"). 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 Salomon Smith Barney will benefit from the
temporary use of the funds. If the investor instructs Salomon Smith Barney to
invest the funds in a Salomon 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 Salomon 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 Salomon 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 Salomon 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 an
investor's assets are held in a Salomon Smith Barney FMA(R)
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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 Advisory
Service 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. Salomon Smith Barney Advisory Service accounts
for employees of Salomon 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 Salomon 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 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 Salomon 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 Salomon
Smith Barney brokerage accounts or as unnegotiated checks from the Transfer
Agent will generally not earn any income for those investors, who should
discuss alternative investments with their Financial Consultants or other
advisers.
Redemption requests may be given to Salomon Smith Barney or to an
Introducing Broker. Salomon 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 a Salomon Smith Barney Advisory Service provides
that, absent separate payment by the participant, fees charged by the Manager
pursuant to that agreement may be paid through automatic redemptions of a
portion of the participant's account. Termination of a Salomon Smith Barney
Advisory Service account must be effected by a redemption order for the
participant's entire Trust account.
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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 the Salomon Smith Barney Advisory Service 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
Salomon 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.
NET ASSET VALUE
Each Portfolio's net asset value per share is calculated by MMC 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, Martin Luther King 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 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.
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, these
investments are quoted at the mean between the current bid and ask prices.
Debt securities of U.S. issuers (other than U.S. Government Securities and
short-term investments) are valued by MMC after consultation with the pricing
service. When, in the judgment of the pricing service, quoted bid prices are
available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid and ask prices.
Investments for which no readily obtainable market quotations are available,
in the judgment of the Pricing Service, are carried at fair value as
determined by the pricing service. The procedures of the pricing service are
reviewed periodically by the officers of the Trust under the general
supervision and responsibility of the Board of Trustees. 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
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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 a
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, MMC 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 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. The Manager may determine that a pattern of frequent exchanges
is excessive and contrary to the best interests of a Portfolio's other
shareholders. In this event, the Trust may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Trust 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. The Trust 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
that Portfolio 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
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Investments, Mortgage Backed Investments, Municipal Bond Investments, Balanced
Investments, High Yield 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 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 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. Distributions of capital gains paid by all the Portfolios will not
qualify for the dividend received deduction for corporations; however,
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.
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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 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 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 an Advisory
Service 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 1998, adjusted gross income in
excess of $121,200 ($60,600 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 Chase is located at 4 Chase MetroTech Center, Brooklyn, New York
11245, and each serves as a Custodian for the Trust.
First Data Investors Services Group, Inc. is located at Exchange Place,
Boston, Massachusetts 02109 and serves as the Trust's transfer agent.
DISTRIBUTOR
Shares in the Trust are offered by CFBDS, Inc., distributor of the Trust.
CFBDS, Inc. is located at 21 Milk Street, Boston, MA 02109-5408.
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 Salomon Smith
Barney Advisory Service fee 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.
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For Intermediate Fixed Income Investments, Long-Term Bond Investments,
Mortgage Backed Investments, High Yield 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 Salomon Smith
Barney Advisory Service fee 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.
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.
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 Salomon Smith Barney Advisory Service fee 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 Salomon Smith Barney Advisory Service
fee 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, of
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 Salomon
Smith Barney Advisory Service fees (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 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.
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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 a meeting.
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.
48
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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
High Yield 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
November 27, 1998
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Salomon Smith Barney Inc.
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APPENDIX A
INVESTMENT INDICES
Following are definitions of indices that are utilized in the Client's
Recommendation and Review.
CREDIT SUISSE FIRST BOSTON HIGH YIELD INDEX
An unmanaged, trader priced portfolio constructed to mirror the high yield debt
market. The index has several modules representing different sectors of the
high yield market including a cash module, a zerofix module, a pay-in-kind
module and a defaulted module.
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).
LIPPER CORPORATE DEBT FUNDS A RATED AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in corporate debt issues rated "A" or better or government issues.
LIPPER CORPORATE DEBT FUNDS A RATED INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER GENERAL MUNICIPAL FUNDS AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in municipal debt issues in the top four credit ratings.
LIPPER GENERAL MUNICIPAL FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER GENERAL WORLD FUNDS AVERAGE
An average of the reinvested performance of the following twelve Lipper
investment objectives: Gold Oriented, Global, Global Small Company,
International, International Small Company, European Region, Pacific Ex Japan,
Pacific Region, Emerging Markets, Japanese, Latin American and Canadian Funds.
LIPPER GROWTH FUNDS AVERAGE
An average of the reinvested performance of funds that normally invest in
companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices.
LIPPER GROWTH FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER INTERNATIONAL FUNDS AVERAGE
An average of the reinvested performance of funds that invest its assets in
securities whose primary trading markets are outside of the United States.
LIPPER INTERNATIONAL FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER SMALL COMPANY GROWTH FUNDS AVERAGE
An average of the reinvested performance of funds that by their prospectus or
portfolio practice, limit investments to companies on the basis of the size of
the company.
LIPPER SMALL COMPANY GROWTH FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER U.S. MORTGAGE FUNDS AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in mortgages/securities issued or guaranteed as to principal and
interest by the U.S. Government and certain federal agencies.
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 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.
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APPENDIX A
INVESTMENT INDICES--(CONTINUED)
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.
WILSHIRE LARGE COMPANY GROWTH EQUITY INDEX
Focuses on the top 750 companies of the Wilshire 5000 in terms of market
capitalization. The smallest company's capitalization is $675 million. The
index excludes companies meeting one or more of the following criteria: less
than 5 years of operating history, high dividend payout companies, low price-
to-book companies or low return on equity.
WILSHIRE LARGE COMPANY VALUE EQUITY INDEX
Focuses on the top 750 companies of the Wilshire 5000 in terms of market
capitalization. The smallest company's capitalization is $675 million. The
index excludes companies that do not rank favorably on a relative basis due to
their high P/E and price-to-book ratios, or low yield.
WILSHIRE SMALL COMPANY GROWTH EQUITY INDEX
Focuses on companies that rank between 751-1,750 of the Wilshire 5000 in terms
of market capitalization. The smallest company's capitalization is $58 million.
The index excludes companies meeting one or more of the following criteria:
less than two years operating history, high yield, little or no earnings growth
or low beta.
WILSHIRE SMALL COMPANY VALUE EQUITY INDEX
Focuses on companies that rank between 751-1,750 of the Wilshire 5000 in terms
of market capitalization. The smallest company's capitalization is $58 million.
The index excludes companies that do not rank favorably on a relative basis due
to their high price-to-earnings and price-to-book ratios, or low yield.
A-2
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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.
B-1
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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.
B-3
<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
- -------
/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.
B-4
<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.
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(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
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<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:
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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."
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<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.
- --------------------------------------------------------------------------------
[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
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/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."
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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 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
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<PAGE>
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, 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.
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<PAGE>
(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 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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[PROHIBITED TRANSACTION EXEMPTION 94-50; 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, 1994, 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."
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<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-17
<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-18
<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
B-19
<PAGE>
FEDERAL REGISTER: NOVEMBER 9, 1998 (VOLUME 63, NUMBER 216)
NOTICES
PAGE 60391-60398
FROM THE FEDERAL REGISTER ONLINE VIA GPO ACCESS [WAIS.ACCESS.GPO.GOV]
- --------------------------------------------------------------------------------
DEPARTMENT OF LABOR
PENSION AND WELFARE BENEFITS ADMINISTRATION [APPLICATION NO. D-10574]
NOTICE OF PROPOSED INDIVIDUAL EXEMPTION TO AMEND PROHIBITED TRANSACTION
EXEMPTION (PTE) 94-50 INVOLVING SALOMON SMITH, BARNEY INC. (SALOMON SMITH
BARNEY) LOCATED IN NEW YORK, NY
AGENCY: PENSION AND WELFARE BENEFITS ADMINISTRATION, U.S. DEPARTMENT OF LABOR.
ACTION: NOTICE OF PROPOSED INDIVIDUAL EXEMPTION TO MODIFY PTE 94-50.
- --------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed individual exemption which, if granted,
would amend PTE 94-50 (59 FR 32024, June 21, 1994), an exemption granted to
Smith Barney, Inc. (Smith Barney), the predecessor of Salomon Smith Barney.
PTE 94-50 relates to the operation of the TRAK Personalized Investment Advisory
Service product (the TRAK Program) and the Trust for TRAK Investments
(subsequently renamed the Trust for Consulting Group Capital Markets Funds)
(the Trust). If granted, the proposed exemption would affect participants and
beneficiaries of and fiduciaries with respect to employee benefit plans (the
Plans) participating in the TRAK Program.
EFFECTIVE DATE: If granted, the proposed amendments will be effective as of
November 9, 1998.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before December 24, 1998.
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-5649, U.S. Department of Labor, 200
Constitution Avenue, N.W., Washington, D.C. 20210, Attention: Application No.
D-10574. The application 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-5507, 200 Constitution Avenue, N.W., Washington, D.C. 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 amend PTE 94-50. PTE 94-50
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. Specifically, PTE 94-50 provides exemptive relief from
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, for the purchase or redemption of shares in the Trust
by an employee benefit plan, an individual retirement account (the IRA), or a
retirement plan for a self-employed individual (the Keogh Plan). PTE 94-50 also
provides exemptive relief from 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, with respect to the
provision, by the Consulting Group of Smith Barney (the Consulting Group), of
investment advisory services to independent fiduciaries of participating Plans
(the Independent Plan Fiduciaries) that might result in such fiduciary's
selection of an investment portfolio (the Portfolio) under the TRAK Program for
the investment of Plan assets.\/1/
[Page 60392]
Besides the transactions described above, PTE 94-50 permitted Smith Barney to
add a daily-traded collective investment fund (the GIC Fund) to the existing
Fund Portfolios and to describe the various entities operating the GIC Fund.
Further, PTE 94-50 replaced references to Shearson Lehman with references to
Smith Barney. PTE 94-50 is effective as of July 31, 1993 for the transactions
described in PTE 92-77 and effective as of March 29, 1994 with respect to
transactions involving the GIC Fund.
As of December 31, 1997, the TRAK Program held assets that were in excess of
$8.4 billion. Of those assets, approximately $1.7 billion were held in 540,
401(k) Plan accounts and approximately 57,100 employee benefit plan and
IRA/Keogh-type accounts. At present, the Trust consists of 13 Portfolios that
are managed by the Consulting Group and advised by one or more unaffiliated
sub-advisers selected by Salomon Smith Barney.
Salomon Smith Barney has informed the Department of certain changes, which are
discussed below, to the facts underlying PTE 94-50. These modifications include
(1) corporate mergers that have changed the names of the parties described in
PTE 94-50 and would permit broader distribution of TRAK-related products, (2)
the implementation of a recordkeeping reimbursement offset system (the
Recordkeeping Reimbursement Offset Procedure) under the TRAK Program, and (3)
the institution of an automated reallocation option (the Automatic Reallocation
Option) under the TRAK Program for which Salomon Smith Barney has requested
administrative exemptive relief from the Department.
The proposed exemption has been requested in an application filed on behalf of
Salomon Smith Barney pursuant to 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, 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, the
proposed exemption is being issued solely by the Department.
1. The Corporate Mergers. Salomon Smith Barney states that in November 1997, a
subsidiary of the Travelers Group Inc. (the Travelers Group), the parent of
Smith Barney, acquired all of the shares of Salomon Brothers, Inc. (Salomon).
Subsequent to the acquisition, Salomon and Smith Barney were operated as
- -------
/1/ On October 5, 1992, the Department granted PTE 92-77 at 55 FR 45833. PTE
92-77 permitted Shearson Lehman Brothers, Inc. (Shearson Lehman) to make the
TRAK Program available to Plans that acquired shares in the Trust. In this
regard, PTE 92-77 permitted Plans to purchase or redeem shares in the Trust and
allowed the Consulting Group to provide investment advisory services to an
Independent Fiduciary of a Plan which might 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, on July 31, 1993, Smith Barney
acquired certain assets of Shearson Lehman associated with its retail business,
including the TRAK Program, and applied for and received a new exemption (PTE
94-50) for the ongoing operation of the TRAK Program. Essentially, PTE 94-50
amended and replaced PTE 92-77. However, because of certain material factual
changes to the representations supporting PTE 92-77, the Department determined
that the exemption was no longer effective for use by Smith Barney and its
subsidiaries as of the date of the asset sale.
B-20
<PAGE>
separately-registered broker-dealers and as sister corporations with a common
parent. On September 1, 1998, Salomon was merged with and into Smith Barney,
with Smith Barney remaining as the surviving corporation. As a result of the
merger, the corporate name of Smith Barney has been changed to "Salomon Smith
Barney Inc."
Salomon Smith Barney also states that in April 1998, the Travelers Group and
Citicorp Inc. (Citicorp) announced a stock merger whereby Citicorp would be
merged with and into a subsidiary of the Travelers Group. As a result of the
merger, the Travelers Group would become a bank holding company and change its
name to "Citigroup Inc." (Citigroup).
Salomon Smith Barney represents that the purpose of the merger is to create
more distribution channels for TRAK products. In this regard, registered
broker-dealers associated with Citigroup will be permitted to market the TRAK
Program under a different product name. However, Salomon Smith Barney explains
that the terms and conditions of PTE 94-50 and this amendment will be complied
with by the parties involved.
The merger, which occurred on October 8, 1998, required that the affected
parties obtain approval from the Federal Reserve Board under the Bank Holding
Company Act (the BHC Act). Under the BHC Act, the Federal Reserve Board does
not authorize bank holding companies, such as Citigroup, to be affiliated with
companies that organize, sponsor, control or distribute United States open-end
mutual funds. As a bank holding company, Citigroup is required to engage an
independent party to provide certain distribution services in connection with
the marketing of mutual fund shares) for all United States, publicly-traded
mutual funds for which any subsidiary of the Travelers Group/Citigroup acts as
a distributor. Salomon Smith Barney notes that although the Funds participating
in the TRAK Program will be affected by this change, no Plan will be required
to pay distribution fees to the independent distributors.
On October 15, 1998, Salomon Smith Barney was merged with and into Pendex Real
Estate Corp. (Pendex), a shell corporation domiciled in New York. Pendex, the
survivor of the merger, was then renamed "Salomon Smith Barney Inc." Upon
completion of this merger, Salomon Smith Barney became a New York corporation.
2. Recordkeeping Reimbursement Offset Procedure. Salomon Smith Barney states
that the Board of Trustees (the Board) of the Funds approved, but has not yet
implemented, a recordkeeping reimbursement offset procedure under which a Plan
participating in the TRAK Program would be permitted to reduce its investment
fees and expenses. The
reimbursement amount would be paid solely by the Funds as a means of being
competitive with other mutual funds offering similar reimbursements to
investors.
In May 1998, the Board approved a recordkeeping reimbursement amount of $12.50
for each investment position held by a participant. (In other words, a
participant holding positions in three different Funds would be eligible to
receive a total annual reimbursement of $37.50). In addition, the Board
resolved that after applying such reimbursement to recordkeeping expenses
charged by recordkeepers of the Plans, any excess reimbursement amount would be
applied to reduce other fees and expenses/2/ payable by participating Plans,
including, but not limited to, the Plan-level investment advisory fee payable
to the Consulting Group for asset allocation recommendations (the Outside Fee),
after the appropriate offset has been applied (the Net Outside Fee)./3/ If
implemented, Salomon Smith Barney explains that the Funds would pay the
appropriate reimbursement amount directly to the recordkeeper of the Plan. The
affected Plan would then be required to pay only the balance of the fee, which
is generally charged on a quarterly basis, after the excess reimbursement
amount has been deducted.
The Recordkeeping Reimbursement Offset Procedure would work as follows:
Assume that Plan A has $1 million in assets invested in the TRAK Program and
100 participants. Assume further that Plan A pays its recordkeeper $20 per
participant per year in Annual Fees totaling $2,000 per year or $500
[Page 60293]
per
quarter and $12 per participant per year in Other Fees, totaling $1,200 per
year or $300 per quarter. In addition, Plan A pays the Consulting Group a total
annual net investment advisory fee (i.e., the Net Outside Fee) of $8,500.
At the end of each calendar quarter, Plan A's recordkeeper will determine the
actual number of Fund positions held by the Plan A participants and calculate
the resulting reimbursement amount. If Plan A had 300 participant positions at
the end of the quarter, the Plan's total recordkeeping reimbursement amount
would be 300 x $3.125 (the annual amount of $12.50 divided by 4) or $937.50.
That amount would be credited as follows:
APPLICATION OF REIMBURSEMENT TO RECORDKEEPING FEES
<TABLE>
<S> <C>
Quarterly Portion of Annual Fees...................................... $ 500.00
Quarterly Portion of Other Fees....................................... 300.00
--------
Total Quarterly Recordkeeping Fees.................................... 800.00
Credit for Reimbursement.............................................. (937.50)
Excess Reimbursement.................................................. (137.50)
--------
</TABLE>
Because the reimbursement amount exceeds the recordkeeping fees due for the
quarter, the Plan does not owe any recordkeeping fee for that period.
Therefore, the recordkeeper will not bill the Plan.
APPLICATION OF EXCESS REIMBURSEMENT TO THE NET OUTSIDE FEE
<TABLE>
<S> <C>
Quarterly Net Outside Fee............................................ $2,125.00
Excess Reimbursement................................................. (137.50)
---------
Total.............................................................. 1,987.50
---------
</TABLE>
The recordkeeper will advise the Consulting Group that it is entitled to bill
the Plan for the $1,987.50 balance of its investment advisory fee (i.e., the
Net Outside Fee).
Upon participation in the TRAK Program, an Independent Plan Fiduciary selects
a recordkeeper for the Plan, from a list of recordkeepers which maintain
computer links to the Funds under the TRAK Program. Salomon Smith Barney states
that of the 23 recordkeepers currently providing services to TRAK Program
investors, only one, Smith Barney Plan Services, is an affiliate. Because the
reimbursement rate and the timing of the offset of the excess reimbursement
amount against fees will be the same regardless of the identity of the
recordkeeper and the Independent Plan Fiduciary is responsible for the
selection of this particular recordkeeper, Salomon Smith Barney believes its
affiliation with Smith Barney Plan Services does not appear to present
additional potential abuses under section 406(b)(1) or 406(b)(3) of the Act in
its capacity as an investment adviser in recommending investment in the Funds
to Independent Plan Fiduciaries.
Salomon Smith Barney notes that the reasoning in the Frost National Bank
Advisory Opinion (ERISA Advisory Opinion 97-15A, May 22, 1997) (the Frost
Opinion), is relevant to this situation. Therefore, it has not requested
administrative exemptive relief from the Department. Salomon Smith Barney
explains that in the Frost Opinion, the bank offered a comprehensive program of
administrative and investment services to Plan investors. Under this program,
the Department opined that section 406(b)(1) and 406(b)(3) of the Act would not
be
- -------
/2/ In addition to annual recordkeeping fees (the Annual Fees) payable by a
Plan participating in the TRAK Program, it is represented that a Plan might be
required to pay recordkeeping fees associated with certain particular services
(the Other Fees) such as initial plan set-up and conversion, preparation of
annual filings, enrollment, special statement preparation and audit.
/3/ Salomon Smith Barney is offsetting, quarterly, against the Outside Fee,
such amount as is necessary to assure that the Consulting Group retains not
more than 20 basis points (as an Inside Fee) from any Portfolio on investment
assets attributable to any Plan.
B-21
<PAGE>
violated if the bank received payments for services from mutual funds while
recommending mutual fund investments to plans provided such payments were fully
disclosed and then offset to reduce other plan expenses, with any excess
payments made to the plans. Salomon Smith Barney further explains that in the
Frost Opinion any benefit from payments made by the mutual funds benefitted the
plans and not the bank.
With respect to the TRAK Program, Salomon Smith Barney represents that the
reimbursement rates adopted by the Funds will be fully disclosed to Independent
Plan Fiduciaries and the offset of the excess reimbursement amount against a
Plan's expenses will be accomplished in a manner to ensure that the Plans
obtain the full benefit of the reimbursement to reduce their recordkeeping and
other Plan expenses. Salomon Smith Barney submits that the reasoning in the
Frost Opinion would apply equally to the proposed reimbursement of expenses
under the TRAK Program. Therefore, Salomon Smith Barney does not believe any
change in the scope of the exemption is necessary./4/
3. The Automatic Reallocation Option. Salomon Smith Barney wishes to modify
the TRAK Program to institute an automated reallocation feature whereby an
Independent Plan Fiduciary could elect to have his or her current asset
allocation adjusted automatically whenever the Consulting Group changes the
recommended asset allocation model (the Allocation Model) followed by such Plan
or participant./5/ Therefore, Salomon Smith Barney proposes to amend General
Condition II(f) of PTE 94-50 which requires that any recommendation or
evaluation offered by the Consulting Group be implemented only upon the express
direction of the Independent Plan Fiduciary. With the exception of the requested
changes to General Condition II(f) of PTE 94-50, all of the existing conditions
of PTE 94-50 will continue to apply to the TRAK Program.
As noted above, General Condition II(f) of PTE 94-50 provides that any
recommendation or evaluation by the Consulting Group to an Independent Plan
Fiduciary will be implemented only at the express direction of such fiduciary.
Accordingly, under the current exemption, whenever asset allocation advice is
modified by the Consulting Group, Salomon Smith Barney states that its
Financial Consultants are required to contact the Independent Plan Fiduciary of
each Plan who has chosen the Allocation Model, and obtain such fiduciary's
consent to modification of the asset allocation applied to the Plan's account.
Salomon Smith Barney notes that many TRAK Program investors have expressly
indicated that they expect reallocations to take place in the ordinary course
of the provision of investment advisory services offered by the Consulting
Group. However, these investors do not understand why they need to be contacted
in each instance
[Page 60394]
for this purpose. In addition, Salomon Smith Barney explains
that the case-by-case contact and reallocation involves delay in implementing
the change at the client's express direction, putting similarly-situated
investors into the new Allocation Models at different times.
To resolve these problems, Salomon Smith Barney proposes to offer TRAK Program
investors an Automatic Reallocation Option. Because Salomon Smith Barney
recognizes that the Automatic Reallocation Option is outside the scope of PTE
94-50, it requests a modification of the existing terms of PTE 94-50 to the
extent necessary to allow it to offer this alternative to investors. If the
exemptive relief is granted, Salomon Smith Barney represents that it will fully
disclose the nature of the Automatic Reallocation Option to the Independent
Plan Fiduciary of each existing client Plan in a written notice (the
Announcement) and permit the fiduciary to elect the Automatic Reallocation
Option by responding in writing. The Announcement will describe the intended
operation of the Automatic Reallocation Option and how future changes to the
Allocation Model selected on behalf of the Plan will be implemented. In order
to implement the Automatic Reallocation Option for new TRAK Program investors,
the Independent Plan Fiduciary will be required to check a box on the form of
Investment Advisory contract with Salomon Smith Barney (or on a separate
document designed for this purpose for those investors who have already
executed such an agreement with Salomon Smith Barney). By checking the box, the
Independent Plan Fiduciary will indicate its consent to and authorization of
actions to be taken by Salomon Smith Barney to reallocate automatically the
asset allocation in the Plan account whenever the Consulting Group modifies the
particular asset allocation recommendation which the Plan or participant has
chosen. Such election will continue in effect until revoked or terminated by
the Plan, in writing.
In operation, Salomon Smith Barney represents that the Automatic Reallocation
Option will work as follows:
(a) The Consulting Group will release a modified version of the Allocation
Model for the Plan account based upon its amended recommendation.
(b) On the day such modification is released, the Consulting Group will adjust
the Plan account to fit the new Allocation Model and to reflect current market
conditions./6/ Such adjustments will be effected through a series of purchases
and redemptions of Portfolio shares to increase or decrease the relative
investment in the various Portfolios by the Plan account.
(c) The reallocation of the Plan account will be effected on the same business
day as the release of the new Allocation Model by the Consulting Group, except
to the extent market conditions and orderly purchase and redemption procedures
may delay such processing. For purposes of calculating the percentage changes
in its asset allocation recommendation underlying the Automatic Reallocation
Option for a Plan investor's account, the Consulting Group will use the net
asset values at the close of business on the preceding trading day. However,
the execution of trades to give effect to the changed percentages will occur on
the next trading day at the then-current net asset values.
(d) Participants in the TRAK Program will receive trade confirmations of the
reallocation transactions. In this regard, for all Plan investors other than
Section 404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney
will mail trade confirmations the next business day after the reallocation
trades are executed. In the case of Section 404(c) Plan participants,
notification will depend upon the notification provisions agreed to by the Plan
recordkeeper./7/\
- -------
/4/ In this proposed exemption, the Department expresses no opinion on whether
the Frost Opinion is applicable to the recordkeeping reimbursement procedure
described above. In this regard, the Department notes that, under the facts
presented in the Frost Opinion, Frost would offset the fees received from the
mutual funds on a dollar-for-dollar basis against the trustee fees that the
plan was otherwise obligated to pay Frost.
/5/ Salomon Smith Barney notes that the Automatic Reallocation Option is to be
distinguished from "rebalancing" which occurs after the passage of time from
the original allocation decision and changes a participant's investment mix to
bring the actual allocation among investment alternatives back in line with the
participant's original allocation choices. For example, Salomon Smith Barney
states that a Plan participant receives a written quarterly review that sets
forth information concerning the participant's investments and includes a chart
comparing the original asset allocation recommendation and the actual
percentage distribution of investments held in the portfolio. Salomon Smith
Barney explains that under the chart is the following legend:
TRAK is a non-discretionary investment advisory service. All investment
decisions rest with you, the participant. Therefore, you are strongly urged to
adhere to the Consulting Group's asset allocation recommendations. Please call
your Financial Consultant should a change in allocation be warranted due to a
significant difference between the portfolio originally recommended by the
Consulting Group and your allocation or due to a change in your objectives.
Salomon Smith Barney further explains that the Financial Consultant is
expected to contact participants at least annually to encourage a comparison of
the holdings in the portfolio against the Consulting Group's original
recommendation. Barney proposes to amend General Condition II(f) of PTE 94-50
which requires that any recommendation or evaluation offered by the Consulting
Group be implemented only upon the express direction of the Independent Plan
Fiduciary. With the exception of the requested changes to General Condition
II(f) of PTE 94-50, all of the existing conditions of PTE 94-50 will continue
to apply to the TRAK Program.
/6/ Salomon Smith Barney notes that there are 12 standard Allocation Models
and that two similarly-situated Plan participants who receive the same
recommendation from the Consulting Group will receive the same reallocation.
/7/ Under these circumstances, Salomon Smith Barney will advise the
recordkeeper of the proposed reallocation of the account of a Section 404(c)
Plan participant as soon as the Consulting Group has determined that a change
to an asset allocation recommendation is going to be made. The communication
may initially be made orally because the recordkeeper must then promptly modify
its system to effect the necessary changes to a participant's account on the
effective date of the new recommendation. The oral communication is customarily
followed by a full written description of the changes within two business days
of the verbal update.
As noted above, a Section 404(c) Plan participant who has elected the
Automatic Reallocation Option would receive a trade confirmation from the
recordkeeper of the resulting changes to the positions in his or her account,
if that is the notification procedure agreed to for the Plan. Also as noted
above, transactions occurring upon automatic reallocation and the underlying
recommendation changes will be disclosed in the "Participant Quarterly Review."
B-22
<PAGE>
For example, if the recordkeeper notifies Section 404(c) Plan participants
(i.e., Independent Plan Fiduciaries) in writing after each trade, such
participants will be notified of reallocation transactions in this manner. If,
however, the recordkeeper notifies Section 404(c) Plan participants of trading
activity in a quarterly statement, the reallocation activity would be included
there.
In addition to the trade confirmations which Salomon Smith Barney will provide
to all Plan investors except Section 404(c) Plans, disclosure of the
reallocation transactions will appear in the next regular client statement.
Such transactions will be reflected as a series of purchase and redemption
transactions that will shift assets among the Portfolios in accordance with the
Allocation Model as modified by the Consulting Group.
(e) If, however, the reallocation to be made in response to the Consulting
Group's recommendation exceeds an increase or decrease of more than 10 percent
in the absolute percentage allocated to any one investment medium (e.g., a
suggested increase in a 15 percent allocation to greater than 25 percent or a
decrease of such 15 percent allocation to less than 5 percent), Salomon Smith
Barney will not automatically adjust a Plan account. Under such circumstances,
Salomon Smith Barney will send out a written notice (the Notice) to the
Independent Plan Fiduciary for each affected Plan, describing the proposed
reallocation and the date on which such allocation is to be instituted (the
Effective Date).
(f) The Notice will be mailed with the presumption of delivery within three
business days to permit timely notification and adequate response time for the
Independent Plan Fiduciary. The Notice will instruct the fiduciary that he or
she will need to do nothing if such fiduciary decides to have his or her Plan
account automatically reallocated on the Effective Date. If, on the other hand,
the Independent Plan Fiduciary does not wish to follow the Consulting Group's
revised asset allocation recommendation, the Notice will instruct the
Independent Plan Fiduciary to inform a Financial Consultant, in writing, at
least 30 calendar days prior to the proposed Effective Date that the fiduciary
wishes to "opt out" of the new Allocation Model.\/8/
(g) If the Independent Plan Fiduciary "opts out," his or her Plan account will
not be changed on the Effective Date.
[Pagae 60395]
Under such circumstances, the Allocation
Model will remain at its current level or at such other level as the Independent
Plan Fiduciary designates. However, the Automatic Reallocation Option, will
remain in effect for future changes in such participant's Allocation Model.
(h) The Independent Plan Fiduciary will always have the ability to elect,
terminate or reinstitute the Automatic Reallocation Option or to otherwise
adjust an Allocation Model, in any way, by providing reasonably prompt notice
to a Financial Consultant. Upon request by the Independent Plan Fiduciary, the
Financial Consultant will send the appropriate form.
Salomon Smith Barney states that it is not possible to predict the frequency
of reallocations because these changes are dictated by the Consulting Group's
analysis of market conditions. However, since November 1991, Salomon Smith
Barney represents that asset allocation changes of the type that would trigger
automatic reallocations have been instituted by the Consulting Group on ten
occasions. Eight of these changes were of a magnitude of 10 percentage points
or less. The other two changes were 15 percent changes and impacted only
approximately one percent and 3 percent, respectively, of the total number of
clients participating in the TRAK Program at the time.\/9/
Salomon Smith Barney also states that the reallocation called for under the
Automatic Reallocation Option will be effected by a dollar- for-dollar
liquidation and purchase of the required amounts in the respective Plan
accounts. Because of the billing of Plan accounts participating in the TRAK
Program is leveled with respect to the compensation received by Salomon Smith
Barney and by the Financial Consultant involved in an account, Salomon Smith
Barney states that the implementation of the Automatic Reallocation Option will
be revenue-neutral. In addition, Salomon Smith Barney represents that neither
the Plan nor the participants will pay any additional fees for electing to use
the Automatic Reallocation Option./10/
Thus, on the basis of the foregoing, General Condition II(f) has been revised
to read as follows:
(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 Plan Fiduciary, provided, however, that--
(1) If such Independent Plan Fiduciary shall have elected in writing (the
Election), on a form designated by Salomon Smith Barney from time to time for
such purpose, to participate in the Automatic Reallocation Option under the
TRAK Program, the affected Plan or participant account will be automatically
reallocated whenever the Consulting Group modifies the particular asset
allocation recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary, in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of a change
in the Consulting Group's asset allocation recommendation, each account based
upon the asset allocation model (the Allocation Model) affected by such change
would be adjusted on the business day of the release of the new Allocation
Model by the Consulting Group, except to the extent that market conditions, and
order purchase and redemption procedures may delay such processing through a
series of purchase and redemption transactions to shift assets among the
affected Portfolios.
(3) If the change in the Consulting Group's asset allocation recommendation
exceeds an increase or decrease of more than 10 percent in the absolute
percentage allocated to any one investment medium (e.g., a suggested increase
in a 15 percent allocation to greater than 25 percent, or a decrease of such 15
percent allocation to less than 5 percent), Salomon Smith Barney will send out
a written notice (the Notice) to all Independent Plan Fiduciaries whose current
investment allocation would be affected, describing the proposed reallocation
and the date on which such allocation is to be instituted (the Effective Date).
If the Independent Plan Fiduciary notifies Salomon Smith Barney, in writing, at
least 30 calendar days prior to the proposed Effective Date that such fiduciary
does not wish to follow such revised asset allocation recommendation, the
Allocation Model will remain at the current level, or at such other level as
the Independent Plan Fiduciary then expressly designates, in writing. If the
Independent Plan Fiduciary does not affirmatively "opt out" of the new
Consulting Group recommendation, in writing, prior to the proposed Effective
Date, such new recommendation will be automatically effected by a dollar-for-
dollar liquidation and purchase of the required amounts in the respective
account.
(4) An Independent Plan Fiduciary will receive a trade confirmation of each
reallocation
- -------
/8/ The Notice will be mailed with the presumption of delivery within three
business days so that the 30 day calendar period will not commence until the
third business day following the mailing. In addition, the Effective Date of
the Automatic Reallocation Option will occur no sooner than the business day
following the thirtieth calendar day. To avoid any misunderstandings or
miscalculations by the Independent Plan Fiduciary, Salomon Smith Barney
represents that it will conspicuously state, in the Notice, the last date for
its receipt of the Independent Plan Fiduciary's written response.
/9/ While there is no minimum percentage threshold that will trigger the
Automatic Reallocation Option, other than the historical ranges specified
above, Salomon Smith Barney notes that there may be future market circumstances
that may justify an asset allocation adjustment of a lesser amount. Because the
Consulting Group will only adjust asset allocation recommendations to reflect
current market conditions, Salomon Smith Barney anticipates that triggers for
the Automatic Reallocation Option will continue to be only market-related. As
is currently the situation, Salomon Smith Barney represents that a Plan
investor may, at any time and for any reason, contact a Financial Consultant to
request a modification of an existing Allocation Model.
/10/ General Condition II(c) of PTE 94-50 as well as this proposal states that
no Plan will pay a fee or commission by reason of the acquisition or redemption
of shares in the Trust. Since the fees paid to Salomon Smith Barney are based
upon net asset values of investments and not transactions, a change of
investment allocations and the net purchases and redemptions used to effect
such changes do not change the payable fees.
B-23
<PAGE>
transaction. In this regard, for all Plan investors other than Section 404(c)
Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney will mail
trade confirmations on the next business day after the reallocation trades are
executed. In the case of Section 404(c) Plan participants, notification will
depend upon the notification provisions agreed to by the Plan recordkeeper.
NOTICE TO INTERESTED PERSONS
Notice of the proposed exemption will be mailed by first class mail to the
Independent Plan Fiduciary Plan of each Plan currently participating in the
TRAK Program, or, in the case of a Section 404(c) Plan, to the recordholder of
Trust shares. Such notice will be given within 15 days of the publication of
the notice of pendency in the Federal Register. The notice will contain a copy
of the notice of proposed exemption as published in the Federal Register and a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2). The
supplemental statement will inform interested persons of their right to comment
on and/or to request a hearing with respect to the pending exemption. Written
comments and hearing requests are due within 45 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) 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) The proposed exemption, if granted, will not extend to transactions
prohibited under section 406(b)(3) of the
[Page 60396]
Act and section 4975(c)(1)(F) of the
Code;
(3) 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;
(4) This 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; and
(5) This proposed exemption, if granted, is subject to the express condition
that the Summary of Facts and Representations set forth in the notice of
proposed exemption relating to PTE 92-77, as amended by PTE 94-50 and this
notice, accurately describe, where relevant, the material terms of the
transactions to be consummated pursuant to this exemption.
WRITTEN COMMENTS AND HEARING REQUESTS
All interested persons are invited to submit written comments or requests for
a hearing on the pending exemption to the address above, within the time frame
set forth above, after the publication of this proposed exemption in the
Federal Register. All comments will be made a part of the record. Comments
received will be available for public inspection with the referenced
applications at the address set forth above.
PROPOSED EXEMPTION
Based on the facts and representations set forth in the application, the
Department is considering granting the requested 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, August 10, 1990).
Section I. Covered Transactions
A. 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) of the Code, shall not apply, to
the purchase or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA), or a retirement plan for self-employed
individuals (the Keogh Plan)/11/ in the Trust for Consulting Group Capital
Market Funds (the Trust), established by Salomon Smith Barney, in connection
with such Plans' participation in the TRAK Personalized Investment Advisory
Service product (the TRAK Program).
B. If the exemption is granted, 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 (1) investment advisory services or (2)
an automatic reallocation option (the Automatic Reallocation Option) 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.
This proposed exemption is subject to the following conditions that are set
forth below 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 Salomon Smith Barney 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 Plan Fiduciary, provided, however, that--
(1) If such Independent Plan Fiduciary shall have elected in writing (the
Election), on a form designated by Salomon Smith Barney from time to time for
such purpose, to participate in the Automatic Reallocation Option under the
TRAK Program, the affected Plan or participant account will be automatically
reallocated whenever the Consulting Group modifies the particular asset
allocation recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of a change
in the Consulting Group's asset allocation recommendation, each account based
upon the asset allocation model (the Allocation Model) affected by such change
- -------
/11/ The employee benefit plan, the IRA and the Keogh Plan are collectively
referred to herein as the Plans.
B-24
<PAGE>
would be adjusted on the business day of the release of the new Allocation
Model by the Consulting Group, except to the extent that market conditions, and
order purchase and redemption procedures may delay such processing through a
series of purchase and redemption transactions to shift assets among the
affected Portfolios.
(3) If the change in the Consulting Group's asset allocation recommendation
exceeds an increase or decrease of more than 10 percent in the absolute
percentage allocated to any one investment medium (e.g., a suggested increase
in a 15 percent allocation to greater than 25 percent, or a decrease of such 15
percent allocation to less than 5 percent), Salomon Smith Barney will send out
a written notice (the Notice) to all Independent Plan Fiduciaries whose current
investment allocation would be affected, describing the proposed reallocation
and the date on which such allocation is to be instituted (the Effective Date).
If the Independent Plan Fiduciary notifies Salomon Smith Barney, in writing, at
least 30 calendar days prior to the proposed Effective Date that such fiduciary
does not wish to follow such revised asset allocation recommendation, the
Allocation Model will remain at the current level, or at such other level as
the Independent Plan Fiduciary then expressly designates, in writing. If the
Independent Plan Fiduciary does not affirmatively "opt out" of the new
Consulting Group recommendation, in writing, prior to the proposed Effective
Date, such new recommendation will be automatically effected by a dollar-for-
dollar liquidation and purchase of the required amounts in the respective
account.
(4) An Independent Plan Fiduciary will receive a trade confirmation of each
reallocation transaction. In this regard, for all Plan investors other than
Section
[Page 60397]
404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney
will mail trade confirmations on the next business day after the reallocation
trades are executed. In the case of Section 404(c) Plan participants,
notification will depend upon the notification provisions agreed to by the Plan
recordkeeper.
(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 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.
(h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Salomon Smith
Barney and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any securities
that are issued by Salomon Smith Barney 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 the 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, Salomon Smith Barney and its subsidiaries and the
compensation paid to such entities./12/
(B) Upon written or oral request to Salomon Smith Barney, 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 and, if applicable,
informing Plan investors of the Automatic Reallocation Option.
(D) Upon written request of Salomon Smith Barney, 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 a
Salomon Smith Barney 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) A copy of PTE 94-50 as well as the proposed exemption and the final
exemption
pertaining to the exemptive relief described herein.
(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 Salomon Smith Barney that such fiduciary is (a) independent of
Salomon Smith Barney 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 Salomon Smith Barney that
such fiduciary is (a) independent of Salomon Smith Barney 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,
- -------
/12/ 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 Salomon Smith Barney or to other third
parties and/or indirectly through the Trust to Smith Barney.
B-25
<PAGE>
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
Salomon Smith Barney and its affiliates and (b)
[Page 60398]
the average brokerage
commission per share paid by each Portfolio to Salomon Smith Barney and its
affiliates, as compared to the average brokerage commission per share paid by
the Trust to brokers other than Salomon Smith Barney and its affiliates, both
expressed as cents per share.
(m) Salomon Smith Barney 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 Salomon Smith Barney
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 Salomon Smith
Barney 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 II 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 Salomon Smith
Barney or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term "Salomon Smith Barney" means Salomon Smith Barney Inc. and any
affiliate of Salomon Smith Barney, as defined in paragraph (b) of this Section
III.
(b) An "affiliate" of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney.
(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.
(c) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of Salomon Smith Barney and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares under 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 Plan, such as a Section 404(c) Plan, who is permitted
under the terms of such Plan to direct, and who elects to direct the investment
of assets of his or her account in such Plan.
Section IV. Effective Dates
If granted, this proposed exemption will be effective as of June 21, 1994 with
respect to the transactions described in Section I.A. and B.(1). With respect
to Section I.B.(2) and Section II(f)(1)-(4) of the General Conditions, this
proposed exemption will be effective November 9, 1998.
The availability of this proposed exemption is subject to the express
condition that the material facts and representations contained in the
application 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 PTEs 92-77 and PTE 94-50, refer to the proposed
exemptions and the grant notices which are cited above.
Signed at Washington, D.C., this 4th day of November, 1998.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-29964 Filed 11-6-98; 8:45 am]
BILLING CODE 4510-29-P
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institutional and individual clients of Salomon Smith Barney's predecessor with
appropriate and qualified money management organizations throughout the nation.
In 1989, the Consulting Group was created with the restructuring and
segregation of research and investment advisory evaluation services functions
of the Consulting Services Division of Salomon Smith Barney. 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 September 30, 1998, the Consulting Group provided services with respect
to over $150.4 billion in client assets representing more than 408,106 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 Salomon 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 fifth 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),(6) and (13) shall be 0.05%; and for Portfolios (7) through (12) and
(14) 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 (except as provided below) 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. Clients may select to receive a Review on a
semi-annual basis, rather than on a quarterly basis. Clients that select this
option nevertheless will be responsible for paying their annual TRAK fee on a
quarterly basis. The quarterly fee will be payable on the tenth business day of
the second month of each quarter. If the client pays this fee by check, these
funds will be deposited in the client's Salomon 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 Salomon 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. Clients
may terminate their participation in TRAK at any time by giving five days'
notice to Salomon 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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SALOMON SMITH BARNEY INC. IS A WHOLLY-OWNED
SUBSIDIARY OF CITIGROUP INC. CITIGROUP BUSINESSES
PRODUCE A BROAD RANGE OF FINANCIAL SERVICES--ASSET
MANAGEMENT, BANKING AND CONSUMER FINANCE, CREDIT AND
CHARGE CARDS, INSURANCE, INVESTMENTS AND INVESTMENT
BANKING AND TRADING--AND USE DIVERSE CHANNELS TO MAKE
THEM AVAILABLE TO CONSUMER AND CORPORATE CUSTOMERS
AROUND THE WORLD.
(C) 1998 SALOMON SMITH BARNEY INC.
TK2088 1/98 29XXX C5
