<PAGE>
[GRAPHIC]
Consulting Group
Capital Markets Funds
Multi-Strategy Market Neutral
Investments
Prospectus SALOMON SMITH BARNEY
May 3, 1999 --------------------
A member of citigroup [LOGO]
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Table of Contents
<TABLE>
<S> <C>
Summary 2
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Investment objective 2
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Principal investments 2
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Principal strategies 2
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Principal risks 5
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Fees and expenses 6
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The Portfolio's Investments 7
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The Manager 8
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Asset Allocation Programs 10
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Investment and Account Information 11
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Account Transactions 11
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Valuation of Shares 12
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Year 2000 Issue 12
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Dividends and distributions 12
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Taxes 12
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Appendix A A-1
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Appendix B B-1
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</TABLE>
An investment in the Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
1
Multi-Strategy Market Neutral Investments
<PAGE>
Summary
The Consulting Group, a division of SSBC Fund Management Inc. ("SSBC"), serves
as the manager for Multi-Strategy Market Neutral Investments (the "Portfolio").
As manager, the Consulting Group selects and oversees professional money manag-
ers who are responsible for investing the assets of the Portfolio. The Portfo-
lio's assets are allocated among three subadvisors according to the following
percentages: Pegasus Investments, Inc.--33.3%, State Street Global Advisors--
33.3%, Calamos Asset Management--33.3%. Changes to this allocation greater than
10% of the Portfolio's assets will be made by the Board of Trustees.
Investment objective
Long-term capital appreciation
Principal investments
The Portfolio invests primarily in securities of U.S. companies of various mar-
ket capitalizations. A portion of the Portfolio's assets may be invested in se-
curities of companies located outside the U.S. The manager allocates the assets
among subadvisers employing three portfolio management strategies:
. Convertible arbitrage
. Merger arbitrage
. Equity market neutral
Through these strategies, the Portfolio attempts to achieve capital apprecia-
tion from stock selection and other strategies rather than from general stock
market movements. Each of the strategies involves taking both long and short
positions in securities. The long positions generally increase in price in a
rising market (and decrease in a declining market). Short positions generally
incur losses in a rising market (and profit from market declines). Consequent-
ly, the long and short positions tend to cancel out the effect of general stock
market trends. Using convertible arbitrage or merger arbitrage, the Portfolio
seeks to profit either by identifying price differentials among related securi-
ties or inefficiencies in the market's pricing of certain securities. Using an
equity market neutral strategy, the Porfolio seeks to select undervalued stocks
for its long positions and overvalued stocks for its short positions. The Port-
folio's strategies are intended to produce favorable returns regardless of the
general trend in the market and to minimize the risks associated with investing
in the equity markets. However, there is no assurance that such favorable re-
turns will be achieved.
Principal strategies
Convertible Arbitrage. A portion of the Portfolio's assets are invested in ac-
cordance with a convertible arbitrage strategy, which is implemented by Calamos
Asset Management. Convertible arbitrage consists of buying debt securities,
preferred stocks and other securities convertible into common stock and hedging
a portion of the equity risk inherent in these securities. This hedging is
achieved by selling short some or all of the common stock issuable upon exer-
cise of the convertible security. If the market price of the common stock in-
creases above the conversion price on the convertible security, the price of
the convertible security will increase. The Portfolio's increased liability on
the short position would, in whole or in part, reduce this gain. If the price
of the common stock declines, any decline in the price of the convertible secu-
rity would offset the Portfolio's gain on the short position. The Portfolio
profits from this strategy by receiving interest and/or dividends on the con-
vertible security and by adjusting the amount of equity risk that is hedged by
short sales.
In selecting securities for the Portfolio, Calamos:
. analyzes the default risk on the convertible security using traditional
credit analysis
. employs fundamental equity analysis to determine the capital appreciation po-
tential of the common stock into which the security is convertible
. considers the risk/return potential of a convertible hedge strategy with re-
spect to the security
. considers the diversification of the Portfolio and other portfolio composi-
tion criteria
2
Multi-Strategy Market Neutral Investments
<PAGE>
Summary, continued
CO-SUBADVISORS
PEGASUS INVESTMENTS, INC.
One Boston Place
Boston, Massachusetts 02108
PORTFOLIO MANAGERS
Paul B. Kopperl
Andrew D. Kopperl
Brian M.O. Kopperl and
Douglas E. Francis,
who are the president, direc-
tor, managing director and
managing director, respective-
ly, of Pegasus Investments.
STATE STREET GLOBAL ADVISORS
Two International Place
Boston, Massachusetts 02110
PORTFOLIO MANAGERS
David A. Hanna
Peter B. Wiley
Jeffrey P. Adams and
Peter M. Stonberg,
each of whom is a principal of SSGA.
CALAMOS ASSET MANAGEMENT
1111 East Warrenville Road
Naperville, Illinois 60563
PORTFOLIO MANGERS
John P. Calamos
Nicholas P. Calamos
John P. Calamos, Jr.,
who are the president and
chief investment officer, man-
aging director and vice presi-
dent, respectively, of
Calamos.
In its equity and credit analysis, Calamos considers:
. The issuer's financial soundness
. Interest and dividend coverage
. Earnings and cash-flow forecasts
. Quality of management
In determining the appropriate portion of the Portfolio's equity exposure to
hedge, Calamos considers:
. The general outlook for interest rates and equity markets
. The availability of stock to sell short
. Expected returns and volatility
Merger Arbitrage. A portion of the Portfolio's assets are allocated to Pegasus
Investments to pursue a merger arbitrage strategy. Merger arbitrage is designed
to profit from the successful completion of announced merger and acquisition
transactions involving publicly owned companies. The Portfolio does not specu-
late on unannounced transactions or where a definitive agreement does not ex-
ist. A number of trading practices may be employed to capture the potential
profit of merger and acquisition transactions. Typically, the Portfolio estab-
lishes merger arbitrage positions by purchasing the shares of a target company
at a discount to the value of the consideration offered in the merger or tender
offer (whether cash or securities). When the consideration is shares of the ac-
quiring company, the Portfolio may also sell short of the acquiring company.
The number of shares sold short generally is based on the exchange ratio speci-
fied in the merger agreement. Hedging the target shares against the considera-
tion offered in the merger or tender offer produces the merger arbitrage profit
spread--effectively the discount to the merger consideration at which the tar-
get company trades--which will be received by the Portfolio upon the transac-
tion closing. Such merger arbitrage positions both establish defined trading
profit spreads and also are intended to provide an overall portfolio hedge
against general market volatility. The merger arbitrage spread is available be-
cause of:
. Market perception that the transaction may be delayed, renegotiated or can-
celled
. The time value of money, that is, the discount an investor is willing to ac-
cept when selling shares today instead of waiting for the merger and acquisi-
tion transaction to close
. Market, industry or company specific events which create trading opportuni-
ties during the course of a merger and acquisition transaction
3
Multi-Strategy Market Neutral Investments
<PAGE>
Pegasus Investments seeks to achieve high absolute returns on investments. At
the same time, Pegasus Investments seeks to create a portfolio the market value
of which is not volatile compared to the general equities market and which is
generally not affected by overall movements in the U.S. equity markets. Pegasus
Investments intends to maintain positions that are substantially hedged and di-
versified principally among U.S. issuers involved in merger and acquisition
transactions with respect to which a definitive agreement has been signed and
approved by the Board of Directors of the companies involved. In selecting
transactions in which to invest, Pegasus Investments focuses on preservation of
capital and minimalization of risks. Pegasus Investments also evaluates among
other things:
. The strategic rationale for the merger and acquisition transaction
. The terms, conditions and valuation of the transaction
. The financial and competitive business condition of the merging companies and
the industries in which they participate
. Regulatory, financing and business contingencies to the transaction
. Trading liquidity and downside risk assessment
. Its ability to diversify among specific transactions and industries
Equity Market Neutral. SSGA manages the portion of the Portfolio's assets that
are invested in accordance with an equity market neutral strategy. Using this
strategy, SSGA purchases stocks of companies it believes are undervalued and
will outperform the equity markets. At the same time, it sells short the stocks
of companies it believes are overvalued and will underperform the general mar-
ket. The stocks purchased and sold short frequently have similar characteris-
tics such as capitalization and industry, so that changes in price arising
solely from general market movements may be expected to be offset by the long
and short positions. Positive returns generally occur when the Portfolio's
stock selection strategy establishes long positions which appreciate more than
its short positions in a rising market and short positions which depreciate
more than its long positions in a falling market.
In selecting stocks and short positions for the Portfolio, SSGA focuses upon a
stock's current relative value and the company's future earnings potential.
SSGA looks for the following to identify long and short positions for the Port-
folio:
. Valuations relative to book value, cash flow, sales and earnings
. Changes in earnings estimates relative to the price
. Whether there is a consensus among analysts
. Changes in individual earnings estimates
Short Sales
Each of the Portfolio's strate-
gies employs short sales to a
significant degree. In a short
sale, the Portfolio borrows se-
curities from a broker and sells
the borrowed securities. The
proceeds of the sale are gener-
ally used to secure the Portfo-
lio's obligation to the lending
broker and are invested in liq-
uid securities. Since the Port-
folio is obligated to return the
borrowed securities, the Portfo-
lio will benefit from a short
sale if the market price of the
security sold short declines in
value because the Portfolio
would have to pay less to re-
place the borrowed security. The
Portfolio will incur a loss if
the security increases in price
because the Portfolio would have
to pay more to replace the bor-
rowed security.
4
Multi-Strategy Market Neutral Investments
<PAGE>
Summary, continued
Principal risks
An investment in the Portfolio involves specific risks relating to the nature
of its investment strategies. You should invest in the Portfolio only if you
are capable of bearing these risks.
Equity Securities. Although the Portfolio's strategies attempt to neutralize
the effect of general trends in the equity markets, your investment in the
Portfolio is subject to the risks associated with investing in equity securi-
ties generally. Equity securities, particularly common stocks, have histori-
cally generated higher average returns than fixed income securities but have
also experienced significantly more volatility in those returns. You could lose
money on your investment or the Portfolio might not perform as well as other
investments if any of the following occurs:
. Equity markets drop in price, experience significant volatility, or perform
poorly relative to fixed income investments
. An adverse event, such as an unfavorable earnings report, depresses the price
of a particular company's stock or reduces trading liquidity
. A subadvisor is incorrect about the attractiveness, value or potential appre-
ciation or depreciation of a particular investment
Short Sales. Short sales are an integral part of each of the Portfolio's strat-
egies. Short sales involve risks, including:
. The Portfolio may incur a loss as a result of a short sale if the market
value of the borrowed security increases between the date of the short sale
and the date the Portfolio replaces the security
. The Portfolio may be unable to repurchase the borrowed security at a particu-
lar time or at an acceptable price. When the Portfolio is short a security,
the lender may terminate the loan at a time when the Portfolio is unable to
borrow the same security from another lender. When this happens the Portfolio
is required to close out its short position at the current market price.
. Although the Portfolio's gain is limited to the amount received upon selling
a security short, its potential loss is unlimited.
. The Portfolio might be unable to implement these strategies because of the
lack of attractive short sale opportunities
Merger Arbitrage. Generally, there may be a risk of insufficient merger arbi-
trage investment opportunities to implement this strategy in the event of a
significant reduction in public company merger and acquisition activity. In ad-
dition to risks generally associated with equity securities and short sales,
merger arbitrage involves the risk of loss in the event:
. A proposed transaction is not completed, is negatively renegotiated or is de-
layed and the price of the target company's securities declines. This failure
or delay may result from regulatory restrictions, negative competitive or fi-
nancial developments, the inability to obtain shareholder approval, the ab-
sence of financing or other transaction contingencies. Because the market
price of the target's securities will generally have risen significantly in
response to the proposed transaction, the corresponding market decline may be
substantial
. In the event of the failure of a merger transaction or a significant delay in
its completion, the price of the stock of the acquiring company, which the
Portfolio has sold short, may increase significantly
Convertible Arbitrage. In addition to the risks associated with equity securi-
ties and short sales, convertible arbitrage also entails risk associated with
fixed income securities. These risks include:
. If interest rates go up, the prices of fixed income securities tend to de-
cline
. The issuer of a security owned by the Portfolio may default on its obligation
to pay principal and/or interest or its credit rating may be downgraded
All strategies. Each of the strategies is based to some extent on historical
correlations between the price movements of different securities. In some mar-
ket conditions, these historical correlations may not reflect current market
conditions and may cause a subadvisor's judgments about the attractiveness of
particular securities or strategies to be incorrect. This may result in the
Portfolio incurring a loss or the Portfolio's net asset value being more vola-
tile than if these strategies were not used.
Impact of high portfolio turnover The Portfolio may engage in active and fre-
quent trading to achieve its principal investment strategies. This may lead to
the realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from the Portfolio's performance.
5
Multi-Strategy Market Neutral Investments
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Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon estimated expenses for the Portfo-
lio's current fiscal year.
<TABLE>
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Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee* 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fee** 1.80%
Administration 0.20%
Other expenses 0.35%
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Total annual Portfolio operating
expenses 2.35%
</TABLE>
* Fee payable under the TRAK(R) Personalized Investment Advisory Service for
asset allocation services. See "Asset Allocation Programs."
** The management fee rate shown above has not been reduced to reflect a waiver
of 0.30% currently in effect. Therefore, the projected effective annual man-
agement fee rate for the Portfolio's current fiscal year will be 1.50%. The
fee waiver will remain in effect until changed by the Board of Trustees.
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$388 $1,182 $1,994 $2,675
</TABLE>
6
Multi-Strategy Market Neutral Investments
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The Portfolio's Investments
The Summary describes the Portfolio's investment objective and its principal
investment strategies and risks. This section provides some additional informa-
tion about the Portfolio's investments and certain investment management tech-
niques the Portfolio may use. More information about the Portfolio's invest-
ments and portfolio management techniques, some of which entail risk, is in-
cluded in the Statement of Additional Information (SAI). To find out how to ob-
tain an SAI, please turn to the back cover of this prospectus.
Percentage Limits
Some Portfolio policies in this
section and in the summary are
stated as a percentage of as-
sets. These percentages are ap-
plied at the time of purchase of
a security and subsequently may
be exceeded because of changes
in the value of the Portfolio's
investments.
Equity Investments. Equity securities include exchange-traded and over-the-
counter common and preferred stocks, warrants, rights, convertible securities,
depositary receipts and shares, trust certificates, limited partnership inter-
ests, shares of other investment companies and real estate investment trusts
and equity participations.
Convertible Securities. Convertible securities include debt obligations and
preferred stock of an issuer which are convertible at a stated exchange rate
into common stock of the issuer. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar quality.
As with all fixed income securities, the market value of convertible securities
tends to decline as interest rates increase and, conversely, to increase as in-
terest rates decline. However, when the market price of the common stock under-
lying a convertible security exceeds the conversion price, the convertible se-
curity tends to reflect the market price of the underlying common stock. As the
market price of the underlying common stock declines, the convertible security
tends to trade increasingly on a yield basis, and thus may not decline in price
to the same extent as the underlying common stock. Convertible securities rank
senior to common stocks in an issuer's capital structure and consequently en-
tail less risk than the issuer's common stock.
Foreign Securities. Investments in securities of foreign entities and securi-
ties quoted or denominated in foreign currencies involve special risks. The
Portfolio may invest in foreign securities directly or in the form of deposi-
tory receipts. The risk of foreign investment include possible political and
economic instability and the possible imposition of exchange controls or other
restrictions on investments. If the Portfolio invests in securities denominated
or quoted in currencies other than the U.S. dollar, changes in foreign currency
rates relative to the U.S. dollar will affect the U.S. dollar value of the
Portfolio's assets.
Economic and monetary union (EMU) in Europe occurred on January 1, 1999, when
11 European countries adopted a single currency--the euro. The full conversion
to the euro is being phased in over a three year period, during which time val-
uation, systems and other operational problems may occur in connection with the
Portfolio's investments quoted in the euro. For participating countries, EMU
means sharing a single currency and single official interest rate and adhering
to agreed upon limits on government borrowing. Budgetary decisions remain in
the hands of each participating country, but are subject to each country's com-
mitment to avoid "excessive deficits" and other more specific budgetary crite-
ria. A European Central Bank is responsible for setting the official interest
rate to maintain price stability within the euro zone. EMU is driven by the ex-
pectation of a number of economic benefits, including lower transaction costs,
reduced exchange risk, greater competition, and a broadening and deepening of
European financial markets. However, there are a number of significant risks
associated with EMU. Monetary and economic union on this scale has never been
attempted before. There is a significant degree of uncertainty as to whether
participating countries will remain committed to EMU in the face of changing
economic conditions. This uncertainty may increase the volatility of the inter-
national markets.
Defensive investing The Portfolio may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short
term debt securities. The Portfolio's investment in these assets is managed by
SSBC.
7
Multi-Strategy Market Neutral Investments
<PAGE>
The Manager
The manager. The Consulting Group, a division of SSBC Fund Management Inc.
("SSBC"), serves as the manager for the Portfolio. SSBC is a wholly-owned sub-
sidiary of Salomon Smith Barney Holdings Inc., which in turn is a wholly-owned
subsidiary of Citigroup Inc. Citigroup businesses produce a broad range of fi-
nancial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world. As manager, the Consulting Group selects and oversees profes-
sional money managers who are responsible for investing the assets of the Port-
folio. The Consulting Group was established to match the investment needs of
institutional investors and substantial individual investors with appropriate
and well-qualified investment advisers. Since 1973, the Consulting Group has
grown to become one of the nation's foremost organizations providing portfolio
evaluation, asset allocation, market analysis and investment adviser selection
services.
The Portfolio is part of a series of portfolios which comprise the Consulting
Group Capital Market Funds (the "Trust"). The Trust is a series company that
consists of the Portfolio and the following additional portfolios which are of-
fered in a separate prospectus, a copy of which can be obtained from any Salo-
mon Smith Barney Financial Consultant:
. 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
The Evaluation Process
The Consulting Group screens
more than 3,000 registered in-
vestment advisory firms, tracks
the performance of more than 700
firms on its comprehensive data-
base and evaluates the strength
and performance of advisory
firms in Consulting Group pro-
grams each year. Throughout the
evaluation, the Consulting Group
focuses on a number of key is-
sues:
. level of expertise
. relative performance and
consistency of performance
. strict adherence to investment
discipline or philosophy
. personnel, facility and finan-
cial strength
. quality of service and commu-
nication.
The subadvisors. The subadvisors are responsible for the day-to-day investment
operations of the Portfolio in accordance with the Portfolio's investment ob-
jectives and policies. The name and address of each subadvisor, and the name
and background of each portfolio manager, is included in the Summary.
The subadvisor selection process. The Consulting Group serves as the manager
for the Portfolio. Subject to the review and approval of the Portfolio's trust-
ees, the Consulting Group is responsible for selecting, supervising and evalu-
ating subadvisors who manage the Portfolio's assets. The Consulting Group may
adjust the allocation of the Portfolio's assets among the subadvisors by up to
10%. Any adjustment affecting more than 10% of the Portfolio's assets will be
made by the Board of Trustees. The Consulting Group employs a rigorous evalua-
tion process to select those subadvisors that have distinguished themselves
through consistent and superior performance. The Consulting Group has retained
Hedge Fund Research, Inc. at its own expense to provide statistical and other
factual information with respect to the Portfolio's subadvisors and potential
subadvisors. The Consulting Group is also responsible for communicating perfor-
mance expectations and evaluations to the subadvisors and ultimately recom-
mending to the Board of Trustees whether a subadvisor's contract should be re-
newed. The Consulting Group provides written reports to the Trustees regarding
the results of its evaluation and monitoring functions.
8
Multi-Strategy Market Neutral Investments
<PAGE>
The Manager, continued
The Portfolio relies upon an exemptive order from the Securities and Exchange
Commission which permits the manager to select new subadvisors or replace ex-
isting subadvisors without first obtaining shareholder approval for the change.
The Trustees, including a majority of the "non-interested" Trustees, must con-
tinue to approve each new subadvisory contract. This allows the manager to act
more quickly to change subadvisors when it determines that a change is benefi-
cial to shareholders by avoiding the delay of calling and holding shareholder
meetings to approve each change. In accordance with the exemptive order, the
Portfolio will provide investors with information about each new subadvisor and
its subadvisory contract within 90 days of the engagement of a new subadvisor.
Management Fees. The Consulting Group receives fees from the Portfolio for its
services at an annual rate of 1.80% of its average daily net assets. In turn,
the Consulting Group pays the subadvisors a portion of this fee for their serv-
ices. In addition, the Portfolio pays SSBC a fee at an annual rate of 0.20% of
the Portfolio's average daily net assets for administration services.
Possible Conflict of Interest. The advisory fee paid by each portfolio in the
Trust to the manager and the portion of that advisory fee paid by the manager
to each subadvisor varies depending upon the portfolio of the Trust selected.
For this reason, the manager could retain a larger portion of the advisory fee
by recommending certain portfolios in the Trust over other portfolios for asset
allocation. You should consider this possible conflict of interest when evalu-
ating the manager's asset allocation recommendation. The manager intends to
comply with standards of fiduciary duty that require it to act solely in the
best interest of a participant when making investment recommendations.
9
Multi-Strategy Market Neutral Investments
<PAGE>
Asset Allocation Programs
Shares of the Portfolio are available to participants in advisory programs
sponsored by Salomon Smith Barney Inc., including the TRAK(R) Personalized In-
vestment Advisory Service, or other qualified investment advisors approved by
the Consulting Group. The advisory services provide investors with asset allo-
cation recommendations, which are implemented through the Portfolio.
Advisory services generally include:
. evaluating the investor's investment objectives and time horizon
. analyzing the investor's risk tolerance
. recommending an allocation of assets among the portfolios in the Trust
. providing monitoring reports containing an analysis and evaluation of an in-
vestor's account and recommending any changes
While an advisory service makes a recommendation, the ultimate investment deci-
sion is normally up to the investor and not the provider of the advisory serv-
ice.
Under an advisory service, an investor typically pays an advisory fee that may
vary based on a number of factors. The maximum fee for assets invested in the
Trust under a Salomon Smith Barney advisory service is 1.50% of average quar-
ter-end net assets. This fee may be reduced in certain circumstances. The fee
under a Salmon Smith Barney advisory program may be paid either by redemption
of shares of the Trust or by separate payment.
10
Multi-Strategy Market Neutral Investments
<PAGE>
Investment and Account Information
Account Transactions
Purchase of Shares. You may purchase shares of the Portfolio if you are a par-
ticipant in an advisory program sponsored by Salomon Smith Barney, including
TRAK(R), or by qualified investment advisers not affiliated with Salomon Smith
Barney. Purchases of shares of the Portfolio must be made through a brokerage
account maintained with Salomon Smith Barney or through a broker that clears
securities transactions through Salomon Smith Barney (an introducing broker).
You may establish a brokerage account with Salomon Smith Barney free of charge
in order to purchase shares of the Portfolio.
. The minimum initial aggregate investment in the TRAK program is $10,000. The
minimum investment in the Portfolio is $100.
. There is no minimum on additional investments.
. The minimum initial aggregate investment in the TRAK program for employees of
Salomon Smith Barney and members of their immediate families, and retirement
accounts or plans for those persons, is $5,000.
. The Portfolio and the TRAK program may vary or waive the investment minimums
at any time.
. You may establish a Systematic Withdrawal/Investment Schedule. For more in-
formation, contact your Investment Professional or consult the SAI.
Shares of the Portfolio are sold at net asset value per share without imposi-
tion of a sales charge but will be subject to any applicable advisory program
fee. All orders to purchase accepted by Salomon Smith Barney or the introducing
broker before 4:00 p.m., Eastern time, will receive that day's share price. Or-
ders accepted after 4:00 p.m. will receive the next day's share price. All pur-
chase orders must be in good order to be accepted. This means you have provided
the following information:
. Name of the Portfolio
. Account Number
. Dollar amount or number of shares to be purchased
. Signatures of each owner exactly as the account is registered
The Portfolio reserves the right to reject purchase orders or to stop offering
its shares without notice. No order will be accepted unless Salomon Smith Bar-
ney has received and accepted an advisory agreement signed by investors partic-
ipating in the TRAK(R) program or other advisory program sponsored by Salomon
Smith Barney. With respect to investors participating in advisory programs
sponsored by entities other than Salomon Smith Barney, Salomon Smith Barney
must have received and accepted the appropriate documents before the order will
be accepted. Payment for shares must be received by Salomon Smith Barney or the
introducing broker within three business days after the order is placed in good
order.
Redemption of Shares. You may sell shares of the Portfolio at net asset value
on any day the New York Stock Exchange is open by contacting your broker. All
redemption requests accepted by Salomon Smith Barney or an introducing broker
before 4:00 p.m. Eastern time on any day will be executed at that day's share
price. Orders accepted after 4:00 p.m. will be executed at the next day's
price. All redemption orders must be in good form, which may require commonly
required documentation to assure the safety of your account. If you discontinue
your Salomon Smith Barney advisory service, you must redeem your shares in the
Portfolio.
The Portfolio has the right to suspend redemptions of shares and to postpone
the transmission of redemption proceeds to a shareholder's account at Salomon
Smith Barney or at an introducing broker for up to seven days, as permitted by
law. Redemption proceeds held in an investor's brokerage account generally will
not earn any income and Salomon Smith Barney or the introducing broker may ben-
efit from the use of temporarily uninvested funds. A shareholder who pays for
shares of the Portfolio by personal check will be credited with the proceeds of
a redemption of those shares after the purchaser's check has cleared, which may
take up to 15 days.
Exchange of Shares. An investor that participates in an advisory program may
exchange shares in the Portfolio for shares in any other portfolio in the Trust
at net asset value without payment of an exchange fee. Be sure to consider the
investment objectives and policies of any Portfolio into which you make an ex-
change. An exchange is a taxable transaction except for exchanges within a re-
tirement account.
The Consulting Group may limit additional exchanges and/or purchases by a
shareholder if it determines that the shareholder is pursuing a pattern of fre-
quent exchanges. Excessive exchange transactions can adversely affect a Portfo-
lio's performance, hurting the Portfolio's other shareholders. If the Consult-
ing Group discovers a pattern of frequent exchanges, it will provide notice in
writing or by telephone to the shareholder at least 15 days before suspending
his or her exchange privilege. During the 15-day period the shareholder will be
required either to redeem his or her shares in the Portfolio
11
Multi-Strategy Market Neutral Investments
<PAGE>
or establish an allocation which the shareholder expects to maintain for a sig-
nificant period of time.
Accounts with Low Balances. If your account falls below $7,500 as a result of
redemptions (and not because of performance or payment of the Salomon Smith
Barney Advisory Service fees), Salomon Smith Barney or the introducing broker
may ask you to increase the size of your account to $7,500 within thirty days.
If you do not increase the account to $7,500, Salomon Smith Barney may redeem
the shares in your account at net asset value and remit the proceeds to you.
The proceeds will be deposited in your brokerage account unless you instruct
otherwise.
Valuation of shares
The Portfolio offers its shares at their net asset value per share. The Portfo-
lio calculates its net asset value once daily as of the close of regular trad-
ing on the New York Stock Exchange (generally at 4:00 p.m., New York time) on
each day the exchange is open. If the exchange closes early, the Portfolio ac-
celerates calculation of net asset value and transaction deadlines to the ac-
tual closing time.
The Portfolio generally values its fund securities based on market prices or
quotations. The Portfolio's currency conversions, if any, are done when the
London stock exchange closes. When market prices are not available, or when the
Consulting Group believes they are unreliable or that the value of a security
has been materially affected by events occurring after the securities or cur-
rency exchanges close, the Portfolio may price those securities at fair value.
Fair value is determined in accordance with procedures approved by the Portfo-
lio's Board of Trustees. A mutual fund that uses fair value to price securities
may value those securities higher or lower than another fund using market quo-
tations to price the same securities.
International markets may be open, and trading may take place, on days when
U.S. markets are closed. For this reason, the values of foreign securities
owned by the Portfolio could change on days when shares of the Portfolio cannot
be bought or sold.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
Portfolio. The cost of addressing the Year 2000 issue, if substantial, could
adversely effect companies and governments that issue securities held by the
Portfolio. The manager and Salomon Smith Barney are addressing the Year 2000
issue for their systems. The Portfolio has been informed by its other service
providers that they are taking similar measures. Although the Portfolio does
not expect the Year 2000 issue to adversely affect it, the Portfolio cannot
guarantee that the efforts of the Portfolio, which are limited to requesting
and receiving reports from its service providers, or the efforts of its service
providers to correct the problem will be successful.
Dividends and distributions
The Portfolio intends to distribute all or substantially all of its net invest-
ment income and realized capital gains, if any, for each taxable year. The
Portfolio declares and pays dividends, if any, from net investment income annu-
ally. The Portfolio declares and distributes realized net capital gains, if
any, annually. All dividends and capital gains are reinvested in shares of the
Portfolio unless the shareholder elects to receive them in cash.
The Portfolio expects distributions to be primarily from capital gains, a sub-
stantial portion of which may be short-term.
Taxes
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions Federal Tax Status
- ------------------------------------------------------------------------------
<S> <C>
Sales or exchange of shares Usually capital gain
or loss; long-term
only if shares owned
more than one year
- ------------------------------------------------------------------------------
Distributions of long term Long-term capital
capital gain gain
- ------------------------------------------------------------------------------
Distributions of short term Ordinary income
capital gain
- ------------------------------------------------------------------------------
Dividends from net Ordinary income
investment income
- ------------------------------------------------------------------------------
Any of the above received by Not a taxable event
a retirement account
- ------------------------------------------------------------------------------
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the Portfolio is about to declare a capital gain distribu-
tion or a taxable dividend, because it will be taxable to you even though it
may actually be a return of a portion of your investment.
After the end of each year, you will receive a Form 1099 indicating your divi-
dends and distributions for the prior year, which are taxable as described
above even if rein-
12
Multi-Strategy Market Neutral Investments
<PAGE>
Investment and Account Information, continued
vested, and your redemptions during that year. If you do not provide the Port-
folio with your correct taxpayer identification number and any required certi-
fications, you may be subject to backup withholding of 31% of the Portfolio's
distributions, dividends and redemption proceeds. Because each shareholder's
circumstances are different and special tax rules may apply, you should consult
your tax adviser about your investment in the Portfolio.
As noted above, investors, out of their own assets, will pay an advisory serv-
ice fee. For most investors who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under cur-
rent federal income tax law, an individual's miscellaneous itemized deductions
for any taxable year will be allowed as a deduction only to the extent the ag-
gregate of these deductions exceeds 2% of adjusted gross income. Such deduc-
tions are also subject to the general limitation on itemized deductions for in-
dividuals having, in 1999, adjusted gross income in excess of $124,500 ($62,250
for married individuals filing separately).
13
Multi-Strategy Market Neutral Investments
<PAGE>
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<PAGE>
APPENDIX A
Investment Indices
Following are definitions of indices that are utilized in the Client's Recom-
mendation and Review.
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 Aggregate Bond Index
Composed of the Lehman Intermediate Government/ Corporate Bond Index and the
Mortgage-Backed Securities Index and also includes treasury issues, agency
issues, corporate bond issues and mortgage-backed securities.
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 Ca nadian 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. Government Money Market 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.
A-1
<PAGE>
APPENDIX A
Investment Indices--(Continued)
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.
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
<PAGE>
APPENDIX B
The following are copies of the proposed and final exemptions from the Depart-
ment of Labor from certain provisions of the Employee Retirement Income Secu-
rity Act of 1974 relating to the purchase of shares and participation in TRAK
by certain retirement plans.
- --------------------------------------------------------------------------------
[Application Nos. D-9337 and D-9415]
Smith Barney Shearson (SBS), Located in New York, NY
NEW AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, Inc.
(Shearson Lehman).
- --------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed individual exemption which, if granted,
would replace PTE 92-77 (55 FR 45833, October 5, 1992). PTE 92-77 permits the
purchase or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA) or a retirement plan for a self-employed
individual (the Keogh Plan; collectively the Plans) in the Trust for TRAK
Investments (the Trust) established by Shearson Lehman, in connection with such
loans' participation in the TRAK Personalized Investment Advisory Service (the
TRAK Program). In addition, PTE 92-77 permits the provision, by the Consulting
Group Division of Shearson Lehman (the Consulting Group), of investment
advisory services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's selection of a
portfolio (the Portfolio) in the TRAK Program for the investment of Plan
assets. These transactions are described in a notice of pendency that was
published in the Federal Register on April 3, 1992 at 57 FR 11514. PTE 92-77 is
effective as of April 3, 1992.
If granted, the proposed exemption would replace PTE 92-77, which as discussed
below, expired by operation of the law. The new proposed exemption would permit
the replacement of Shearson Lehman with a newly-merged entity known as "Smith
Barney Shearson, Inc." It would also permit the adoption of a daily-traded
collective investment fund (the GIC Fund) for Plans providing for participant
directed investments (the Section 404(c) Plans). The proposed exemption would
provide conditional relief that is identical to that provided by PTE 92-77. In
addition, the proposed exemption would affect participants and beneficiaries
of, and fiduciaries with respect to, Plans participating in the TRAK Program.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before the expiration of 60 days from the publication of
this proposed exemption in the Federal Register. If granted, the proposed
exemption will be effective July 31, 1993 for transactions that are covered by
PTE 92-77. With respect to transactions involving the GIC Fund, the proposed
exemption will be effective as of the date the grant notice is published in the
Federal Register.
ADDRESSES: All written comments and requests for a public hearing (preferably,
three copies) should be sent to the Office of Exemption Determinations, Pension
and Welfare Benefits Administration, Room N-5849, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210. Attention: Application Nos. D-
9337 and D-9415. The applications pertaining to the proposed exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration. U.S.
Department of Labor, Room N-3307, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S. Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency before the
Department of a proposed exemption that would replace PTE 92-77. PTE 92-77
provides an exemption from certain prohibited transaction restrictions of
section 406 of the Employee Retirement Income Security Act of 1974 (the Act)
and from the sanctions resulting from the application of section 4975 of the
Internal Revenue Code of 1986 (the Code), as amended, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an application
filed by SBS pursuant to section 408(a) of the Act and section 4975(c)(2) of
the Code, and in accordance with the procedures (the Procedures) set forth in
29 CFR Part 2570, Subpart 3 (55 FR 32836, August 10, 1990). Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor. Accordingly,
this proposed replacement exemption is being issued solely by the Department.
As stated briefly above, PTE 92-77 allows Shearson Lehman to make the TRAK
Program available to Plans that acquire shares in the Trust subject to certain
conditions. Specifically, PTE 92-77 provides exemptive relief from section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of the Code,
with respect to the purchase or redemption of shares in the Trust by Plans
investing therein. In addition, PTE 92-77 provides exemptive relief from the
restrictions of section 408(b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason of
section 4975(c)(1)(E) of the Code, with respect to the provision, by the
Consulting Group of Shearson Lehman, of investment advisory services to an
Independent Plan Fiduciary of a Plan participating in the TRAK Program which
may result in such fiduciary's selection of a Portfolio in the TRAK Program for
the investment of Plan assets.
Subsequent to the granting of PTE 92-77, Shearson Lehman informed the
Department that it had signed an asset purchase agreement with Primerica
Corporation (Primerica) and Smith Barney Harris Upham & Company, Inc. (Smith
Barney), an indirect wholly owned subsidiary. The terms of the agreement
provided for the sale of substantially all of the assets of Shearson Lehman and
its Asset Management Divisions (collectively, the Shearson Divisions) to Smith
Barney./1/ The transaction was completed on July 31, 1993. As a result of the
transaction, most of the assets and business of the Shearson Divisions were
transferred to Smith Barney which, upon merger with Shearson Lehman, was
renamed "Smith Barney Shearson." (Smith Barney Shearson is denoted herein as
SBS.) Shearson Lehman received cash and an
- -------
/1/ Shearson Lehman's other primary division, Lehman Brothers, which is
responsible for securities underwriting, financial advisory, investment and
merchant banking services and commodities trading as a principal and agent has
been retained by Shearson Lehman it has been renamed "Lehman Brothers Inc."
B-1
<PAGE>
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
B-2
<PAGE>
Act and the Code, including statutory or administrative exemptions.
Furthermore, the fact that a transaction is subject to an administrative or
statutory exemption is not dispositive of whether the transaction is in fact a
prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the proposed
exemption, if granted, will be applicable to the transactions previously
described in PTE 92-77 only if the conditions specified therein are met.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or requests for
a hearing on the proposed replacement exemption to the address above, within
the time period set forth above. All comments will be made a part of the
record. Comments and requests for a hearing should state the reasons for the
writer's interest in the proposed exemption. Comments received will be
available for public inspection with the referenced applications at the address
set forth above.
Proposed Exemption
Under the authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the Procedures cited above, 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
B-3
<PAGE>
manager or a named fiduciary, such Independent Plan Fiduciary is required to
acknowledge, in writing, receipt of such documents and represent to SBS that
such fiduciary is (a) independent of SBS and its affiliates, (b) capable of
making an independent decision regarding the investment of Plan assets and (c)
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan receives
the following written or oral disclosures with respect to its ongoing
participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include financial
statement for the Trust and investment management fees paid by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(3) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing, Plan level asset allocation, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of section 404(c) Plans to discuss the report as well as with
eligible participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all Plans of the
(a) percentage of each Portfolio's brokerage commissions that are paid to SBS
and its affiliates and (b) the average brokerage commission per share paid by
each Portfolio to SBS and its affiliates; as compared to the average brokerage
commission per share paid by the Trust to brokers other than SBS and its
affiliates, both expressed as cents per share.
(m) SBS shall maintain, for a period of six years, the records necessary to
enable the persons described in paragraph (n) of this section to determine
whether the conditions of this exemption have been met, except that (1) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of SBS and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (2) no party in
interest other than SBS shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this section shall be unconditionally
available at their customary location during normal business hours by:
(A) Any duly authorized employee or representative of the Department or the
Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of SBS or
commercial or financial information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) An "affiliate" of SBS includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with SBS. (For purposes of
this subsection, the term "control" means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(b) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of SBS and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan.
(2) A participant in a Keogh Plan.
(3) An individual covered under a self-directed IRA which invests in Trust
shares, or
(4) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a Title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for transactions
involving the GIC Fund. The exemption will be effective upon its grant with
respect to the inclusion of the GIC Fund in the TRAK Program.
The availability of this proposed exemption is subject to the express
condition that the material facts and representations contained in the
applications for exemption are true and complete and accurately describe all
material terms of the transactions. In the case of continuing transactions, if
any of the material facts or representations described in the applications
change, the exemption will cease to apply as of the date of such change. In the
event of any such change, an application for a new exemption must be made to
the Department.
For a more complete statement of the facts and representations supporting the
Department's decision to grant PTE 92-77, refer to the proposed exemption and
grant notice which are cited above.
Signed at Washington, D.C. this 23rd day of March, 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-7271 Filed 3-28-94; 8:45 am]
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<PAGE>
- --------------------------------------------------------------------------------
[Prohibited Transaction Exemption 94-50; 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
- -------
/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."
B-5
<PAGE>
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 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.
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<PAGE>
(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 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
- -------
/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.
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<PAGE>
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.
(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-8
<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
- -------
/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-9
<PAGE>
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
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
[Page 60393]
$500 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
- -------
/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-10
<PAGE>
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 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.
- -------
/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.
B-11
<PAGE>
(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/\ 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.
[Page 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/
- -------
/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."
- -------
/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-12
<PAGE>
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 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).
B-13
<PAGE>
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
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,
- -------
/11/ The employee benefit plan, the IRA and the Keogh Plan are collectively
referred to herein as the Plans.
B-14
<PAGE>
(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,
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;
- -------
/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-15
<PAGE>
(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
B-16
<PAGE>
Federal Register: April 5, 1999 (Volume 64, Number 64)
Notices
Page 16486-16493
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ap99-118]
- --------------------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-15; Exemption Application No. D-10574]
Grant of 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: Grant of individual exemption to modify PTE 94-50.
- --------------------------------------------------------------------------------
SUMMARY: This document contains a final exemption before the Department of
Labor (the Department) which 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). These transactions are described in a
notice of pendency that was published in the Federal Register on November 9,
1998 at 63 FR 60391.
EFFECTIVE DATE: This exemption is effective as of July 31, 1993 with respect to
the transactions described in Section I.A. and B.(1). of this grant notice. It
is also effective as of March 29, 1994 for transactions involving a daily-
traded collective investment fund (the GIC Fund) that was added to the TRAK
Program pursuant to PTE 94-50. With respect to Section I.B(2) and Section
II(f)(1)-(4) of the General Conditions of this grant notice, which set forth
the amendments to PTE 94-50, this exemption is effective as of November 9,
1998.
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 November 9, 1998, the Department published, at 63
FR 60391, a notice of proposed exemption in the Federal Register 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, or a retirement plan for a self-employed individual
(collectively, the Plans). 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 under the TRAK Program for the investment of Plan assets.
Besides the transactions described above, PTE 94-50 permitted Smith Barney to
add a daily-traded collective investment fund (i.e., 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.
Salomon Smith Barney has informed the Department of certain changes 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 was 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 (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 exemption is being
issued solely by the Department.
The proposed exemption gave interested persons an opportunity to comment on
the notice of pendency and to request a public hearing. During the comment
period, the Department received three written comments and no requests for a
hearing in response to the notice. Two comments were submitted by Plan
participants investing in the TRAK Program. The third comment, which is
intended to clarify and
[[Page 16487]]
modify the proposed exemption, was submitted by Salomon Smith Barney.
Following is a discussion of the comments received, the responses provided by
Salomon Smith Barney, and the Department's determinations regarding the
comments.
Participant Comments
The first commenter objects to the proposed exemption because he is under the
impression that the new services that will be
- -------
/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-17
<PAGE>
offered to TRAK Program investors by Salomon Smith Barney will result in
increased fees paid to consultants and investment advisers by the Funds. The
commenter also does not believe that there will be a corresponding increase in
the growth of the Funds.
Salomon Smith Barney represents that although it is not clear which provisions
in the proposed exemption have elicted the comment, it points out that the
comment relates more or less to the underlying Fund portfolios rather than to
the TRAK Program.
As to the commenter's first area of concern, Salomon Smith Barney explains
that the proposed Automatic Reallocation Option is a service that is to be
provided at no additional cost to the investor and it does not affect the
calculation of the investment advisory fee. In addition, Salomon Smith Barney
represents that it does not have a basis to respond to the inclusion of
"consultants" in this comment. With respect to the commenter's concern about
growth prospects, Salomon Smith Barney states that no investment vehicle can
assure investors future performance.
The second commenter states that while he has no objection to Salomon Smith
Barney's implementation of the Automatic Reallocation Option, he would like to
see the requirement for clear explanations of the choices and the implications
of such choices. The commenter also suggests that Salomon Smith Barney provide
a clear path for revocation of the Automatic Reallocation Option, whereby a
Plan investor's choice would have to be reaffirmed periodically.
In response to this comment, Salomon Smith Barney states that the text of the
announcement referred to in the preamble (the Preamble) at 60394 provides
participants with the same information that the commenter requests. However, as
an alternative to the commenter's suggestion of a reaffirmation mechanism,
Salomon Smith Barney represents that it will include a footnote in the
"Participant Quarterly Review" indicating that the participant is currently
using the Automatic Reallocation Option and stating that such participant can
cancel this service at any time. Salomon Smith Barney proposes to place the
footnote after the legend quoted in Footnote 5 of the Preamble. The additional
language would read as follows:
You have elected to have your TRAK Portfolio automatically reallocated at such
time as the Consulting Group recommends a change to the Allocation Model you
are following. If, at any time, you choose to discontinue this service, please
contact your Financial Consultant for instructions.
Salomon Smith Barney believes the participant will then be consistently
reminded of his or her option to discontinue the Automatic Reallocation Option.
Salomon Smith Barney's Comments
1. Corporate Mergers
Salomon Smith Barney wishes to clarify that on page 60392 of the Preamble, in
the first sentence of the paragraph captioned "Corporate Mergers," the phrase
"Salomon Inc., the ultimate parent of" should be inserted after the phrase
"acquired all the shares of." Also, in this section, Salomon Smith Barney
wishes to modify the first sentence of the third paragraph to clarify that one
of the purposes of the merger, rather than the "sole" purpose of the merger,
was to create additional distribution channels for the TRAK Program.
In response to this comment, the Department concurs with the requested
modifications and has made the suggested changes.
2. Recordkeeping Reimbursement Offset Procedure
Salomon Smith Barney has informed the Department that although it has not yet
implemented the Recordkeeping Reimbursement Offset Procedure in a manner that
will reduce the net outside fee (the Net Outside Fee), at the present time, it
has in place a recordkeeping reimbursement program that reduces recordkeeping
expenses only, at an annual rate of $8.50 per participant position. Salomon
Smith Barney states that this annualized rate has been approved by the Funds'
Board of Trustees and that, of the $8.50 amount, $0.50 per participant position
represents a sub-transfer agency fee for the costs associated with the
application of the reimbursement process (the Processing Fee). Currently,
Salomon Smith Barney states that its affiliate, Smith Barney Corporate Trust
Company, is retaining this Processing Fee.
Salomon Smith Barney has provided an example showing the manner in which the
recordkeeping reimbursement amount is determined by the Funds at the $8.50
level using some of the numbers set forth in the example given in the Preamble
on pages 60392 and 60393. The example assumes that all positions are eligible
for reimbursement because positions in the Government Money Investments
Portfolio and the Stable Value (GIC) Fund Portfolio are not eligible for
recordkeeping reimbursement.
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 per
quarter and $12 per participant per year in Other Fees, totaling $1,200 per
year or $300 per quarter. Assume also that the Plan pays the recordkeeper an
annual Processing Fee of $150.
At the end of each calendar quarter, Plan A's recordkeeper would determine the
actual number of Fund positions held by the Plan A participants and calculate
the resulting reimbursement amount that would be paid by the Funds. If Plan A
had 300 participant positions at the end of the quarter, the Plan's total
recordkeeping reimbursement amount to be paid by the Funds would be 300 x $2
(the annual amount of $8 divided by 4) or $600.
The Processing Fee paid by the Plan to the recordkeeper for the quarter would
be 300 x $0.125 (the annual amount of $0.50 divided by 4) or $37.50. This
Processing Fee would, in turn, also be credited back to the Plan by the Funds.
Application of Reimbursement to Recordkeeping Fees
<TABLE>
<S> <C>
Quarterly Portion of Annual Fees..................................... $ 500.00
Quarterly Portion of Other Fees/2................................./.. 300.00
Processing Fee....................................................... 37.50
--------
Total Quarterly Recordkeeping Fees................................... $ 837.50
Credit for Reimbursement............................................. $(600.00)
Credit for Processing Fee............................................ $ (37.50)
--------
Total Reimbursement............................................... $(637.50)
Net Amount of Recordkeeping Fees Payable by the Plan................. $ 200.00
Net Amount of Recordkeeping Fees Payable by the Funds................ 637.50
--------
Total Quarterly Recordkeeping Fees................................ $ 837.50
</TABLE>
Since the recordkeeping reimbursement program currently in place applies only
to the payment of expenses related to recordkeeping, there would never be an
"excess reimbursement" according to Salomon Smith Barney. Therefore, the Total
Reimbursement amount would reflect the lesser of the amount calculated as in
the example above, or the actual
[[Page 16488]]
costs billed. If the Total Reimbursement
- -------
/2/ Assumes "Other Fees" are paid by the Plan during the quarter.
B-18
<PAGE>
calculation had exceeded the Total Quarterly Recordkeeping Fees, Salomon Smith
Barney states that the maximum reimbursement amount would be limited to the
Total Quarterly Recordkeeping Fees.
On page 60392 of the Preamble, the second paragraph of the section describing
the Recordkeeping Reimbursement Offset Procedure states that in May 1998, the
Board of Trustees of the Funds approved a recordkeeping reimbursement amount of
$12.50 for each investment position held by a participant. Salomon Smith Barney
notes that the recordkeeping reimbursement amount may be changed by the Board
of Trustees of the Funds from time to time. Therefore, it requests that the
description of the TRAK Program define the reimbursement amount as "such annual
dollar amount per eligible position as shall be set by the Board of Trustees of
the Funds from time to time." Salomon Smith Barney has also informed the
Department that, of the $12.50 annual reimbursement amount approved by the
Board of Trustees of the Funds, $0.50 is being retained by Smith Barney
Corporate Trust Company as a Processing Fee.
The Department does not object to making the foregoing clarifications to the
description of the Recordkeeping Reimbursement Offset Procedure in the
Preamble. However, because Smith Barney Corporate Trust Company is retaining
$0.50 per participant position as a Processing Fee, the Department requested
that Salomon Smith Barney revise the calculations in the example appearing on
pages 60392 and 60393 of the Preamble. In addition to these changes, Salomon
Smith Barney suggested that the following disclaimer language preface the
example in order to avoid investor confusion:
Salomon Smith Barney has provided the following numbers solely for ease of
calculation and not as typical or representative of the operation of the TRAK
product in any particular client circumstance.
Moreover, Salomon Smith Barney notes that because a Plan participating in the
TRAK Program may be required to pay a recordkeeper "Other Fees" in addition to
annual recordkeeping fees, both of which may be billed on a quarterly basis, it
wishes to clarify that "Other Fees" may arise only at certain times of the year
and that it does not wish to imply by the example that "Other Fees" are
regularly billed quarterly in all instances.
In light of these changes, the revised example is set forth as follows:
Salomon Smith Barney has provided the following numbers solely for ease of
calculation and not as typical or representative of the operation of the TRAK
product in any particular client circumstance. Therefore, 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 per
quarter and $12 per participant per year in Other Fees, totaling $1,200 per
year or $300 per quarter. Assume also that the Plan pays the recordkeeper an
annual Processing Fee of $150.
At the end of each calendar quarter, Plan A's recordkeeper would 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 (the annual amount of $12 divided by 4) or $900. In addition,
the Processing Fee paid to the recordkeeper for the quarter would be 300 x
$0.125 (the annual amount of $0.50 divided by 4) or $37.50.
At the end of each calendar quarter, Plan A's recordkeeper would determine the
actual number of Fund positions held by the Plan A participants and calculate
the resulting reimbursement amounts to be paid by the Funds. 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 (the annual amount of $12 divided by 4)
or $900. To this amount would be added the $37.50 Processing Fee paid to the
recordkeeper during the quarter. Such amounts would be credited as follows:
Application of Reimbursement to Recordkeeping Fees
<TABLE>
<S> <C>
Quarterly Portion of Annual Fees/3/ ................................. $ 500.00
Quarterly Portion of Other Fees...................................... 300.00
Processing Fee....................................................... 37.50
Total Quarterly Recordkeeping Fees................................... $ 837.50
Credit for Reimbursement............................................. $(900.00)
Credit for Processing Fee............................................ (37.50)
--------
Total Reimbursement............................................... $(937.50)
--------
Excess Reimbursement................................................. $(100.00)
</TABLE>
Because the Total Reimbursement amount exceeds the Total Quarterly
Recordkeeping Fees, the Plan does not owe any recordkeeping fees for that
period. Therefore, the recordkeeper would not bill the Plan. Instead, the Funds
would pay the recordkeeper the $837.50 amount due.
Application of Excess Reimbursement to the Net Outside Fee
<TABLE>
<S> <C>
Quarterly Net Outside Fee............................................ $2,125.00
Excess Reimbursement................................................. (100.00)
Net Outside Fee Paid by the Plan..................................... $2,025.00
Net Outside Fee Paid by the Funds.................................... 100.00
---------
Total Quarterly Net Outside Fee................................... $2,125.00
---------
</TABLE>
In the program as proposed, the Funds have agreed that any Excess
Reimbursement amount remaining after the payment of the Total Quarterly
Recordkeeping Fees would be paid by the Funds to reduce the Plan's investment
advisory fee obligations. Therefore, the $100 Excess Reimbursement amount would
be applied against the Plan's Quarterly Net Outside Fee. Under such
circumstances, the recordkeeper would advise the Consulting Group that it is
entitled to bill the Plan for the $2,025.00 balance of the Consulting Group's
Net Outside Fee. In turn, the Funds would pay the $100 amount attributable to
the Excess Reimbursement to the Consulting Group./4/
Also, on page 60392 of the Preamble, in the second paragraph of the section
describing the Recordkeeping Reimbursement Offset Procedure, it states that a
participant holding positions in three different Funds would be eligible to
receive a total annual reimbursement of $37.50. In light of the change to the
allocation of the $12.50 reimbursement amount (i.e., $12.00 per participant
position and $0.50 payable to Smith Barney Corporate Trust Company as a
Processing Fee), Salomon Smith Barney wishes to clarify that the participant
would receive a "total annual offset of $36.00" rather than a "total annual
reimbursement of $37.50."
Finally, on page 60392 of the Preamble, in the last sentence of the second
paragraph describing the Recordkeeping Reimbursement Offset Procedure, it
states that an affected Plan will be required to pay only the balance of the
[Net Outside] fee, which is generally charged on a quarterly
- -------
/3/ Assumes "Other Fees" are paid by the Plan during the quarter.
- -------
/4/ It should be noted that the existence or the amount of the excess will not
alter the amount of the recordkeeping or advisory fees. Instead, the
reimbursement calculations will determine the proportion of payment by the
Funds of the Plan's fee obligations.
B-19
<PAGE>
basis, after the excess reimbursement amount has been deducted. Salomon Smith
Barney wishes to point out that because some recordkeepers choose to bill the
initial quarterly installment of the recordkeeping fee in full and then apply
the recordkeeping reimbursement amount for each quarter to the next quarter's
[[Page 16489]]
fees, it suggests that the Department delete the clause stating "and the timing
of the offset of the excess reimbursement amount against the fees," appearing
on page 60393 of the Preamble in the second sentence of the first full
paragraph following the example. The Department concurs with the modifications
to the Preamble.
3. Footnote 3
On page 60392 of the Preamble, Footnote 3 states that 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.
For purposes of clarification, Salomon Smith Barney requests that the
Department add the following parenthetical exception at the end of the footnote
after the word "Plan":
(except the Government Money Investments Portfolio and the Stable Value (GIC)
Fund Portfolio, as to which no investment management fee is retained).
In response, the Department concurs with this clarification. On page 60393 of
the Preamble, the second sentence of the first paragraph following the example
states that 23 recordkeepers currently provide services to TRAK Program
investors. Salomon Smith Barney explains that since a Plan designates its own
recordkeeper, the number "23" is subject to change. Therefore, Salomon Smith
Barney suggests the deletion of this number and the Department concurs with
this clarification.
4. Investor Contact/Superfluous Language
On page 60393 of the Preamble, Footnote 5 distinguishes the Automatic
Reallocation Option from rebalancing of a participant's account and it
instructs a TRAK Program participant to contact his or her Financial Consultant
should a change in an investment allocation be warranted. Footnote 5 also
states that a Financial Consultant is expected to initiate contact with Plan
participants at least annually to encourage a comparison of the holdings in the
Plan participant's portfolio against the Consulting Group's recommendation.
Salomon Smith Barney wishes to inform the Department that in the case of
retirement plans covering multiple participants, this contact typically may
take the form of regular written communications between the Financial
Consultant and the Plan investor.
Moreover, the Department has stricken the last two sentences of Footnote 5,
which due to a printing error, contain superfluous language also appearing on
page 60393 of the Preamble, in the second and third sentences of the first
paragraph under the description of the Automatic Reallocation Option.
5. Footnote 6
On page 60394 of the Preamble, Footnote 6 states, in pertinent part, that
there are 12 standard asset allocation models (the Allocation Models). Salomon
Smith Barney explains that because it is constantly in the process of refining
the basis for its asset allocation advice, the number of standard Allocation
Models is expected to change as a result of such product modifications. To
avoid an ongoing obligation to alter this number, Salomon Smith Barney suggests
that the reference to the number "12" be deleted. Therefore, the Department has
modified the Preamble, accordingly.
6. Condition (f)
On page 60395 of the Preamble and page 60396 of the operative language of the
proposed exemption, Section II(f)(3) of the General Conditions contains a
notice provision that requires an Independent Plan Fiduciary to give Salomon
Smith Barney at least 30 calendar days prior written notice of its intention to
"opt out" of a new asset allocation model. Salomon Smith Barney wishes to
clarify that an Independent Plan Fiduciary has a period of at least 30 calendar
days during which to provide Salomon Smith Barney with written notice.
Therefore, Salomon Smith Barney proposes that the notice period be described as
"at any time within the period of 30 calendar days" prior to the Effective
Date.
In response to this comment, the Department has made the change suggested by
Salomon Smith Barney.
7. Deletion of the Last Sentence of Paragraph (g)
On pages 60394 and 60395 of the Preamble, paragraph (g) states that if the
Independent Plan Fiduciary "opts out," his or her Plan account will not be
changed on the Effective Date. Paragraph (g) also states that, 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.
Salomon Smith Barney explains that once a participant has opted out of the
Automatic Reallocation Option, the participant's account is left at its current
"non-conforming" allocation levels and it no longer resembles a Consulting
Group Allocation Model. Because the Automatic Reallocation Option, in effect,
terminates upon a participant's "opting out," Salomon Smith Barney requests the
deletion of the last sentence of paragraph (g).
In response to this comment, the Department has made the requested deletion to
paragraph (g).
8. General Information
On page 60395 of the proposed exemption, in the section captioned "General
Information," paragraph (2) states that the proposed exemption, if granted,
will not extend to transactions prohibited under section 406(b)(3) of the Act
and section 4975(c)(1)(F) of the Code. The Department wishes to point out that
the exemption will extend to transactions that are prohibited under section
406(b) of the Act and section 4975(c)(1)(E) and (F) of the Code and it has
modified the final exemption, accordingly.
9. Scope of the Term "Employee Benefit Plans"
Salomon Smith Barney requests that the exemption cover transactions in the
TRAK Program that are entered into not only by qualified plans that meet the
requirements of section 401(k) of the Code, but also by any individual account
pension plan that may be subject to Title I of the Act and established under
section 403(b) of the Code (the Section 403(b) Plan). To the extent that
participants in Section 403(b) Plans invest their contributions in shares of
the Funds, Salomon Smith Barney and its affiliates would like to make the TRAK
Program available to them.
The Department concurs with this comment and, on page 60396 of the proposed
exemption, it has revised Section I.A. of the operative language by deleting
the word "or" preceding the phrase "a retirement plan for self-employed
individuals (the Keogh Plan)" and adding
B-20
<PAGE>
the phrase "or an individual account pension plan that is subject to the
provisions of Title I of the Act and established under section 403(b) of the
Code (the Section 403(b) Plan)." In addition, the Department has revised
Footnote 11 of the proposed exemption to include a reference to the term
"Section 403(b) Plan" after the term "Keogh Plan." Further, on page 60398 of
the proposed exemption, the Department has
[[Page 16490]]
revised Section III(c)(3) of the Definitions as follows:
(3) An individual covered under (i) a self-directed IRA or (ii) a Section
403(b) Plan, which invests in Trust shares.
For further information regarding the comments or other matters discussed
herein, interested persons are encouraged to obtain copies of the exemption
application file (Exemption Application No. D-10574) the Department is
maintaining in this case. The complete application file, as well as all
supplemental submissions received by the Department are made available for
public inspection in the Public Documents Room of the Pension and Welfare
Benefits Administration, Room N-5638, U.S. Department of Labor, 200
Constitution Avenue, N.W., Washington, D.C. 20210.
Accordingly, after giving full consideration to the entire record, including
the written comments received, the Department has decided to grant the
exemption subject to the modifications and clarifications described above.
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 exemption will extend to transactions prohibited under section
406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act and section 4975(c)(2) of the
Code, and the Procedures cited above, and based upon the entire record, the
Department finds 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) The exemption 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 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.
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 above, the Department
hereby amends PTE 94-50 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 an employee benefit plan, an individual retirement
account (the IRA), a retirement plan for self- employed individuals (the Keogh
Plan), or an individual account pension plan that is subject to the provisions
of Title I of the Act and established under section 403(b) of the Code (the
Section 403(b) Plan)/5/ 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. 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 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
- -------
/5/ The employee benefit plan, the IRA, the Keogh Plan and the Section 403(b)
Plan are collectively referred to herein as the Plans.
B-21
<PAGE>
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
[[Page 16491]]
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
any time within the period of 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 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./6/
(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
- -------
/6/ 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-22
<PAGE>
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
[[Page 16492]]
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
Salomon Smith Barney and its affiliates and (b) 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 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) a self-directed IRA, or (B) a Section
403(b) Plan 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
This exemption is effective as of July 31, 1993 with respect to the
transactions described in Section I.A. and B.(1). of this grant notice. It is
also effective as of March 29, 1994 for transactions involving a daily-traded
collective investment fund that was added to the TRAK Program pursuant to PTE
94-50. With respect to Section I.B(2) and Section II(f)(1)-(4) of the General
Conditions of this grant notice, which set forth the amendments to PTE 94-50,
this exemption is effective as of November 9, 1998.
B-23
<PAGE>
The availability of this 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 application 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 the case of continuing transactions, if any of
the material facts or representations described in the application 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 this exemption, refer to the proposed exemption
and PTEs 92-77 and 94-50 which are cited above.
[[Page 16493]]
Signed at Washington, DC, this 30th day of March, 1999.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration,
Department of Labor.
[FR Doc. 99-8226 Filed 4-2-99; 8:45 am]
BILLING CODE 4510-29-P
B-24
<PAGE>
For More Information
If you want more information about the Portfolio or the other portfolios that
comprise the Trust, the following resources are available upon request.
Annual and Semiannual Reports
Additional information about the Portfolio's investments will be available in
the Portfolio's annual and semiannual reports to shareholders. The Portfolio's
annual report will contain a discussion of the market conditions and investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year.
Statement of Additional Information
The Statement of Additional Information provides more detailed information
about the Portfolio and is incorporated into this prospectus by reference.
Investment Professional
The investor's Financial Consultant is available to answer questions about the
Portfolio or the investor's overall asset allocation program.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the Portfolio by contacting their Financial
Consultant, or the Consulting Group at:
The Consulting Group
222 Delaware Avenue
Wilmington, Delaware 19801
Telephone 1-212-816-8725
Investors can review the Portfolio's reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. Investors can get text-only
copies for free from the Commission's Internet website at:
http://www.sec.gov, or for a fee by calling or writing to:
Public Reference Section of the Commission
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
If someone makes a statement about the Portfolio that is not in this prospectus,
you should not rely upon that information. Neither the Portfolio nor the
distributor is offering to sell shares of the Portfolio to any person to whom
the Portfolio may not lawfully sell such shares.
Investment Company Act File No. 811-06318
SALOMON SMITH BARNEY
--------------------
A member of citigroup [LOGO]
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.
(R)1999 Salomon Smith Barney Inc. TK2090 5/99
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
MULTI-STRATEGY MARKET NEUTRAL INVESTMENTS
May 3, 1999
222 Delaware Avenue - Wilmington, Delaware 19801 -
(212) 816-8725
This Statement of Additional Information ("SAI") supplements the
information contained in the current prospectus of Multi-Strategy Market
Neutral Investments, a separate series of the Consulting Group Capital
Markets Funds (the "Trust"), dated May 3, 1999, and should be read in
conjunction with the prospectus. The prospectus may be obtained by
contacting your Financial Consultant or by writing or calling the Trust at
the address or telephone number listed above. This SAI, although not in
itself a prospectus, is incorporated by reference into the prospectus in
its entirety.
CONTENTS
Objectives and Policies of the
Portfolio
2
Certain Securities, Investment
Techniques and Risk Factors
2
Management of the Trust
18
Purchase of Shares
23
Redemption of Shares
23
Redemption in Kind
24
Net Asset Value
24
Determination of Performance
25
Taxes
26
Distributor
30
Custodian and Transfer Agent
30
OBJECTIVES AND POLICIES OF THE PORTFOLIO
The prospectus discusses the investment objective of Multi-Strategy
Market Neutral Investments (the "Portfolio") and the principal policies
employed to achieve that objective. This SAI sets out supplemental
information concerning the types of securities and other instruments in
which the Portfolio may invest, the investment policies and strategies
that the Portfolio may utilize and certain risks associated with those
investments, policies and strategies.
CERTAIN SECURITIES, INVESTMENT TECHNIQUES AND RISK FACTORS
Short Sales. The Portfolio will seek to neutralize the exposure of its
long equity positions to general equity market risk and to realize
additional gains through the use of short sales (selling a security it
does not own) in anticipation of a decline in the value of the security
sold short relative to the long positions held by the Portfolio. In
pursuing the merger arbitrage strategy, the Portfolio may use short sales
as a hedge against any stock considered to be received in the merger
transaction. To complete such a short-sale transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then
is obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at such time may be
more or less than the price at which the security was sold by the
Portfolio. Until the security is replaced, the Portfolio is required to
repay the lender any dividends or interest that accrue during the period
of the loan. To borrow the security, the Portfolio also may be required to
pay a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker (or by the
Portfolio's custodian in a special custody account) until the short
position is closed out, to the extent necessary to meet margin
requirements. The Portfolio also will incur transaction costs in effecting
short sales. The amount of any gain will be decreased, and the amount of
any loss increased, by the amount of the premium, dividends, interest or
expenses the Portfolio may be required to pay in connection with a short
sale. An increase in the value of a security sold short by the Portfolio
over the price at which it was sold short will result in a loss to the
Portfolio, and there can be no assurance that the Portfolio will be able
to close out the position at any particular time or at an acceptable
price. The lender of the security may demand the return of the security
at any time.
EQUITY SECURITIES
Common Stocks. The Portfolio may purchase common stocks. Common stocks
are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the entity's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an
exclusive right to do so.
Convertible Securities. The Portfolio invests in convertible securities,
including debt obligations and preferred stock of the issuer convertible
at a stated exchange rate into common stock of the issuer. Convertible
securities generally offer lower interest or dividends yields than non-
convertible securities of similar quality. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. However, when the market price of the common stock underlying a
convertible security exceeds the conversion price, the convertible
security tends to reflect the market price of the underlying common stock.
As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and
thus may not decline in price to the senior to common stock in an issuer's
capital structure and consequently entail less risk than the issuer's
common stock.
The Portfolio may also purchase synthetic convertible securities
manufactured by other parties, including convertible structured notes.
Convertible structured notes are fixed income debentures linked to equity,
and are typically issued by investment banks. Convertible structured
notes have the attributes of a convertible security, however, the
investment bank that issued the convertible note assumes the credit risk
associated with the investment, rather than the issuer of the underlying
common stock into which the note is convertible.
Preferred Shares. The Portfolio may invest in preferred shares.
Preferred shares are equity securities, but they have many characteristics
of fixed income securities, such as a fixed dividend payment rate and/or a
liquidity preference over the issuer's common shares. However, because
preferred shares are equity securities, they may be more susceptible to
risks traditionally associated with equity investments than the
Portfolio's fixed income securities.
Warrants. The Portfolio may purchase warrants. Warrants acquired by the
Portfolio entitle it to buy common stock from the issuer at a specified
price and time. Warrants are subject to the same market risk as stocks,
but may be more volatile in price. The Portfolio's investment in warrants
will not entitle it to receive dividends or exercise voting rights and
will become worthless if the warrants cannot be profitably exercised
before the expiration dates.
Real Estate Investment Trusts ("REITs") and Associated Risk Factors.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their
assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with the applicable
requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). Debt securities issued by REITs, for the most part, are general
and unsecured obligations and are subject to risks associated with REITs.
Investing in REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in
general. An equity REIT may be affected by changes in the value of the
underlying properties owned by the REIT. A mortgage REIT may be affected
by changes in interest rates and the ability of the issuers of its
portfolio mortgages to repay their obligations. REITs are dependent upon
the skills of their managers and are not diversified. REITs are generally
dependent upon maintaining cash flows to repay borrowings and to make
distributions to shareholders and are subject to the risk of default by
lessees or borrowers. REITs whose underlying assets are concentrated in
properties used by a particular industry, such as health care, are also
subject to risks associated with such industry.
REITs (especially mortgage REITs) are also subject to interest rate
risks. When interest rates decline, the value of a REIT's investment in
fixed rate obligations can be expected to rise. Conversely, when interest
rates rise, the value of a REIT's investment in fixed rate obligations can
be expected to decline. If the REIT invests in adjustable rate mortgage
loans the interest rates on which are reset periodically, yields on a
REIT's investments in such loans will gradually align themselves to
reflect changes in market interest rates. This causes the value of such
investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less
frequently and in a limited volume and may be subject to more abrupt or
erratic price movements than larger company securities. Historically REITs
have been more volatile in price than the larger capitalization stocks
included in Standard & Poor's 500 Stock Index (the "S&P 500").
Other Investment Companies. The Portfolio may invest in the securities of
other investment companies to the extent that such investments are
consistent with the Portfolio's investment objective and policies and
permissible under the Investment Company Act of 1940, as amended (the
"1940 Act"). Under the 1940 Act, the Portfolio may not acquire the
securities of other domestic or foreign investment companies if, as a
result, (i) more than 10% of the Portfolio's total assets would be
invested in securities of other investment companies, (ii) such purchase
would result in more than 3% of the total outstanding voting securities of
any one investment company being held by the Portfolio, or (iii) more than
5% of the Portfolio's total assets would be invested in any one investment
company. These limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company. The Portfolio will not invest in other investment
companies for which the subadvisers or any of their affiliates act as an
investment adviser or distributor.
The Portfolio, as a holder of the securities of other investment
companies, will bear its pro rata portion of the other investment
companies' expenses, including advisory fees. These expenses are in
addition to the direct expenses of the Portfolio's own operations.
Risks of Non-U.S. Investments. To the extent that the Portfolio invests
in the securities of non-U.S. issuers, those investments involve
considerations and risks not typically associated with investing in the
securities of issuers in the U.S. These risks are heightened with respect
to investments in countries with emerging markets and economies. The
risks of investing in securities of non-U.S. issuers or issuers with
significant exposure to non-U.S. markets may be related, among other
things, to (i) differences in size, liquidity and volatility of, and the
degree and manner of regulation of, the securities markets of certain non-
U.S. markets compared to the securities markets in the U.S.; (ii)
economic, political and social factors; and (iii) foreign exchange
matters, such as restrictions on the repatriation of capital, fluctuations
in exchange rates between the U.S. dollar and the currencies in which the
Portfolio's portfolio securities are quoted or denominated, exchange
control regulations and costs associated with currency exchange. The
political and economic structures in certain non-U.S. countries,
particularly emerging markets, are expected to undergo significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed
countries. Unanticipated political or social developments may affect the
values of the Portfolio's investments in such countries. The economies and
securities and currency markets of many emerging markets have experienced
significant disruption and declines. There can be no assurances that these
economic and market disruptions will not continue.
Foreign Securities Markets and Regulations. There may be less publicly
available information about non-U.S. markets and issuers than is available
with respect to U.S. securities and issuers. Non-U.S. companies generally
are not subject to accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to U.S.
companies. The trading markets for most non-U.S. securities are generally
less liquid and subject to greater price volatility than the markets for
comparable securities in the U.S. The markets for securities in certain
emerging markets are in the earliest stages of their development. Even the
markets for relatively widely traded securities in certain non-U.S.
markets, including emerging countries, may not be able to absorb, without
price disruptions, a significant increase in trading volume or trades of a
size customarily undertaken by institutional investors in the U.S.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility
and reduced liquidity. The less liquid a market, the more difficult it may
be for the Portfolio to accurately price its portfolio securities or to
dispose of such securities at the times determined by the subadviser to be
appropriate. The risks associated with reduced liquidity may be
particularly acute in situations in which the Portfolio's operations
require cash, such as in order to meet redemptions and to pay its
expenses.
Economic, Political and Social Factors. Certain non-U.S. countries,
including emerging markets, may be subject to a greater degree of
economic, political and social instability than is the case in the U.S.
and Western European countries. Such instability may result from, among
other things: (i) authoritarian governments or military involvement in
political and economic decision making; (ii) popular unrest associated
with demands for improved economic, political and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection and conflict.
Such economic, political and social instability could significantly
disrupt the financial markets in such countries and the ability of the
issuers in such countries to repay their obligations. Investing in
emerging countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital
invested. In the event of such expropriation, nationalization or other
confiscation in any emerging country, the Portfolio could lose its entire
investment in that country.
Certain emerging market countries restrict or control foreign investment
in their securities markets to varying degrees. These restrictions may
limit the Portfolio's investment in those markets and may increase the
expenses of the Portfolio. In addition, the repatriation of both
investment income and capital from certain markets in the region is
subject to restrictions such as the need for certain governmental
consents. Even where this is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
Portfolio's operation.
Economies in individual non-U.S. countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Many non-U.S. countries have experienced substantial, and in some cases
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain
emerging countries.
Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be
affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These
economies also have been, and may continue to be, affected adversely by
economic conditions in the countries with which they trade.
Currency Risks. The value of the securities quoted or denominated in
international currencies may be adversely affected by fluctuations in the
relative currency exchange rates and by exchange control regulations. The
Portfolio's investment performance may be negatively affected by a
devaluation of a currency in which the Portfolio's investments are quoted
or denominated. Further, the Portfolio's investment performance may be
significantly affected, either positively or negatively, by currency
exchange rates because the U.S. dollar value of securities quoted or
denominated in another currency will increase or decrease in response to
changes in the value of such currency in relation to the U.S. dollar.
Custodian Services and Related Investment Costs. Custodial services and
other costs relating to investment in international securities markets
generally are more expensive than in the U.S. Such markets have settlement
and clearance procedures that differ from those in the U.S. In certain
markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to
conduct such transactions. The inability of the Portfolio to make
intended securities purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Portfolio due to a subsequent decline in value of
the portfolio security or could result in possible liability to the
Portfolio. In addition, security settlement and clearance procedures in
some emerging countries may not fully protect the Portfolio against loss
or theft of its assets.
Withholding and Other Taxes. The Portfolio will be subject to taxes,
including withholding taxes, on income (possibly including, in some cases,
capital gains) that are or may be imposed by certain non-U.S. countries
with respect to the Portfolio's investments in such countries. These taxes
will reduce the return achieved by the Portfolio. Treaties between the
U.S. and such countries may not be available to reduce the otherwise
applicable tax rates.
ADRs, EDRs and GDRs. The Portfolio may also purchase ADRs, EDRs and GDRs
or other securities representing underlying shares of foreign companies.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation
to pay some or all of the depository's transaction fees, whereas under an
unsponsored arrangement, the foreign issuer assumes no obligation and the
depository's transaction fees are paid by the ADR holders. In addition,
less information is available in the United States about an unsponsored
ADR than about a sponsored ADR, and the financial information about a
company may not be as reliable for an unsponsored ADR as it is for a
sponsored ADR. A fund may invest in ADRs through both sponsored and
unsponsored arrangements.
Economic Monetary Union ("EMU"). On January 1, 1999, 11 European
countries adopted by a single currency - the Euro. The conversion to the
Euro is being phased in over a three-year period. During this time,
valuation, systems and other operational problems may occur in connection
with the Portfolio's investment quoted in the Euro. For participating
countries, EMU will mean sharing a single currency and single official
interest rate and adhering to agreed upon limits on government borrowing.
Budgetary decisions will remain in the hands of each participating
country, but will be subject to each country's commitment to avoid
"excessive deficits" and other more specific budgetary criteria. A
European Central Bank is responsible for setting the official interest
rate to maintain price stability within the Euro zone.
EMU is driven by the expectation of a number of economic benefits,
including lower transaction cost, reduced exchange risk, greater
competition, and a broadening and deepening of European financial markets.
However, there are a number of significant risks associated with EMU.
Monetary and economic union on this scale has never been attempted before.
There is a significant degree of uncertainty as to whether participating
countries will remain committed to EMU in the face of changing economic
conditions. This uncertainty may increase the volatility of European
markets.
Fixed Income Securities. The market value of fixed income obligations of
the Portfolio 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 Portfolio. The market value of the obligations held by the
Portfolio can be expected to vary inversely to changes in prevailing
interest rates. Investors also should recognize that, in periods of
declining interest rates, the Portfolio's yield will tend to be somewhat
higher than prevailing market rates and, in periods of rising interest
rates, the Portfolio's yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to the 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 the 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.
Debt Securities Rating Criteria. Investment grade debt securities are
those rated "BBB" or higher by Standard & Poor's Ratings Group ("Standard
& Poor's"), the equivalent rating of other national statistical rating
organizations or determined to be of equivalent credit quality by the
subadviser. Debt securities rated BBB are considered medium grade
obligations with speculative characteristics, and adverse economic
conditions or changing circumstances may weaken the issuer's ability to
pay interest and repay principal.
Below investment grade debt securities are those rated "BB" and
below by Standard & Poor's or the equivalent rating of other national
statistical rating organizations. Below investment grade debt securities
or comparable unrated securities are commonly referred to as "junk bonds"
and are considered predominantly speculative and may be questionable as to
principal and interest payments. Changes in economic conditions are more
likely to lead to a weakened capacity to make principal payments and
interest payments. The amount of junk bond securities outstanding has
proliferated as an increasing number of issuers have used junk bonds for
corporate financing. An economic downturn could severely affect the
ability of highly leveraged issuers to service their debt obligations or
to repay their obligations upon maturity. Factors having an adverse impact
on the market value of lower quality securities will have an adverse
effect on the Portfolio's net asset value to the extent that it invests in
such securities. In addition, the Portfolio may incur additional expenses
to the extent it is required to seek recovery upon a default in payment of
principal or interest on its portfolio holdings.
The secondary market for junk bond securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary
market for more highly rated securities, a factor which may have an
adverse effect on the Portfolio's ability to dispose of a particular
security when necessary to meet its liquidity needs. Under adverse market
or economic conditions, the secondary market for junk bond securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the Portfolio could find it
more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Portfolio's net asset value.
Since investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the
Portfolio may invest a portion of its assets, the yields and prices of
such securities may tend to fluctuate more than those for higher rated
securities. In the lower quality segments of the debt securities market,
changes in perceptions of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner than do changes in higher
quality segments of the debt securities market, resulting in greater yield
and price volatility.
Lower rated and comparable unrated debt securities tend to offer
higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such
securities may not have been as strong as that of other issuers. However,
lower rated securities generally involve greater risks of loss of income
and principal than higher rated securities. The subadvisers will attempt
to reduce these risks through portfolio diversification and by analysis of
each issuer and its ability to make timely payments of income and
principal, as well as broad economic trends and corporate developments.
Currency Exchange Rates. The Portfolio's share value may change
significantly when the currencies, other than the U.S. dollar, in which
the Portfolio's investments are quoted or 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. The Portfolio may invest in securities quoted
or denominated in foreign currencies, 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 quoted or denominated. Forward currency
contracts are agreements to exchange one currency for another, for
example, to exchange a certain amount of U.S. dollars for a certain amount
of French francs at a future date. The date (which may be any agreed upon
fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be
negotiated with a currency trader and fixed for the term of the contract
at the time that the Portfolio enters into the contract. To assure that
the 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.
Forward currency contracts (i) are traded in an interbank market
conducted directly between currency traders (typically commercial banks or
other financial institutions) and their customers, (ii) generally have no
deposit requirements and (iii) are typically consummated without payment
of any commissions. The Portfolio, however, may enter into forward
currency contracts containing either or both deposit requirements and
commissions.
At or before the maturity of a forward currency contract, the
Portfolio may either sell a portfolio security and make delivery of the
currency, or retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which the
Portfolio will obtain, on the same maturity date, the same amount of the
currency that it is obligated to deliver. If the Portfolio retains the
portfolio security and engages in an offsetting transaction, the
Portfolio, at the time of execution of the offsetting transaction, will
incur a gain or a loss to the extent that movement has occurred in forward
currency contract prices. Should forward prices decline during the period
between the Portfolio's entering into a forward currency contract for the
sale of a currency and the date it enters into an offsetting contract for
the purchase of the currency, the Portfolio will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price
of the currency it has agreed to purchase. Should forward prices increase,
the Portfolio will suffer a loss to the extent the price of the currency
it has agreed to purchase exceeds the price of the currency it has agreed
to sell.
In hedging specific portfolio positions, the 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 subadviser. 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 the Portfolio's ability to hedge
against the risk of devaluation of currencies in which the Portfolio holds
a substantial quantity of securities and are unrelated to the qualitative
rating that may be assigned to any particular security. In addition,
although forward currency contracts limit the risk of loss owing to a
decline in the value of the hedged currency, at the same time, they limit
any potential gain that might result should the value of the currency
increase. If a devaluation is generally anticipated, the Portfolio may not
be able to contract to sell currency at a price above the devaluation
level it anticipates. The successful use of forward currency contracts as
a hedging technique draws upon special skills and experience with respect
to these instruments and usually depends on the ability of the Portfolio's
subadviser to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner,
the Portfolio may not achieve the anticipated benefits of forward currency
contracts or may realize losses and thus be in a worse position than if
those strategies had not been used. Many forward currency contracts are
subject to no daily price fluctuation limits so that adverse market
movements could continue with respect to those contracts to an unlimited
extent over a period of time.
Options on Securities and Securities Indices. The Portfolio may purchase
put and call options on any security in which it may invest or options on
any securities index based on securities in which it may invest. The
Portfolio would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options it has purchased.
Writing Covered Call and Put Options on Securities. A call option written
by the Portfolio obligates the Portfolio to sell specified securities to
the holder of the option at a specified price if the option is exercised
at any time before the expiration date. Call options covered means that
the Portfolio will own the securities subject to the options as long as
the options are outstanding, or the Portfolio will use the other methods
described below. The Portfolio's purpose in writing covered call options
is to realize greater income than would be realized on portfolio
securities transactions alone. However, the Portfolio may forego the
opportunity to profit from an increase in the market price of the
underlying security.
A covered put option written by the Portfolio would obligate the
Portfolio to purchase specified securities from the option holder at a
specified price if the option is exercised at any time before the
expiration date. Put options that are covered, means that the Portfolio
would have segregated assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to
generate additional income for the Portfolio. However, in return for the
option premium, the Portfolio accepts the risk that it may be required to
purchase the underlying security at a price in excess of its market value
at the time of purchase.
Call and put options written by the Portfolio will also be
considered to be covered to the extent that the Portfolio's liabilities
under such options are wholly or partially offset by its rights under call
and put options purchased by the Portfolio. In addition, a written call
option or put may be covered by entering into an offsetting forward
contract and/or by purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the
Portfolio's net exposure on its written option position.
Writing Covered Call and Put Options on Securities Indices. The Portfolio
may also write (sell) covered call and put options on any securities index
composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the
actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of
securities or segments of the securities market rather than price
fluctuations in a single security.
The Portfolio may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional
consideration if cash in such amount is segregated) upon conversion or
exchange of other securities in its portfolio. The Portfolio may cover
call and put options on a securities index by segregated assets with a
value equal to the exercise price.
Writing Uncovered Call an Put Options on Securities an Securities Indices.
The Portfolio may write options that are not covered by portfolio
securities. This is regarded as a speculative investment technique that
could expose the Portfolio to substantial losses. The Portfolio will
designate liquid securities in the amount of its potential obligation
under uncovered options, an increase or decrease the amount of designated
assets daily based on the amount of the then-current obligation under the
option. This designation of liquid assets will not eliminate the risk of
loss from writing the option but it will ensure that the Portfolio can
satisfy its obligations under the option.
Purchasing Call and Put Options. The Portfolio would normally purchase
call options in anticipation of an increase in the market value of
securities of the type in which it may invest. The purchase of a call
option would entitle the Portfolio, in return for the premium paid, to
purchase specified securities at a specified price during the option
period. The Portfolio would ordinarily realize a gain if, during the
option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the
Portfolio would realize either no gain or a loss on the purchase of the
call option.
The Portfolio would normally purchase put options in anticipation of
a decline in the market value of securities in its portfolio ("protective
puts") or in securities in which it may invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price during the option period.
The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Portfolio's securities. Put options may
also be purchased by the Portfolio for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not
own. The Portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the
exercise price sufficiently to more than cover the premium and transaction
costs; otherwise the Portfolio would realize either no gain or a loss on
the purchase of the put option. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes
in the value of the underlying portfolio securities.
Risks of Trading Options. There is no assurance that a liquid secondary
market on an options exchange will exist for any particular
exchange-traded option, or at any particular time. If the Portfolio is
unable to effect a closing purchase transaction with respect to covered
options it has written, the Portfolio will not be able to sell the
underlying securities or dispose of its segregated assets until the
options expire or are exercised. Similarly, if the Portfolio is unable to
effect a closing sale transaction with respect to options it has
purchased, it will have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on
opening or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or the
Options Clearing Corporation (the "OCC") may not at all times be adequate
to handle current trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange, if any, that had been issued by the OCC as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Portfolio may terminate its obligations under an exchange-traded
call or put option by purchasing an option identical to the one it has
written. Obligations under over-the-counter options may be terminated
only by entering into an offsetting transaction with the counterparty to
such option. Such purchases are referred to as "closing purchase
transactions."
The Portfolio may purchase and sell both options that are traded on
U.S. and foreign exchanges and options traded over the counter with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter options is more limited than with exchange-traded options
and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. Until such time as the
staff of the Securities and Exchange Commission (the "SEC") changes its
position, the Portfolio will treat purchased over-the-counter options and
all assets used to cover written over-the-counter options as illiquid
securities, except that with respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by the Portfolio in options on securities and indices
will be subject to limitations established by each of the exchanges,
boards of trade or other trading facilities governing the maximum number
of options in each class which may be written or purchased by a single
investor or group of investors acting in concert. Thus, the number of
options which the Portfolio may write or purchase may be affected by
options written or purchased by other investment advisory clients of
Pioneer. An exchange, board of trade or other trading facility may order
the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The successful
use of protective puts for hedging purposes depends in part on a
subadviser's ability to predict future price fluctuations and the degree
of correlation between the options and securities markets.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities,
significant price movements can take place in the underlying markets that
cannot be reflected in the options markets.
In addition to the risks of imperfect correlation between the
Portfolio's portfolio and the index underlying the option, the purchase of
securities index options involves the risk that the premium and
transaction costs paid by the Portfolio in purchasing an option will be
lost. This could occur as a result of unanticipated movements in the price
of the securities comprising the securities index on which the option is
based.
Futures Contracts and Related Options. The Portfolio 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 the
Portfolio intends to purchase.
The 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.
The 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 a subadviser'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, the 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 the Portfolio may not
be able to close a futures or options position without incurring a loss in
the event of adverse price movements.
The Portfolio will incur brokerage costs whether or not its hedging
is successful and will be required to post and maintain "margin" as a
good-faith deposit against performance of its obligations under futures
contracts and under options written by the Portfolio. Futures and options
positions are marked to the market daily and the Portfolio may be required
to make subsequent "variation" margin payments depending upon whether its
positions increase or decrease in value. In this context margin payments
involve no borrowing on the part of the Portfolio.
U.S. Government Securities. The U.S. Government Securities in which the
Portfolio may invest include debt obligations of varying maturities issued
by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. government, including the Federal Housing
Administration, Federal Financing Bank, Farmers Home Administration,
Export-Import Bank of the U.S., Small Business Administration, Government
National Mortgage Association ("GNMA"), General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust Corporation and various
institutions that previously were or currently are part of the Farm Credit
System (which has been undergoing reorganization since 1987). Some U.S.
Government Securities, such as U.S. Treasury bills, Treasury notes and
Treasury bonds, which differ only in their interest rates, maturities and
times of issuance, are supported by the full faith and credit of the
United States. Others are supported by: (i) the right of the issuer to
borrow from the U.S. Treasury, such as securities of the Federal Home Loan
Banks; (ii) the discretionary authority of the U.S. Government to purchase
the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will
provide financial support in the future to U.S. Government agencies,
authorities or instrumentalities that are not supported by the full faith
and credit of the United States. Securities guaranteed as to principal
and interest by the U.S. Government, its agencies, authorities or
instrumentalities include: (i) securities for which the payment of
principal and interest is backed by an irrevocable letter of credit issued
by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participations in loans made to foreign
governments or other entities that are so guaranteed. The secondary
market for certain of these participations is limited and, therefore, may
be regarded as illiquid.
U.S. Government Securities may include zero coupon securities that
may be purchased when yields are attractive and/or to enhance portfolio
liquidity. Zero coupon U.S. Government Securities are debt obligations
that are issued or purchased at a significant discount from face value.
The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. Zero coupon U.S. Government
Securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet
debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government
Securities that make regular payments of interest. The 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.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities, including U.S. government securities, on a when-issued basis
or may purchase or sell securities for delayed delivery. In such
transactions, delivery of the securities occurs beyond the normal
settlement period, but no payment or delivery is made by the Portfolio
prior to the actual delivery or payment by the other party to the
transaction. The purchase of securities on a when-issued or delayed
delivery basis involves the risk that the value of the securities
purchased will decline prior to the settlement date. The sale of
securities for delayed delivery involves the risk that the prices
available in the market on the delivery date may be greater than those
obtained in the sale transaction. When-issued and delayed delivery
transactions will be fully collateralized by segregated liquid assets.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. Under the terms of a typical repurchase agreement, the
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. The 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
subadviser, 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. The 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 15% of the Portfolio's total
assets. 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.
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.
Lending Portfolio Securities. Consistent with applicable regulatory
requirements, the Portfolio, may lend portfolio securities to brokers,
dealers and other financial organizations. The Portfolio will not lend
securities to Salomon Smith Barney unless the Portfolio has applied for
and received specific authority to do so from the Securities and Exchange
Commission (the "SEC"). The Portfolio's loan of securities will be
collateralized by cash, letters of credit or U.S. Government Securities.
The Portfolio will maintain the collateral in an amount at least equal to
the current market value of the loaned securities. From time to time, the
Portfolio may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third
party that is unaffiliated with the Portfolio and is acting as a "finder."
The Portfolio will comply with the following conditions whenever it loans
securities: (i) the Portfolio must receive at least 100% cash collateral
or equivalent securities from the borrower; (ii) the borrower must
increase the collateral whenever the market value of the securities loaned
rises above the level of the collateral; (iii) the Portfolio must be able
to terminate the loan at any time; (iv) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market
value; (v) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities
may pass to the borrower except that, if a material event adversely
affecting the investment in the loaned securities occurs, the trust's
Board of Trustees must terminate the loan and regain the right to vote the
securities.
Illiquid Securities. The Portfolio will not invest more than 15% of its
net assets in illiquid and other securities that are not readily
marketable. Repurchase agreements maturing in more than seven days will be
included for purposes of the foregoing limit. Securities subject to
restrictions on resale under the Securities Act of 1933, as amended (the
"1933 Act"), are considered illiquid unless they are eligible for resale
pursuant to Rule 144A or another exemption from the registration
requirements of the 1933 Act and are determined to be liquid by the
subadviser. The subadvisers determine the liquidity of Rule 144A and
other restricted securities according to procedures adopted by the Board
of Trustees. The Board of Trustees monitors the subadvisers' application
of these guidelines and procedures. The inability of the Portfolio to
dispose of illiquid investments readily or at reasonable prices could
impair the Portfolio's ability to raise cash for redemptions or other
purposes.
Temporary Investments. For temporary defensive purposes during periods
when a subadviser of the Portfolio, 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. The Portfolio's U.S. dollar-denominated
temporary investments are managed by SSBC. The 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. The 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.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust as
fundamental policies of the Portfolio. Under the 1940 Act, a fundamental
policy may not be changed without the vote of a majority of the
outstanding voting securities of the Portfolio, which is defined in the
1940 Act as the lesser of (i) 67% or more of the shares present at the
Portfolio meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Portfolio.
Under the investment restrictions adopted by the Portfolio:
1. The Portfolio will not deviate from the definition of a
"diversified company" as defined in the 1940 Act and rules thereunder.
2. The Portfolio will not invest more than 25% of its total assets
in securities, the issuers of which conduct their principal business
activities in the same industry. For purposes of this limitation, U.S.
government securities and securities of state or municipal governments and
their political subdivisions are not considered to be issued by members of
any industry.
3. The Portfolio will not borrow money, except that (a) the
Portfolio may borrow from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 33 1/3% of the value of the Portfolio's total assets
(including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) valued at the time
the borrowing is made and (b) the Portfolio may, to the extent consistent
with its investment policies, enter into reverse repurchase agreements,
short sales, forward roll transactions and similar investment strategies
and techniques and (c) for short-term purposes to satisfy margin
requirements or calls.
4. The Portfolio will not make loans. This restriction does not
apply to: (a) the purchase of debt obligations in which a Portfolio may
invest consistent with its investment objectives and policies (including
participation interests in such obligations); (b) repurchase agreements;
and (c) loans of its portfolio securities.
5. The Portfolio will not purchase any securities on margin (except
for such short-term credits as are necessary for the clearance of
purchases and sales of Portfolio securities), except in connection with
short-sales of securities. For purposes of this restriction, the deposit
or payment by a Portfolio of underlying securities and other assets in
escrow and collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related options and
options on securities, indexes or similar items is not considered to be
the purchase of a security on margin.
6. The Portfolio will not purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in and selling securities of
issuers engaged in the real estate business and securities which are
secured by real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds; (c) trading in
futures contracts and options on futures contracts or (d) investing in or
purchasing real estate investment trust securities.
7. The Portfolio will not engage in the business of underwriting
securities issued by other persons, except to the extent that the
Portfolio may technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of Portfolio securities.
Portfolio Transactions
Decisions to buy and sell securities for the Portfolio are made by
the subadviser(s), subject to the overall review of the manager and the
board of trustees. Although investment decisions for the Portfolio are
made independently from those of the other accounts managed by an
subadviser, investments of the type that the Portfolio may make also may
be made by those other accounts. When the Portfolio and one or more other
accounts managed by an subadviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the subadviser to be
equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Portfolio or the size of the position
obtained or disposed of by the Portfolio.
Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions
may vary among different brokers. On most foreign exchanges, commissions
are generally fixed. No stated commission is generally applicable to
securities traded in U.S. over-the-counter markets, but the underwriters
include an underwriting commission or concession and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-
up or mark-down. U.S. Government Securities generally are purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions
on behalf of the Portfolio, its subadviser seeks the best overall terms
available. In assessing the best overall terms available for any
transaction, the subadviser will consider the factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker
or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, each Advisory
Agreement between the trust and the subadviser authorizes the subadviser,
in selecting brokers or dealers to execute a particular transaction, and
in evaluating the best overall terms available, to consider the brokerage
and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Portfolio and/or other
accounts over which the subadviser or its affiliates exercise investment
discretion. The fees under the investment management agreement and the
subadvisery agreements, respectively, are not reduced by reason of the
Portfolio's subadvisers receiving brokerage and research services. The
board of trustees of the trust will periodically review the commissions
paid by the Portfolio to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Portfolio. Over-the-counter purchases and sales by the
Portfolio are transacted directly with principal market makers except in
those cases in which better prices and executions may be obtained
elsewhere and in which commissions may be paid.
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 has determined that transactions for the Portfolio may
be executed through Salomon Smith Barney and other affiliated broker-
dealers if, in the judgment of the subadviser, 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, and if, in the
transaction, the affiliated broker-dealer charges the Portfolio a fair and
reasonable rate. The Portfolio will not purchase any security, including
U.S. Government Securities or Obligations, during the existence of any
underwriting or selling group relating thereto of which Salomon Smith
Barney is a member, except to the extent permitted by the SEC.
The Portfolio may use Salomon Smith Barney and other affiliated
broker-dealers as a commodities broker in connection with entering into
futures contracts and options on futures contracts if, in the judgment of
the subadviser, 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, and if, in the transaction, the affiliated broker-dealer
charges the Portfolio a fair and reasonable rate. Salomon Smith Barney has
agreed to charge the Portfolio commodity commissions at rates comparable
to those charged by Salomon Smith Barney to its most favored clients for
comparable trades in comparable accounts.
Portfolio Turnover
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation. Under certain market conditions, the
Portfolio authorized to engage in transactions in options may experience
increased portfolio turnover as a result of its investment strategies. For
instance, the exercise of a substantial number of options written by the
Portfolio (due to appreciation of the underlying security in the case of
call options or depreciation of the underlying security in the case of put
options) could result in a turnover rate in excess of 100%. A portfolio
turnover rate of 100% would occur if all of the Portfolio's securities
that are included in the computation of turnover were replaced once during
a period of one year.
Certain practices that may be employed by the Portfolio could result
in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later
sold. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what
a subadviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities. Portfolio
turnover rates may vary greatly from year to year as well as within a
particular year and may be affected by cash requirements for redemptions
of the Portfolio's shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
In addition, the Portfolio's use of merger arbitrage probably will
result in high portfolio turnover rates because of the relatively short
period of time that elapses between the announcement of a reorganization
and its completion or termination. The majority of mergers and
acquisitions are consummated in less than six months while tender offers
are normally completed in less than two months. Such short-term trading
involves increased brokerage commissions which expense is ultimately borne
by the shareholder.
MANAGEMENT OF THE TRUST
Trustees and Officers of the Trust
The trustees and executive officers of the trust, together with
information as to their principal business occupations, are set forth
below. The executive officers of the trust are employees of organizations
that provide services to the Portfolio. Each trustee who is an "interested
person" of the trust, as defined in the 1940 Act, is indicated by an
asterisk. As of the date of this SAI and the prospectus, the trustees and
officers of the trust as a group did not own any of the outstanding shares
of the Portfolio.
Walter E. Auch, trustee (Age 77). Consultant to companies in the
financial services industry; Director of Pimco Advisers L.P.; Brinson
Partners; Nicholas-Applegate (each a registered investment adviser);
Legend Properties, a real estate management company; Banyan Realty trust;
and Banyan Land Fund II. Director or trustee of 2 investment companies
associated with Citigroup Inc.("Citigroup").His address is 6001 N. 62nd
Place, Paradise Valley, Arizona 85253.
Martin Brody, trustee (Age 77). Private Investor; Director or
trustee of 22 investment companies associated with Citigroup
Inc.("Citigroup").His address is c/o HMK Associates, 30 Columbia Turnpike,
Florham Park, New Jersey 07932.
H. John Ellis, trustee (Age 71). Retired. Director or trustee of 2
investment companies associated with Citigroup Inc.("Citigroup").His
address is 858 East Crystal Downs Drive, Frankfort, Michigan 49635.
Armon E. Kamesar, trustee (Age 71). Chairman of the Board of TEC, an
international organization of Chief Executive Officers; Trustee, U.S.
Bankruptcy Court. Director or trustee of 2 investment companies associated
with Citigroup Inc.("Citigroup").His address is 7328 Country Club Drive,
La Jolla, California 92037.
Stephen E. Kaufman, Trustee (Age 65). Attorney. Director or trustee
of 13 investment companies associated with Citigroup Inc.("Citigroup").His
address is 277 Park Avenue, New York, New York 10172.
*Heath B. McLendon, Trustee and Chairman of the Board (Age 65).
Managing Director of Salomon Smith Barney and Chairman of the Board of
Salomon Smith Barney Strategy Advisers Inc. and Director and President of
SSBC Fund Management Inc. ("SSBC")(formerly known as Mutual Management
Corp.) and Travelers Investment Adviser, Inc. ("TIA"); Mr. McLendon serves
on the Board of 64 investment companies associated with Citigroup. His
address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney; Director and Senior Vice
President of SSBC and TIA. Mr. Daidone serves as Senior Vice President
and Treasurer of 59 investment companies associated with Citigroup. His
address is 388 Greenwich Street, New York, New York 10013.
Frank L. Campanale, Investment Officer (Age 46). President and Chief
Executive Officer of Salomon Smith Barney's Consulting Group. Prior to
1996, National Sales Director for Consulting Group. His address is 222
Delaware Avenue, Wilmington, Delaware 19801.
LeRoy T. Pease, CFA, Investment Officer (Age 40). Vice President of
Salomon Smith Barney Consulting Group. Prior to 1996, Chief Investment
Officer of EMT Group and manager for Investment Strategy for Bell
Atlantic, Philadelphia, Pennsylvania. His address is 222 Delaware Avenue,
Wilmington, Delaware 19801.
Christina T. Sydor, Secretary (Age 48). Managing Director of
Salomon Smith Barney; General Counsel and Secretary of SSBC and TIA. Ms.
Sydor serves as Secretary of 59 investment companies associated with
Citigroup. Her address is 388 Greenwich Street, New York New York 10013.
Irving David, Controller (Age 38). Director of Salomon Smith Barney
and Controller or Assitant Treasurer of 43 investment companies associated
with Citigroup. Prior to March, 1994, Assistant Treasurer of First
Investment Management Company. His address is 388 Greenwich Street, New
York New York 10013.
As of April 3, 1999, the trustees and officers as a group owned less
than 1% of the outstanding common stock of the trust.
Remuneration
No director, officer or employee of Salomon Smith Barney, SSBC or
any of their affiliates will receive any compensation from the trust for
serving as an officer or trustee of the trust. The trust pays each trustee
who is not a director, officer or employee of Salomon Smith Barney, the
manager, any subadviser, SSBC or any of their affiliates a fee of $32,000
per annum plus $1,000 per meeting attended. The trust reimburses the
trustees for travel and out-of-pocket expenses to attend meetings of the
board. For the fiscal year ended August 31, 1998, such fees and expenses
totaled $34,163.
For the fiscal year ended August 31, 1998, the trustees of the trust
were paid the following compensation:
Name
Aggregate
Compensation
From
Portfolio
Aggregate
Compensation
Pension or
Retirement
Benefits
Accrued as
Expense of
The Trust
Total
Compensation
From Fund
Complex
Total
Number
of Funds
Served In
Complex
Heath B. McLendon*
$0
None
None
None
58
Walter Auch
0
$28,000
None
$42,464
2
Martin Brody
0
28,000
None
119,814
19
Armon E. Kamesar
0
29,200
None
42,364
2
Stephen E. Kaufman
0
29,200
None
91,964
13
Manager; Subadvisers; Administrator
The manager serves as investment manager to the trust pursuant to an
investment management agreement ("Management Agreement"). Each subadviser
serves as investment subadviser to the Portfolio pursuant to separate
written agreements with the Portfolio ("Advisory Agreements"), SSBC serves
as administrator to the Portfolio pursuant to a written agreement
("Administration Agreement").
The Portfolio bears its own expenses, which generally include all
costs not specifically borne by the manager, the subadvisers, and SSBC.
Included among the 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. As administrator, SSBC generally
oversees all aspects of the trust's administration and operations
including furnishing the trust with statistical and research data,
clerical help, accounting, data processing, bookkeeping, internal auditing
and legal services and certain other services required by the trust,
prepares reports to the trust's shareholders and prepares tax returns,
reports to and filings with the SEC and state blue sky authorities. The
Portfolio pays SSBC 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.
The manager has agreed to waive a portion of the fees otherwise
payable to it by the Portfolio so that the manager would retain, as its
annual management fee, no more than 0.30% of the Portfolio's average daily
net assets.
SSBC was incorporated on March 12, 1968 under the laws of Delaware
and is a registered investment adviser. SSBC renders investment advice to
investment companies hat had aggregate assets under management as of
September 30, 1998 in excess of $108 billion. The Consulting Group, a
division of SSBC, has extensive experience in providing investment
subadviser selection services. The Consulting Group, through its
predecessors, was established in 1973 with the primary objective of
matching the investment needs of institutional and individual clients with
appropriate and qualified money management organizations throughout the
nation. In 1989, the Consulting Services Division was restructured and its
research and investment advisory evaluation services functions were
segregated and named the Consulting Group. The Consulting Group's
analysts, in the aggregate, have many years of experience performing asset
manager searches for institutional and individual clients. These analysts
rely on the manager's comprehensive database of money management firms,
through which the manager tracks the historic and ongoing performance of
over 800 of the more than 16,000 registered investment subadvisers, and
over 300 on-sight evaluation visits annually to subadvisers. 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.
The manager and the subadvisers each pays the salaries of all
officers and employees who are employed by it and the trust, and the
manager maintains office facilities for the trust. The manager and the
subadvisers bear all expenses in connection with the performance of their
respective services under the Management Agreement, the Advisory
Agreements, and the Administration Agreement.
As noted in the prospectus, subject to the supervision and direction
of the manager and, ultimately, the board of trustees, each subadviser
manages the securities held by the Portfolio it serves in accordance with
the Portfolio's stated investment objectives and policies, makes
investment decisions for the Portfolio and places orders to purchase and
sell securities on behalf of the Portfolio.
Subject to the supervision and direction of the Board of Trustees,
the manager provides to the trust investment management evaluation
services principally by performing initial due diligence on prospective
subadvisers for the Portfolio and thereafter monitoring subadvisers'
performance through quantitative and qualitative analysis as well as
periodic in-person, telephonic and written consultations with subadvisers.
In evaluation prospective subadvisers, the manager considers, among other
factors, each subadviser's level of expertise; relative performance and
consistency of performance over a minimum period of five years; level of
adherence to invest 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 subadvisers and ultimately recommending to the Board of
Trustees whether subadvisers contracts should be renewed, modified or
terminated. The manager provides written reports to the Board of Trustees
regarding the results of its elevations and monitoring functions. The
manager is also responsible for conducting all operations of the trust
except those operations contracted to the subadviser, custodian, transfer
agent or administrator.
Investors should be aware that the manager be subject to a conflict
of interest when making decisions regarding the retention and compensation
of particular subadvisers. However, the manager's decisions, including
the identity of the subadviser and the specific amount of the manager's
compensation to be paid to the subadviser and the specific amount of the
manager's compensation to be paid to the subadviser, 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.
Investors should also be aware that through Smith Barney Advisory
Services the Consulting Group serves as investment adviser to each
participant in such service and receives a fee from each participant that
does not vary based on the portfolios of the trust 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 subadviser and receives a
fee from each portfolio of the trust. 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 Smith Barney Advisory Services, may be
presented with a conflict of interest as to the specific portfolios of the
trust 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.
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 subadvisers. The Exemption is based
on among other things: (1) the manager will select, monitor, evaluate and
allocated assets to, subadviser and ensure that the subadvisers comply
with the Portfolio's investment objective, policies and restrictions; (2)
shares of the portfolio 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
subadviser and its investment advisory contract within 90 days of the
engagement of new subadviser; (4) the trust will disclose in its
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.
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 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 manger has been
advised by the trust's custodian, transfer agent and accounting service
agent that they are also in the process of modifying their system 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
funds at that time.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the trust. Stroock &
Stroock & Lavan LLP serves as counsel to the trustees who are not
interested persons of the trust.
KPMG LLP, 345 Park Avenue, New York, New York 10154, currently
serves as the independent auditors of the trust and rendered an opinion on
the trust's most recent financial statements and financial highlights.
Organization of the Trust
The trust has been organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to a Master
Trust Agreement dated April 12, 1991, as amended from time to time (the
"Trust Agreement").
In the interest of economy and convenience, certificates
representing shares in the trust are not physically issued. PNC Bank,
N.A., the trust's custodian, maintains a record of each shareholder's
ownership of trust shares. Shares do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for the
election of trustees can elect all trustees. Shares are transferable, but
have no preemptive, conversion or subscription rights. Shareholders
generally vote on a trust-wide basis, except with respect to continuation
of the Advisory Agreements, in which case shareholders vote by the
Portfolio.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the trust.
The Trust Agreement disclaims shareholder liability for acts or
obligations of the trust, however, and requires that notice of the
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the trust or a trustee. The Trust Agreement provides
for indemnification from the trust's property for all losses and expenses
of any shareholder held personally liable for the obligations of the
trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust would be unable to meet its obligations, a possibility that the
trust's management believes is remote. Upon payment of any liability
incurred by the trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the trust. The
trustees intend to conduct the operations of the trust in a manner so as
to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the trust.
PURCHASE OF SHARES
Purchases of shares of the 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. 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 Portfolio are available 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 of choices available. Advisory Services generally provide
investment advice in connection with investments among the Portfolios of
the Trust 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. Shares of
the Portfolio may be sold to clients of Salomon Smith Barney, Inc. or its
affiliates that are not participants in an Advisory Program.
The TRAK(r) Personalized Investment Advisory Service ("TRAK")
sponsored by Salomon Smith Barney is one such advisory service. Under the
TRAK program 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 objective
and risk tolerances. Shares of the Portfolio are offered for purchase and
redemption at their respective net asset value next determined, without
imposition of any initial or contingent deferred sales charge except that
the Consulting Group is paid directly by the investors purchasing
Portfolio shares based on the recommendation of investment subadvisers
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.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Portfolio is
included in the prospectus. The right of redemption of shares of the
Portfolio may be suspended or the date of payment postponed (i) for any
periods during which the New York Stock Exchange, Inc. (the "NYSE") is
closed (other than for customary weekend and holiday closings), (ii) when
trading in the markets the Portfolio normally utilizes is restricted, or
an emergency, as defined by the rules and regulations of the SEC, exists
making disposal of the Portfolio's investments or determination of its net
asset value not reasonably practicable or (iii) for such other periods as
the SEC by order may permit for the protection of the Portfolio's
shareholders.
REDEMPTIONS IN KIND
If the board of trustees determines that it would be detrimental to
the best interests of the Portfolio's shareholders to make a redemption
payment wholly in cash, the Portfolio may pay, in accordance with rules
adopted by the SEC, any portion of a redemption in excess of the lesser of
$250,000 or 1% of the Portfolio's net assets by a distribution in kind of
readily marketable portfolio securities in lieu of cash. Redemptions
failing to meet this threshold must be made in cash. Shareholders
receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
NET ASSET VALUE
The Portfolio's net asset value per share is calculated by SSBC on
each day, Monday through Friday, except 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. On those days, securities
held by the Portfolio may nevertheless be actively traded and the value of
the Portfolio's shares could be significantly affected.
Net asset value per share is determined as of the close of trading
on the NYSE and is computed by dividing the value of the Portfolio's net
assets by the total number of its shares outstanding. Securities that are
primarily traded on foreign exchanges are generally valued for purposes of
calculating the 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 as reported to the Portfolio or, if no sales occurred during
the day, these investments are quoted at the mean between the current bid
and ask prices. A security that is listed or traded on more than one
exchange is valued for purposes of calculating the Portfolio's net asset
value at the quotation on the exchange determined to be the primary market
for the security. Debt securities of U.S. issuers (other than U.S.
Government Securities and short-term investments) are valued by SSBC after
consultation with an independent 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. An option that is written by
the Portfolio is generally valued at the last sale price or, in the
absence of the last sale price, the last offer price. An option that is
purchased by the Portfolio is generally valued at the last sale price or,
in the absence of the last sale price, the last bid price. The value of a
futures contract is equal to the unrealized gain or loss on the contract
that is determined by marking the contract to the current settlement price
for a like contract on the valuation date of the futures contract. A
settlement price may not be used if the market makes a limit move with
respect to a particular futures contract or if the securities underlying
the futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as
determined by or under the direction of the board of trustees.
All assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the
bid and offered quotations of the currencies against U.S. dollars as last
quoted by 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, SSBC
may consult with an independent pricing service retained by the trust.
The valuation of the securities held by the Portfolio in U.S.
dollar-denominated securities with less than 60 days to maturity are based
upon their amortized cost, which does not take into account unrealized
capital gains or losses. Amortized cost valuation involves initially
valuing an instrument at its cost and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price that the Portfolio would receive if it sold
the instrument.
DETERMINATION OF PERFORMANCE
From time to time, the trust may quote the Portfolio's total return
in advertisements or in reports and other communications to shareholders.
Average Annual Total Return
From time to time, the Trust may advertise the Portfolio's "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 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).
Aggregate total returns also 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).
In reports or other communications to shareholders or in advertising
material, the Portfolio may quote total return figures that do not reflect
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. The
performance information also may include evaluations of the Portfolio
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.
The Portfolio's average annual total return figures are computed
according to a formula prescribed by the SEC, expressed as follows:
P(1+T)n = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return, including the effect of the
maximum annual fee for participation in TRAK.
n= number of years
ERV= Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of a 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions and the effect of the maximum
annual fee for participation in TRAK.
The ERV assumes complete redemption of the hypothetical investment
at the end of the measuring period
The Portfolio's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be
considered representative of a Portfolio's performance for any specified
period in the future.
TAXES
The following is a summary of certain federal income tax
considerations that may affect the Portfolio and its shareholders. In
addition to the considerations described below, there may be other
federal, state, local or foreign tax applications to consider. The
summary does not address all of the potential federal income tax
consequences that may be applicable to the Portfolio or to all categories
of investors, some of which may be subject to special tax rules. The
summary is not intended as a substitute for individual tax advice and
investors are urged to consult their own tax advisors as to the tax
consequences of an investment in the Portfolio.
The Portfolio intends to qualify in each year as a separate
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code") by complying with certain requirements regarding the
sources and distribution of its income and the diversification of its
assets. Provided that the Portfolio (i) is a regulated investment company
and (ii) distributes to its shareholders at least 90% of its taxable net
investment income (including, for this purpose, any excess of its net
short-term capital gain over its net long-term capital loss) for a taxable
year and 90% of its tax exempt interest income (reduced by certain
expenses for that year), it will not be liable for federal income taxes to
the extent its taxable net investment income and its net realized long-
term and short-term capital gains, if any, are distributed to its
shareholders in compliance with the Code's timing and other requirements.
As described above and in the prospectus, the Portfolio may invest
in certain types of warrants, foreign currencies, forward contracts,
options and futures contracts. The Portfolio anticipates that these
investment activities will not prevent it from qualifying as regulated
investment companies.
The Portfolio's transactions in foreign currencies, forward
contracts, options and futures contracts (including options and futures
contracts on foreign currencies) will be subject to special provisions of
the Code that, among other things, may affect the character of gains and
losses realized by the Portfolio (i.e., may affect whether gains or losses
are ordinary or capital and, if capital, the extent to which they are
long-term or short-term), accelerate recognition of income to the
Portfolio and defer Portfolio losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. These
provisions also (i) will require the Portfolio to mark-to-market certain
types of the positions in its portfolio (i.e., treat them as if they were
closed out), and (ii) may cause the Portfolio to recognize income without
receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes that are referred to above. The Portfolio will
monitor its transactions, will make the appropriate tax elections, if any,
and will make the appropriate entries in its books and records when it
acquires any foreign currency, forward contract, option, futures contract
or hedged investment in order to mitigate the effect of these rules and
seek to prevent disqualification of the Portfolio as a regulated
investment company.
As a general rule, the Portfolio's gain or loss on a sale or
exchange of an investment will be a long-term capital gain or loss if the
Portfolio has held the investment for more than one year and will be a
short-term capital gain or loss if it has held the investment for one year
or less. Gains or losses on the sale of debt securities denominated in a
foreign currency may be recharacterized as ordinary income or losses, as
described below.
Dividends or other income (including, in some cases, capital gains)
received by the Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes in some cases. The Portfolio will not be eligible to
elect to treat any foreign taxes paid by it as paid by its shareholders,
who therefore will not be entitled to deductions or credits for such taxes
on their own tax returns.
If the Portfolio acquires an equity interest (including a depositary
receipt for shares of stock) in certain foreign investment entities,
referred to as "passive foreign investment companies," the Portfolio
itself may be subject to U.S. federal income tax and an additional charge
in the nature of interest on a portion of any "excess distribution" from
such company or gain from the disposition of its equity interest, even if
the distribution or gain is distributed by the Portfolio to its
shareholders in a manner that satisfies the requirements referred to
above. If the Portfolio were able and elected to treat a passive foreign
investment company as a "qualified electing fund," in lieu of the
treatment described above, the Portfolio would be required each year to
include in income, and distribute to shareholders in accordance with the
distribution requirements referred to above, the Portfolio's pro rata
share of the ordinary earnings and net capital gains of the company,
whether or not actually received by the Portfolio. The Portfolio
generally should be able to make an alternative election to mark these
investments to market annually, resulting in the recognition of ordinary
income (rather than capital gain) or ordinary loss, subject to certain
limitations on the ability to use any such loss.
The Portfolio may be required to treat amounts as taxable income or
gain, subject to the distribution requirements referred to above, even
though no corresponding amounts of cash are received concurrently, as a
result of (1) mark to market, constructive sale or other rules applicable
to passive foreign investment companies or partnerships or trusts in which
the Portfolio invests or to certain options, futures or forward contracts,
or "appreciated financial positions" or (2) the inability to obtain cash
distributions or other amounts due to currency controls or restrictions on
repatriation imposed by a foreign country with respect to the Portfolio's
investments (including through depositary receipts) in issuers in such
country or (3) tax rules applicable to debt obligations acquired with
"original issue discount," including zero-coupon or deferred payment bonds
and pay-in-kind debt obligations, or to market discount if an election is
made with respect to such market discount. The Portfolio may therefore be
required to obtain cash to be used to satisfy these distribution
requirements by selling securities at times that it might not otherwise be
desirable to do so or borrowing the necessary cash, thereby incurring
interest expenses.
Under Section 988 of the Code, gains or losses attributable to
fluctuations in exchange rates between the time the Portfolio accrues
income or receivables or expenses or other liabilities denominated in a
foreign currency and the time the Portfolio actually collects such income
or pays such liabilities are generally treated as ordinary income or
ordinary loss. Similarly, gains or losses on foreign currency, foreign
currency forward contracts, certain foreign currency options or futures
contracts and the disposition of debt securities denominated in foreign
currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates, are also treated as
ordinary income or loss.
The Portfolio is permitted to carry forward any unused capital
losses to be utilized to offset its capital gains realized during the
eight-year period following the year in which the losses arose, which will
reduce the net realized capital gains (if any) required to be distributed
to shareholders for those years.
Dividends and Distributions
In order to avoid the application of a 4% nondeductible excise tax
on certain undistributed amounts of ordinary income and capital gains, the
Portfolio may make an additional distribution shortly before or shortly
after December 31 in each year of any undistributed ordinary income or
capital gains. The Portfolio generally will seek to pay any additional
dividends and distributions necessary to avoid the application of this
tax. For federal income tax purposes, dividends declared by the Portfolio
in October, November or December as of a record date in such a month and
which are actually paid in January of the following year will be taxable
to shareholders as if they were paid on December 31 of the year in which
they are declared rather than in the year in which shareholders actually
receive the dividends.
As a general rule, a shareholder's gain or loss on a redemption or
other disposition of Portfolio shares that is treated as a sale under the
Code will be a long-term capital gain or loss if the shareholder has held
his or her Portfolio shares for more than one year and will be a short-
term capital gain or loss if he or she has held his or her Portfolio
shares for one year or less.
The Portfolio expects to realize a significant amount of net long-
term capital gains that will be distributed as described in the
prospectus. Distributions of the excess of net long-term capital gain over
net short-term capital loss ("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless of whether received in
cash or reinvested in additional shares and how long a shareholder has
held Portfolio shares, and will be designated as capital gain dividends in
a written notice mailed to the shareholders after the close of the
Portfolio's prior taxable year. If a shareholder receives a capital gain
dividend with respect to any share and redeems, sells or otherwise
disposes of the share before it has been held for more than six months,
then any loss, to the extent of the capital gain dividend, will be treated
as a long-term capital loss. Additionally, any loss realized on a
redemption, exchange or other disposition of Portfolio shares generally
will be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with shares of the Portfolio within a period of
61 days beginning 30 days before and ending 30 days after such
disposition, such as pursuant to reinvestment of dividends in Portfolio
shares.
Dividends paid from net investment income and distributions of any
excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income, regardless of how long
shareholders have held their Portfolio shares and whether such dividends
and distributions are received in cash or reinvested in additional
Portfolio shares. Dividends paid by the Portfolio that are declared from
net investment income and are attributable to qualifying dividends
received by the Portfolio from domestic corporations may qualify for the
federal dividends-received deduction for corporations.
The portion of the dividends received from the Portfolio that
qualifies for the dividends-received deduction for corporations will be
reduced to the extent that the Portfolio holds dividend-paying stock for
less than 46 days (91 days for certain preferred stocks). The Portfolio's
holding period requirement must be satisfied separately for each dividend
during a prescribed period before and after the ex-dividend date and will
not include any period during which the Portfolio has reduced its risk of
loss from holding the stock by purchasing an option to sell, granting an
option to buy, or entering into a short sale of substantially identical
stock or securities, such as securities convertible into the stock. The
holding period for stock may also be reduced if the Portfolio diminishes
its risk of loss by holding one or more other positions with respect to
substantially similar or related properties. Dividends-received
deductions will be allowed only with respect to dividends paid on
Portfolio shares for which a corporate shareholder satisfies the same
holding period rules applicable to the Portfolio, and the deduction is
subject to limitations on debt financing at both the Portfolio and
shareholder levels. Receipt of dividends that qualify for the dividends-
received deduction may increase a corporate shareholder's liability, if
any, for alternative minimum tax. Such a shareholder should also consult
its tax adviser regarding the possibility that its federal tax basis in
its Portfolio shares may be reduced by the receipt of "extraordinary
dividends" from the Portfolio, and to the extent such basis would be
reduced below zero, current recognition of income would be required.
Each shareholder will receive after the close of the calendar year
an annual statement as to the federal income tax status of his or her
dividends and distributions for the prior calendar year. Each shareholder
will also receive, if appropriate, various written notices after the close
of the Portfolio's prior taxable year as to the federal income tax status
of the Portfolio during the Portfolio's prior taxable year. Shareholders
should consult their tax advisors as to any state and local taxes that may
apply to these dividends and distributions and the possible availability
of an exemption for dividends paid by a Portfolio attributable to interest
the Portfolio earns from U.S. Government obligations.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to the stock, these dividends
will be included in the Portfolio's gross income as of the later of (i)
the date the stock became ex-dividend with respect to the dividends (i.e.,
the date on which a buyer of the stock would not be entitled to receive
the declared, but unpaid, dividends) or (ii) the date the Portfolio
acquired the stock. Accordingly, in order to satisfy its income
distribution requirements, the Portfolio may be required to pay dividends
based on anticipated earnings, and shareholders may receive dividends in
an earlier year than would otherwise be the case.
Investors considering buying shares of the Portfolio on or just
prior to the record date for a taxable dividend or capital gain
distribution should be aware that even if the net asset value of the
Portfolio's shares is reduced below the investor's cost as a result of the
distribution, the amount of the forthcoming dividend or distribution
payment will be a taxable dividend or distribution payment even though it
may represent a return of invested capital.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to
certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then the
shareholder may be subject to a 31% "backup withholding" tax with respect
to (i) dividends and distributions and (ii) the proceeds of any
redemptions of Portfolio shares. An individual's taxpayer identification
number is his or her social security number. The 31% "backup withholding"
tax is not an additional tax and may be credited against a taxpayer's
federal income tax liability. Distributions to nonresident aliens and
foreign entities may be subject to different tax rules, including other
possible withholding taxes.
The foregoing is only a summary of certain tax considerations
generally affecting the Portfolio and its shareholders, and is not
intended as a substitute for careful tax planning. Shareholders are urged
to consult their tax advisors with specific reference to their own tax
situations, including their state and local tax liabilities.
DISTRIBUTOR
CFBDS, Inc. serves as the Portfolio's distributor on a best efforts
basis pursuant to a written agreement, which was approved by the trustees
of the trust.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association ("PNC") serves as the custodian for
the Portfolio. The assets of the Portfolio are held under bank
custodianship in accordance with the 1940 Act. Under its custody with the
trust, PNC is authorized to establish separate accounts for foreign
securities owned by the Portfolio to be held with foreign branches of U.S.
banks as well as certain foreign banks and securities depositories as sub-
custodians of assets owned by the Portfolio. For its custody services,
PNC receives monthly fees charged to the Portfolio based upon the month-
end, aggregate net asset value of the Portfolio plus certain charges for
securities transactions. PNC is also reimbursed by the Portfolio for out-
of-pocket expenses including the costs of any foreign and domestic sub-
custodians.
First Data Investor Services Group Inc., ("First Data"), a
subsidiary of First Data Corporation, serves as the trust's transfer
agent. For its services as transfer agent, First Data receives fees
charged to the Portfolio at an annual rate based upon the number of
shareholder accounts maintained during the year. First Data is also
reimbursed by the Portfolio for out-of-pocket expenses.
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