<PAGE>
Consulting Group
Capital Markets Funds
Government Money Investments
Intermediate Fixed Income Investments
Long-Term Bond Investments
Municipal Bond Investments
Mortgage Backed Investments
High Yield Investments
Balanced Investments
Large Capitalization Value Equity Investments
Large Capitalization Growth Investments
Small Capitalization Value Equity Investments
Small Capitalization Growth Investments
International Equity Investments
International Fixed Income Investments
Emerging Markets Equity Investments
Multi-Sector Fixed Income Investments
Prospectus
SalomonSmithBarney
December 28, 1999 --------------------------
A member of citigroup[LOGO]
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Investments, Risks and Performance 3
- -----------------------------------------------------------
Large Capitalization Growth Investments 4
- -----------------------------------------------------------
Large Capitalization Value Equity Investments 6
- -----------------------------------------------------------
Small Capitalization Growth Investments 8
- -----------------------------------------------------------
Small Capitalization Value Equity Investments 12
- -----------------------------------------------------------
International Equity Investments 16
- -----------------------------------------------------------
Emerging Markets Equity Investments 18
- -----------------------------------------------------------
Balanced Investments 20
- -----------------------------------------------------------
Intermediate Fixed Income Investments 22
- -----------------------------------------------------------
Long-Term Bond Investments 24
- -----------------------------------------------------------
Mortgage Backed Investments 26
- -----------------------------------------------------------
High Yield Investments 28
- -----------------------------------------------------------
Multi-Sector Fixed Income Investments 30
- -----------------------------------------------------------
International Fixed Income Investments 34
- -----------------------------------------------------------
Municipal Bond Investments 36
- -----------------------------------------------------------
Government Money Investments 38
- -----------------------------------------------------------
More on the Portfolios' Investments and Related Risks 40
- -----------------------------------------------------------
The Manager 44
- -----------------------------------------------------------
Year 2000 Issue 50
- -----------------------------------------------------------
Asset Allocation Programs 51
- -----------------------------------------------------------
Investment and Account Information 52
- -----------------------------------------------------------
Account Transactions 52
- -----------------------------------------------------------
Valuation of Shares 53
- -----------------------------------------------------------
Dividends and distributions 53
- -----------------------------------------------------------
Taxes 53
- -----------------------------------------------------------
Financial Highlights 55
- -----------------------------------------------------------
Appendix A A-1
- -----------------------------------------------------------
Appendix B B-1
- -----------------------------------------------------------
</TABLE>
An investment in a Portfolio is not a bank deposit and is not insured or guar-
anteed by the Federal Deposit Insurance Corporation or any other government
agency.
1
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
2 | Consulting Group Capital Markets Funds
<PAGE>
Investments, Risks and Performance
About the portfolios
The manager selects and oversees professional money managers who are responsi-
ble for investing the assets of the portfolios comprising the Consulting Group
Capital Markets Funds (each a "Portfolio").
You should know:
. You could lose money on your investment in a Portfolio, or the Portfolio may
not perform as well as other investments
. An investment in any of the Portfolios is not a bank deposit and is not in-
sured or guaranteed by the FDIC or any other government agency
Principal risks of investing in fixed income securities and equity securities
The Portfolios invest in fixed income securities and equity securities. Risks
common to investments in fixed income securities and equity securities are set
forth below. Because each Portfolio has a different investment strategy, there
are also principal risks that are specific to an investment in a particular
Portfolio. These unique risks are described in the Portfolio summaries begin-
ning on the next page.
Fixed Income Securities:
. When interest rates go up, prices of fixed income securities go down
. An issuer of a security may default on its obligation to pay principal and/or
interest or the security's credit rating may be downgraded
. An issuer of a security may prepay principal earlier than scheduled, which
would force an underlying fund to reinvest in lower yielding securities. This
is known as call or prepayment risk
. Slower than expected principal payments may extend a security's life. This
locks in a below-market interest rate, increases the security's duration and
reduces the value of the security. This is known as extension risk
Equity Securities:
. Stock prices may decline generally
. If an adverse event occurs, such as the issuance of an unfavorable earnings
report, the value of a particular issuer's security may be depressed
3
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Growth Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in the common stocks of companies with favora-
ble growth prospects and total market capitalizations of $1 billion or more at
the time of purchase.
How the subadvisors select the Portfolio's investments
The manager has selected two subadvisors to manage the Portfolio.
Each subadvisor manages its portion of the Portfolio's assets
using a different investment style. Each
subadvisor's investment approach is described below.
Barclays Global Fund Advisors is a passive, index-based manager which uses a
quantitative investment approach to create a portfolio which fully replicates
the performance of the Russell 1000 Growth Index.
Provident Investment Counsel employs an active management style and seeks to
focus on companies whose earnings are growing at a faster rate than the average
rate of earnings growth of companies comprising Standard & Poor's 500 Index. It
identifies possible investments based on sales and earnings growth, high return
on equity and profit margin. The subadvisor uses portfolio analysis to further
narrow this list by considering factors such as the quality of management, com-
pany goals and proprietary positioning of products. It generally sells a secu-
rity when its price or price-to-earnings ratio reaches set objectives or there
is a fundamental change in the company's earnings.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These principal risks are described on
page 3. Your investment in the Portfolio is also subject to the following
specific risks:
. Large cap or growth stocks may fall out of favor with investors
. A share price that is generally more volatile than that of Large Capitaliza-
tion Value Equity Investments because of the Portfolio's focus on growth
stocks
The bar chart and tables indicate the risks and returns of investing in
the Portfolio. The bar chart below shows changes in the performance of the
Portfolio from year to year since its founding on November 18, 1991. The table
on the next page shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Large Capitalization Growth Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
6.52% 0.20% 0.26% 31.66% 20.71% 29.03% 38.05%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 38.05% 23.20% 19.10% 11/18/91
Russell 1000 Growth Index 38.71% 25.70% 21.06% **
Lipper Growth Funds Average 23.57% 18.80% 17.62% **
Lipper Large Cap Growth Funds Average 37.09% 22.17% 19.44% **
- ----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 26.04 % 4th/1998
Worst (9.26)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date 5.76 % through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
4
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Growth Investments, continued
BENCHMARKS
The Portfolio's benchmark is the
Russell 1000 Growth Index. The
index is comprised of those
Russell 1000 securities with
greater-than-average growth
orientation. The Russell 1000
Index is composed of the 1000
largest U.S. companies by market
capitalization. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses.
In addition, the Portfolio compares its performance with the
Lipper Large-Cap Growth Funds Average and Lipper Growth
Funds Average. Lipper Large-Cap Growth Funds Average is an
average of the reinvested performance of funds that normally
invest in companies with long-term earnings expected to grow
significantly faster than the earnings of the stocks
represented in a major unmanaged stock index. These funds
will normally have an above-average price-to-earnings ratio,
price-to-book ratio and three-year earnings growth figure,
compared to the U.S. diversified large-cap funds universe
average. Large-cap funds will generally invest at least 75%
of their assets in companies with market capitalizations (on
a three-year weighted basis) greater than 300% of the
dollar-weighted median market capitalization of the S&P Mid-
Cap 400 Index.
Lipper Growth Funds Average is an average of the reinvested
performance of funds that normally invest in companies with
long-term earnings expected to grow significantly faster
than the earnings of the stocks represented in major
unmanaged stock indices.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.58%
Other expenses 0.10%
-----
Total annual Portfolio operating
expenses 0.68%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$221 $681 $1,169 $2,513
</TABLE>
5
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Value Equity Investments
Investment objective
Total return consisting of capital appreciation and dividend income.
Principal investment strategies
The Portfolio invests primarily in common stock of companies with total market
capitalizations of $1 billion or more at the time of purchase. The majority of
the Portfolio's investments are expected to pay regular dividends.
How the subadvisors select the Portfolio's investments
The manager has selected four subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a dif-
ferent investment style. Each subadvisor's investment approach is described
below.
The Boston Company Asset Management seeks total return by investing in portfo-
lios of highly liquid common stocks that in its opinion have above average ap-
preciation potential. The subadvisor employs an active portfolio management
style using a proprietary quantitative model to identify those companies which
demonstrate characteristics of both value and positive market momentum. Those
stocks ranking highest through quantitative analysis are then evaluated using
qualitative fundamental analysis to verify the quantitative scores and to make
recommendations for investment. The subadvisor assesses a company's value by
looking at traditional measures such as its price-to-earnings and price-to-book
ratios, as well as extensive balance sheet analysis, including the company's
break-up worth. The firm looks for momentum in a company's rising expectations
about earnings or sales, or through a return to financial health following man-
agement changes or restructuring.
Chartwell Investment Partners employs "top-down" and "bottom-up" management
techniques in managing its portion of the Portfolio's assets. Chartwell focuses
on a combination of low price to sales, price to earnings, price to cash flow
and price to book ratios, along with a preference for premium yielding issues.
Specific price targets are established for each stock selected for the Portfo-
lio. The subadvisor then shifts its focus to identifying those companies with
evidence of a major catalyst for change. Stocks are evaluated through such fac-
tors as management/board changes, the extent to which performance incentives
are in place, the degree of insider ownership, positive restructuring and ac-
quisition opportunities.
Parametric Portfolio Associates seeks to track the performance of the Russell
1000 Value Index. The subadvisor uses a quantitative process to identify stocks
which the firm believes are underpriced relative to their underlying value. The
subadvisor then looks for companies from that list with rising earnings expec-
tations, reasonable valuations and positive market momentum through an analysis
of the company's fundamentals, including factors such as revenues, cash flow,
earnings and analyst ratings. The subadvisor designs the portfolio to have a
risk profile similar to that of the Russell 1000 Value Index.
Barclays Global Fund Advisors is a passive, index-based manager which uses a
quantitative investment approach to create a portfolio which fully replicates
the performance of the Russell 1000 Value Index.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following spe-
cific risks:
. Large cap or value stocks may fall out of favor with investors
. The Portfolio can invest in issuers with a broad range of market capitaliza-
tions. To the extent the Portfolio invests in companies at the lower end
of such range, the Portfolio's investments may be more volatile and less liq-
uid than other large cap funds
6
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Value Equity Investments, continued
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Large Capitalization Value Equity Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
4.44% 9.88% (3.63)% 33.92% 20.42% 31.45% 12.62%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 12.62% 18.13% 15.31% 11/18/91
Russell 1000 Value Index 15.63% 20.85% 20.55% **
Lipper Multi-Cap Value Funds Average 8.99% 16.96% 16.71% **
- ----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 16.84 % 4th/1998
Worst (14.09)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date 0.00 % through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Russell 1000 Value Index. The
index represents the stocks in
the Russell 1000 Index with less
than average growth orientation.
The Russell 1000 Index includes
the 1,000 largest U.S. companies
by market capitalization. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses.
In addition, the Portfolio compares its performance with the
Lipper Multi-Cap Value Funds Average. It is an average of
the reinvested performance of funds that normally invest in
companies considered to be undervalued relative to a major
unmanaged stock index based on price-to-current earnings,
book value, asset value or other factors. These funds will
normally have a below-average price-to-earnings ratio,
price-to-book ratio and three-year earnings growth figure,
compared to the U.S. diversified multi-cap funds universe
average. Multi-cap funds will generally have between 25% to
75% of their assets invested in companies with market
capitalizations (on a three-year weighted basis) greater
than 300% of the dollar-weighted median market
capitalization of the S&P Mid-Cap 400 Index.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.66%
Other expenses 0.09%
-----
Total annual Portfolio operating
expenses 0.75%
=====
</TABLE>
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 cost may be
higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. 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>
$227 $703 $1,205 $2,584
</TABLE>
7
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Growth Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in common stock of small capitalization
"growth" companies. The Portfolio considers small cap companies to have total
market capitalizations at the time of purchase below the maximum market capi-
talization permitted for a stock in the Russell 2000 Growth Index. As of June
30, 1999, that maximum market capitalization was $2.4 billion. A portion of the
Portfolio's assets will be invested in common stocks of companies with market
capitalizations at the lower range of the Russell 2000 Growth Index.
How the subadvisors select the Portfolio's investments
The manager has selected four subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a dif-
ferent investment style. Each subadvisor's investment approach is described
below.
Mellon Capital Management is a passive, index-based manager that seeks to fully
replicate the performance of the Russell 2000 Growth Index. It minimizes per-
formance differences from the index through systematic quantitative methods.
Wall Street Associates is an active manager and follows a bottom-up investment
style. It looks for companies with superior earnings growth, strong balance
sheets, attractive valuations and potentially positive earning surprises.
Westpeak Investment Advisors is an active manager and employs a value-oriented
and research-driven approach to identify reasonably priced growth stocks that
are likely to have positive earning surprises and revisions. The firm uses a
value constraint to ensure that the growth stocks selected are reasonably
priced.
Kern Capital Management's investment style focuses fundamental research on un-
covering innovative small-cap companies early in their growth cycle. The firm's
bottom-up investment process, which targets the four most innovative sectors
(technology, healthcare, consumer and services) involves (i) detailed financial
analysis, (ii) in-depth meetings with corporate management, (iii) discussions
with brokerage firm and industry analysts and (iv) competitive analysis for
discovering attractively priced small-cap companies.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These principal risks are described on
page 3. Your investment in the Portfolio is also subject to the following
specific risks:
. Growth stocks or small capitalization stocks may fall out of favor with in-
vestors
. Recession or adverse economic trends may have a greater adverse affect on the
earnings or financial condition of smaller companies than on larger ones
. Greater volatility of share price because of the focus on small cap compa-
nies. Compared to large cap companies, small cap companies or the market for
their equity securities are more likely to:
. Be more sensitive to changes in earnings results and investor expectations
. Have more limited product lines, capital resources and management depth
. Experience sharper swings in market values
. Be harder to sell at the times and prices the subadvisor believes appropri-
ate
. Offer greater potential for gain and loss
8
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Growth Investments, continued
The bar chart and tables indicate the risks and returns of investing in
the Portfolio. The bar chart below shows changes in the performance of the
Portfolio
from year to year since its founding on November 18, 1991. The table on
the next page also shows
how the Portfolio's average annual returns for different calendar periods com-
pare to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Small Capitalization Growth Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
11.42% 23.52% 13.11% 34.19% 18.88% 10.30% 2.84%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 2.84 % 15.40% 17.61% 11/18/91
Russell 2000 Growth Index 1.23 % 10.22% 11.62% **
Lipper Small Company Funds Average (0.10)% 13.26% 15.28% **
Lipper Small-Cap Growth Funds Average 5.05 % 13.01% 14.73% **
- -----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 25.00 % 4th/1998
Worst (18.18)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date 9.14 % through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is The
Russell 2000 Growth Index. This
index represents stocks in the
Russell 2000 Index with better
than average growth orientation.
The Russell 2000 Index includes
the smallest 2000 U.S. stocks
out of Russell 3000 Universe.
Unlike the Portfolio, the
benchmark is unmanaged and does
not include any expenses.
In addition, the Portfolio compares its performance with the
Lipper Small Cap Growth Funds Average and Lipper Small
Company Funds Average. Lipper Small Cap Growth Funds Average
is an average of the reinvested performance of funds that
normally invest in companies with long-term earnings
expected to grow significantly faster than the earnings of
the stocks represented in a major unmanaged stock index.
These funds will normally have an above-average price-to-
earnings ratio, price-to-book ratio and three-year earnings
growth figure, compared to the U.S. diversified small-cap
funds universe average. Small-cap funds will generally
invest at least 75% of their assets in companies with market
capitalizations (on a three-year weighted basis) of less
than 250% of the dollar-weighted median market
capitalization of the S&P Small-Cap 600 Index.
Lipper Small Company Funds Average is 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.
Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon the expenses of the Portfolio's latest fis-
cal year.
<TABLE>
<S> <C>
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 fees 0.80%
Other expenses 0.13%
-----
Total annual Portfolio operating
expenses 0.93%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$245 $758 $1,297 $2,766
</TABLE>
9
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Value Equity Investments
Investment objective
Above average capital appreciation.
Principal investment strategies
The Portfolio invests primarily in common stocks of small capitalization "val-
ue" companies. The active subadvisors primarily invest the Portfolio's assets
in the common stocks of companies with total market capitalizations at the
time of purchase
below the maximum market capitalization permitted for a stock in the Russell
2000 Value Index. As of June 30, 1999, that maximum market capitalization was
$1.7 billion. The Portfolio may also invest a portion of its assets in common
stocks of companies with total market capitalization of $550 million or less at
the time of purchase.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a
different investment style. Each subadvisor's investment approach is described
below.
Mellon Capital Management is a passive, index based manager that seeks to fully
replicate the performance of the Russell 2000 Value Index. It minimizes perfor-
mance differences from the index through systematic quantitative methods.
NFJ Investments Group uses an active management style that invests in a diver-
sified portfolio of small capitalization common stocks that it believes are un-
dervalued in the marketplace generally and within their respective industries.
These securities are characterized as having below average price-to-earnings
ratios and improving fundamentals. These securities are often out of favor, and
widespread securities analyst coverage is not common. The subadvisor also con-
siders valuation factors such as price-to-book, price-to-cash flow, dividend
policy and industry outlook in selecting stocks for investment.
David L. Babson & Co. uses an active management style and focuses upon compa-
nies that are not widely followed in the investment community. It seeks to
identify those with superior, but neglected, investment opportunities. The
subadvisor looks for companies with favorable valuations relative to book val-
ue, cash flow and sales, strong balance sheets and the potential for earnings
acceleration.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following spe-
cific risks:
. Value stocks or small capitalization stocks fall out of favor with investors
. Greater volatility of share price because of the focus on small cap compa-
nies. Compared to large companies, small cap companies or the market for
their equity securities are more likely to:
. Be more sensitive to changes in earnings results and investor expectations
. Have more limited product lines, capital resources and management depth
. Experience sharper swings in market values
. Be harder to sell at the times and prices the subadvisors believe appropri-
ate
. Offer greater potential for gain and loss
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the
Portfolio from
year to year since its founding on November 18, 1991. The table on the next
page also shows how the Portfolio's average annual returns for different calen-
dar periods compare to those of the Portfolio's benchmark index and its Lipper
peer group. The Portfolio's past performance does not necessarily indicate how
the Portfolio will perform in the future.
[BAR CHART]
Percentage Total Returns for
Small Capitalization Value Equity Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
23.65% (4.27)% (8.54)% 24.54% 25.05% 35.94% (8.88)%
Calendar years ended December 31
10
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Value Equity Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (8.88)% 12.03% 11.60% 11/18/91
Russell 2000 Value Index (6.45)% 13.19% 17.66% **
Lipper Small Company Average (0.10)% 13.26% 15.28% **
Lipper Small-Cap Value Funds Average (6.84)% 12.27% 14.81% **
- -----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Year Return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 17.74 % 4th/1992
Worst (18.18)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date (3.57)% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is The
Russell 2000 Value Index. The
index represents stocks in the
Russell 2000 Index with less
than average growth orientation.
The Russell 2000 Index is
comprised of the smallest 2000
U.S. stocks out of the Russell
3000 Universe. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses.
In addition, the Portfolio compares its performance with the
Lipper Small-Cap Value Funds Average and Lipper Small
Company Funds Average. It is an average of the reinvested
performance of funds that normally invest in companies
considered to be undervalued relative to a major unmanaged
stock index based on price-to-current earnings, book value,
asset value or other factors. These funds will normally
have a below-average price-to-earnings ratio, price-to-book
ratio and three-year earnings growth figure, compared to the
U.S. diversified small-cap funds universe average. Small-cap
funds will generally invest at least 75% of their assets in
companies with market capitalizations (on a three-year
weighted basis) of less than 250% of the dollar-weighted
median market capitalization of the S&P Small-Cap 600 Index.
Lipper Small Company Funds Average is 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.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.81%
Other expenses 0.15%
-----
Total annual Portfolio operating
expenses 0.96%
=====
</TABLE>
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 reinvest all dividends and distributions.
. 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>
$248 $767 $1,312 $2,796
</TABLE>
11
Consulting Group Capital Markets Funds
<PAGE>
International Equity Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in equity securities of companies located out-
side the U.S. The Portfolio focuses on companies located in developed markets,
but may also invest a portion of its assets in securities of companies located
in emerging markets. The Portfolio intends to diversify its assets by investing
primarily in securities of issuers located in at least three foreign countries.
The Portfolio generally attempts to hedge against unfavorable changes in cur-
rency exchange rates by engaging in forward currency transactions and trading
currency futures contracts and options on these futures. However, the Portfolio
may not always choose or be able to hedge its currency exposure.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a
different investment style. Each subadvisor's investment approach is described
below.
State Street Global Advisors uses a quantitative process to construct a portfo-
lio that fully replicates the performance of the Morgan Stanley Capital Inter-
national Europe Australia Far East (EAFE) Index. The EAFE Index consists of se-
curities of companies located in 20 countries outside of North America and rep-
resents approximately 60% of the total market value of all publicly traded
stocks in these countries.
Oechsle International Advisors, LLC first seeks to identify the most attractive
foreign markets by ranking their expected returns through country and currency
analysis. It then selects investments within attractive markets through both a
top-down and bottom-up company analysis.
Marvin & Palmer Associates uses both a top-down and bottom-up investment proc-
ess, beginning with a quantitative screening process and ending with fundamen-
tal security research. Its investment approach is broken down into four compo-
nents: evaluation of global financial conditions, country and currency deci-
sions, sector/industry evaluation and individual security selection.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. The principal risks associated with in-
vesting in equity securities are described on page 3.
Your investment is also subject to the unique risks of investing in foreign is-
suers. These risks are more pronounced to the extent that the Portfolio invests
in countries with emerging markets or the Portfolio invests significantly in
any one foreign country. These risks include:
. Less information about foreign issuers or markets may be available because of
less rigorous accounting standards or regulatory practices
. Many foreign markets are smaller, less-liquid and more volatile than U.S.
markets. In a changing market, the subadvisors may not be able to sell the
Portfolio's securities in amounts and at prices they consider reasonable
. The U.S. dollar may appreciate against non-U.S. currencies
. Economic, political or social instability in foreign countries may signifi-
cantly disrupt the principal financial markets in which the Portfolio invests
12
Consulting Group Capital Markets Funds
<PAGE>
International Equity Investments, continued
The bar chart and tables shown below indicate the risks of investing in the
Portfolio. The bar chart shows changes in the performance of the Portfolio from
year to year since the Portfolio's inception on November 18, 1991. The table
shows how the Portfolio's average annual returns for different calendar periods
compare to those of the Portfolio's benchmark index and its Lipper peer group.
The Portfolio's past performance does not necessarily indicate how the Portfo-
lio will perform in the future.
[BAR CHART]
Percentage Total Returns for
International Equity Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
(6.68)% 28.97% 9.50% 9.64% 4.87% 1.73% 22.51%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 22.51% 9.43% 9.36% 11/18/91
EAFE Index 20.00% 9.19% 9.49% **
Lipper International Funds Average 12.99% 7.81% 10.65% **
- ----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 18.94 % 4th/1998
Worst (13.97)% 3rd/1988
- ------------------------------------------------------------------------------------------------
Year-to-date 10.21 % through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Morgan Stanley Capital Interna-
tional EAFE--Capitalization
Weighted Index. The index is a
composite portfolio of equity
total returns for the countries
of Europe, Australia, New Zea-
land and the Far East. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the Portfolio
compares its performance with the
Lipper International Funds
Average. It is an average of the
reinvested performance of funds
that invest its assets in securities
whose trading markets are outside of
the Unites States.
Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
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 fees 0.68%
Other expenses 0.14%
-----
Total annual Portfolio operating
expenses 0.82%
=====
</TABLE>
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.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. 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 TRAK(R) fee, would
be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$234 $724 $1,241 $2,656
</TABLE>
13
Consulting Group Capital Markets Funds
<PAGE>
Emerging Markets Equity Investments
Investment objective.
Long-term capital appreciation.
Principal investment strategies
The Portfolio invests primarily in equity securities of issuers located in
countries with emerging markets. The Portfolio considers an emerging market
country to be one having per capita income in the low to middle ranges, as de-
termined by the International Bank for Reconstruction and Development (The
World Bank). To diversify its investments, the Portfolio invests primarily in
securities of issuers located in at least three foreign countries. The Portfo-
lio may also invest a portion of its assets in closed-end investment companies
that invest in emerging markets. The Portfolio generally attempts to hedge
against unfavorable changes in currency exchange rates by engaging in forward
currency transactions and trading currency futures contracts and options on
these futures. However, the Portfolio may not always choose or be able to hedge
its currency exposure.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a
different investment style. Each subadvisor's investment approach is described
below.
AIB Govett employs a top-down approach to analyzing stocks. The firm looks for
under-valued securities with a bias towards relative earnings momentum. The
subadvisor believes that the greatest influences on investment return over the
long-term are country asset allocation and superior stock selection rather than
short-term adjustments to portfolio weightings.
State Street Global Advisors uses quantitative analysis to identify countries
and stocks which are under-valued relative to their growth rates. It employs an
investment process that combines top-down country selection with bottom-up
stock selection to determine an optimal country and security mix.
Baring Asset Management looks for unrecognized "growth" stocks through an in-
vestment process that combines top-down country allocation, bottom-up company
research and risk analysis to determine an optimal country and security mix.
This process is driven by structured fundamental research using a disciplined
investment framework at both the country and company levels. The fundamental
research is supported by quantitative screening at the country level.
Principal risks of investing in the Portfolio
Because the Portfolio invests primarily in equity securities, your investment
in the Portfolio is subject to the risks associated with investing in equity
securities generally. These risks are described on page 3.
Your investment is also subject to the unique risks of investing in securities
of foreign issuers. These risks are more pronounced because the Portfolio in-
vests in countries with emerging markets. The market value for emerging market
equity securities historically has been very volatile and an investment in the
Portfolio involves a substantial degree of risk. These risks include:
. Less information about emerging market issuers or markets may be available
because of less rigorous disclosure or accounting standards or regulatory
practices
. Most emerging markets are smaller, less liquid and more volatile than devel-
oped markets. In a changing market, the subadvisors may not be able to sell
portfolio securities in amounts and at prices they consider reasonable
. Economic, political or social instability in an emerging market country or
region may significantly disrupt the principal financial market
. The economies of emerging market countries may grow at slower rates than ex-
pected or suffer a downturn or recession
. Emerging market countries may experience rising interest rates, or, more sig-
nificantly, rapid inflation or hyperinflation
. The Portfolio could experience a loss from settlement and custody practices
in some emerging markets
. Withholding and other foreign taxes may decrease the Portfolio's return
14
Consulting Group Capital Markets Funds
<PAGE>
Emerging Markets Equity Investments, continued
The bar chart and tables below indicate the risks of investing in the Portfo-
lio. The bar chart shows changes in the performance of the Portfolio from year
to year since the Portfolio's inception on April 21, 1994. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index. The Portfolio's past performance
does not necessarily indicate how the Portfolio will perform in the future.
[BAR CHART]
Percentage Total Returns for
Emerging Markets Equity Investments
1995 1996 1997 1998
---- ---- ---- ----
(2.52)% 13.16% (8.06)% (32.02)%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (32.02)% N/A (7.27)% 4/21/94
Morgan Stanley Emerging Markets Free Index (25.34)% N/A (7.64)% **
Lipper Emerging Markets Fund Average (27.19)% N/A (7.87)% **
- ------------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 4/30/94.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 10.58 % 4th/1998
Worst (23.67)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date 28.69 % through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Morgan Stanley Emerging Markets
Free Index. The index is com-
posed of equity total returns of
countries with low to middle per
capita incomes, as determined by
the World Bank. Unlike the Port-
folio, the benchmark is unman-
aged and does not include any
expenses. In addition, the Portfolio compares its performance with the
Lipper Emerging Markets Funds Average. It is an average of
the reinvested performance of funds that invest at least 65%
of total assets in emerging market equity securities, where
emerging market is defined by a country's gross national
product per capita or other economic measures.
Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
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 fees 1.10%
Other expenses 0.62%
-----
Total annual Portfolio operating
expenses 1.72%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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 fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$325 $992 $1,683 $3,522
</TABLE>
15
Consulting Group Capital Markets Funds
<PAGE>
Balanced Investments
Investment objective
Total return through a combination of current income and capital appreciation.
Principal investment strategies
The Portfolio balances its investments across both common stocks and investment
grade fixed income securities issued by corporate and governmental issuers. The
Portfolio intends to maintain at least a quarter of its assets in fixed-income
senior securities, preferred stocks and convertible debt securities and con-
vertible preferred stocks to the extent their value is attributable to their
fixed income characteristics.
How the subadvisors select the Portfolio's investments
The manager has selected two subadvisors to manage the Portfolio, an equity
subadvisor and a fixed income subadvisor.
Laurel Capital Advisors manages the equity portion of the Portfolio's
assets. In selecting stocks for investment, it focuses on common stocks of com-
panies which it believes are undervalued and which exhibit improving earnings
momentum, while maintaining sector weightings similar to the S&P 500 Index.
Seix Investment Advisors manages the fixed income portion of the Portfolio's
assets. The subadvisor combines traditional credit research with proprietary
analysis that seeks to identify mispriced or undervalued fixed-income securi-
ties such as U.S. government securities and corporate bonds. It emphasizes
those securities that have a potential for higher income while maintaining a
duration that is approximately equal to the Lehman Brothers Aggregate Bond In-
dex.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks of investing in equity
securities and of investing in fixed income securities generally. These risks
are described on page 3. The market prices of common stocks are generally
more volatile than fixed income investments. As a balanced investment, the
Portfolio's net asset value may be less volatile than other equity oriented
portfolios. However, since the Portfolio invests a significant portion of its
assets in fixed income securities, it has less potential for capital apprecia-
tion.
The market value of foreign securities may go down because of unfavorable for-
eign government actions, political, economic or market instability or the ab-
sence of accurate information about foreign companies. These risks may be more
severe for securities of issuers in emerging markets. Foreign securities are
sometimes less liquid and harder to value than securities of U.S. issuers.
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on February 16, 1993. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark indices and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Balanced Investments
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(2.68)% 27.41% 15.32% 20.29% 8.43%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 8.43% 13.28% 12.80% 2/16/93
Lehman Gov/Corp Bond Index 9.47% 7.30% 7.37% **
S&P 500 28.60% 24.05% 21.80% **
Lipper Balanced Funds Average 13.73% 13.98% 13.29% **
- ----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 2/28/93.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 11.66% 2nd/1997
Worst (8.06)% 3rd/1998
- ------------------------------------------------------------------------------------------------
Year-to-date 0.96% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
16
Consulting Group Capital Markets Funds
<PAGE>
Balanced Investments, continued
BENCHMARKS
The Portfolio's benchmarks are
Standard & Poor's 500 Index and
the Lehman Brothers Government/
Corporate Bond Index. The S&P
500 is an index of 500 of the
largest stocks in the U.S. The
Lehman Index is a composite of
debt securities of the U.S.
government and its agencies and
publicly issued fixed income
investment grade, non-
convertible corporate debt
securities. Unlike the
Portfolio, the benchmarks are
unmanaged and do not include any
expenses. In addition, the Portfolio compares its performance with the
Lipper Balanced Funds Average. It is an average of the
reinvested performance of funds whose primary objective is
to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the
stock/bond ratio ranges around 60 percent/40 percent,
respectively.
The Consulting Group has de-
signed this Portfolio for in-
vestors who participate in the
TRAK(R) Advisory Service through
employee benefit plans which do
not make the full range of Capi-
tal Markets Funds offered
through this prospectus avail-
able to participants. The Con-
sulting Group will not recommend
this Portfolio to investors in
advisory programs which make all
of the Capital Markets Funds
available.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.79%
Other expenses 0.06%
-----
Total annual Portfolio operating
expenses 0.85%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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 After After After
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$237 $734 $1,256 $2,687
</TABLE>
17
Consulting Group Capital Markets Funds
<PAGE>
Intermediate Fixed Income Investments
Investment objective
Current income and reasonable stability of principal.
Principal investment strategies
The Portfolio invests primarily in fixed income securities and instruments is-
sued by governmental and corporate issuers. These securities include mortgage-
related and asset-backed securities, although the Portfolio will not invest
more than 5% of its assets at the time of purchase in asset-backed securities.
Credit quality. The Portfolio invests exclusively in securities rated invest-
ment grade by a nationally recognized rating organization, or, if unrated, of
equivalent quality as determined by the subadvisor.
Maturity. The Portfolio's average maturity ranges from three to ten years. Av-
erage maturity is a weighted average of the stated maturities of the debt secu-
rities the Portfolio owns. Individual investments may be of any maturity.
How the subadvisors select the Portfolio's investments
The manager has selected two subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Pacific Investment Management Company employs top-down and bottom-up in-
vestment techniques. It implements the following "top-down" strategies: dura-
tion and volatility analyses, sector evaluation and yield curve shape analysis.
The subadvisor also employs the following "bottom-up" strategies: credit analy-
sis, quantitative research, issue selection and cost-effective trading.
Standish Ayer & Wood seeks to maximize current income and minimize volatility
by:
. Analyzing issuers and sectors on a yield spread basis, with an overlay of
fundamental company analysis.
. Identifying fixed income securities with the greatest potential for adding
value, such as those involving new issuers, the potential for credit up-
grades, unique structural characteristics or innovative features.
. Managing variables such as sector, maturity, duration, credit quality, yield
and potential capital appreciation.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on
page 3.
Your investment is also subject to the following specific risks:
. Greater sensitivity to rising interest rates than Government Money Invest-
ments because of the Portfolio's longer average maturity
. Greater exposure to prepayment and extension risks because the Portfolio may
invest a portion of its assets in mortgage-related and asset-backed securi-
ties
. Increased volatility in share price to the extent the Portfolio holds mort-
gage derivative securities having imbedded leverage or unusual interest rate
reset terms
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the
Portfolio from
year to year since its founding on November 18, 1991. The table on the next
page shows how the Portfolio's average annual returns for different calendar
periods compare to those of the Portfolio's benchmark index and its Lipper In-
vestor Services peer group. The Portfolio's past performance does not necessar-
ily indicate how the Portfolio will perform in the future.
5
[BAR CHART]
Percentage Total Returns for
Intermediate Fixed Income Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
5.86% 10.49% (2.76)% 14.67% 3.64% 7.45% 7.23%
Calendar years ended December 31
18
Consulting Group Capital Markets Funds
<PAGE>
Intermediate Fixed Income Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 7.23% 5.89% 6.75% 11/18/91
Lehman Brothers Intermediate Gov/Corp Bond
Index 8.44% 6.60% 7.27% **
Lipper Corporate Debt Funds A Rated Average 7.52% 6.54% 7.86% **
- -----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 5.08 % 1st/1993
Worst (2.30)% 1st/1994
- --------------------------------------------------------------------------------------------------
Year-to-date (0.31)% through 3rd/1999
- --------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary
benchmark is the Lehman Brothers
Intermediate
Government/Corporate Bond Index.
The index is composed of debt
securities of the U.S.
government and its agencies and
publicly issued, fixed rate,
non-convertible, investment-
grade domestic corporate debt
with at least one year remaining
to maturity. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the Portfolio compares
its performance with the Lipper
Corporate Debt Funds A Rated
Average. It is an average
of the reinvested performance
of funds that invest at
least 65% of their assets
in corporate debt issues
rated "A" or better by a nationally
recognized rating organization or
government issues.
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 expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.53%
Other expenses 0.08%
-----
Total annual Portfolio operating
expenses 0.61%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$214 $661 $1,134 $2,441
</TABLE>
19
Consulting Group Capital Markets Funds
<PAGE>
Long-Term Bond Investments
Investment objective
Total return consisting of current income and appreciation of capital through
investments in fixed income securities without regard to remaining maturity.
Principal investment strategies
The Portfolio invests primarily in fixed income securities issued by U.S. gov-
ernmental and corporate issuers, U.S. dollar denominated fixed income securi-
ties of foreign issuers and mortgage-related and asset-backed securities. The
Portfolio will not invest more than 25% of its assets in privately issued mort-
gage-related securities.
Credit quality. The Portfolio invests exclusively in securities rated invest-
ment grade by a nationally recognized rating organization, or, if unrated, of
equivalent quality as determined by the subadvisor, Western Asset Management
Company.
Maturity. The Portfolio's average maturity is at least 10 years. Average matu-
rity is a weighted average of the stated maturity of debt securities the Port-
folio owns. Individual investments may be of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor emphasizes three key strategies to enhance the Portfolio's total
return:
. Adjusting the allocation of the Portfolio among the key sectors of the fixed-
income market--government, corporate and mortgage and asset-backed--depending
upon its forecast of relative values.
. Tracking the duration of the overall portfolio so that it falls within a nar-
row band relative to the benchmark index, with adjustment made to reflect the
subadvisor's long-term outlook for interest rates.
. Purchasing under-valued securities in each of the key sectors of the bond
market while keeping overall quality high.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3.
Your investment is also subject to the following specific risks:
. Greater sensitivity to rising interest rates than Intermediate Fixed Income
Investments because of the Portfolio's longer average maturity
. Greater exposure to prepayment and extension risks because the Portfolio may
invest a portion of its assets in mortgage-related and asset-backed securi-
ties
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Long-Term Bond Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
5.93% 10.02% (5.12)% 18.13% 3.11% 12.90% 10.63%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 10.63% 7.62% 7.95% 11/18/91
Lehman Brothers Gov/Corp Bond Index 9.47% 7.30% 8.28% **
Lipper Corporate Debt Funds A Rated Average 7.52% 6.54% 7.86% **
- ------------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 6.76 % 3rd/1998
Worst (3.43)% 1st/1994
- ------------------------------------------------------------------------------------------------
Year-to-date (7.83)% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
20
Consulting Group Capital Markets Funds
<PAGE>
Long-Term Bond Investments, continued
BENCHMARKS
The Portfolio's primary bench-
mark is the Lehman Brothers
Government/Corporate Bond Index.
The index is composed of debt
securities of the U.S. govern-
ment and its agencies and pub-
licly issued fixed rate, non-
convertible, investment-grade
corporate debt securities with
at least one year remaining to
maturity. Unlike the Portfolio,
the benchmark is unmanaged and
does not include any expenses.
In addition, the Portfolio
Compares its performance
With the Lipper Corporate
Debt Funds A Rated Average.
It is an average
of the reinvested performance
of funds that invest at
least 65% of their assets
in corporate debt issues
rated "A" or better by a nationally
recognized rating organization or
government issues.
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 expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.60%
Other expenses 0.20%
-----
Total annual Portfolio operating
expenses 0.80%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$232 $718 $1,231 $2,635
</TABLE>
21
Consulting Group Capital Markets Funds
<PAGE>
Mortgage Backed Investments
Investment objective
High current income and secondarily capital appreciation, each to the extent
consistent with the protection of capital.
Principal investment strategies
The Portfolio invests primarily in mortgage-related securities representing
pools of mortgage loans assembled for sale to investors by various U.S. govern-
mental agencies, and government-related organizations, and private issuers. The
Portfolio will not invest more than 25% of its assets in privately issued mort-
gage-related securities.
The Portfolio may also invest in mortgage-related derivative securities such as
government stripped mortgage-backed securities (SMBS) and collateralized mort-
gage obligations (CMOs). SMBS represent the right to receive either principal
or interest payments on U.S. government securities. Interests in CMOs entitle
the holder to specified cash flows from a pool of mortgages. In order to en-
hance current income, the Portfolio may enter into mortgage dollar roll trans-
actions with respect to mortgage-related securities issued by U.S. governmental
agencies or instrumentalities.
How the subadvisor selects the Portfolio's investments
The subadvisor, Utendahl Capital Management CFI, (successor to Atlantic
Portfolio Analytics & Management, Inc.) uses a quantitative computer-
modelled investment process to seek to identify and capitalize on inefficien-
cies in the mortgage-backed securities market.
The subadvisor generally maintains the portfolio's average duration within a
narrow band around the duration of the entire mortgage-backed securities mar-
ket. Duration is an approximate measure of the sensitivity of the market value
of the Portfolio's holdings to changes in interest rates. The subadvisor nor-
mally focuses the Portfolio's holdings on mortgage related securities issued by
U.S. government agencies and government related organizations.
Credit quality. The Portfolio generally invests in securities rated no lower
than "A" at the time of purchase by a nationally recognized rating agency or,
if unrated, of equivalent quality as determined by the subadvisor. However, up
to 20% of the Portfolio's assets may be invested in securities rated as low as
"B" by a nationally recognized rating organization or, if unrated, of equiva-
lent quality as determined by the subadvisor, upon the concurrence of the man-
ager.
Principal risks of investing in the Portfolio
Because mortgage-related securities are a type of fixed income security, your
investment in the Portfolio is subject to the risks of investing in fixed in-
come securities generally. These risks are described on page 3.
Your investment is also subject to the specific risks of investing primarily in
mortgage related securities. Mortgage-related securities generally represent
direct or indirect interests in the principal and interest payments on individ-
ual pools of mortgage loans. The mortgage loans typically allow the mortgagor
(i.e., the homeowner) to prepay principal on their mortgages whenever they
choose. For this reason, your investment is also subject to:
. Increased prepayment and extension risk which increases price and yield vola-
tility
. Increased volatility in share price to the extent the Portfolio holds mort-
gage derivative securities having imbedded leverage or unusual interest rate
reset terms
. To the extent the Portfolio enters into mortgage dollar roll transactions,
the risk that the securities the Portfolio has agreed to purchase will be
worth less on the repurchase date than the repurchase price because of
changes in interest rates and market conditions
Payments of principal and interest on mortgage pools issued by government re-
lated organizations are not guaranteed by the U.S. government. Although mort-
gage pools issued by U.S. agencies are guaranteed with respect to payments of
principal and interest, such guarantee does not apply to losses resulting from
declines in the market value of such securities.
22
Consulting Group Capital Markets Funds
<PAGE>
Mortgage Backed Investments, continued
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[BAR CHART]
Percentage Total Returns for
Mortagage Backed Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
6.55% 6.20% (2.08)% 15.46% 4.69% 8.78% 6.93%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 6.93% 6.60% 6.77% 11/18/91
Lehman Mortgage Backed Index 6.96% 7.23% 7.35% **
Lipper U.S. Mortgage Fund Average 6.22% 6.08% 6.67% **
- ---------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 4.95% 2nd/1995
Worst (2.16)% 1st/1994
- ------------------------------------------------------------------------------------------------
Year-to-date 0.79% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary
benchmark is Lehman Brothers
Mortgage Backed Securities
Index. The index contains most
fixed rate securities issued and
backed by mortgage pools of
federal agencies or government
related organizations. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses.
In addition, the Portfolio compares its performance with the
Lipper U.S. Mortgage Funds Average. It is 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.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.70%
Other expenses 0.21%
-------
Total annual Portfolio operating
expenses 0.91%
Management and Administration
Fee waivers and expense
reimbursements* (0.11)%
-------
Net annual portfolio operating
expenses 0.80%
=======
</TABLE>
* Management has agreed to waive a portion of management and administration
fees because it has voluntarily agreed to limit total annual portfolio oper-
ating expenses to 0.80% of average net assets. The manager may change
or eliminate this expense limitation at any time.
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 reinvest all dividends and distributions;
. 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>
$232 $718 $1,231 $2,635
</TABLE>
23
Consulting Group Capital Markets Funds
<PAGE>
High Yield Investments
Investment objective
A high level of current income by investing primarily in below investment grade
debt securities.
Principal investment strategies
The Portfolio invests primarily in fixed income securities of corporate issuers
located in the United States. The Portfolio may invest a portion of its assets
in securities of issuers located in developed foreign countries. The Portfolio
may also invest up to 10% of its assets in equity and equity-related securi-
ties, including convertible securities, preferred stock, warrants and rights.
Credit quality. The Portfolio invests primarily in fixed-income securities
rated below investment grade by two or more nationally recognized rating orga-
nizations, or, if unrated, of equivalent quality as determined by the
subadvisor, Alliance Capital Management. Securities rated below investment
grade are commonly known as "junk bonds."
Duration. The Portfolio's average duration ranges from two to six years. Dura-
tion is an approximate measure of the sensitivity of the market value of the
Portfolio's holdings to changes in interest rates. Individual securities may be
of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor employs a relative value investment process, looking for securi-
ties of companies with improving or stable credit quality trends. The Portfolio
focuses on investments in the "BB" and "B" quality spectrum. The investing
process includes:
. Extensive portfolio research on issuers and their business conditions
. Thorough analysis of issuers and their credit quality
. Emphasis on general economic and interest rate trends and forecasts
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks of investing in fixed
income securities generally. However, these risks, which are described on page
3, are significantly greater for the Portfolio because of its focus on
non-investment grade fixed income securities.
Investment in high yield securities involves substantial risk of loss. These
securities are considered speculative with respect to the issuer's ability to
pay interest and principal and are susceptible to default or decline in market
value because of adverse economic and business developments.
The market values for
high yield securities tend to be very volatile, and these securities are less
liquid than investment grade debt securities. For these reasons, your invest-
ment in the Portfolio is subject to the following specific risks:
. Increased price sensitivity to changing interest rates
. Greater risk of loss because of default or declining credit quality
. Adverse company specific events are more likely to render the issuer unable
to make interest and/or principal payments
. A negative perception of the high yield market develops, depressing the price
and liquidity of high yield securities. This negative perception could last
for a significant period of time
The market value of foreign securities may decline because of unfavorable for-
eign government actions, political, economic or market instability or the ab-
sence of accurate information about foreign companies. These risks may
be more severe for securities of issuers in emerging markets.
Foreign securities are sometimes less liquid and harder to value
than securities of U.S. issuers.
24
Consulting Group Capital Markets Funds
<PAGE>
High Yield Investments, continued
Because this Portfolio commenced operations on July 13, 1998, the Portfolio
does not yet have a sufficient operating history to generate the performance
information which other Portfolios show in bar and table form in this location
of the prospectus.
Year to date: (0.99)% (through 3rd Quarter/1999)
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.90%
Other expenses 0.29%
-----
Total annual Portfolio operating
expenses 1.19%
=====
</TABLE>
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;
. You reinvest all dividends and distributions;
. 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 After After After
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$272 $835 $1,425 $3,022
</TABLE>
25
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments
Investment objective
Total return consisting of capital appreciation and income.
Principal investment strategies
The Portfolio invests primarily in fixed-income securities issued by U.S. gov-
ernmental and corporate issuers and mortgage-related and asset-backed securi-
ties.
How the subadvisors select the Portfolio's investments
The manager has selected four subadvisors to manage the Portfolio. Each
subadvisor focuses on a different segment of the fixed income marketplace. Each
subadvisor's investment approach is described below.
Standish Ayer & Wood focuses on investment grade intermediate maturity fixed
income securities. The average maturity of securities ranges from three to ten
years. Average maturity is a weighted average of the stated maturities of the
debt securities the Portfolio owns. Individual investments may be of any matu-
rity. The subadvisor seeks to maximize current income and minimize volatility
by:
. Analyzing issuers and sectors on a yield spread basis, with an overlay of
fundamental company analysis
. Identifying fixed income securities with the greatest potential for adding
value, such as those involving new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
. Managing variables such as sector, maturity, duration, credit quality, yield
and potential capital appreciation.
Western Asset Management Company focuses on investment grade long-term fixed
income securities, including those issued by U.S. governmental and corporate
issuers, U.S. dollar denominated fixed income securities of foreign issuers and
mortgage-backed and asset-backed securities. It emphasizes three key strategies
to enhance the Portfolio's total return:
. Adjusting the allocation of the Portfolio among the key sectors of the fixed
income market (government, corporate and mortgage and asset-backed) depending
on its forecast of relative values
. Tracking the duration of the overall Portfolio so that it falls within a
narrow band relative to the benchmark index, with adjustment made to reflect
its long-term outlook for interest rates
. Purchasing under-valued securities in each of the key sectors of the bond
market while keeping overall quality high.
Utendahl Capital Management CFI (successor to Atlantic Portfolio Analytics &
Management, Inc.) focuses on mortgage-related securities repre-
senting pools of mortgage loans assembled for sale to investors by various U.S.
government agencies, government-related organizations and private issuers. The
Portfolio may also invest in mortgage-related derivative securities such as
government stripped mortgage-backed securities ("SMBS") and collaterized mort-
gage obligations ("CMOs"). SMBS represent the right to receive either principal
or interest payments of U.S. government securities. Interests in CMOs entitle
the holder to specified cash flows from a pool of mortgages. In order to en-
hance current income, the Portfolio may enter into mortgage dollar roll trans-
actions with respect to mortgage-related securities issued by U.S. governmental
agencies or instrumentalities.
The subadvisor uses a quantitative computer-modelled investment process to seek
to identify and capitalize on inefficiencies in the mortgage-backed securities
market. The subadvisor generally maintains the Portfolio within a narrow band
around the duration of the entire mortgage-backed market and normally focuses
on mortgage-related securities issued by U.S. government agencies and government
related organizations.
Alliance Capital Management focuses on below investment grade fixed income se-
curities, also known as "high yield" securities and commonly referred to as
"junk bonds." It invests primarily in fixed income securities of corporate is-
suers located in the U.S., but may also invest in securities of issuers located
in developed foreign countries. It may also invest a portion of the Portfolio
in equity
and equity-related securities, including convertible securities, preferred
stocks, warrants and rights.
The subadvisor invests primarily in fixed income securities whose average dura-
tion ranges from two to six years. Individual securities may be of any maturi-
ty.
The subadvisor employs a relative value investment process, looking for securi-
ties of companies with improving or stable credit quality trends. It focuses on
investments in the "BB" and "B" quality spectrum. The investing process
includes:
. Extensive research of issuers and their business conditions
. Thorough analysis of issuers and their credit quality
. Emphasis on general economic and interest rate trends and forecasts.
26
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments, continued
Credit Quality. The intermediate maturity, long-term maturity and mortgage-re-
lated portions of the Portfolio are invested primarily in securities rated in-
vestment grade by a nationally recognized statistical rating organization, or,
if unrated, of equivalent quality as determined by the subadvisor. The high
yield portion of the Portfolio will primarily be invested in fixed income secu-
rities rated below investment grade, or, if unrated, of equivalent quality as
determined by the subadvisor. Securities rated below investment grade are com-
monly known as "junk bonds."
Duration and Maturity. The Portfolio's average duration is normally within one
year of the duration of the Lehman Brothers Aggregate Bond Index. Duration is
an approximate measure of the sensitivity of the market value of the Portfo-
lio's holdings to changes in interest rates. Individual securities may be of
any maturity.
Principal risks of investing in the Portfolio
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 the risks described below.
. You could lose money on your investment in the portfolio, or the portfolio
may not perform as well as other investments
. The manager's judgment about the attractiveness and risk adjusted return
potential of particular asset classes, investment styles or other issues may
prove to be wrong
. When interest rates go up, prices of fixed income securities decline
. An issuer of a security may prepay principal earlier than scheduled, which
would force the portfolio to reinvest in lower yielding securities. This is
known as call or prepayment risk
. An issuer of a security may default on its obligation to pay principal and/or
interest or the security's credit rating may be downgraded
. Slower than expected principal payments may extend a security's life. This
locks in a below-market interest rate, increases the security's duration and
reduces the value of the security. This is known as extension risk
. Greater sensitivity to rising interest rates because of the Portfolio's
longer average maturity and because the Portfolio invests a portion of its
assets in high yield securities
. Increased volatility in share price because the Portfolio invests a portion
of its assets in high yield securities and holds mortgage derivative securi-
ties with embedded leverage or unusual interest rate reset terms
. The Portfolio may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value
of the underlying securities
Performance
Because this Portfolio was added to the Consulting Group Capital Markets Funds
this year, the Portfolio does not yet have a sufficient operating history to
generate the performance information which other Smith Barney funds show in bar
and table form at this location of the prospectus.
Fee table
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>
<S> <C>
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** 0.85%
Other expenses 0.20%
-----
Total annual Portfolio operating
expenses** 1.05%
</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 reflects the maximum fee paid to the
manager and a single subadvisor. However, the projected effective annual
management fee rate for the Portfolio is expected to be 0.45% or less
as a result of the allocation of assets among multiple subadvisors.
The Portfolio is oper-
ating under an expense cap of 0.80% for the current fiscal year. The expense
cap will remain in effect until changed by the Board of Trustees.
27
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments, continued
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 reinvest all dividends and distributions;
. 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
year years
<S> <C>
$127 $675
</TABLE>
BENCHMARK
The Portfolio's primary benchmark
is Lehman Brothers Aggregate Bond
Index. The Index is composed of
the Lehman Intermediate
Government/Corporate Bond Index
and the Lehman Mortgage-Backed
Securities Index and also
includes treasury issues, agency
issues, corporate bond issues and
mortgage-backed securities.
Unlike the Portfolio, the
benchmark is unmanaged and does
not include any expenses.
28
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
29 | Consulting Group Capital Markets Funds
<PAGE>
International Fixed Income Investments
Investment objective
Maximize current income consistent with the protection of principal.
Principal investment strategies
The Portfolio invests primarily in non-U.S. dollar denominated fixed income se-
curities issued by foreign governments and corporations and supranational enti-
ties. The Portfolio invests primarily in fixed income securities of issuers lo-
cated in at least three countries and will not invest more than 25% of its as-
sets in the securities of governments or corporations in any one country. The
Portfolio attempts to hedge against unfavorable changes in currency exchange
rates by engaging in forward currency transactions and trading currency futures
contracts and options on these futures.
Credit Quality: The Portfolio invests in securities rated investment grade by a
nationally recognized rating organization, or if unrated, of equivalent quality
as determined by the subadvisor, Julius Baer Investment Management. The Portfo-
lio may invest up to 10% of its assets in emerging market debt securities rated
below investment grade, or if unrated, of equivalent quality as determined by
the subadvisor.
Duration: The Portfolio's average duration ranges from two to eight years. Du-
ration is an approximate measure of the sensitivity of the market value of the
Portfolio's holdings to changes in interest rates. The Portfolio may invest in
individual securities of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor applies portfolio economic analysis to select a portfolio of
high-quality, well-diversified foreign bonds. From a universe of 20 developed
countries outside the U.S., the subadvisor forecasts which bond markets offer
the best opportunity to outperform the U.S. bond market, considering factors
such as currencies, local bond market conditions, issuers and instruments. It
pays particular attention to markets that offer attractive yields. The
subadvisor employs a proprietary computer model to analyze exchange rates to
assist in its forecasts and to help manage the risk of the Portfolio.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3.
Your investment is also subject to the unique risks of investing in securities
of foreign issuers. These risks are more pronounced to the extent that the
Portfolio invests in countries with emerging markets or the Portfolio invests
significantly in any one foreign country. These risks include:
. Less information about foreign issuers or markets may be available
because of less rigorous accounting standards or regulatory practices
. Many foreign markets are smaller, less-liquid and more volatile than U.S.
markets. In a changing market, the subadvisor may not be able to sell the
Portfolio's securities in amounts and at prices the sub-adviser considers
reasonable
. The foreign governmental issuer may default on, declare a moratorium on, or
restructure its obligations
. The U.S. dollar may appreciate against non-U.S. currencies
. Economic, political or social instability in foreign countries may signifi-
cantly disrupt the principal financial markets in which the Portfolio invests
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the
Portfolio from
year to year since the Portfolio's inception on November 18, 1991. The table on
the next page shows how the Portfolio's average annual returns for different
calendar periods compare to those of the Portfolio's benchmark index and its
Lipper peer group. The Portfolio's past performance does not necessarily indi-
cate how the Portfolio will perform in the future.
[BAR CHART]
Percentage Total Returns for
International Fixed Income Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
3.23% 13.83% 2.30% 23.85% 8.69% (2.38%) 17.64%
Calendar years ended December 31
30
Consulting Group Capital Markets Funds
<PAGE>
International Fixed Income Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 17.64% 9.60% 9.99% 11/18/91
Salomon Non-U.S. Gov. Bond Index 17.80% 8.26% 9.62% **
Lipper International Income Funds Average 11.85% 6.55% 8.08% **
- ----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 11.45 % 1st/1995
Worst (4.53)% 1st/1992
- ------------------------------------------------------------------------------------------------
Year-to-date (5.59)% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary bench-
mark is the Salomon Brothers
Non-U.S. Government Bond Index.
The index is a market capital-
ization-weighted index consist-
ing of government bond markets
in 13 developed countries, ex-
cluding the U.S. Unlike the
Portfolio, the benchmark is un-
managed and does not include any
expenses. In addition, the Portfolio compares its performance with the
Lipper International Income Funds Average. It is an average
of the reinvested performance of funds that invest primarily
in U.S. dollar and non-U.S. dollar debt securities located
in at least three countries, excluding the United States,
except in periods of market weakness.
Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
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 fees 0.70%
Other expenses 0.24%
-----
Total annual Portfolio operating
expenses 0.94%
=====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$246 $761 $1,302 $2,776
</TABLE>
The Portfolio is a "non-diversified portfolio," which means that it
is permitted to invest in a limited number of issuers. To the extent
the Portfolio concentrates its investments in a limited number
of issuers or countries, it is subject, to a greater extent, to the
risks associated with those issuers or countries.
31
Consulting Group Capital Markets Funds
<PAGE>
Municipal Bond Investments
Investment objective
A high level of interest income that is excluded from federal income taxation
to the extent consistent with prudent investment management and the preserva-
tion of capital.
Principal investment strategies
The Portfolio invests principally in tax exempt general obligation, revenue and
private activity bonds and notes, which are issued by or on behalf of states,
territories or possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities (including
Puerto Rico, the Virgin Islands and Guam). Tax exempt means that the bonds pay
interest that is excluded from gross income for federal income tax purposes.
The Portfolio's investments generally include municipal obligations with a full
range of maturities and broad issuer and geographic diversification.
Credit quality. The Portfolio limits its investments to municipal obligations
that are rated investment grade or higher by a nationally recognized rating or-
ganization, or, if unrated, of equivalent quality as determined by the
subadvisor, Smith Affiliated Capital Corporation.
How the subadvisor selects the Portfolio's investments
The subadvisor uses an active fixed-income management style that focuses first
on the appropriate maturity allocation for the Portfolio within a given market
environment. The maturity allocation is supplemented by a long-term market sec-
tor rotation. The subadvisor focuses primarily on:
. ""Vital service" revenue bonds (i.e., water, electric, power, sewer and se-
lect transportation authority) and secondarily on general obligation bonds of
high-quality issuers.
. Using portfolio credit analysis to evaluate the relative attractiveness of
various securities and sectors.
. Broad geographic and issuer diversification.
Maturity. The Portfolio is generally composed of a full range of maturities.
Individual investments may be of any maturity.
Principal risks of investing in the Portfolio
Because municipal obligations are a type of fixed income security, your invest-
ment in the Portfolio is subject to the risks associated with investing in
fixed income securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following specific
risks:
. New federal or state legislation may adversely affect the tax-exempt status
of securities held by the Portfolio or the financial ability of the munici-
palities to repay these obligations
. The issuer of municipal obligations may not be able to make timely payments
because of general economic downturns or increased governmental costs
It is possible that some of the Portfolio's income distributions may be, and
distributions of the Portfolio's gains will be, subject to federal taxation.
The Portfolio may realize taxable gains on the sale of its securities or other
transactions, and some of the Portfolio's income distributions may be subject
to the federal alternative minimum tax. This may result in a lower tax-adjusted
return. In addition, distribution of the Portfolio's income and gains will be
subject to state taxation.
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the
Portfolio from
year to year since its founding on November 18, 1991. The table on the next
page shows how the Portfolio's average annual returns for different calendar
periods compare to those of the Portfolio's benchmark index and its Lipper peer
group. The Portfolio's past performance does not necessarily indicate how the
Portfolio will perform in the future.
[BAR CHART]
Percentage Total Returns for
Municipal Bond Investments
1992 1993 1994 1995 1996 1997 1998
---- ----- ----- ----- ----- ----- -----
8.13% 12.59% (10.20)% 20.12% 2.10% 9.96% 11.24%
Calendar years ended December 31
32
Consulting Group Capital Markets Funds
<PAGE>
Municipal Bond Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
Year Years Portfolio Date
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 5.39% 4.78% 6.48% 11/18/91
Lehman Municipal Bond Index 6.48% 6.22% 7.67% **
Lipper General Municipal Debt Funds Average 5.32% 5.44% 7.25% **
- ---------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/30/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 8.99% 1st/1995
Worst (8.16)% 1st/1994
- ------------------------------------------------------------------------------------------------
Year-to-date (4.27)% through 3rd/1999
- ------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary bench-
mark is the Lehman Brothers Mu-
nicipal Bond Index. The index is
a composite measure of the total
return performance of the munic-
ipal bond market. Unlike the
Portfolio, the benchmark is un-
managed and does not include any
expenses.
In addition, the Portfolio compares its performance with the
Lipper General Municipal Debt Funds Average. It is 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 as determined by a nationally
recognized rating organization.
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 expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.60%
Other expenses 0.18%
----
Total annual Portfolio operating
expenses 0.78%
====
</TABLE>
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 reinvest all dividends and distributions;
. 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>
$230 $712 $1,221 $2,615
</TABLE>
33
Consulting Group Capital Markets Funds
<PAGE>
Government Money Investments
Investment objective
To provide maximum current income to the extent consistent with the maintenance
of liquidity and the preservation of capital.
Principal investment strategies
The Portfolio invests exclusively in U.S. dollar denominated short-term debt
securities issued or guaranteed by the U.S. government, its agencies, or in-
strumentalities and in repurchase agreements with respect to these securities.
Credit quality. The Portfolio invests exclusively in U.S. treasury securities
and other U.S. government securities rated by a nationally recognized rating
organization in the two highest short-term rating categories or, if unrated, of
equivalent quality as determined by the subadvisor, Standish Ayer & Wood.
Maturity. Individual securities must have remaining maturities of 397 days or
less. The Portfolio maintains a dollar-weighted portfolio maturity of 90 days
or less.
How the subadvisor selects the Portfolio's investments
The Portfolio seeks to maintain a constant net asset value of $1 per share by
investing in securities which the subadvisor believes present minimal credit
risks. It focuses on improving the Portfolio's yield by:
. Actively managing sector allocations and the average maturity of the Portfo-
lio.
. Monitoring the spread relationships between U.S. Treasury and government
agency issues and purchasing agencies when they provide a yield advantage.
. Adjusting average portfolio maturity to reflect the subadvisor's outlook on
interest rates.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3. Because the Portfolio invests exclusively in short-term, high-quality
debt securities, these risks are less significant than in the case of Portfo-
lios which invest in longer-term securities or in below investment grade secu-
rities.
Investment in short-term U.S. government securities is generally the most con-
servative investment approach of all the Portfolios. Over time, the Portfolio
is likely to underperform other investment options.
The Portfolio seeks to maintain a $1 share price. However, the maintenance of a
$1 share price is not guaranteed and you may lose money on your investment.
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to the return on the 90-day Treasury bill. The Portfolio's past performance
does not necessarily indicate how the Portfolio will perform in the future.
[BAR CHART]
Percentage Total Returns for
Government Money Investments
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
3.25% 2.69% 3.71% 5.48% 4.91% 5.04% 4.99%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 4.99% 3.27% 2.73% 11/18/91
90-day T-bill Index 4.88% 5.02% 4.52% **
- --------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in advisory pro-
grams. These programs charge an annual fee, which in the case of TRAK(R)
Personalized Investment Advisory Service may be up 1.5%
** Index comparison begins on 11/30/91.
The portfolio's 7-day yield as of December 31, 1998 was 4.54%.
34
Consulting Group Capital Markets Funds
<PAGE>
Government Money Investments, continued
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 1.40% 2nd/1995
Worst 0.65% 1st & 2nd/1993
- -------------------------------------------------------------------------------------------------
Year-to-date 3.30% through 3rd/1999
- -------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARK
The Portfolio's benchmark is the
rate of return of the 90 day
Treasury bill. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses.
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 expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
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 fees 0.35 %
Other expenses 0.36 %
-----
Total annual Portfolio operating
expenses 0.71 %
Management and Administration fee
waivers and expense
reimbursements* (0.11)%
-----
Net annual Portfolio operating
expenses 0.60 %
=====
</TABLE>
* Management has agreed to waive a portion of management and administration
fees because it has voluntarily agreed to limit total annual Portfolio oper-
ating expenses to 0.60% of average net assets. The manager may change or
eliminate this expense limitation at any time.
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 reinvest all dividends and distributions;
. 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>
$213 $658 $1,129 $2,431
</TABLE>
35
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments and Related Risks
The section entitled "Investments, Risks and Performance" describes the Portfo-
lios' investment objectives and their principal investment strategies and
risks. This section provides some additional information about the Portfolios'
investments and certain investment management techniques the Portfolios may
use. More information about the Portfolios' investments and portfolio manage-
ment techniques, some of which entail risk, is included in the Statement of Ad-
ditional Information (SAI). To find out how to obtain an SAI, please turn to
the back cover of this prospectus.
Percentage Limits
Some Portfolio policies in this
section are stated as a percent-
age of assets. These percentages
are applied at the time of pur-
chase of a security and subse-
quently may be exceeded because
of changes in the values of a
Portfolio's investments.
Equity Investments. The equity oriented Portfolios may invest in all types of
equity securities. 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.
Fixed Income Investments. The fixed income oriented Portfolios (except Govern-
ment Money Investments, Municipal Bond Investments and Balanced Investments,
which limit their investments to certain types of fixed income instruments) may
invest in all types of fixed income securities. The equity oriented Portfolios
may invest a portion of their assets in fixed income securities. Fixed income
investments include bonds, notes (including structured notes), mortgage-related
and asset-backed securities (Intermediate Fixed Income Investments, Long-Term
Bond Investments, Mortgage Backed Investments, Multi-Sector Fixed Income In-
vestments and Balanced Investments only), convertible securities, eurodollar
and yankee dollar instruments, preferred stocks and money market instruments.
Fixed income securities may be issued by corporate and governmental issuers and
may have all types of interest rate payment and reset terms, including fixed
rate, adjustable rate, zero coupon, contingent, deferred, payment-in-kind and
auction rate features.
An individual security's maturity is the date upon which the issuer must pay
back the face amount of the security. A security may have an "effective" matu-
rity which is shorter or longer than its stated maturity depending on the de-
gree of prepayment or extension risk associated with that security. Duration
is the measure of an individual security's price sensitivity to changing inter-
est rates. The longer a security's duration, the more sensitive that security's
price will be to changes in interest rates.
Mortgage-related securities may be issued by private companies or by agencies
of the U.S. government and represent direct or indirect participations in, or
are collateralized by and payable from, mortgage loans secured by real proper-
ty. Intermediate Fixed Income Investments, Long-Term Bond Investments and Mort-
gage Backed Investments may each invest up to 25% of their assets in privately
issued mortgage-related securities. Long-Term Bond Investments, Balanced In-
vestments and Intermediate Fixed Income Investments may each invest up to 5% of
their respective net assets and Multi-Sector Fixed Income Investments may in-
vest up to 10% of its net assets in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as install-
ment sales or loan contracts, leases, credit card receivables and other catego-
ries of receivables. A Portfolio's investments in asset-backed securities will
be rated in the highest rating category at the time of investment.
Certain debt instruments may pay principal only at maturity or may represent
only the right to receive payments of principal or payments of interest on un-
derlying pools of mortgages or government securities, but not both. The value
of these types of instruments may change more drastically than debt securities
that pay both principal and interest during periods of changing interest rates.
Interest only mortgage-backed securities are particularly subject to prepayment
risk. A Portfolio may obtain a below market yield or incur a loss on such in-
struments during periods of declining interest rates. Principal only instru-
ments are particularly subject to extension risk. For mortgage derivatives and
structured securities that have imbedded leverage features, small changes in
interest or prepayment rates may cause large and sudden price movements. Mort-
gage derivatives can also become illiquid and hard to value in declining mar-
kets.
Foreign Securities. Investments in securities of foreign entities and securi-
ties quoted or denominated in foreign currencies involve special risks. These
include possible political and economic instability and the possible imposition
of exchange controls or other restrictions on investments. If a Portfolio in-
vests 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 af-
fect the U.S. dollar value of the Portfolio's assets.
Emerging market investments offer the potential of significant gains but also
involve greater risks than investing
36
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments and Related Risks, continued
in more developed countries. Political or economic instability, lack of market
liquidity and government actions such as currency controls or seizure of pri-
vate businesses or property may be more likely in emerging markets. The Con-
sulting Group generally considers all of the western European countries, Cana-
da, Australia, New Zealand, Hong Kong, Singapore and Japan to have developed
markets and economies and the rest of the countries in the world to have emerg-
ing markets and economies.
Economic and monetary union (EMU) in Europe began to be implemented on January
1, 1999, when 11 European countries adopted a single currency--the euro. The
conversion to the euro is being phased in over a three year period, during
which time valuation, systems and other operational problems may occur in con-
nection with the fund's investments quoted in the euro. For participating coun-
tries, EMU means 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 of-
ficial 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 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 uncer-
tainty 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 international markets.
Each Portfolio which is not an international oriented Portfolio (International
Equity Investments, International Fixed Income Investments and Emerging Markets
Equity Investments), may invest up to 10% of its net assets in foreign securi-
ties, including emerging market securities.
Municipal Obligations. Municipal Bond Investments invests primarily in munici-
pal obligations, which are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal classi-
fications of municipal obligations are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of a facility being financed. Revenue securities may include private ac-
tivity bonds which may be issued by or on behalf of public authorities to fi-
nance various privately operated facilities and are not payable from the unre-
stricted revenues of the issuer. As a result, the credit quality of private ac-
tivity bonds is frequently related directly to the credit standing of private
corporations or other entities.
The secondary market for municipal obligations may be less liquid than for most
taxable fixed income securities which may limit the Portfolio's ability to buy
and sell these obligations at times and prices the manager believes would be
advantageous. There may be less information available about the financial con-
dition of an issuer of municipal obligations than about issuers of other pub-
licly traded securities. Also, state and federal bankruptcy laws could hinder
the Portfolio's ability to recover interest or principal in the event of a de-
fault by the issuer.
The Portfolio will not invest more than 25% of its total assets in municipal
obligations whose issuers are located in the same state or more than 25% of its
total assets in obligations that are secured by revenues from entities in any
one of the following categories: hospitals and health facilities; ports and
airports; or colleges and universities. The Portfolio also will not invest more
than 25% of its total assets in private activity bonds of similar projects. The
Portfolio may, however, invest more than 25% of its total assets in municipal
obligations of one or more of the following types: turnpikes and toll roads;
public housing authorities; general obligations of states and localities; state
and local housing finance authorities; municipal utilities systems; tax-free
prefunded bonds secured or backed by the U.S. Treasury or other U.S.
government guaranteed securities; and pollution control bonds.
37
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments and Related Risks, continued
Credit Quality
A Portfolio's rating criteria
are applied at the time of pur-
chase. If a security is subse-
quently downgraded, the
subadvisor may, but is not re-
quired to, sell the security. If
a security is rated differently
by two or more rating organiza-
tions, the subadvisor may use
the higher rating to determine
the security's rating category.
Securities are considered in-
vestment grade if they are:
. rated in one of the top four
long-term rating categories by
a nationally recognized sta-
tistical rating organization.
. unrated securities that the
subadvisor believes to be of
comparable quality.
Securities are considered below
investment grade if they are
rated below the top four long-
term ratings or are of equiva-
lent quality if unrated. Below
investment grade securities,
also known as "high yield secu-
rities," (commonly known as
"junk bonds") are subject to:
. the increased risk of an is-
suer's inability to meet prin-
cipal and interest obliga-
tions.
. greater price volatility be-
cause of a heightened sensi-
tivity to changing interest
rates.
. less liquidity.
Derivative contracts. Each Portfolio, except Government Money Investments, may,
but is not required to, use derivative contracts for any of the following pur-
poses:
. To hedge against adverse changes caused by changing interest rates, stock
market prices or currency exchange rates in the market value of securities
held by or to be bought for a Portfolio.
. As a substitute for purchasing or selling securities.
. To shorten or lengthen the effective maturity or duration of a Portfolio's
fixed income investments.
. To enhance a Portfolio's potential gain in non-hedging situations.
. To increase a Portfolio's liquidity.
The Portfolios may use various types of derivative instruments, including op-
tions on securities and securities indices, futures and options on futures (ex-
cept Government Money Investments, Municipal Bond Investments and Balanced In-
vestments) and, for those Portfolios that invest directly in foreign securi-
ties, forward currency contracts, currency futures contracts and options on
currencies and currency futures. A derivative contract will obligate or entitle
a Portfolio to deliver or receive an asset or a cash payment based on the
change in value of one or more designated securities, currencies or indices.
Even a small investment in derivative contracts can have a big impact on a
Portfolio's interest rate, stock market and currency exposure. Therefore, using
derivatives can disproportionately increase Portfolio losses and reduce oppor-
tunities for gains when interest rates, stock prices or currency rates are
changing. A Portfolio may not fully benefit from or may lose money on deriva-
tives if changes in their value do not correspond accurately to changes in the
value of the Portfolio's holdings. The other party to certain derivative con-
tracts presents the same types of credit risk as issuers of fixed income secu-
rities. Derivatives can also make a Portfolio's assets less liquid and harder
to value, especially in declining markets.
Mortgage Dollar Rolls. Mortgage Backed Investments, Balanced Investments and
Multi-Sector Fixed Income Investments may enter into mortgage dollar roll
transac-tions to earn additional income. In these transactions, a Portfolio
sells a U.S. agency mortgage-backed security and simultaneously agrees to re-
purchase at a future date another U.S. agency mortgage-backed security with the
same interest rate and maturity date, but generally backed by a different pool
of mortgages. The Portfolio loses the right to receive interest and principal
payments on the security it sold. However, the Portfolio benefits from the in-
terest earned on investing the proceeds of the sale and may receive a fee or a
lower repurchase price. The benefits from these transactions depend upon the
subadvisor's ability to forecast mortgage prepayment patterns on different
mortgage pools. The Portfolio may lose money if, during the period between the
time it agrees to the forward purchase of the mortgage securities and the set-
tlement date, these securities decline in value because of market conditions or
prepayments on the underlying mortgages.
High Yield Securities. High Yield Investments and Multi-Sector Fixed Income In-
vestments can invest in high yield securities. These are commonly known as
"junk bonds" and involve a substantial risk of loss. These securities are con-
sidered speculative with respect to the issuer's ability to pay interest and
principal and are susceptible to default or decline in market value be-cause of
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. The Portfolio may experience increased price
sensitivity to changing interest rates and greater risk of loss because of de-
fault or declining credit quality. In addition, adverse company specific
Consulting Group Capital Markets Funds
38
<PAGE>
More on the Portfolios' Investments and Related Risks, continued
events are more likely to render the issuer unable to make interest and/or
principal payments. A negative perception of the high yield market may develop,
depressing the price and liquidity of high yield securities. This negative per-
ception could last for a significant period of time.
Swaps. Emerging Markets Equity Investments, with respect to 15% of the total
assets allocated to State Street Global Advisors, may enter into index swaps. A
swap transaction is an agreement between the Portfolio and a counterparty to
act in accordance with the terms of the swap contract. Index swaps involve the
exchange by the Portfolio with another party of the respective amounts payable
with respect to a notional principal amount related to one or more indices. The
Portfolio may enter into these transactions to preserve a return or spread on a
particular investment or portion of its assets, as a duration management tech-
nique or to protect against any increase in the price of securities the Portfo-
lio anticipates purchasing at a later date. Swaps have risks associated with
them, including possible default by the counterparty to the transaction, illi-
quidity and, where swaps are used as hedges, the risk that the use of a swap
could result in losses greater than if the swap had not been employed.
Defensive investing. The Portfolios may depart from their 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 Portfolios' investments in these assets are managed
by SSB Citi Fund Management LLC.
Impact of high portfolio turnover. Each 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 a Portfolio's performance.
Order of Exemption. The Trust is subject to an Order of Exemption from the De-
partment of Labor requiring the Portfolio to limit its investments in the secu-
rities of affiliates of Salomon Smith Barney, including Citigroup, Inc., to one
percent of the Portfolio's net assets. Since the Portfolio will be managed to
comply with this limitation, this may result in differences in performance be-
tween the Portfolio and other funds that fully replicate the S&P 500 Index.
Investment Policies. The Portfolios' non-fundamental investment policies gener-
ally may be changed by the Board of Trustees without shareholder approval.
More information about investment styles. If a subadvisor follows a passive
style, the subadvisor's principal objective is to mirror the return of a bench-
mark index. The subadvisor may seek to achieve that goal by investing in all of
the securities in the index or by selecting certain securities in the index
with respect to which the subadvisor believes there is a high correlation be-
tween changes in the value of the index and these securities. An active
subadvisor seeks to outperform the index by selecting securities which the
subadvisor believes will appreciate in value at a rate greater than the index.
However, if the subadvisor is incorrect in its estimate of a security's perfor-
mance, the Portfolio may underperform the index. A risk controlled subadvisor
uses an active management style but employs investment criteria that are in-
tended to limit the positive or negative variances from the index. A top down
investment approach places greater emphasis on selecting the industries or sec-
tors, or in the case of an international fund, country allocations, that the
subadvisor believes will outperform the market rather than on individual stock
selection. Consequently, these subadvisors place greater emphasis upon economic
and market trends. A subadvisor using a bottom up approach primarily emphasizes
the outlook for individual companies. Stock picking and not overall market
trends or industry or sector weightings is most important. If a subadvisor or
Portfolio focuses upon growth stocks, the emphasis is upon companies whose
earnings are expected to increase at a rate that exceeds the average of the
market as a whole. Value investing seeks to identify companies that have an un-
derlying value that is not currently reflected in the company's market price.
The subadvisor anticipates that over time the market will reflect the under-
lying value in the market price.
Potential Conversion. The High Yield Investments reserves the right, if ap-
proved by the Board of Trustees, to convert in the future to a "Master/Feeder"
fund that would invest all of its assets in a Master/Feeder fund having sub-
stantially the same investment objective, policies and restrictions. At least
30 days' written notice of any action would be given to all shareholders if, and
when, such a proposal is approved.
39
Consulting Group Capital Markets Funds
<PAGE>
The Manager
The manager. The Consulting Group, a division of SSB Citi Fund Management LLC
("SSB Citi"), serves as the manager for the Portfolios. SSB Citi is a wholly-
owned subsidiary of Salomon Smith Barney Holdings Inc., which in turn 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, investment banking and trad-
ing--and use diverse channels to make them available to consumer and corporate
customers around the world. As manager, the Consulting Group selects and
oversees professional money managers who are responsible for investing the as-
sets of the Portfolios. The Consulting Group was established to match the in-
vestment needs of institutional investors and substantial individual investors
with appropriate and well-qualified investment advisers. Since 1973, the Con-
sulting Group has grown to become one of the nation's foremost organizations
providing portfolio evaluation, asset allocation, market analysis and invest-
ment adviser selection services.
The Portfolios are part of a series of portfolios which comprise the Consulting
Group Capital Markets Funds (the "Trust"). The Trust is a series company that
consists of the Portfolios and the following additional portfolios which are
offered in a separate prospectus, a copy of which can be obtained from any Sal-
omon Smith Barney Financial Consultant:
. Multi-Strategy Market Neutral Investments
. S&P 500 Index 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 Portfolios in accordance with each 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 section entitled
"Investments, Risks and Performance".
The subadvisor selection process. Subject to the review and approval of the
Portfolios' Trustees, the Consulting Group is responsible for selecting, super-
vising and evaluating subadvisors who manage the Portfolios' assets. The Con-
sulting Group may adjust the allocation of a Portfolio's assets among the
subadvisors by up to 10%. Any adjustment affecting more than 10% of a Portfo-
lio's assets can only be made by the Board of Trustees. The Consulting Group
employs a rigorous evaluation process to select those subadvisors that have
distinguished themselves through consistent and superior performance. The Con-
sulting Group is also responsible for communicating performance expectations
and evaluations to the subadvisors and ultimately recommending to the Board of
Trustees whether a subadvisor's contract should be renewed. The Consulting
Group provides written reports to the Trustees regarding the results of its
evaluation and monitoring functions.
The Portfolios rely 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.
The Trustees, including a majority of the "non-interested" Trustees, must ap-
prove each new subadvisory contract. This allows the manager to act more
quickly to change subadvisors when it determines that a change is beneficial to
shareholders by avoiding the delay of calling and holding shareholder meetings
to approve each change. In accordance with the exemptive order, the Portfolios
will provide investors with information about each new subadvisor and its
subadvisory contract within 90 days of the engagement of a new subadvisor.
40
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
The subadvisors, portfolio managers and the percentage of Portfolio assets each
subadvisor manages are described below.
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Capitalization Growth Barclays Global Fund Advisors 20% Barclays uses a team management
Investments 45 Fremont Street approach to manage indexed
San Francisco, CA 94105 portfolios.
Provident Investment Counsel 80% Harlan Thompson, CFA
300 North Lake Avenue Mr. Thompson is a senior
Pasadena, CA 91101 vice president of Provident and
has been responsible for the
day-to-day management of the
Portfolio since 1997. He has
been with Provident for 7 years.
Large Capitalization Value The Boston Company Asset 15% Robert J. Eastman
Equity Investments Management L.L.C. Mr. Eastman has been
One Boston Place responsible for the day-to-day
Boston, MA 02108 management of the Portfolio
since 1996. He has been a vice
president of the firm since
1991.
Parametric Portfolio Associates 50% David Stein
7310 Columbia Center Tom Seto
701 Fifth Avenue Mr. Stein has been primarily
Seattle, WA 98164 responsible for the day-to-day
management of the Portfolio
since 1996. Mr. Stein, a
managing director of
Parametric, joined the firm in
1997 and has had 12 years of
investment experience. Mr. Seto
is a portfolio manager and
joined Parametric in 1998 and
has 7 years of investment
experience.
Barclays Global Fund Advisors 20% Barclays uses a team management
45 Fremont Street approach to manage indexed
San Francisco, CA 94105 portfolios.
Chartwell Investment Partners 15% Bernard Schaffer
1235 Westlakes Drive, Suite 330 Mr. Schaffer has been primarily
Berwyn, PA 19312 responsible for the day-to-day
management of the Portfolio
since 1999. He has been with
Chartwell since 1997 and has
had 28 years of investment
experience.
</TABLE>
41
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Capitalization Growth Mellon Capital Management 40% Mellon uses a team management
Investments Corporation approach to manage indexed
595 Market Street, Suite 3000 portfolios.
San Francisco, CA 94105
Wall Street Associates 20% William Jeffery, III
1200 Prospect Street, Suite 100 Kenneth McCain
La Jolla, CA 92037 Messrs. Jeffery and McCain have
been primarily responsible for
the day-to-day management of
the Portfolio since 1997.
Messrs. Jeffery and McCain are
founding partners of the firm
and have over 25 years of
investment experience.
Westpeak Investment Advisors, 20% Gerald Scriver
L.P. Mr. Scriver has been primarily
1011 Walnut Street, Suite 400 responsible for the day-to-day
Boulder, CO 80302 management of the Portfolio
since 1997. He has been
president, chief investment
officer and chief executive
officer of the firm since its
inception in 1991.
Kern Capital Management LLC 114 20% David G. Kern
West 47th Street, Suite 1926 Mr. Kern has been primarily
New York, NY 10036 responsible for the day-to-day
management of the Portfolio
since 1999. He has been with
Kern since 1997 and has had 12
years of investment experience.
Small Capitalization Value Mellon Capital Management 50% Mellon uses a team management
Equity Investments Corporation approach to manage indexed
595 Market Street, Suite 3000 portfolios.
San Francisco, CA 94105
NFJ Investment Group 35% Benno Fischer
2121 San Jacinto Street, Paul Magnuson
Suite 1840 Messrs. Fischer and Magnuson
Dallas, TX 75201 have been responsible for the
day-to-day management of the
Portfolio since 1993. Mr.
Fischer is a managing director
and has been with NFJ since
1989. Mr. Magnuson is a
portfolio manager and has been
with NFJ since 1992.
</TABLE>
42
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Capitalization Value David L. Babson & Co., Inc. 15% Dennis J. Scannel
Equity Investments-- One Memorial Drive Mr. Scannel has been primarily
(Continued) Cambridge, MA 02142 responsible for the day-to-day
management of the Portfolio
since 1998. Mr. Scannel joined
Babson in 1993. Prior to
joining Babson he was a
management consultant at
Greenwich Associates.
International Equity State Street Global Advisors 40% State Street utilizes a team
Investments Two International Place management approach.
Boston, MA 02110
Oechsle International Advisors, 30% Walter Oechsle
LLC Kathleen Harris
One International Place Mr. Oechsle has been primarily
Boston, MA 02110 responsible for the day-to-day
management of the Portfolio
since 1991. He has been a
managing general partner of
Oechsle since 1986. Ms. Harris
has shared management
responsibility since 1997. She
has been with Oechsle since
1997. Previously, Ms. Harris
was portfolio manager and
investment director for the
State of Wisconsin Investment
Board, where she managed the
fund's international equity
assets. Prior to that time, she
was a fund manager and equity
analyst for the Northern Trust
Company.
Marvin & Palmer Associates, 30% Marvin & Palmer uses a team
Inc. 1201 N. Market Street, management approach.
Suite 2300 Wilmington, DE 19801
Emerging Markets Equity State Street Global Advisors 30% State Street uses a team
Investments Two International Place management approach.
Boston, MA 02110
AIB Govett, Inc. 40% AIB Govett utilizes a team
250 Montgomery Street management approach.
San Francisco, CA 94104
Baring Asset Management, Inc. 30% Baring utilizes a team
125 High Street management approach.
Boston, MA 02110
</TABLE>
43
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Investments Laurel Capital Advisors, LLP 60% Bert Mullins
One Mellon Bank Center, Mr. Mullins is a senior vice
Suite 151-3925 president and has been with the
Pittsburgh, PA 15258 firm for 8 years and has had 33
years of investment experience.
He has been primarily
responsible for the day-to-day
management of the Portfolio since January 1999.
Seix Investment Advisors 40% Christina Seix
300 Tice Boulevard Ms. Seix is Chairman and Chief
Woodcliff Lake, NJ 07675 Investment Officer of the firm.
She has been with the firm for
7 years and has had 26 years of
investment experience. Ms. Seix
has been primarily responsible
for the day-to-day management
of the portfolio since January 1999.
Intermediate Fixed Income Standish Ayer & Wood, Inc. 50% Richard Doll
Investments One Financial Center Mr. Doll has been primarily
Boston, MA 02111 responsible for the day-to-day
management of the Portfolio
since its inception in 1991. He
has been a Vice President of
Standish since 1984 and a
director since 1987.
Pacific Investment Management 50% William C. Powers
Company Mr. Powers is a Managing
840 Newport Center Drive, Director at Pacific Investment
Management Company and has been
Suite 300 with the firm for nine years.
Newport Beach, CA 92660 He has had 16 years of
investment experience.
Long-Term Bond Investments Western Asset Management 100% Western utilizes a team
Company management approach.
117 East Colorado Boulevard
Pasadena, CA 91105
Mortgage Backed Investments Utendahl Capital Management CFI
(successor to Atlantic Portfolio Analytics & Management,
Inc.)
100% Utendahl utilizes a team
201 East Pine Street, management approach.
Suite 600
Orlando, FL 32801
High Yield Investments Alliance Capital Management 100% Nelson R. Jantzen
L.P. 1345 Avenue of the Sheryl A. Rothman
Americas Mr. Jantzen is a senior vice
New York, NY 10105 president and co-head of the
High Yield Group and has had 25
years of investment experience.
Ms. Rothman is a senior vice
president and portfolio manager
and has 15 years of investment
experience.
</TABLE>
44
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multi-Sector Fixed Income Standish Ayer & Wood, Inc. 50% Richard Doll
Investments One Financial Center Mr. Doll has been primarily
Boston, MA 02111 responsible for the day-to-day
management of the Portfolio
since its inception in 1999. He
has been a Vice President of
Standish since 1984 and a
director since 1987.
Western Asset Management 20% Western utilizes a team
Company management approach.
117 East Colorado Boulevard
Pasadena, CA 91105
Utendahl Capital Management CFI
(successor to Atlantic Portfolio Analytics & Management
, Inc.)
20% Utendahl utilizes a team
201 East Pine Street, Suite 600 management approach.
Orlando, FL 32801
Alliance Capital Management 10% Nelson R. Jantzen
L.P. 1345 Avenue of the Sheryl A. Rothman
Americas Mr. Jantzen is a senior vice
New York, NY 10105 president and co-head of the
High Yield Group and has had 25
years of investment experience.
Ms. Rothman is a senior vice
president and portfolio manager
and has 15 years of investment
experience.
International Fixed Income Julius Baer Investment 100% Edward Dove
Investments Management Inc. Mr. Dove has been primarily
330 Madison Avenue responsible for the day-to-day
New York, NY 10017 management of the Portfolio
since 1992. He is a Director of
Fixed Income and Portfolio
Manager at Julius Baer and has
had 18 years of investment
experience.
Municipal Bond Investments Smith Affiliated Capital 100% Smith utilizes a team
Corporation management approach.
880 Third Avenue
New York, NY 10022
Government Money Investments Standish Ayer & Wood, Inc. 100% Jennifer Pline
One Financial Center Ms. Pline has been primarily
Boston, MA 02111 responsible for the day-to-day
management of the Portfolio
since its inception in 1991.
Ms. Pline is a Vice President
and joined Standish in 1987.
</TABLE>
45
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
Management Fees. The Consulting
Group receives fees from each daily net assets for administra-
Portfolio for its services. In tion services. The Consulting
turn, the Consulting Group pays Group and SSB Citi may voluntar-
the subadvisors a portion of ily waive a portion or all of
this fee for their services. In their respective fees otherwise
addition, each Portfolio pays SSB payable to them. The chart below
Citi a fee at an annual rate of shows the management fees paid by
0.20% of its average each Portfolio.
<TABLE>
<CAPTION>
Actual Management
Fee Paid
During
Most Recent
Management Fiscal
Portfolio Fee Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Large Capitalization Growth Investments 0.60% 0.38%
Large Capitalization Value Equity Investments 0.60% 0.46%
Small Capitalization Growth Investments 0.80% 0.60%
Small Capitalization Value Equity Investments 0.80% 0.61%
International Equity Investments 0.70% 0.48%
Emerging Markets Equity Investments 0.90% 0.90%
Balanced Investments 0.60% 0.59%
Intermediate Fixed Income Investments 0.40% 0.33%
Long-Term Bond Investments 0.40% 0.40%
Mortgage Backed Investments 0.50% 0.39%
High Yield Investments 0.70% 0.70%
Multi-Sector Fixed Income Investments 0.65% N/A
International Fixed Income Investments 0.50% 0.50%
Municipal Bond Investments 0.40% 0.40%
Government Money Investments 0.15% 0.12%
</TABLE>
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 to clients in its asset allocation program certain Portfolios
in the Trust over other Portfolios for asset allocation. You should consider
this possible conflict of interest when evaluating the manager's asset alloca-
tion 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.
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 a Portfolio. The cost of addressing the Year 2000 issue, if
substantial, could adversely effect companies and governments that issue secu-
rities held by a Portfolio. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The Portfolios have been informed by
other service providers that they are taking similar measures. Although the
Portfolios do not expect the Year 2000 issue to adversely affect them, the
Portfolios cannot guarantee that the efforts of the Portfolios, which are lim-
ited to requesting and receiving reports from service providers, or the efforts
of service providers to correct the problem, will be successful.
46
<PAGE>
Asset Allocation Programs
Shares of the Trust's Portfolios are available to participants in advisory pro-
grams or asset based fee programs sponsored by Salomon Smith Barney Inc., in-
cluding the TRAK(R) Personalized Investment Advisory Service, or other quali-
fied investment advisors approved by the Consulting Group. The advisory serv-
ices provide investors with asset allocation recommendations, which are imple-
mented through the Portfolios.
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 up to the investor and not the provider of the advisory service.
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 Salomon Smith Barney advisory program may be paid either by redemption
of shares of the Trust or by separate payment.
47
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information
Account Transactions
Purchase of Shares. You may purchase shares of a Portfolio if you are a partic-
ipant in an advisory program or asset based fee program sponsored by Salomon
Smith Barney, including TRAK(R), or by qualified investment advisers not affil-
iated with Salomon Smith Barney. Purchases of shares of a Portfolio must be
made through a brokerage account maintained with Salomon Smith Barney or
through a broker that clears securities transactions through Salomon Smith Bar-
ney (an introducing broker). You may establish a brokerage account with Salomon
Smith Barney free of charge in order to purchase shares of a Portfolio.
. The minimum initial aggregate investment in the TRAK program is $10,000. The
minimum investment in a 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 Portfolios 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 Portfolios 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
Each 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 the investor par-
ticipating in the TRAK(R) program or other advisory program sponsored by Salo-
mon 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 a Portfolio at net asset value on
any day the New York Stock Exchange is open by contacting your broker. All re-
demption requests accepted by Salomon Smith Barney or an introducing broker be-
fore 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 a signa-
ture guarantee (available from most banks, dealers, brokers, credit unions and
federal savings and loan associations, but not from a notary public) to assure
the safety of your account. If you discontinue your Salomon Smith Barney advi-
sory service, you must redeem your shares in the Portfolios.
Each 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 a 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 a 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
re-
48
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information, continued
quired either to redeem his or her shares in the Portfolio or establish an al-
location which the shareholder expects to maintain for a significant 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
Each Portfolio offers its shares at their net asset value per share. Each Port-
folio calculates net asset value once daily as of the close of regular trading
on the New York Stock Exchange (generally at 4:00 p.m., New York time) on each
day the exchange is open. The exchange is closed on certain holidays listed in
the SAI. If the exchange closes early, the Portfolio accelerates calculation of
net asset value and transaction deadlines to the actual closing time.
A Portfolio generally values its fund securities based on market prices or quo-
tations. A Portfolio's currency conversions, if any, are done when the London
stock exchange closes. When market prices are not available, or when the Con-
sulting Group believes they are unreliable or that the value of a security has
been materially affected by events occurring after the securities or currency
exchanges close, a Portfolio may price those securities at fair value. Fair
value is determined in accordance with procedures approved by the Portfolios'
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 quota-
tions 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 a Portfolio could change on days when shares of the Portfolio cannot
be bought or sold.
Dividends and distributions
Each Portfolio intends to distribute all or substantially all of its net in-
vestment income and realized capital gains, if any, for each taxable year. Gov-
ernment Money Investments declares dividends, if any, from net investment in-
come daily and pays dividends monthly. Shareholders in Government Money Invest-
ments receive dividends from the day following purchase through the date of
redemption. The other fixed income oriented Portfolios and Balanced Investments
declare and pay dividends, if any, from net investment income monthly. The eq-
uity oriented Portfolios declare and pay dividends, if any, from net investment
income annually. All of the Portfolios declare and distribute realized net cap-
ital gains, if any, annually, typically in December. All dividends and capital
gains are reinvested in shares of the Portfolio that paid them unless the
shareholder elects to receive them in cash.
The equity oriented Portfolios expect distributions to be primarily from capi-
tal gains. Balanced Investments expects distributions to be from both capital
gains and income. The fixed income oriented Portfolios expect distributions to
be primarily from income.
Taxes
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions Federal Tax Status
- ------------------------------------------------------------------------------
<S> <C>
Sales or exchange of shares Usually capital gain
or loss (except no
gain or loss for
Government Money
Investments); 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 (for
investment income all Portfolios
except Municipal
Bond Investments)
- ------------------------------------------------------------------------------
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 a Portfolio is about to declare a capital gain distribution
or a taxable dividend, because it will be taxable to you even though it may ac-
tually be a return of a portion of your investment.
Dividends paid by Municipal Bond Investments that are derived from interest
earned on qualifying tax-exempt obligations are expected to be "exempt-inter-
est" dividends that shareholders may exclude from their gross incomes for fed-
eral income tax purposes if the Portfolio satisfies certain asset percentage
requirements.
49
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information, continued
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 reinvested, and your redemptions during that year. If you do not
provide the Portfolios with your correct taxpayer identification number and any
required certifications, you may be subject to backup withholding of 31% of a
Portfolio's distributions, dividends (other than exempt-interest 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 in-
vestment in a 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 2000, adjusted gross income in excess of $128,950 ($64,475
for married individuals filing separately).
50
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each portfolio for the past five years. The information in the follow-
ing tables was audited by KPMG LLP, independent accountants, whose report,
along with each portfolio's financial statements, are included in the annual
report (available upon request). Certain information reflects financial results
for a single share. Total return represents the rate that a shareholder would
have earned (or lost) on a share of a fund assuming reinvestment of all divi-
dends and distributions. No information is presented for Multi-Sector
Fixed Income Investments because none of its shares were outstanding
for the periods shown.
For a share of beneficial interest
outstanding throughout each year ended August
31:
Large Capitalization Growth Investments
-------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $17.30 $17.27 $13.10 $12.13 $10.00
------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.01 0.04 0.07 0.07 0.09
Net realized and
unrealized gain 7.87 1.31 4.72 1.46 2.13
------------------------------------------------------------
Total Income From
Operations 7.88 1.35 4.79 1.53 2.22
------------------------------------------------------------
Less Distributions From:
Net investment income (0.01) (0.08) (0.08) (0.06) (0.08)
Net realized gains (0.82) (1.24) (0.54) (0.50) (0.01)
------------------------------------------------------------
Total Distributions (0.83) (1.32) (0.62) (0.56) (0.09)
------------------------------------------------------------
Net Asset Value, End of
Year $24.35 $17.30 $17.27 $13.10 $12.13
------------------------------------------------------------
Total Return 46.29% 7.81% 37.47% 12.89% 22.30%
------------------------------------------------------------
Net Assets, End of Year
(millions) $2,326 $1,793 $1,845 $1,205 $782
------------------------------------------------------------
Ratios to Average Net
Assets:
Expenses(2) 0.68% 0.76% 0.69% 0.83% 0.88%
Net investment income 0.06 0.16 0.50 0.63 0.98
------------------------------------------------------------
Portfolio Turnover Rate 34% 39% 65% 40% 38%
------------------------------------------------------------
Large Capitalization Value Equity Investments
------------------------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995(1)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $12.28 $14.91 $11.55 $10.42 $9.39
------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.17 0.16 0.23 0.26 0.27
Net realized and
unrealized gain 2.94 0.08 4.09 1.25 1.16
------------------------------------------------------------
Total Income From
Operations 3.11 0.24 4.32 1.51 1.43
------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.11) (0.34) (0.24) (0.24)
Net realized gains (1.68) (2.76) (0.62) (0.14) (0.16)
------------------------------------------------------------
Total Distributions (1.86) (2.87) (0.96) (0.38) (0.40)
------------------------------------------------------------
Net Asset Value, End of
Year $13.53 $12.28 $14.91 $11.55 $10.42
------------------------------------------------------------
Total Return 26.36% 0.03% 38.98% 14.75% 16.14%
------------------------------------------------------------
Net Assets, End of Year
(millions) $1,946 $1,712 $1,935 $1,512 $1,070
------------------------------------------------------------
Ratios to Average Net
Assets:
Expenses(2) 0.75% 0.80% 0.78% 0.80% 0.83%
Net investment income 1.10 1.18 1.70 2.31 2.93
------------------------------------------------------------
Portfolio Turnover Rate 54% 57% 70% 24% 21%
------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) Expense ratios and the per share decreases in net
investment income before fee waivers and/or expense
reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Without
Income Per Waivers and/or
Share Decrease Reimbursements
Portfolio 1995 1995
------------------------------------------------------
<S> <C> <C>
Large Capitalization Growth
Investments $0.00* 0.98%
Large Capitalization Value
Equity Investments 0.01 0.93
</TABLE>
* Amount represents less than $0.01 per share.
51
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Small Capitalization Growth Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995(1)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.83 $18.29 $17.79 $17.19 $12.50
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(2) (0.07) (0.07) (0.06) (0.08) (0.05)
Net realized and unrealized gain (loss) 5.68 (4.23) 2.87 3.36 4.81
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations 5.61 (4.30) 2.81 3.28 4.76
- ------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.51) (1.16) (2.31) (2.68) (0.07)
- ------------------------------------------------------------------------------
Total Distributions (0.51) (1.16) (2.31) (2.68) (0.07)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $17.93 $12.83 $18.29 $17.79 $17.19
- ------------------------------------------------------------------------------
Total Return 44.32% (25.10)% 17.53% 21.33% 38.25%
- ------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,109 $859 $777 $494 $315
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.93% 1.01% 0.90% 1.00% 1.14%
Net investment loss (0.39) (0.43) (0.39) (0.49) (0.35)
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 108% 91% 81% 83% 174%
- ------------------------------------------------------------------------------
Small Capitalization Value Equity Investments
- ------------------------------------------------------------------------------
<CAPTION>
1999 1998(1) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.11 $14.45 $11.11 $10.01 $ 9.03
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.19 0.17 0.19 0.16 0.15
Net realized and unrealized gain (loss) 1.28 (1.66) 4.22 1.08 0.95
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.47 (1.49) 4.41 1.24 1.10
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.13) (0.19) (0.14) (0.12)
Net realized gains (1.82) (1.72) (0.88) -- (0.00)*
- ------------------------------------------------------------------------------
Total Distributions (2.02) (1.85) (1.07) (0.14) (0.12)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $10.56 $11.11 $14.45 $11.11 $10.01
- ------------------------------------------------------------------------------
Total Return 13.61% (12.84)% 42.40% 12.48% 12.50%
- ------------------------------------------------------------------------------
Net Assets, End of Year (millions) $744 $740 $622 $479 $340
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.96% 0.94% 0.90% 0.95% 1.11%
Net investment income 1.70 1.45 1.62 1.52 1.54
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 53% 59% 53% 39% 115%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Without
Income Per Waivers and/or
Share Decrease Reimbursements
Portfolio 1995 1995
-----------------------------------------------------------------------------
<S> <C> <C>
Small Capitalization Growth Investments $0.00* 1.16%
Small Capitalization Value Equity Investments 0.00* 1.13
</TABLE>
* Amount represents less than $0.01 per share.
52
Consulting Group Capital Market Funds
<PAGE>
Financial Highlights (continued)
International Equity Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.69 $10.63 $10.49 $10.50 $10.86
- ----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.09 0.14 0.09 -- 0.05
Net realized and unrealized gain (loss) 2.39 0.21 0.87 0.44 (0.09)
- ----------------------------------------------------------------------------
Total Income (Loss) From Operations 2.48 0.35 0.96 0.44 (0.04)
- ----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.17) (0.12) (0.17) --
Net realized gains (0.59) (0.12) (0.70) (0.28) (0.32)
- ----------------------------------------------------------------------------
Total Distributions (0.74) (0.29) (0.82) (0.45) (0.32)
- ----------------------------------------------------------------------------
Net Asset Value, End of Year $12.43 $10.69 $10.63 $10.49 $10.50
- ----------------------------------------------------------------------------
Total Return 24.06% 3.53% 9.53% 4.23% (0.18)%
- ----------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,385 $1,331 $1,136 $844 $663
- ----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.82% 0.90% 0.97% 1.00% 1.19%
Net investment income (loss) 0.90 1.23 0.70 (0.12) 0.43
- ----------------------------------------------------------------------------
Portfolio Turnover Rate 45% 45% 32% 50% 28%
- ----------------------------------------------------------------------------
</TABLE>
(1) During the year ended August 31, 1996, the portfolio earned credits from
the custodian which reduced service fees incurred. If the credits are taken
into consideration, the ratio of expenses to average net assets for
International Equity Investments would be 1.00%; prior year numbers have
not been restated to reflect these numbers.
53
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Emerging Markets Equity Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $4.37 $9.31 $8.50 $7.85 $9.49
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.05 0.06 0.04 0.03 0.01
Net realized and unrealized gain
(loss) 2.36 (4.44) 0.79 0.62 (1.45)
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 2.41 (4.38) 0.83 0.65 (1.44)
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.04) (0.10) (0.01) -- --
Net realized gains -- (0.46) (0.01) -- (0.20)
- -------------------------------------------------------------------------------
Total Distributions (0.04) (0.56) (0.02) -- (0.20)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $6.74 $4.37 $9.31 $8.50 $7.85
- -------------------------------------------------------------------------------
Total Return 55.37% (49.49)% 9.88% 8.28% (15.13)%
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $317,626 $230,526 $226,280 $97,489 $ 59,333
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2)(3) 1.72% 1.69% 1.60% 1.84% 1.75%
Net investment income 0.84 0.80 0.39 0.26 0.15
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 139% 105% 106% 89%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Without
Income Per Waivers and/or
Share Decrease Reimbursements
Portfolio 1996 1995 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Markets Equity Investments $ 0.01 $ 0.02 1.97% 1.96%
</TABLE>
(3) During the year ended August 31, 1996, the portfolio earned credits from
the custodian which reduced service fees incurred. If the credits are taken
into consideration, the ratio of expenses to average net assets for
Emerging Markets Equity Investments would be 1.80%; prior year numbers have
not been restated to reflect these numbers.
54
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Balanced Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $10.87 $12.01 $10.00 $9.37 $8.63
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(1) 0.25 0.26 0.27 0.29 0.26
Net realized and unrealized gain
(loss) 1.74 (0.53) 2.27 0.95 0.81
- ------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.99 (0.27) 2.54 1.24 1.07
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.30) (0.27) (0.28) (0.29)
Net realized gains (1.16) (0.57) (0.26) (0.33) (0.04)
- ------------------------------------------------------------------------------
Total Distributions (1.45) (0.87) (0.53) (0.61) (0.33)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $11.41 $10.87 $12.01 $10.00 $9.37
- ------------------------------------------------------------------------------
Total Return 18.78% (2.85)% 26.05% 13.60% 12.76%
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $74,866 $68,470 $89,789 $50,281 $30,268
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.85% 1.00% 1.00% 1.00% 1.00%
Net investment income 1.77 1.92 2.49 2.85 3.28
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 332% 57% 67% 47% 47%
- ------------------------------------------------------------------------------
Intermediate Fixed Income Investments
- ------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $8.19 $8.06 $7.92 $8.10 $7.92
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.44 0.48 0.50 0.50 0.50
Net realized and unrealized gain
(loss) (0.35) 0.15 0.14 (0.17) 0.16
- ------------------------------------------------------------------------------
Total Income From Operations 0.09 0.63 0.64 0.33 0.66
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.50) (0.50) (0.51) (0.48)
- ------------------------------------------------------------------------------
Total Distributions (0.45) (0.50) (0.50) (0.51) (0.48)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $7.83 $8.19 $8.06 $7.92 $8.10
- ------------------------------------------------------------------------------
Total Return 1.07% 8.00% 8.23% 4.08% 8.70%
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $594,666 $574,998 $384,094 $296,053 $246,323
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.61% 0.73% 0.73% 0.73% 0.80%
Net investment income 4.53 5.95 6.19 5.78 6.40
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 207% 63% 118% 98% 98%
- ------------------------------------------------------------------------------
</TABLE>
(1) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Investments N/A N/A $0.00* $0.03 $0.06 N/A N/A 1.02% 1.26% 1.75%
</TABLE>
* Amount represents less than $0.01 per share.
55
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights (continued)
Long-Term Bond Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $9.05 $8.26 $7.87 $8.23 $7.86
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.49 0.52 0.53 0.51 0.45
Net realized and unrealized gain
(loss) (1.00) 0.78 0.46 (0.41) 0.36
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations (0.51) 1.30 0.99 0.10 0.81
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.50) (0.51) (0.59) (0.46) (0.44)
Net realized gains (0.34) -- -- -- --
Capital -- -- (0.01) -- --
- -------------------------------------------------------------------------------
Total Distributions (0.84) (0.51) (0.60) (0.46) (0.44)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $7.70 $9.05 $8.26 $7.87 $8.23
- -------------------------------------------------------------------------------
Total Return (6.19)% 16.22% 12.93% 1.11% 10.71%
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $115,355 $157,612 $183,051 $155,910 $137,545
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.80% 0.82% 0.78% 0.80% 0.80%
Net investment income 5.81 5.96 6.54 6.18 5.80
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 63% 34% 125% 62%
- -------------------------------------------------------------------------------
Mortgage Backed Investments
- -------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997 1996(1) 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $8.13 $7.96 $7.74 $7.91 $7.69
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.45 0.46 0.48 0.48 0.51
Net realized and unrealized gain
(loss) (0.34) 0.19 0.25 (0.14) 0.22
- -------------------------------------------------------------------------------
Total Income From Operations 0.11 0.65 0.73 0.34 0.73
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.48) (0.51) (0.48) (0.49)
Net realized gains (0.05) -- -- -- --
Capital (0.01) -- -- (0.03) (0.02)
- -------------------------------------------------------------------------------
Total Distributions (0.51) (0.48) (0.51) (0.51) (0.51)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $7.73 $8.13 $7.96 $7.74 $7.91
- -------------------------------------------------------------------------------
Total Return 1.30% 8.37% 9.69% 4.37% 9.96%
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $131,039 $156,043 $136,586 $120,945 $104,789
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.80% 0.80% 0.80% 0.80% 0.80%
Net investment income 5.67 5.69 6.08 6.09 6.85
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 87% 214% 94% 23% 30%
- -------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
</TABLE>
(2) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Bond
Investments N/A N/A N/A N/A $0.01 N/A N/A N/A N/A 0.93%
Mortgage Backed
Investments $0.01 $0.01 $0.01 $0.01 0.02 0.91% 0.93% 0.93% 0.94% 1.09
</TABLE>
56
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
High Yield Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999(2) 1998(3)
- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $7.89 $8.00
- --------------------------------------------------------
Income (Loss) From
Operations:
Net investment income(1) 0.83 0.05
Net realized and
unrealized loss (0.54) (0.16)
- --------------------------------------------------------
Total Income (Loss) From
Operations 0.29 (0.11)
- --------------------------------------------------------
Less Distributions From:
Net investment income (0.83)
Net realized gains (0.02) --
- --------------------------------------------------------
Total Distributions (0.85) --
- --------------------------------------------------------
Net Asset Value, End of
Year $7.33 $7.89
- --------------------------------------------------------
Total Return 3.67% (1.38)%++
- --------------------------------------------------------
Net Assets, End of Year
(000s) $155,057 $76,557
- --------------------------------------------------------
Ratios to Average Net
Assets:
Expenses(1) 1.19% 1.20%+
Net investment income 10.62 7.37+
- --------------------------------------------------------
Portfolio Turnover Rate 122% 13%
- --------------------------------------------------------
</TABLE>
(1)Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and Reimbursements
Portfolio 1999 1998 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Investments N/A 0.01 N/A 2.42+
</TABLE>
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from July 13, 1998 (commencement of operations) to August
31, 1998.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
57
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
International Fixed Income Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $8.34 $8.21 $9.11 $9.01 $8.17
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.42 0.51 0.51 0.55 0.56
Net realized and unrealized gain
(loss) (0.24) 0.31 (0.62) 0.49 0.84
- ------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.18 0.82 (0.11) 1.04 1.40
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.27) (0.55) (0.94) (0.56)
Net realized gains -- (0.34) (0.24) -- --
Capital (0.00)* (0.08) -- -- --
- ------------------------------------------------------------------------------
Total Distributions (0.42) (0.69) (0.79) (0.94) (0.56)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $8.10 $8.34 $8.21 $9.11 $9.01
- ------------------------------------------------------------------------------
Total Return 2.30% 10.45% (1.52)% 12.05% 17.66%
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $236,254 $192,068 $125,610 $129,410 $105,884
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2)(3) 0.94% 0.97% 0.99% 1.02% 0.95%
Net investment income 4.85 5.39 5.87 6.34 6.50
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 204% 211% 251% 211% 307%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the year ended August 31, 1995, expense ratios and the per share
decreases in net investment income before fee waivers and/or expense
reimbursements would have been 1.18% and $0.02, respectively.
(3) During the years ended August 31, 1997 and August 31, 1996, the portfolios
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the ratio of expenses to average
net assets for International Fixed Income Investments would be 0.97% and
0.97%, respectively; prior year numbers have not been restated to reflect
these numbers.
* Amount represents less than $0.00 per share.
58
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights (continued)
Financial Highlights, continued
Municipal Bond Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $8.92 $8.62 $8.26 $8.27 $8.06
- ------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(1) 0.35 0.36 0.38 0.38 0.40
Net realized and unrealized gain
(loss) (0.57) 0.32 0.34 -- 0.21
- ------------------------------------------------------------------------------
Total Income (Loss) From
Operations (0.22) 0.68 0.72 0.38 0.61
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.38) (0.36) (0.39) (0.40)
In excess of net investment
income -- (0.00)* -- -- --
Net realized gains (0.13) -- -- -- (0.00)*
- ------------------------------------------------------------------------------
Total Distributions (0.48) (0.38) (0.36) (0.39) (0.40)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $8.22 $8.92 $8.62 $8.26 $8.27
- ------------------------------------------------------------------------------
Total Return (2.60)% 8.09% 8.88% 4.62% 7.86%
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $61,743 $72,511 $52,024 $46,485 $45,356
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.78% 0.80% 0.80% 0.80% 0.80%
Net investment income 4.03 4.20 4.50 4.59 4.99
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 142% 160% 31% 29% 49%
- ------------------------------------------------------------------------------
Government Money Investments
- ------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------
Net investment income(1) 0.04 0.05 0.05 0.05 0.05
Dividends from net investment
income (0.04) (0.05) (0.05) (0.05) (0.05)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------
Total Return 4.53% 5.10% 4.98% 5.02% 5.24%
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $303,160 $375,761 $388,713 $278,162 $241,590
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.60% 0.60% 0.60% 0.60% 0.60%
Net investment income 4.46 4.99 4.91 4.93 5.14
- ------------------------------------------------------------------------------
</TABLE>
(1) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond
Investments N/A N/A $0.00* $0.02 $0.02 N/A N/A 0.83% 1.02% 1.04%
Government Money
Investments $0.00* $0.00* 0.01 0.01 0.05 0.71% 0.66% 0.64 0.72 0.74
</TABLE>
* Amount represents less than $0.01 per share.
59
Consulting Group Capital Markets Funds
<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 Balanced Funds Average
An average of the
reinvested performance of funds whose primary objective is
to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the
stock/bond ratio ranges around 60 percent/40 percent,
respectively.
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 Emerging Markets Funds Average
An average of
the reinvested performance of funds that invest at least 65%
of total assets in emerging market equity securities, where
emerging market is defined by a country's gross national
product per capita or other economic measures.
Lipper General Municipal Debt Funds Average
An average of the reinvested performance of funds that invest at least 65% of
their assets in municipal debt issues in the top four credit ratings.
Lipper General Municipal Funds Index
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
Lipper General World Funds Average
An average of the reinvested performance of the following twelve Lipper
investment objectives: Gold Oriented, Global, Global Small Company,
International, International Small Company, European Region, Pacific Ex Japan,
Pacific Region, Emerging Markets, Japanese, Latin American and Canadian Funds.
Lipper Growth Funds Average
An average of the reinvested performance of funds that normally invest in
companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices.
Lipper Growth Funds Index
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
Lipper International Funds Average
An average of the reinvested performance of funds that invest its assets in
securities whose primary trading markets are outside of the United States.
Lipper International Funds Index
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
Lipper International Income Funds Average
In addition, the Portfolio compares its performance with the
Lipper International Income Funds Average. It is an average
of the reinvested performance of funds that invest primarily
in U.S. dollar and non-U.S. dollar debt securities located
in at least three countries, excluding the United States,
except in periods of market weakness.
Lipper Large-Cap Growth Funds Average
An average of the reinvested performance of funds that
normally invest in companies with long-term earnings
expected to grow significantly faster than the earnings of
the stocks represented in a major unmanaged stock index.
These funds will normally have an above-average price-to-
earnings ratio, price-to-book ratio and three-year earnings
growth figure, compared to the U.S. diversified large-cap
funds universe average. Large-cap funds will generally
invest at least 75% of their assets in companies with market
capitalizations (on a three-year weighted basis) greater
than 300% of the dollar-weighted median market
capitalization of the S&P Mid-Cap 400 Index.
Lipper Multi-Cap Value Funds Average
An average of the reinvested performance of funds that
normally invest in companies considered to be undervalued
relative to a major unmanaged stock index based on price-to-
current earnings, book value, asset value or other factors.
These funds will normally have a below-average price-to-
earnings ratio, price-to-book ratio and three-year earnings
growth figure, compared to the U.S. diversified multi-cap
funds universe average. Multi-cap funds will generally have
between 25% to 75% of their assets invested in companies
with market capitalizations (on a three-year weighted basis)
greater than 300% of the dollar-weighted median market
capitalization of the S&P Mid-Cap 400 Index.
Lipper Small-Cap Growth Funds Average
An average of the reinvested performance of funds that
normally invest in companies with long-term earnings
expected to grow significantly faster than the earnings of
the stocks represented in a major unmanaged stock index.
These funds will normally have an above-average price-to-
earnings ratio, price-to-book ratio and three-year earnings
growth figure, compared to the U.S. diversified small-cap
funds universe average. Small-cap funds will generally
invest at least 75% of their assets in companies with market
capitalizations (on a three-year weighted basis) of less
than 250% of the dollar-weighted median market
capitalization of the S&P Small-Cap 600 Index.
Lipper Small-Cap Value Funds Average
An average of the reinvested performance of funds that
normally invest in companies considered to be undervalued
relative to a major unmanaged stock index based on price-to-
current earnings, book value, asset value or other factors.
These funds will normally have a below-average price-to-
earnings ratio, price-to-book ratio and three-year earnings
growth figure, compared to the U.S. diversified small-cap
funds universe average. Small-cap funds will generally
invest at least 75% of their assets in companies with market
capitalizations (on a three-year weighted basis) of less
than 250% of the dollar-weighted median market
capitalization of the S&P Small-Cap 600 Index.
Lipper Small Company 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 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 $1.35 billion in market capitalization. The average market
capitalization for a company in this index is $12.10 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 lower forecasted growth rates 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 higher forecasted growth rates 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 approximately 8.0% of the Russell 3000 Index
capitalization. The average market capitalization for a company in this index
is $526.4 million, with the largest being $1.35 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 lower forecasted growth values 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 higher forecasted growth values 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
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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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[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."
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<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.
B-7
<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
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For More Information
If you want more information about the
Portfolios, the following resources are available upon request.
Annual and Semiannual Reports
Additional information about the Portfolios' investments will be available in
the Portfolios' annual and semiannual reports to shareholders. Each Portfolio's
annual report contains 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 Portfolios and is incorporated into this prospectus by reference.
Investment Professional
The investor's Financial Consultant is available to answer questions about the
Portfolios 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 Portfolios by contacting their Financial
Consultant, or the
Consulting Group at:
The Consulting Group
222 Delaware Avenue
Wilmington, Delaware 19801
Telephone: 1-212-816-8725
Information about the fund(including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission")Public Reference Room
in Washington D.C. In addition, information
on the operation of the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090. Reports and other information about the fund is
available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained for
a duplicating fee by electronic request at the following E-mail
address:[email protected], or by writing the Commission's Public Reference
Section, Washington D.C. 20549-0102.
If someone makes a statement about the Portfolios that is not in this
prospectus, you should not rely upon that information. Neither the Portfolios
nor the distributor is offering to sell shares of the Portfolios to any person
to whom the Portfolios may not lawfully sell their shares.
Investment Company Act File No. 811-06318
SalomonSmithBarney
---------------------------
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. TK 2088 12/99
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
December 28, 1999
222 Delaware Avenue ~ Wilmington, Delaware 19801 ~
(212) 816-8725
This Statement of Additional Information supplements the
information contained in the current Prospectus (the "Prospectus")
of Consulting Group Capital Markets Funds (the "Trust"), dated
December 28, 1999, and should be read in conjunction with the
Prospectus. The Trust is a series company that consists of
seventeen portfolios, fifteen of which are offered by the
Prospectus. These are 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 and Multi-Sector Fixed Income Investments. Two
additional portfolios, Multi-Strategy Market Neutral Investments
and S & P 500 Index Investments, are offered in separate
prospectuses. The Prospectus may be obtained by contacting any
Financial Consultant of Salomon Smith Barney Inc. ("Salomon Smith
Barney"), or by writing or calling the Trust at the address or
telephone number listed above. This Statement of Additional
Information, although not in itself a prospectus, is incorporated
by reference into the Prospectus in its entirety.
CONTENTS
Trustees and Executive Officers of the Trust
2
Investment Objectives, Management Policies and Risk Factors
of the Portfolios
4
Investment Restrictions
25
Portfolio Transactions
27
Portfolio Turnover
31
Investment Management and Other Services
32
Purchase of Shares
38
Redemption of Shares
39
Redemptions in Kind
39
Net Asset Value
40
Determination of Performance
41
Taxes
45
Distributor
50
Custodians, Transfer Agent and Sub-Transfer Agent
50
Financial Statements
50
Appendix
51
Capitalized terms used but not defined in this Statement of
Additional Information have the meanings accorded to them in the
Prospectus.
TRUSTEES AND EXECUTIVE 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 Portfolios. Each
Trustee who is an "interested person" of the Trust, as defined in
the 1940 Act, is indicated by an asterisk (Mr. Walter Auch is an
"interested person" of Large Capitalization Value Equity
Investments, Small Capitalization Value Equity Investments and
Intermediate Fixed Income Investments).
*Walter E. Auch, Trustee (Age 78). 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 20 investment companies associated with Citigroup. His
address is c/o HMK Associates, 30 Columbia Turnpike, Florham Park,
N.J. 07932.
H. John Ellis, Trustee (Age 72). Retired. Director or trustee of 2
investment companies associated with Citigroup. His address is
858 East Crystal Downs Drive, Frankfort, Michigan 49635.
Armon E. Kamesar, Trustee (Age 72). 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. His address is
7328 Country Club Drive, La Jolla, CA 92037.
Stephen E. Kaufman, Trustee (Age 67). Attorney. Director or
trustee of 13 investment companies associated with Citigroup. His
address is 277 Park Avenue, New York, New York 10172.
*Heath B. McLendon, Trustee and Chairman of the Board (Age 66).
Managing Director of Salomon Smith Barney and Chairman of the
Board of Salomon Smith Barney Strategy Advisers Inc. and Director
and President of SSB Citi Fund Management LLC ("SSB Citi")
(successor to SSBC Fund Management Inc.) and Travelers Investment
Adviser, Inc. ("TIA"); Mr. McLendon serves on the Board of 64
investment companies associated with Citigroup. His address is 7
World Trade Center, New York, New York 10048.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney; Director and Senior
Vice President of SSB Citi 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
(the "Manager"). 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). First 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 SSB Citi
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. Controller or Assistant Treasurer of 43 investment
companies associated with Citigroup; Formerly Assistant Treasurer
of First Investment Management Company; His address is 388
Greenwich Street, New York, New York 10013.
As of December 10, 1999, the Trustees and officers as a group
owned less than 1% of the outstanding common stock of the Trust.
As of December 10, 1999, the following shareholders own of record
or beneficially 5% or more of shares of a Portfolio of the Trust:
Balanced Investments
SB Corp. Trust
Custodian
Synthes (USA)
Attn: Patricia Davis
1690 Russell Road
Paoli, PA 19301
owned 1,274,831.708 shares (17.58%)
SBC Trust Company
TST Inc.
Attn: Jody Tourant
20232 E. 220th Street
Long Beach, CA 98010-1644
owned 630,361.086 shares (8.69%)
SBC Trust Company TTEE
Marketing Specialist Sales Co.
Attn: Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 578,612.962 shares (7.98%)
SBC Trust Company TTEE
Reihalt Thomas Corporation Profit
Sharing and 401k Savings Plan
Attn: Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 447,816.924 shares (6.17%)
Balanced Investments (Continued)
SBC Trust Company TTEE
EBCO Manufacturing Company
401 (k) Profit Sharing Plan
Attn: Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 566,546.436 shares (5.05%)
Remuneration. No director, officer or employee of Salomon Smith
Barney, SSB Citi 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
advisor, SSB Citi 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 calendar year ended December 31, 1998, such
fees and expenses totaled $23,140.
For the fiscal year ended August 31, 1999, the Trustees of the
Trust were paid the following compensation:
Total
Pension or Total Number
Retirement Benefits Compensation of Funds
Aggregate Accrued as Expense From Served in
Name Compensation of Trust Fund Complex* Complex
Heath B. McLendon** None None None 64
Walter Auch** $36,312 None $ 45,400 2
Martin Brody 34,212 None 132,500 20
H. John Ellis*** 18,100 None 41,500 2
Armon E. Kamesar 37,212 None 47,400 2
Stephen E. Kaufman 36,112 None 96,400 13
* For calendar year ended December 31, 1998.
** Designates "interested trustee". Mr. Auch is an "interested
trustee" of Large Capitalization Value Equity Investments, Small
Capitalization Value Equity Investments and Intermediate Fixed
Income Investments.
*** Mr. Ellis was elected a Trustee of the Trust on March 3, 1999.
INVESTMENT OBJECTIVES, MANAGEMENT POLICIES AND RISK FACTORS
Each of the Portfolios is a diversified, open-end management
investment company, except International Fixed Income Investments,
which is a non-diversified Portfolio. The Prospectus discusses the
investment objectives of the Portfolios, separate series of the
Trust and the policies to be employed to achieve those objectives.
Supplemental information is set out below concerning 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.
Equity Securities. The equity oriented Portfolios may invest in
all types of equity securities and High Yield Investments may
invest up to 10% of its assets in equity securities. Common stock
is an interest in a company, limited liability company, or similar
entity that entitles the holder to a share in the profits of the
company, in the form of dividends, and the proceeds from a sale or
liquidation of the company. The interests of common shareholders
are the most junior in a corporate structure. This means that in
the event of the bankruptcy of the company its creditors and any
holders of a preferred class of equity securities are paid before
the common stockholders are entitled to receive anything.
However, any assets of the company in excess of the amount owed to
creditors or preferred shareholders are shared pro-rata among the
common stockholders. Common stockholders normally have voting
control of the company and are entitled to vote on the election of
directors and certain fundamental corporate actions.
Preferred stocks are equity securities, but they have many
characteristics of fixed income securities. Their similarities to
fixed income securities generally cause preferred stocks to trade
more like debt instruments than common stocks. Thus, the value of
preferred stocks reflects the credit risk of the company and the
dividend yield on the preferred stocks compared to prevailing
interest rates. Preferred shares are entitled to receive
dividends before any dividend is paid to the holders of common
stock. The dividend may be at a fixed or variable dividend
payment rate, may be payable on fixed dates or at times determined
by the company and may be payable in cash, additional shares of
preferred stock or other securities. Many preferred stocks are
redeemable at the option of the company after a certain date.
Holders of preferred stock are also entitled to receive a payment
upon the sale or liquidation of a company before any payment is
made to the company's common stockholders. However, preferred
stock is an equity security and, therefore, is junior in priority
of payment to the company's creditors in the event of a
bankruptcy, including holders of the company's debt securities.
This junior ranking to creditors makes preferred stock riskier in
some respects than fixed income securities.
Convertible securities are preferred stocks or fixed income
securities that are convertible at the option of the holder, or in
some circumstances at the option of the issuing company, at a
stated exchange rate or formula into the company's common stock or
other equity securities. At the time a company sells the
convertible securities, the conversion price is normally higher
than the market price of the common stock. A holder of
convertible securities will generally receive interest or
dividends at a rate lower than comparable debt securities, but the
holder has the potential for additional gain if the market value
of the common stock exceeds the conversion price. When the market
price of the common stock is below the conversion price,
convertible securities tend to trade like fixed income securities.
If the market price of the common stock is higher than the
conversion price, convertible securities tend to trade like the
common stock. Convertible securities rank senior to common stocks
in an issuer's capital structure and consequently may be of higher
quality and entail less risk than the issuer's common stock.
Warrants and stock purchase rights are securities permitting, but
not obligating, their holder to purchase other securities,
normally the issuer's common stock. Stock purchase rights are
frequently issued as a dividend to a company's stockholders and
represent the right to purchase a fixed number of shares at a
fixed or formula price. The price may reflect a discount to the
market price. Warrants are generally sold by a company or issuer
together with fixed income securities and represent the right to a
fixed number of shares of common stock or other securities at a
fixed or formula price. The exercise price is normally higher
than the market price at the time the company sells the warrant.
Warrants and stock purchase rights do not carry with them the
right to receive dividends on or to vote the securities that they
entitle their holders to purchase. They also do not entitle the
holder to share in the assets of the company in a liquidation.
The rights to purchase common stock or other securities conferred
by a warrant or stock purchase right can only be exercised on
specific dates or for a specific period. Trading in these
instruments is affected both by the relationship of the exercise
price to the current market price of the common stock or other
securities and also by the period remaining until the right or
warrant expires. An investment in warrants and stock purchase
rights may be considered more speculative than other types of
equity investments. A warrant or stock purchase right expires
worthless if it is not exercised on or prior to its expiration
date.
Real Estate Investment Trusts ("REITs"). Each Portfolio may
invest in REITs. 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 Portfolios may invest in the
securities of other investment companies to the extent such
investments are consistent with the Portfolios' investment
objectives and policies and permissible under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the 1940
Act, a 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. A Portfolio will not
invest in other investment companies for which the subadvisors or
any of their affiliates act as an investment advisor or
distributor.
A 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.
Investing in Small and Medium Capitalization Companies. Investing
in the equity securities of small and medium capitalization
companies involves additional risks compared to investing in large
capitalization companies. Compared to large companies, these
companies may have more limited product lines and capital
resources; have less established markets for their products; have
earnings that are more sensitive to changes in the economy,
competition and technology and be more dependent upon key members
of management.
The market value of the common stock of small and medium
capitalization companies may be more volatile, particularly in
response to company announcements or industry events; have less
active trading markets and be harder to sell at the time and
prices that a Subadvisor considers appropriate.
Fixed Income Securities. The market value of the obligations held
by the Portfolios can be expected to vary inversely to changes in
prevailing interest rates. Investors also should recognize that,
in periods of declining interest rates, the Portfolios' yield will
tend to be somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Portfolios' yield will tend
to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to the Portfolios from the continuous sale
of their shares will tend to be invested in instruments producing
lower yields than the balance of their portfolios, thereby
reducing the Portfolios' current yield. In periods of rising
interest rates, the opposite can be expected to occur. In
addition, securities in which the Portfolios 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.
The Portfolios invest in U.S. Government securities, corporate
bonds, debentures, non-convertible fixed income preferred stocks,
mortgage related securities, asset-backed securities ("ABS"),
Eurodollar certificates of deposit, Eurodollar bonds and Yankee
bonds.
Debt Securities Rating Criteria. Investment grade debt securities
are those rated "BBB" or higher by Standard & Poor's Ratings Group
("S & P"), the equivalent rating of other nationally recognized
statistical rating organizations ("NRSROs") or determined to be of
equivalent credit quality by the subadvisor. 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 S & P or the equivalent rating of other NRSROs. 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 a Portfolio's net asset value to the extent it invests
in such securities. In addition, the Portfolios may incur
additional expenses to the extent they are required to seek
recovery upon a default in payment of principal or interest on
their 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 a 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, a 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
a 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 subadvisors 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.
The definitions of the ratings of debt obligations may be found in
the Appendix following this Statement of Additional Information.
Ratings as Investment Criteria. In general, the ratings of an
NRSRO such as Moody's Investors Service, Inc. ("Moody's") and S&P
represent the opinions of those agencies as to the quality of debt
obligations that they rate. It should be emphasized, however, that
these ratings are relative and subjective, are not absolute
standards of quality and do not evaluate the market risk of
securities. These ratings will be used by the Portfolios as
initial criteria for the selection of portfolio securities, but
the Portfolios also will rely upon the independent advice of their
respective investment advisors (separately a "Subadvisor",
collectively, the "Subadvisors") to evaluate potential
investments. Among the factors that will be considered are the
long term ability of the issuer to pay principal and interest and
general economic trends.
Subsequent to its purchase by a Portfolio, an issue of debt
obligations may cease to be rated or its rating may be reduced
below the minimum required for purchase by that Portfolio. Neither
event will require the sale of the debt obligation by the
Portfolio, but the Portfolio's Subadvisors will consider the event
in their determination of whether the Portfolio should continue to
hold the obligation. In addition, to the extent that the ratings
change as a result of changes in rating organizations or their
rating systems or owing to a corporate restructuring of an NRSRO,
a Portfolio will attempt to use comparable ratings as standards
for its investments in accordance with its investment objectives
and policies.
Municipal Obligations. Municipal Bond Investments invests in
municipal obligations. These are obligations issued by or on
behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions,
agencies and instrumentalities the interest on which, in the
opinion of bond counsel to the issuer, is exempt from federal
income tax. Municipal obligations are issued to obtain funds for
various public purposes, including the construction of public
facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets, water and sewer
works, gas, and electric utilities. They may also be issued to
refund outstanding obligations, to obtain funds for general
operating expenses, to obtain funds to loan to other public
institutions and facilities or to obtain funds in anticipation of
the receipt of revenue or the issuance of other obligations.
Municipal obligations consist of municipal bonds, municipal notes
and municipal commercial paper as well as variable or floating
rate obligations and participation interests.
Municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws, such as the federal Bankruptcy Code,
affecting the rights and remedies of creditors. In addition,
Congress or state legislatures may enact laws extending the time
for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the
possibility that, as a result of litigation or other conditions,
the power or ability of any issuer to pay when due the principal
of and interest on its obligations may be materially affected.
The yields on municipal obligations are dependent on a variety of
factors, including general market conditions, supply and demand,
general conditions of the municipal market, size of a particular
offering, the maturity of the obligation and the rating of the
issue.
For purposes of applying the Portfolio's diversification,
concentration and other restrictions, the identification of the
issuer of municipal obligations depends on the terms and
conditions of the obligation. The "issuer" of municipal
obligations is generally deemed to be the person expected to be
the source of principal and interest payments on the obligations
and may be:
? the governmental agency, authority, instrumentality or other
political subdivision that issued the security;
? the non-governmental user of a revenue bond-financed facility,
the assets and revenues of which will be used to meet the
payment obligations on the municipal security; or
? the guarantor of payment obligations on the municipal
obligations.
Municipal bonds, which generally have maturities of more than one
year when issued, are designed to meet longer-term capital needs.
Municipal bonds have two principal classifications: general
obligation bonds and revenue bonds. General obligation bonds are
backed by the issuer's pledge of its full faith and credit based
on its ability to levy taxes for the payment of principal and
interest. These levies may be constitutionally or statutorily
limited as to rate or amount. Revenue bonds are not backed by an
issuer's taxing authority but are payable only from the revenue
derived from a particular facility or class of facilities. The
issuer may repay these bonds from the proceeds of a special excise
tax or other specific revenue source, but not the issuer's general
taxing power.
Private activity bonds include certain types of industrial
development bonds ("IDBs") issued by public authorities to finance
various privately-operated facilities for business and
manufacturing, housing, sports, convention or trade show
facilities, airport, mass transit, port and parking facilities,
air or water pollution control facilities, and certain facilities
for water supply, gas, electricity or sewage or solid waste
disposal. Private activity bonds are, in most cases, revenue
bonds and are generally secured by the revenues derived from
payments by the private user. The payment of the principal and
interest on private activity bonds is dependent solely on the
ability of the user of the facilities financed by the bonds to
meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
Private activity bonds that are issued by or on behalf of public
authorities to finance privately operated facilities are
considered to be municipal obligations if the interest paid on
them qualifies as excluded from gross income (but not necessarily
from alternative minimum taxable income) for federal income tax
purposes in the opinion of bond counsel to the issuer. Dividends
derived from interest income on municipal obligations are a
"current earnings" adjustment for purposes of the federal
corporate alternative minimum tax.
Interest income on certain types of private activity bonds issued
after August 7, 1986 to finance non-governmental activities is a
specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. Individual
and corporate shareholders may be subject to a federal alternative
minimum tax to the extent that the fund's dividends are derived
from interest on those bonds.
Municipal notes are short-term obligations of issuing
municipalities or agencies, generally having maturities of less
than three years, such as tax anticipation notes, revenue
anticipation notes and bond anticipation notes. These instruments
are sold in anticipation of the collection of taxes, receipt of
other revenues or a bond sale. State and local governments or
governmental entities issue these notes to provide short-term
capital or to meet cash flow needs.
Mortgage Backed Securities. Mortgage Backed Investments,
Intermediate Fixed Income Investments, Long-Term Bond Investments,
Balanced Investments and Multi-Sector Fixed Income Investments may
invest in mortgage related securities. The average maturity of
pass-through pools of mortgage backed securities varies with the
maturities of the underlying mortgage instruments. In addition, a
pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments
include the level of interest rates, general economic and social
conditions, the location of the mortgaged property and age of the
mortgage. Because prepayment rates of individual pools vary
widely, it is not possible to accurately predict the average life
of a particular pool. Common practice is to assume that
prepayments will result in an average life ranging from two to ten
years for pools of fixed rate 30-year mortgages. Pools of
mortgages with other maturities of different characteristics will
have varying average life assumptions.
Mortgage backed securities may be classified as private,
governmental or government related, depending on the issuer or
guarantor. Private mortgage backed securities represent pass-
through pools consisting principally of conventional residential
mortgage loans created by non-governmental issuers, such as
commercial banks, savings and loan associations and private
mortgage insurance companies. Governmental mortgage backed
securities are backed by the full faith and credit of the United
States. Government National Mortgage Association ("GNMA"), the
principal U.S. guarantor of such securities, is a wholly owned
U.S. Governmental Corporation within the Department of Housing and
Urban Development. Government related mortgage backed securities
are not backed by the full faith and credit of the United States.
Issuers of these securities include the Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government sponsored corporation owned
entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development.
Pass-through securities issued by FNMA are guaranteed as to timely
payment of principal and interest by FNMA. FHLMC is a corporate
instrumentality of the United States, the stock of which is owned
by the Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC's national
portfolio are guaranteed as to the timely payment of interest and
ultimate collection of principal by FHLMC.
The Trust expects that private and governmental entities may
create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may vary
or whose terms to maturity may be shorter than previously
customary. As new types of mortgage backed securities are
developed and offered to investors, the Trust, consistent with the
Portfolios' investment objectives and policies, will consider
making investments in those new types of securities on behalf of
the Portfolios. A Portfolio will not invest more than 25% of its
assets in privately issued mortgage related securities.
Mortgage Backed Investments, Intermediate Fixed Income
Investments, Long-Term Bond Investments, Multi-Sector Fixed Income
Investments and Balanced Investments may invest in government
stripped mortgage related securities, collateralized mortgage
obligations ("CMOs") collateralized by mortgage loans or mortgage
pass-through certificates and zero coupon securities, which,
because of changes in interest rates, may be more speculative and
subject to greater fluctuations in value than securities that pay
interest currently. CMOs are obligations fully collateralized by
a portfolio of mortgages or mortgage related securities. Payments
of principal and interest on the mortgages are passed through to
the holders of the CMOs on the same schedule as they are received,
although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which a Portfolio
invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage related securities.
The Portfolios also may invest in pass-through securities backed
by adjustable rate mortgages that have been introduced by GNMA,
FNMA and FHLMC. These securities bear interest at a rate that is
adjusted monthly, quarterly or annually. The prepayment experience
of the mortgages underlying these securities may vary from that
for fixed rate mortgages. The Portfolios will only purchase
mortgage related securities issued by persons that are
governmental agencies or instrumentalities or fall outside, or are
excluded from, the definition of investment company under the 1940
Act.
Asset-Backed Securities ("ABS"). Intermediate Fixed Income
Investments, Long-Term Bond Investments and Balanced Investments
may each invest up to 5% of their assets and Multi-Sector Fixed
Income Investments may invest up to 10% of its assets in ABS. ABS
may enhance a Portfolio's performance, however their use involves
certain risks that may not be found in other mutual fund
investments. The Portfolios will only invest in ABS that have
received a AAA rating from both Moody's and S&P or an equivalent
rating from another nationally recognized statistical rating
organization.
Mortgage Dollar Roll Transactions. In order to enhance current
income, Mortgage Backed Investments, Balanced Investments and
Multi-Sector Fixed Income Investments may enter into mortgage
dollar rolls with respect to mortgage related securities issued by
GNMA, FNMA and FHLMC. In a mortgage dollar roll transaction, a
Portfolio sells a mortgage related security to a financial
institution, such as a bank or a broker-dealer, and simultaneously
agrees to repurchase a similar security from the institution at a
later date at an agreed upon price. The mortgage related
securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, a
Portfolio will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be
invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together with
any additional fee income received on the sale, is intended to
generate income for a Portfolio exceeding the yield on the
securities sold. Mortgage dollar roll transactions involve the
risk that the market value of the securities sold by a Portfolio
may decline below the repurchase price of those securities. At
the time a Portfolio enters into a mortgage dollar roll
transaction, it will place in a segregated custodial account
liquid securities having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the
account to insure that the equivalent value is maintained.
Mortgage dollar roll transactions are considered to be borrowings
by a Portfolio.
High Yield Securities. High Yield Investments and Multi-Sector
Fixed Income Investments may invest in medium or lower rated
securities and unrated securities of comparable quality, sometimes
referred to as "junk bonds." Generally, such securities offer a
higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations.
The market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in
economic conditions than higher quality bonds. In addition,
medium and lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The
risk of loss because of default by these issuers is significantly
greater because medium and lower rated securities generally are
unsecured and frequently subordinated to the prior payment of
senior indebtedness. In light of these risks, the Board of
Trustees has instructed the Subadvisors, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take
various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to
economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated
categories is more volatile than that of higher quality
securities, and the markets in which medium and lower rated
securities are traded are more limited that those in which higher
rated securities are traded. The existence of limited markets may
make it more difficult for the Portfolio to obtain accurate market
quotations for purposes of valuing its securities and calculating
its net asset value. Moreover, the lack of a liquid trading
market may restrict the availability of securities for the
Portfolio to purchase and may also have the effect of limiting the
ability of the Portfolio to sell securities at their fair value
either to meet redemption requests or to respond to changes in the
economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption,
the Portfolio may have to replace the security with a lower
yielding security, resulting in a decreased return for investors.
Also, the principal value of bonds moves inversely with movements
in interest rates; in the event of rising interest rates, the
value of the securities held by the Portfolio may decline
proportionately more than a portfolio consisting of higher rated
securities. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated bonds,
resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of
the Portfolio to the risks of lower rated securities. Investments
in zero coupon bonds may be more speculative and subject to
greater fluctuations in value because of changes in interest rates
than bonds that pay interest currently.
Subsequent to its purchase by the Portfolio, an issue of
securities may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Portfolio. Neither
event will require sale of these securities by the Portfolio, but
the Subadvisor will consider the event in determining whether the
Portfolio should continue to hold the security.
Non-Publicly Traded Securities. Each Portfolio may invest in non-
publicly traded securities, which may be less liquid than publicly
traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by a Portfolio. In
addition, companies whose securities are not publicly traded are
not subject to the disclosure and other investor protection
requirements that may be applicable if their securities were
publicly traded.
Supranational Entities. International Fixed Income Investments,
subject to the diversification requirements of the tax code, may
invest up to 25% of its total assets in debt securities issued by
supranational organizations such as the International Bank for
Reconstruction and Development (commonly referred to as the World
Bank), which was chartered to finance development projects in
developing member countries; the European Coal and Steel
Community, which is an economic union of various European nations'
steel and coal industries; and the Asian Development Bank, which
is an international development bank established to lend funds,
promote investment and provide technical assistance to member
nations in the Asian and Pacific regions. As supranational
entities do not possess taxing authority, they are dependent upon
their members' continued support in order to meet interest and
principal payments.
ADRs, EDRs and GDRs. The Portfolios may also purchase American
Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("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 Portfolio may invest in ADRs through
both sponsored and unsponsored arrangements.
Eurodollar Instruments and Yankee Bonds. Intermediate Fixed
Income Investments, Long-Term Bond Investments and Multi-Sector
Fixed Income Investments may invest in Eurodollar certificates of
deposit ("ECDs"), Eurodollar bonds and Yankee bonds. Eurodollar
instruments are bonds of corporate and government issuers that pay
interest and principal in U.S. dollars but are issued in markets
outside the United States, primarily in Europe. Yankee bonds are
bonds of foreign governments and their agencies and foreign banks
and corporations that pay interest in U.S. dollars and are
typically issued in the U.S. ECDs are U.S. dollar-denominated
certificates of deposit issued by foreign branches of domestic
banks. Long-Term Bond Investments may invest up to 15% of its
assets in Yankee bonds.
Risks of Non-U.S. Investments. To the extent a 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 a 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 a 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 a Portfolio to accurately price its
portfolio securities or to dispose of such securities at the times
determined by the subadvisor to be appropriate. The risks
associated with reduced liquidity may be particularly acute in
situations in which a 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, a 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 a 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 a 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. A 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, a
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. Custodian
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 a Portfolio to make intended
securities purchases because of 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 because of
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 a Portfolio against loss or theft
of its assets.
Withholding and Other Taxes. The Portfolios 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 a Portfolio's
investments in such countries. These taxes will reduce the return
achieved by a Portfolio. Treaties between the U.S. and such
countries may not be available to reduce the otherwise applicable
tax rates.
Economic Monetary Union ("EMU"). On January 1, 1999, 11 European
countries adopted a single currency - the Euro. The conversion to
the Euro is being phased in over a three-year period. 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 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 European markets.
Currency Exchange Rates. A Portfolio's share value may change
significantly when the currencies, other than the U.S. dollar, in
which that 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 Portfolios 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 a 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 a Portfolio enters into the
contract. To assure that a Portfolio's forward currency contracts
are not used to achieve investment leverage, the Portfolio will
segregate cash or high grade securities with its custodian in an
amount at all times equal to or exceeding the Portfolio's
commitment with respect to these contracts.
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 Portfolios,
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, a
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 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, a Portfolio may enter
into a forward contract with respect to either the currency in
which the positions are denominated or another currency deemed
appropriate by the Portfolio's Subadvisor. 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 an active
forward currency contract market will always exist. These factors
will restrict a Portfolio's ability to hedge against the risk of
devaluation of currencies in which 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, a 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 Subadvisor 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 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. Each 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. A 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 Indices. Each
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.
A 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. A Portfolio may cover call and put
options on a securities index by segregating assets with a value
equal to the exercise price.
Purchasing Call and Put Options. The Portfolios will normally
purchase call options in anticipation of an increase in the market
value of securities of the type in which they may invest. The
purchase of a call option will entitle a Portfolio, in return for
the premium paid, to purchase specified securities at a specified
price during the option period. A Portfolio will 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 will realize
either no gain or a loss on the purchase of the call option.
A Portfolio will 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 will 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 a Portfolio for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The
Portfolio will 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 will 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 a
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 a 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.
A 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."
A 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, a
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 a 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 that a Portfolio may write or
purchase may be affected by options written or purchased by other
investment advisory clients. 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 subadvisor'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
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 a
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. Each Portfolio other than
Government Money Investments may enter into futures contracts and
purchase and write (sell) options on these contracts, including
but not limited to interest rate, securities index and foreign
currency futures contracts and put and call options on these
futures contracts. These contracts will be entered into only upon
the concurrence of the Subadvisor that such contracts are
necessary or appropriate in the management of a Portfolio's
assets. These contracts will be entered into on exchanges
designated by the Commodity Futures Trading Commission ("CFTC")
or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other
permissible risk management purposes including protecting against
anticipated changes in the value of securities a Portfolio intends
to purchase.
A Portfolio will not enter into futures contracts and related
options for which the aggregate initial margin and premiums exceed
5% of the fair market value of that Portfolio's assets after
taking into account unrealized profits and unrealized losses on
any contracts it has entered into. All futures and options on
futures positions will be covered by owning the underlying
security or segregation of assets. With respect to long positions
in a futures contract or option (e.g., futures contracts to
purchase the underlying instrument and call options purchased or
put options written on these futures contracts or instruments),
the underlying value of the futures contract at all times will not
exceed the sum of cash, short-term U.S. debt obligations or other
high quality obligations set aside for this purpose.
A Portfolio may lose the expected benefit of these futures or
options transactions and may incur losses if the prices of the
underlying securities or commodities move in an unanticipated
manner. In addition, changes in the value of a 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 Subadvisor's ability to predict correctly movements
in the direction of the securities markets generally, which
ability may require different skills and techniques than
predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by
entering into offsetting transactions on the exchange where the
position was entered into (or a linked exchange), and as a result
of daily price fluctuation limits there can be no assurance that
an offsetting transaction could be entered into at an advantageous
price at any particular time. Consequently, a Portfolio may
realize a loss on a futures contract or option that is not offset
by an increase in the value of its portfolio securities that are
being hedged or the Portfolio may not be able to close a futures
or options position without incurring a loss in the event of
adverse price movements.
A 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 a 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 a Portfolio.
Swaps. Emerging Markets Equity Investments, with respect to 15%
of the total assets allocated to State Street Global Advisors, may
enter into index swaps. A swap transaction is an agreement
between the Portfolio and a counterparty to act in accordance with
the terms of the swap contract. Index swaps involve the exchange
by the Portfolio with another party of the respective amounts
payable with respect to a notional principal amount related to one
or more indices. The Portfolio may enter into these transactions
to preserve a return or spread on a particular investment or
portion of its assets, as a duration management technique or to
protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio
may also use these transactions for speculative purposes, such as
to obtain the price performance of a security without actually
purchasing the security in circumstances where, for example, the
subject security is illiquid, is unavailable for direct investment
or available only on less attractive terms. Swaps have risks
associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are
used as hedges, the risk that the use of a swap could result in
losses greater that if the swap had not been employed.
The Portfolio will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the agreement, with the
Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. Swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly,
the risk of loss with respect to swaps is limited to the net
amount of payments that the Portfolio is contractually obligated
to make. If the counterparty to a swap defaults, the Portfolio's
risk of loss consists of the net amount of payments that the
Portfolio is contractually entitled to receive. Where swaps are
entered into for good faith hedging purposes, the Portfolio
believes such obligations do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being
subject to the Portfolio's borrowing restrictions. Where swaps
are entered into for other than hedging purposes, the Portfolio
will segregate an amount of cash or liquid securities having a
value equal to the accrued excess of its obligations over its
entitlements with respect to each swap on a daily basis.
U.S. Government Securities. The U.S. Government Securities in
which the Portfolios 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.
A Portfolio accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy
the Portfolio's distribution obligations, in which case the
Portfolio will forego the purchase of additional income producing
assets with these funds. Zero coupon U.S. Government Securities
include STRIPS and CUBES, which are issued by the U.S. Treasury as
component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.
Exchange Rate-Related U.S. Government Securities. Each Portfolio,
except Government Money Investments, may invest up to 5% of its
net assets in U.S. Government Securities for which the principal
repayment at maturity, while paid in U.S. dollars, is determined
by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency
risk and, in most cases, is paid at rates higher than most other
U.S. Government Securities in recognition of the foreign currency
risk component of Exchange Rate-Related Securities.
Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The
principal repayment formula may be structured so that the security
holder will benefit if a particular foreign currency to which the
security is linked is stable or appreciates against the U.S.
dollar. In the alternative, the principal repayment formula may be
structured so that the securityholder benefits if the U.S. dollar
is stable or appreciates against the linked foreign currency.
Finally, the principal repayment formula can be a function of more
than one currency and, therefore, be designed as a combination of
those forms.
Investments in Exchange Rate-Related Securities entail special
risks. There is the possibility of significant changes in rates of
exchange between the U.S. dollar and any foreign currency to which
an Exchange Rate-Related Security is linked. If currency exchange
rates do not move in the direction or to the extent anticipated by
the Subadvisor at the time of purchase of the security, the amount
of principal repaid at maturity might be significantly below the
par value of the security, which might not be offset by the
interest earned by the Portfolios over the term of the security.
The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. The
imposition or modification of foreign exchange controls by the
U.S. or foreign governments or intervention by central banks could
also affect exchange rates. Finally, there is no assurance that
sufficient trading interest to create a liquid secondary market
will exist for a particular Exchange Rate-Related Security because
of conditions in the debt and foreign currency markets.
Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring a significant price
loss.
Custodial Receipts. Each Portfolio other than Government Money
Investments may acquire custodial receipts or certificates, such
as CATS, TIGRs and FICO Strips, underwritten by securities dealers
or banks that evidence ownership of future interest payments,
principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities.
The underwriters of these certificates or receipts purchase a U.S.
Government Security and deposit the security in an irrevocable
trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal
payments on the U.S. Government Security. Custodial receipts
evidencing specific coupon or principal payments have the same
general attributes as zero coupon U.S. Government Securities,
described above. Although typically under the terms of a
custodial receipt a Portfolio is authorized to assert its rights
directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank
such rights as may exist against the underlying issuer. Thus, in
the event the underlying issuer fails to pay principal and/or
interest when due, a Portfolio may be subject to delays, expenses
and risks that are greater than those that would have been
involved if the Portfolio had purchased a direct obligation of the
issuer. In addition, if the trust or custodial account in which
the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable
entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
When-Issued and Delayed Delivery Securities. Each 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 a 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. Each Portfolio may enter into repurchase
agreements. Under the terms of a typical repurchase agreement, a
Portfolio would acquire an underlying debt obligation for a
relatively short period (usually not more than one week) subject
to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed upon price and time, thereby
determining the yield during the Portfolio's holding period. This
arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. A
Portfolio may enter into repurchase agreements with respect to
U.S. Government Securities with member banks of the Federal
Reserve System and certain non-bank dealers approved by the board
of trustees. Under each repurchase agreement, the selling
institution is required to maintain the value of the securities
subject to the repurchase agreement at not less than their
repurchase price. A Portfolio's Subadvisor, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those
non-bank dealers with whom the Portfolio enters into repurchase
agreements. A Portfolio will not invest in a repurchase agreement
maturing in more than seven days if the investment, together with
illiquid securities held by that Portfolio, exceeds 10% of the
Portfolio's total assets (or 15% of the assets of Multi-Sector
Fixed Income Investments ). In entering into a repurchase
agreement, a Portfolio bears a risk of loss in the event 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.
Reverse Repurchase Agreements. Emerging Markets Equity
Investments may enter into reverse repurchase agreements with the
financial institutions with which it may enter into repurchase
agreements. Under a reverse repurchase agreement, a Portfolio
sells securities to a financial institution and agrees to
repurchase them at a mutually agreed upon date, price and rate of
interest. During the period between the sale and repurchase, the
Portfolio would not be entitled to principal and interest paid on
the securities sold by the Portfolio. The Portfolio, however,
would seek to achieve gains derived from the difference between
the current sales price and the forward price for the future
purchase as well as the interest earned on the proceeds on the
initial sale. Reverse repurchase agreements will be viewed as
borrowings by a Portfolio for the purpose of calculating the
Portfolio's indebtedness and will have the effect of leveraging
the Portfolio's assets.
Borrowing. Leverage increases investment risk as well as
investment opportunity. If the income and investment gains on
securities purchased with borrowed money exceed the interest paid
on the borrowing, the net asset value of a 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 a Portfolio's shares will decrease faster than
otherwise would be the case.
Lending Portfolio Securities. Consistent with applicable
regulatory requirements, each Portfolio other than Municipal Bond
Investments, may lend portfolio securities to brokers, dealers and
other financial organizations. A Portfolio will not lend
securities to Salomon Smith Barney unless the Portfolio has
applied for and received specific authority to do so from the SEC.
A Portfolio's loan of securities will be collateralized by cash,
letters of credit or U.S. Government Securities. A Portfolio will
maintain the collateral in an amount at least equal to the current
market value of the loaned securities. From time to time, a
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." A 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.
Short Sales "Against the Box". Each Portfolio may from time to
time make short sales against the box. In a short sale, a
Portfolio borrows from a broker or bank securities identical to
those being sold and delivers the borrowed securities to the
buying party. The Portfolio is said to have a short position in
the securities sold until it replaces the borrowed securities, at
which time it receives the proceeds of the sale. A short sale is
''against the box'' if the Portfolio owns or has the right to
acquire at no added cost securities identical to those sold short.
Illiquid Securities. Each Portfolio will not invest more than 10%
of its net assets (except that Multi-Sector Fixed Income
Investments 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 Subadvisor. The Subadvisors
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 Subadvisors'
application of these guidelines and procedures. The inability of a
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 Subadvisor of a Portfolio, in consultation with the
Manager, believes that pursuing a Portfolio's basic investment
strategy may be inconsistent with the best interests of its
shareholders, that 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. A
Portfolio's U.S. dollar-denominated temporary investments are
managed by SSB Citi. A Portfolio also may hold a portion of its
assets in money market instruments or cash in amounts designed to
pay expenses, to meet anticipated redemptions or pending
investment in accordance with its objectives and policies. Any
temporary investments may be purchased on a when-issued basis. A
Portfolio's investment in any other short-term debt instruments
would be subject to the Portfolio's investment objectives and
policies, and to approval by the Trust's Board of Trustees.
For the same purposes, Emerging Markets Equity Investments,
International Fixed Income Investments and International Equity
Investments may invest in obligations issued or guaranteed by
foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated at least
"AA" by an NRSRO, or if unrated, are determined by the Subadvisor
to be of equivalent quality. Emerging Markets Equity Investments
may also invest in obligations of foreign banks, but will limit
its investments in such obligations to U.S. dollar- denominated
obligations of foreign banks which at the time of investment (i)
have assets with a value of more than $10 billion; (ii) are among
the 75 largest foreign banks in the world, based on the amount of
assets; (iii) have branches in the United States; and (iv) are of
comparable quality to obligations issued by United States banks in
which the Portfolio may invest in the opinion of the Portfolio's
Subadvisor.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 8 below have been
adopted by the Trust as fundamental policies of the Portfolios.
Under the 1940 Act, a fundamental policy may not be changed
without the vote of a majority of the outstanding voting
securities of a Portfolio, which is defined in the 1940 Act as the
lesser of (i) 67% or more of the shares present at a 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. Investment
restrictions 9 through 12 may be changed by a vote of a majority
of the Board of Trustees at any time.
Under the investment restrictions adopted by the Portfolios:
1. A Portfolio, other than International Fixed Income
Investments, will not deviate from the definition of a
"diversified company" as defined in the 1940 Act and rules
thereunder.
2. A Portfolio, except Municipal Bond Investments, 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. A Portfolio will not issue "senior securities" as defined
in the 1940 Act, and the rules, regulations and orders thereunder,
except as permitted under the 1940 Act and the rules, regulations
and orders thereunder.
4. A Portfolio will not borrow money, except that (a) a
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) and (b) a Portfolio may, to the extent consistent
with its investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar investment
strategies and techniques.
5. A 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.
6. A Portfolio will not purchase or sell real estate, real
estate mortgages, commodities or commodity contracts, but this
restriction shall not prevent a 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. A Portfolio will not engage in the business of
underwriting securities issued by other persons, except to the
extent that a Portfolio may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities.
8. A 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). 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.
9. A Portfolio will not invest in oil, gas or other mineral
leases or exploration or development programs.
10. A Portfolio will not make short sales of securities,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
11. A Portfolio will not make investments for the purpose
of exercising control or management.
12. A Portfolio will not purchase any security if, as a
result, (unless the security is acquired pursuant to a plan of
reorganization or an offer of exchange) the Portfolio would own
more than 3% of any registered investment company's outstanding
voting stock; or more than 5% of the value of the Portfolio's
total assets would be invested in securities of any one registered
investment company or more than 10% of the Portfolio's total
assets would be invested in registered investment companies in
general.
The percentage limitations contained in the restrictions listed
above (other than with respect to Number 4 above) apply at the
time of purchase of securities.
Department of Labor ("DOL") Exemption. The Trust may offer shares
of its portfolios to certain employee benefit plans, individual
retirement accounts ("IRAs"), or retirement plans for a self-
employed individual ("Keogh Plans"). Because the Trust may offer
shares of its portfolios to these plans, it is subject to
regulation by the DOL and the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Salomon Smith
Barney has received a DOL exemption covering certain transactions
in shares of the portfolios. The full text of the DOL exemption
may be found in Exhibit A of the Prospectus. The DOL exemption
includes, among other things, a limitation on investments in the
securities of affiliates of Salomon Smith Barney, including
Citigroup, of one percent of a Portfolio's net assets. Since the
Portfolios will be managed to comply with this limitation, this
may result in differences in performance between the Portfolios
and other funds that fully replicate the S&P 500 Index.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for a Portfolio are made by
the Subadvisor(s), subject to the overall review of the Manager
and the Board of Trustees. Although investment decisions for the
Portfolios are made independently from those of the other accounts
managed by a Subadvisor, investments of the type that the
Portfolios may make also may be made by those other accounts. When
a Portfolio and one or more other accounts managed by a Subadvisor
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 Subadvisor to be equitable
to each. In some cases, this procedure may adversely affect the
price paid or received by a Portfolio or the size of the position
obtained or disposed of by a 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 a Portfolio, its Subadvisor seeks the best overall
terms available. In assessing the best overall terms available for
any transaction, the Subadvisor 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 Subadvisor authorizes the Subadvisor, 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 Subadvisor or
its affiliates exercise investment discretion. The fees under the
Management Agreement and the Advisory Agreements, respectively,
are not reduced by reason of a Portfolio's Subadvisor receiving
brokerage and research services. The Board of Trustees will
periodically review the commissions paid by a 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 a Portfolio are
transacted directly with principal market makers except in those
cases in which better prices and executions may be obtained
elsewhere.
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 a
Portfolio may be executed through Salomon Smith Barney and other
affiliated broker-dealers if, in the judgment of its Subadvisor,
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 Portfolios 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 Portfolios 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 Subadvisor, 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 Portfolios commodity commissions at rates comparable to
those charged by Salomon Smith Barney to its most favored clients
for comparable trades in comparable accounts.
BROKERAGE COMMISSIONS PAID TO SALOMON SMITH BARNEY
The following table sets forth certain information regarding each
Portfolio's payment
of brokerage commissions for the fiscal year ended August 31,
1999:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney
Balanced Investments
$144,938
$3,636
2.51%
0.45%
Large Capitalization
Value Equity
Investments
2,358,891
91,291*
3.87%
4.36%
Large Capitalization
Growth Investments
930,284
0
0.00%
0.00%
Small Capitalization
Value Equity
Investments
1,604,130
17,682
1.10%
0.51%
Small Capitalization
Growth Investments
1,633,318
0
0.00%
0.00%
International Equity
Investments
2,541,653
9,755
0.38%
0.64%
Emerging Markets
Equity Investments
1,585,052
1,261
0.08%
0.08%
*Includes $8,906 for execution, research and statistical
services.
Government Money Investments, Intermediate Fixed Income
Investments, Long-Term Bond Investments, Municipal Bond
Investments, Mortgage Backed Investments, International Fixed
Income Investments and High Yield Investments did not pay
brokerage commissions during the year ended August 31, 1999.
There is no information present for Multi-Sector Fixed Income
Investments because it commenced operations on October 1, 1999.
The following table sets forth certain information regarding each
Portfolio's payment of brokerage commissions for the fiscal year
ended August 31, 1998:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney
Balanced Investments
$108, 343
$27,565
25.44%
14.34%
Large Capitalization
Value Equity
Investments
2,783,192
152,635
5.48%
4.44%
Large Capitalization
Growth Investments
737,579
9
0.001%
0.00%
Small Capitalization
Value Equity
Investments
1,470,232
24,868
1.69%
0.78%
Small Capitalization
Growth Investments
1,550,679
6,218
0.40%
0.14%
International Equity
Investments
3,180,676
70,525
2.22%
0.43%
Emerging Markets
Equity Investments
2,550,496
0
0.00%
0.00%
Government Money Investments, Intermediate Fixed Income
Investments, Long-Term Bond Investments, Municipal Bond
Investments, Mortgage Backed Investments, International Fixed
Income Investments and High Yield Investments did not pay
brokerage commissions during the year ended August 31, 1998.
The following table sets forth certain information regarding
each Portfolio's payment of brokerage commissions for the fiscal
year ended August 31, 1997:
Portfolio
Total
Brokerage
Commissions
Commission
s paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Transaction
s involving
Commissions
Paid to
Salomon
Smith
Barney
Balanced Investments
$102,303
$16,253
15.89%
10.28%
Large Capitalization
Value Equity
Investments
1,952,663
$132,015
4.47%
5.01%
Large Capitalization
Growth Investments
1,401,805
4,770
0.34%
0.00%
Small Capitalization
Value Equity
Investments
761,002
27,534
3.62%
1.76%
Small Capitalization
Growth Investments
732,557
17,568
2.40%
0.46%
International Equity
Investments
1,890,342
0
0.00%
0.00%
Emerging Markets
Equity Investments
1,973,521
0
0.00%
0.00%
Government Money Investments, Intermediate Fixed Income
Investments, Long-Term Bond Investments, Municipal Bond
Investments, Mortgage Backed Investments and International Fixed
Income Investments did not pay brokerage commissions during the
year ended August 31, 1997.
PORTFOLIO TURNOVER
Government Money Investments may attempt to increase yields by
trading to take advantage of short-term market variations, which
results in high portfolio turnover. Because purchases and sales of
money market instruments are usually effected as principal
transactions, this policy does not result in high brokerage
commissions to the Portfolio. Municipal Bond Investments, Mortgage
Backed Investments, International Fixed Income and Emerging
Markets Equity Investments may engage in active short-term trading
to benefit from yield disparities among different issues of
securities, to seek short-term profits during periods of
fluctuating interest rates or for other reasons. The other
Portfolios do not intend to seek profits through short-term
trading. Nevertheless, the Portfolios will not consider portfolio
turnover rate a limiting factor in making investment decisions.
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. Because the
Portfolios are authorized to engage in transactions in options,
they may experience increased portfolio turnover under certain
market conditions as a result of their investment strategies. For
instance, the exercise of a substantial number of options written
by a Portfolio (because of 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 a 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 a 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 Subadvisor 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 a Portfolio's shares as well
as by requirements that enable a Portfolio to receive favorable
tax treatment.
The Portfolios' portfolio turnover rates for the last two fiscal
years were as follows:
Portfolio
Year
Ended
August
31, 1999
Year Ended
August 31,
1998
Government Money Investments
N/A
N/A
Intermediate Fixed Income
Investments
207%
63%
Long-Term Bond Investments
30%
63%
Municipal Bond Investments
142%
160%
Mortgage Backed Investments
87%
214%
High Yield Investments
122%
13%
Balanced Investments
332%
57%
Large Capitalization Value Equity
Investments
54%
57%
Large Capitalization Growth
Investments
34%
39%
Small Capitalization Value Equity
Investments
53%
59%
Small Capitalization Growth
Investments
108%
91%
International Equity Investments
45%
45%
International Fixed Income
Investments
204%
211%
Emerging Markets Equity Investments
135%
139%
Multi-Sector Fixed Income
Investments
N/A
N/A
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager; Subadvisors; Administrator. The Manager serves as
investment manager to the Trust pursuant to an investment
management agreement ("Management Agreement"). Each Subadvisor
serves as investment advisor to a Portfolio pursuant to separate
written agreements with the Portfolios ("Advisory Agreements"),
SSB Citi serves as administrator to the Portfolio pursuant to a
written agreement ("Administration Agreement").
The Portfolios bear their own expenses, which generally include
all costs not specifically borne by the Manager, the Subadvisors,
and SSB Citi. Included among the Portfolios' expenses are costs
incurred in connection with a 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, SSB Citi 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.
Under the Management Agreement, each Portfolio pays SSB Citi a
fee, calculated daily and paid monthly, based on the rates applied
to the value of each Portfolio's average daily net assets. In
addition, SSB Citi pays each Subadvisor, based on the rates
applied to each respective Portfolio's average daily net assets on
a monthly basis. The applicable management fee, advisory fee paid
by
SSB Citi to each Subadvisor, and the Subadvisor for each Portfolio
are indicated below:
Annual
Subadvisor
Management
Portfolio Subadvisors
Fee Fee
Government Money Investments
Standish, Ayer & Wood, Inc.
on the first $100
million 0.15% 0.15%
on the amount over
$100 million 0.10 0.15
High Yield Investments
Alliance Capital Management L.P. 0.45
0.70
Intermediate Fixed Income Investments
Standish, Ayer & Wood, Inc.:
on the first $200
million 0.20 0.40
on the amount over
$200 million 0.15 0.40
Pacific Investment
Management Co. 0.25 0.45
Long-Term Bond Investments
Western Asset Management Co. 0.20
0.40
Municipal Bond Investments
Smith Affiliated Capital Corp. 0.20
0.40
Mortgage Backed Investments
Utendahl Capital Management CFI 0.25
0.50
Balanced Investments
Laurel Capital Advisors, LLP 0.30
0.60
Seix Investment Advisors,
Inc. 0.25 0.60
Annual
Subadvisor
Management
Portfolio Subadvisors
Fee Fee
Large Capitalization Value Equity Investments
Barclays Global Fund Advisors 0.02
0.32
The Boston Co. Asset
Management, Inc.:
on the first
$350 million 0.30 0.60
on the amount
over $350 million 0.25 0.60
Parametric Portfolio
Associates:
on the first $300
million 0.20 0.50
on the amount over
$300 million 0.15 0.45
Chartwell Investment Partners 0.30
0.60
Large Capitalization Growth Investments
Provident Investment Counsel Inc.:
on the first $100
million 0.30 0.60
on the amount over
$100 million 0.25 0.60
Barclays Global Fund
Advisors 0.02 0.32
Small Capitalization Value Equity Investments
NFJ Investment Group
on the first
$450 million 0.50 0.80
on the amount over
$450 million 0.45 0.75
David L. Babson & Co.,Inc.
on the first $100
million 0.50 0.80
on the amount
over $100 million 0.45 0.80
Mellon Capital Management
Corp. 0.06 0.36
Small Capitalization Growth Investments
Wall Street Associates 0.50
0.80
Mellon Capital Management
Corp. 0.06 0.36
Westpeak Investment
Advisors, L.P. 0.50 0.80
Kern Capital Management
LLC 0.50 0.80
International Equity Investments
Oechsle International Advisors, LLC
0.40 0.70
Marvin & Palmer Associates,
Inc. 0.40 0.70
State Street Global
Advisors 0.06 0.36
International Fixed Income Investments
Julius Baer Investments Management Inc. 0.25
0.50
Annual
Subadvisor
Management
Portfolio Subadvisors
Fee Fee
Emerging Markets Equity Investments
AIB Govett, Inc. 0.60 0.90
State Street Global
Advisors 0.60 0.90
Baring Asset Management, Inc.
0.60 0.90
Multi-Sector Fixed Income Investments
Standish, Ayer & Wood, Inc.:
on the first $200
million 0.20 0.45
on the amount over
$200 million 0.15 0.45
Western Asset Management Co. 0.20
0.45
Alliance Capital Management L.P. 0.45
0.45
Utendahl Capital Management CFI 0.25
0.45
For the fiscal years ended August 31, 1999 and 1998 the Portfolios
accrued investment management and administration fees as follows:
1999
1998
Portfolio
Management
Fee
Administrati
on Fee
Management
Fee
Administrati
on Fee
Government Money Investments
$497,007
$662,677
$624,357
$832,477
High Yield Investments
923,581
263,880
47,537
13,582
Intermediate Fixed Income
Investments
2,448,152
1,224,478
1,862,860
934,088
Long-Term Bond Investments
559,894
279,947
703,985
351,993
Municipal Bond Investments
284,311
142,156
255,992
127,996
Mortgage Backed Investments
732,616
293,046
766,937
306,775
Balanced Investments
436,950
148,790
506,736
168,912
Large Capitalization Value
Equity Investments
9,718,618
3,901,989
9,677,020
3,922,176
Large Capitalization Growth
Investments
8,640,613
4,546,476
8,517,286
3,867,159
Small Capitalization Value
Equity Investments
4,638,188
1,530,784
4,705,182
1,721,750
Small Capitalization Growth
Investments
6,456,592
2,077,503
6,308,016
2,167,276
International Equity
Investments
6,938,953
2,706,824
7,088,985
2,704,967
International Fixed Income
Investments
1,165,291
475,963
718,551
287,421
Emerging Markets Equity
Investments
2,444,974
536,702
2,430,735
540,163
For the fiscal year ended August 31, 1999, management,
administration and custody fees, in the aggregate, were waived as
follows: Government Money Investments $364,437 and Mortgage
Backed Investments - $163,318.
For the fiscal year ended August 31, 1998, management,
administration and custody fees, in the aggregate, were waived as
follows: Government Money Investments $250,798; Mortgage Backed
Investments - $185,737; and High Yield Investments - $85,979.
The Manager has agreed to waive a portion of the fees otherwise
payable to it by certain of the Trust's Portfolios so that the
Manager would retain, as its annual management fee, no more than
0.30% of each such Portfolio's average daily net assets.
For the year ended August 31, 1997, the Portfolios
accrued investment management and administration fees as
follows:
Portfolio
Management
Fee
Administrati
on Fee
Government Money Investments
$490,756
$654,342
High Yield Investments
N/A
N/A
Intermediate Fixed Income
Investments
1,325,387
662,693
Long-Term Bond Investments
672,437
336,219
Municipal Bond Investments
190,705
95,353
Mortgage Backed Investments
642,610
257,044
Balanced Investments
400,541
133,514
Large Capitalization Value Equity
Investments
8,514,670
3,452,366
Large Capitalization Growth
Investments
6,413,997
3,126,348
Small Capitalization Value Equity
Investments
2,721,377
1,039,277
Small Capitalization Growth
Investments
3,060,297
1,217,818
International Equity Investments
5,372,446
1,986,030
International Fixed Income
Investments
641,164
256,466
Emerging Markets Equity Investments
1,690,749
375,723
For the fiscal year ended August 31, 1997, management,
administration and custody fees, in the aggregate, were waived as
follows: Government Money Investments - $124,703; Municipal Bond
Investments - $12,330; Mortgage Backed Investments - $172,962; and
Balanced Investments - $15,022.
SSB Citi, through its predecessors, was incorporated on March 12,
1968 under the laws of Delaware and is a registered investment
adviser. SSB Citi renders investment advice to investment
companies that had aggregate assets under management as of October
31, 1999 in excess of $114 billion. The Consulting Group, a
division of SSB Citi, has extensive experience in providing
investment advisor 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 advisors, and conducts over 300 on-sight evaluation
visits annually to advisors. As of August 31, 1999, the Consulting
Group provided services with respect to over $125 billion in
client assets representing more than 216,974 separate accounts
under a variety of programs designed for individual and
institutional investors.
The Manager and the Subadvisors each pay the salaries of all
officers and employees who are employed by them and the Trust, and
the Manager maintains office facilities for the Trust. The Manager
and the Subadvisors 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 Subadvisor manages the securities held by the Portfolio it
serves in accordance with that 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 Subadvisors for the Portfolios and thereafter
monitoring each Subadvisor's performance through quantitative and
qualitative analysis as well as periodic in-person, telephonic and
written consultations with Subadvisors. In evaluating prospective
Subadvisors, the Manager considers, among other factors, each
Subadvisor's level of expertise; relative performance and
consistency of performance over a minimum period of five years;
level of adherence to investment discipline or philosophy,
personnel, facilities, financial strength and quality of service
and client communications. The Manager has responsibility for
communicating performance expectations and evaluations to
Subadvisors and ultimately recommending to the Board of Trustees
whether Subadvisors' contracts should be renewed, modified or
terminated. The Manager provides written reports to the Board of
Trustees regarding the results of its evaluations and monitoring
functions. The Manager is also responsible for conducting all
operations of the Trust except those operations contracted to the
Subadvisor, custodian, transfer agent or administrator.
Investors should be aware that the Manager may be subject to a
conflict of interest when making decisions regarding the retention
and compensation of particular Subadvisors. However, the
Manager's decisions, including the identity of a Subadvisor and
the specific amount of the Manager's compensation to be paid to a
Subadvisor, 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 Subadvisor 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 Subadvisors.
The Exemption is based on among other things: (1) the Manager
will select, monitor, evaluate and allocate assets to, the
Subadvisors and ensure that the Subadvisors comply with a
Portfolio's investment objective, policies and restrictions; (2)
shares of a 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 Subadvisor and its investment
advisory contract within 90 days of the engagement of new
Subadvisor; (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.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017, 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 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 a Portfolio through an Advisory Service
must be made through a brokerage account maintained with Salomon
Smith Barney. Payment for Portfolio shares must be made by check
directly to Salomon Smith Barney or to a broker that clears
securities transactions through Salomon Smith Barney. No
brokerage account or inactivity fee is charged in connection with
a brokerage account through which an investor purchases shares of
a Portfolio.
Shares of the Portfolios are available exclusively to participants
in Advisory Services and certain asset based fee programs and are
generally designed to relieve investors of the burden of devising
an asset allocation strategy to meet their individual needs as
well as selecting individual investments within each asset
category among the myriad choices available. Advisory Services
generally provide investment advice in connection with investments
among the Trust's Portfolios by identifying the investor's risk
tolerances and investment objectives through evaluation of an
investment questionnaire; identifying and recommending in writing
an appropriate allocation of assets among the Portfolios that
conform to those tolerances and objectives in a written
recommendation; and providing on a periodic basis, a written
monitoring report to the investor containing an analysis and
evaluation of an investor's account and recommending any
appropriate changes in the allocation of assets among the
Portfolios. Usually under an Advisory Service, all investment
decisions ultimately rest with the investor and investment
discretion is not given to the investment adviser.
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 Portfolios 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
advisors other than the Consulting Group, or who contract with the
Consulting Group for services other than those described above,
pay, in lieu of TRAK charges, different fees for different levels
of services as agreed upon with their investment advisers.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Portfolio is
included in the Prospectus. The right of redemption of shares of a
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 a Portfolio
normally utilizes is restricted, or an emergency, as defined by
the rules and regulations of the SEC, exists making disposal of a
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 a Portfolio's
shareholders.
REDEMPTIONS IN KIND
If the Board of Trustees determines that it would be detrimental
to the best interests of a 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
Each Portfolio's net asset value per share is calculated by SSB
Citi 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 Jr. 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 a Portfolio may nevertheless be actively traded and the
value of that 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 a 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 a Portfolio's net
asset value at the preceding closing values of the securities on
their respective exchanges, except that, when an occurrence
subsequent to the time a value was so established is likely to
have changed that value, the fair market value of those securities
will be determined by consideration of other factors by or under
the direction of the Board of Trustees. A security that is
primarily traded on a domestic or foreign stock exchange is valued
at the last sale price on that exchange as reported to a 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 a 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 SSB Citi 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 written by a Portfolio is generally valued at the last
sale price or, in the absence of the last sale price, the last
offer price. An option purchased by a 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 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, SSB Citi may consult
with an independent pricing service retained by the Trust.
The valuation of the securities held by a 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 the Portfolio would receive if it sold the
instrument.
DETERMINATION OF PERFORMANCE
From time to time, the Trust may quote a Portfolio's yield or
total return in advertisements or in reports and other
communications to shareholders.
Yield and Equivalent Taxable Yield
For a Portfolio other than Government Money Investments, the 30-
day yield figure described in the Prospectus is calculated
according to a formula prescribed by the SEC, expressed as
follows:
YIELD = 2[(a - b + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursement),
including a ratable portion of the maximum annual fee for
participation in TRAK.
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by a
Portfolio at a discount or premium, the formula generally calls
for amortization of the discount or premium; the amortization
schedule will be adjusted monthly to reflect changes in the market
values of the debt obligations.
A Portfolio's equivalent taxable 30-day yield is computed by
dividing the portion of the Portfolio's 30-day yield that is tax
exempt by one minus a stated income tax rate and adding the
product to any portion of the Portfolio's yield that is not tax
exempt.
The yield for Municipal Bond Investments for the 30-day period
ended August 31, 1999 was 4.82%. The equivalent taxable yield for
that same period was 7.53%, assuming the payment of Federal income
taxes at a rate of 36%.
The yield for Government Money Investments is computed by: (a)
determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account in the Portfolio
having a balance of one share at the beginning of a seven day
period for which yield is to be quoted; (b) subtracting a
hypothetical charge reflecting deductions from shareholder
accounts; (c) dividing the difference by the value of the account
at the beginning of the period to obtain the base period return;
and (d) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account
reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares, but
does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the Portfolio may
calculate a compound effective annualized yield by adding one to
the base period return (calculated as described above), raising
the sum to a power equal to 365/7 and subtracting one.
Investors should recognize that in periods of declining interest
rates, a Portfolio's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates
will tend to be somewhat lower. In addition, when interest rates
are falling, the inflow of net new money to a Portfolio from the
continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its
portfolio of securities, thereby reducing the current yield of the
Portfolio. In periods of rising interest rates the opposite can be
expected to occur.
For the seven-day period ended August 31, 1999, the yield for the
Government Money Investments portfolio was 4.63% (the effective
yield was 4.74%) with an average dollar-weighted portfolio
maturity of 58 days.
Average Annual Total Return
From time to time, the Trust may advertise a 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 that Portfolio from the beginning date of the
measuring period to the ending date of the measuring period and is
reduced by the maximum Salomon Smith Barney Advisory Service fee
during the measuring period. The figure reflects changes in the
price of a Portfolio's shares and assumes that any income,
dividends and/or capital gains distributions made by a Portfolio
during the period are reinvested in shares of that 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 Portfolios' 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, a Portfolio may quote total return figures
that do not reflect Salomon Smith Barney Advisory Service fees
(provided that these figures are accompanied by standardized total
return figures calculated as described above), as well as compare
its performance with that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar
independent services that monitor the performance of mutual funds
or with other appropriate indices of investment securities. The
performance information also may include evaluations of a
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.
A 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. A Portfolio's net investment
income changes in response to fluctuations in interest rates and
the expenses of the Portfolio. Consequently, the given
performance quotations should not be considered as representative
of a Portfolio's performance for any specified period in the
future.
A Portfolio's net investment income changes in response to
fluctuations in interest rates and the expenses of the Portfolio.
A 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. In addition,
because performance will fluctuate, it may not provide a basis for
comparing an investment in a Portfolio with certain bank deposits
or other investments that pay a fixed yield for a stated period of
time. Investors comparing a Portfolio's performance with that of
other mutual funds should give consideration to the quality and
maturity of the respective investment companies' portfolio
securities.
Comparative performance information may be used from time to time
in advertising the Portfolios' shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock
Price Index, the Dow Jones Industrial Average and other industry
publications.
The Portfolios' average annual total returns without the effect of
the maximum annual fee for participation in TRAK and with the
effect of fee waivers were as follows:
Portfolio
From
September
1, 1998
through
August 31,
1999
From
September
1, 1994
through
August 31,
1999
From
Inception**
** through
August 31,
1999
Government Money Investments
4.53%
4.97%
4.29%
High Yield Investments*
3.67%
N/A
1.98%
Intermediate Fixed Income
Investments
1.07%
5.97%
5.98%
Long-Term Bond Investments
(6.19)%
6.62%
6.04%
Municipal Bond Investments
(2.60)%
5.28%
5.39%
Mortgage Backed Investments
1.30%
6.68%
6.07%
Balanced Investments**
18.78%
13.25%
11.77%
Large Capitalization Value Equity
Investments
26.36%
18.55%
14.46%
Large Capitalization Growth
Investments
46.29%
24.52%
18.47%
Small Capitalization Value Equity
Investments
13.61%
12.28%
10.44%
Small Capitalization Growth
Investments
44.32%
16.34%
16.92%
International Equity Investments
24.06%
7.92%
9.66%
International Fixed Income
Investments
2.30%
7.97%
8.10%
Emerging Markets Equity
Investments***
55.37%
(4.55)%
(1.14)%
* High Yield Investments commenced operations on July 13,
1998.
** Balanced Investments commenced operations on February 16,
1993.
*** Emerging Market Equity Investments commenced operations on
April 21, 1994.
**** The remaining Portfolios commenced operations on November
18, 1991.
The Portfolios' average annual total returns with the effect of
the maximum annual fee for participation in TRAK and with the
effect of fee waivers were as follows:
Portfolio
From
September 1,
1998 through
August 31,
1999
From
September
1, 1994
through
August 31,
1999
From
Inception**
** through
August 31,
1999
Government Money Investments
2.98%
3.41%
2.74%
High Yield Investments*
2.14%
N/A
0.47%
Intermediate Fixed Income
Investments
(0.43)%
4.40%
4.40%
Long-Term Bond Investments
(7.58)%
5.04%
4.47%
Municipal Bond Investments
(4.05)%
3.72%
3.82%
Mortgage Backed Investments
(0.21)%
5.10%
4.50%
Balanced Investments**
17.03%
11.57%
10.11%
Large Capitalization Value Equity
Investments
24.50%
16.79%
12.76%
Large Capitalization Growth
Investments
44.11%
22.67%
16.71%
Small Capitalization Value Equity
Investments
11.94%
10.62%
8.80%
Small Capitalization Growth
Investments
42.17%
14.61%
15.19%
International Equity Investments
22.22%
6.32%
8.03%
International Fixed Income
Investments
0.78%
6.37%
6.50%
Emerging Markets Equity
Investments***
53.05%
(5.97)%
(2.62)%
_________________
* High Yield Investments commenced operations on July 13,
1998.
** Balanced Investments commenced operations on February 16,
1993.
*** Emerging Market Equity Investments commenced operations on
April 21, 1994.
**** The remaining Portfolios commenced operations on November
18, 1991.
TAXES
The following is a summary of certain federal income tax
considerations that may affect the Portfolios and their
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 a 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 a Portfolio. The summary is based on the laws in
effect on the date of this SAI, which are subject to change.
Each Portfolio intends to continue 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 a 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.
If, in any taxable year, a Portfolio fails to qualify as a
regulated investment company under the Code or fails to meet the
distribution requirement, it would be taxed in the same manner as
an ordinary corporation and distributions to its shareholders
would not be deductible by the Portfolio in computing its taxable
income. In addition, in the event of a failure to qualify, a
Portfolio's distributions, to the extent derived from its current
or accumulated earnings and profits would constitute dividends
(eligible for the corporate dividends-received deduction) which
are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated
in the shareholders' hands as a long-term capital gain or as tax-
exempt interest. If a Portfolio fails to qualify as a regulated
investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if a Portfolio failed
to qualify as a regulated investment company for a period greater
than one taxable year, the Portfolio may be required to recognize
any net built-in gains (the excess of the aggregate gains,
including items of income, over aggregate losses that would have
been realized if it had been liquidated) in order to qualify as a
regulated investment company in a subsequent year.
In order to avoid the application of a 4% nondeductible excise tax
on certain undistributed amounts of ordinary income and capital
gains, a Portfolio may make an additional distribution shortly
before or shortly after December 31 in each year of any
undistributed ordinary income or capital gains. Each Portfolio
generally will seek to pay any additional dividends and
distributions necessary to avoid the application of this tax.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of Municipal Bond Investments will not be deductible
for federal income tax purposes. If a shareholder receives exempt-
interest dividends with respect to any share of Municipal Bond
Investments and if the share is held by the shareholder for six
months or less, then any loss on the sale or exchange of the share
may, to the extent of the exempt-interest dividends, be
disallowed. In addition, the Code may require a shareholder that
receives exempt-interest dividends to treat as taxable income a
portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Furthermore, that portion of
any exempt-interest dividend paid by Municipal Bond Investments
that represents income derived from certain revenue or AMT-Subject
Bonds held by the Portfolio may not retain its tax exempt status
in the hands of a shareholder who is a "substantial user" of a
facility financed by such bonds, or a "related person" thereof.
Moreover, as noted in the Prospectus, some or all of Municipal
Bond Investments' exempt-interest dividends may be a specific
preference item, or a component of an adjustment item, for
purposes of the federal individual and corporate alternative
minimum taxes. In addition, the receipt of Municipal Bond
Investments' dividends and distributions may affect a foreign
corporate shareholder's federal "branch profits" tax liability and
federal "excess net passive income" tax liability of a shareholder
of a Subchapter S corporation. Shareholders should consult their
own tax advisors as to whether they are (i) "substantial users"
with respect to a facility or "related" to such users within the
meaning of the Code or (ii) subject to a federal alternative
minimum tax, the federal "branch profits" tax, or the federal
"excess net passive income" tax.
As described above, a Portfolio may invest in certain types of
warrants, foreign currencies, forward contracts, options and
futures contracts. The Portfolios anticipate that these investment
activities will not prevent them from qualifying as regulated
investment companies.
A 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 that
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 a Portfolio to mark-to-
market certain types of 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. Each 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, a 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.
The Portfolios, other than Government Money Investments,
Intermediate Fixed Income Investments, Municipal Bond Investments,
Mortgage Backed Investments and Multi-Sector Fixed Income
Investments, expect to realize a significant amount of net long-
term capital gains that will be distributed as described in the
Prospectus. Distributions of net realized long-term capital gains
("capital gain dividends") will be taxable to shareholders as
long-term capital gains, regardless of 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 held
for six months or less, then any loss (to the extent not
disallowed pursuant to the other six-month rule described above
with respect to Municipal Bond Investments) on the sale or
exchange of the share, to the extent of the capital gain dividend,
shall be treated as a long-term capital loss.
Dividends or other income (including, in some cases, capital
gains) received by a Portfolio from investments in foreign
securities 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. A 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.
A 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 a 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. A 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 a 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.
A 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.
On August 31, 1999, the unused capital loss carryovers, by fund,
were approximately as follows: Government Money Investments,
$20,000, Intermediate Fixed Income Investments, $2,622,000 and
Emerging Markets Equity Investments, $121,162,000. For Federal
income tax purposes, these amounts are available to be applied
against future capital gains of the fund that has the carryovers,
if any, that are realized prior to the expiration of the
applicable carryover. The carryovers expire as follows:
PORTFOLIO
August
31,
(in thousands)
2003
2004
2005
2006
2007
Government Money
$12
$8
- --
- --
- --
Intermediate
Fixed Income
$387
$1,46
2
$773
- --
- --
Emerging Markets
Equity
- --
- --
- --
$11,52
7
$109,63
5
Dividends and Distributions
For federal income tax purposes, dividends declared by a 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.
A Portfolio may realize net long-term capital gains. Distributions
of the excess of net long-term capital gain over net short-term
capital loss ("capital gain dividends" if any) 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. 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 to
the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the Portfolio, within a 61-day period beginning
30 days before and ending 30 days after the disposition of the
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 a
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.
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 a 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 a 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, a 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 a 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 Portfolios and their 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., 21 Milk Street, 5th Floor, Boston, MA 02109 serves as
the Portfolios' distributor on a best efforts basis pursuant to a
written agreement, which was approved by the Trustees of the
Trust.
CUSTODIANS, TRANSFER AGENT AND SUB-TRANSFER AGENT
PNC Bank National Association ("PNC") and The Chase Manhattan Bank
("Chase") serve as the custodians for the Trust. The assets of the
Trust are held under bank custodianship in accordance with the
1940 Act. Under their custody agreements with the Trust, PNC and
Chase are authorized to establish separate accounts for foreign
securities owned by the Portfolios 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
Portfolios. For custody services, PNC and Chase receive monthly
fees charged to a Portfolio based upon the month-end, aggregate
net asset value of the Portfolio plus certain charges for
securities transactions. PNC and Chase are also reimbursed by the
Portfolios for out-of-pocket expenses including the costs of any
foreign and domestic sub-custodians.
Smith Barney Private Trust Company, located at 388 Greenwich
Street, New York, NY 10013, serves as the Trust's transfer agent
and shareholder services agent.
PFPC Global Fund Services, located at P.O. Box 9699, Providence,
RI 02940-9699 serves as the Trust's sub-transfer agent.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended August 31, 1999
is incorporated herein by reference in their entirety. The Annual
Report was filed on November 2, 1999, Accession Number 91155-99-
698.
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND AND NOTE RATINGS
Moody's Investors Services, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present
that make the long term risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered
adequate but elements may be present that suggest a susceptibility
to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba - Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated "B" generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa - Bonds which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest
Ca - Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated "C" are the lowest class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Con (..)- Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of
condition.
Note: The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group
AAA - Debt rated "AAA" has the highest rating assigned by Standard
& Poor's Ratings Group ("S&P"). Capacity to pay interest and
repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only
in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to
such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.
+ Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR- Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of
policy.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-l" (or related supporting institutions) have
a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment will normally be evidenced by the
following characteristics: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issuers determined to possess overwhelming safety
characteristics will be noted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
Shearson Lehman Brothers, Inc. (Shearson Lehman), Located in New
York,
NY [Application No. D-8723]
Proposed Exemption
Section I. Covered Transactions
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2)
4975(c)(2) of the Code and in accordance with the procedures set
forth
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
If the exemption is granted, the restrictions of section 406(a) of
the
Act and the sanctions resulting from the application of section
4975
of the Code, by reason of section 4975(c)(1)(A) through (D) shall
not apply to the proposed purchase or redemption of shares by an
employee benefit plan, an individual retirement account (the IRA)
or a
retirement plan for a self-employed individual (the Keogh Plan;
collectively, the Plans) in the Shearson Lehman-established Trust
for
TRAK Investments (the Trust) in connection with such Plans'
participation in the TRAK Personalized Investment Advisory Service
(the TRAK Program). In addition, the restrictions of section
406(b)(1)
and (b)(2) of the Act and the sanctions resulting from the
application
of section 4975 of the Code by reason of section 4975(c)(1)(E)
shall not apply to the provision, by the Consulting Group Division
of
Shearson Lehman (the Consulting Group), of investment advisory
services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's
selection of a portfolio grouping (the Portfolio-Type) in the TRAK
Program for the investment of Plan assets.
This proposed exemption is subject to the following conditions
that
are set forth below in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be
approved by
a Plan fiduciary which is independent of Shearson Lehman.
(2) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the
acquisition
or redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those
obtainable
in an arm's length transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations
based
upon objective criteria.
(6) Any recommendation or evaluation made by the Consulting Group
to
an Independent Plan Fiduciary will be implemented only at the
express
direction of such independent fiduciary.
(7) The Consulting Group will generally give investment advice to
an
Independent Plan Fiduciary with respect to Portfolio-Types.
However,
in the case of a Plan providing for participant-directed
investments
(the Section 404(c) Plan), the Consulting Group will provide
investment advice that is limited to the Portfolios made available
under the Plan.
(8) Any sub-adviser (the Sub-Adviser) that is appointed by the
Consulting Group to exercise investment discretion over a
Portfolio
will be independent of Shearson Lehman and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any
securities that are issued by Shearson Lehman and/or its
affiliates,
the percentage of that Portfolio's net assets invested in such
securities will not exceed one percent.
(10) The quarterly investment advisory fee that is paid by a Plan
to
the Consulting Group for investment advisory services rendered to
such
Plan will be offset by such amount as is necessary to assure that
the
Consulting Group retains no more than 20 basis points from any
Portfolio which contains investments attributable to the Plan
investor.
(11) The Consulting Group will not retain an investment advisory
or
management fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior
to
purchasing Trust shares.
(a) Each Plan will receive the following written or oral
disclosures
from the Consulting Group:
(1) A copy of the prospectus (the Prospectus) for the Trust
discussing
the investment objectives of the Portfolios comprising the Trust,
the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, Shearson Lehman
and
its subsidiaries and the compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement
of
Additional Information supplementing the Prospectus which
describes
the types of securities and other instruments in which the
Portfolios
may invest, the investment policies and strategies that the
Portfolios
may utilize and certain risks attendant to those investments,
policies
and strategies.
(3) A copy of the investment advisory agreement between the
Consulting
Group and such Plan relating to participation in the TRAK Program.
(4) A copy of the respective investment advisory agreement between
the
Consulting Group and the Sub-Advisers upon written request to
Shearson
Lehman.
(5) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan,
an
explanation by a Shearson Lehman Financial Consultant (the
Financial
Consultant) to eligible participants in such Plan, of the services
offered under the TRAK Program and the operation and objectives of
the
Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, will be required to
acknowledge, in writing, prior to purchasing Trust shares that
such
fiduciary has received copies of such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement
of
the receipt of such documents will be provided by the Independent
Plan
Fiduciary (i.e., the plan administrator, trustee or named
fiduciary,
as the recordholder of Trust shares). Such Independent Plan
Fiduciary
will be required to represent in writing to Shearson Lehman that
such
fiduciary is (1) independent of Shearson Lehman and its affiliates
and
(2) knowledgeable with respect to the Plan in administrative
matters
and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under title I of the
Act,
where investment decisions are made by a trustee, investment
manager
or a named fiduciary, such Independent Plan Fiduciary will be
required
to acknowledge, in writing, receipt of such documents and
represent to
Shearson Lehman that such fiduciary is (1) independent of Shearson
Lehman and its affiliates, (2) capable of making an independent
decision regarding the investment of Plan assets and (3)
knowledgeable
with respect to the Plan in administrative matters and funding
matters
related thereto, and able to make an informed decision concerning
participation in the TRAK Program.
(13) Each Plan will receive the following written or oral
disclosures
with respect to its ongoing participation in the TRAK Program.
(a) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees
paid
by each Portfolio.
(b) A written quarterly monitoring report containing an analysis
and
an evaluation of a Plan investor's account to ascertain whether
the
Plan's investment objectives have been met and recommending, if
required, changes in Portfolio allocations.
(c) If required by the arrangement negotiated between the
Consulting
Group and a Section 404(c) Plan, a quarterly, detailed investment
performance monitoring report, in writing, provided to an
Independent
Plan Fiduciary of such Plan showing Plan level asset allocations,
Plan
cash flow analysis and annualized risk adjusted rates of return
for
Plan investments. In addition, if required by such arrangement,
Financial Consultants will meet periodically with Independent Plan
Fiduciaries of Section 404(c) Plans to discuss the performance
monitoring report as well as with eligible participants to review
their accounts' performance.
(d) If required by the arrangement negotiated between the
Consulting
Group and a Section 404(c) Plan, a quarterly participant
performance
monitoring report provided to a Plan participant which accompanies
the
participant's benefit statement and describes the investment
performance of the Portfolios, the investment performance of the
participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or
to
amend his or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all
Plans
of the (1) percentage of each Portfolio's brokerage commissions
that
are paid to Shearson Lehman and its affiliates and (2) the average
brokerage commission per share paid by each Portfolio to Shearson
Lehman and its affiliates, as compared to the average brokerage
commission per share paid by the Trust to brokers other than
Shearson
Lehman and its affiliates, both expressed as cents per share.
(14) Shearson Lehman shall maintain, for a period of six years,
the
records necessary to enable the persons described in paragraph
(15) of
this section to determine whether the conditions of this exemption
have been met, except that (a) a prohibited transaction will not
be
considered to have occurred if, due to circumstances beyond the
control of Shearson Lehman and/or its affiliates, the records are
lost
or destroyed prior to the end of the six year period, and (b) no
party
in interest other than Shearson Lehman shall be subject to the
civil
penalty that may be assessed under section 502(1) of the Act, or
to
the taxes imposed by section 4975(a) 4975(a) and 4975(b) (b) of
the
Code, if the records are not maintained, or are not available for
examination as required by paragraph (15) below.
(15) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (14)
of
this section shall be unconditionally available at their customary
location during normal business hours by:
(1) Any duly authorized employee or representative of the
Department
or the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any
duly
authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or
any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4)
of
this paragraph (15) shall be authorized to examine the trade
secrets
of Shearson Lehman or commercial or financial information which is
privileged or confidential.
The availability of this exemption is subject to the express
condition
that the material facts and representations contained in the
application are true and complete, and that the application
accurately
describes all material facts which are the subject of this
exemption.
Summary of Facts and Representations
1. Shearson Lehman, whose principal executive offices are located
in
New York, New York, is a wholly owned subsidiary of Shearson
Lehman
Brothers Holdings, Inc. (Shearson Holdings). Shearson Holdings is
one
of the leading full-line securities firms servicing institutions,
governments and individual investors in the United States and
throughout the world. Shearson Holdings conducts its principal
businesses through two divisions--Shearson Lehman Brothers
(referred
to herein as Shearson Lehman) and Lehman Brothers. Shearson Lehman
is
responsible for individual investor services and asset management
while Lehman Brothers is responsible for securities underwriting,
financial advisory, investment and merchant banking services and
securities and commodities trading as principal and agent.
Shearson
Holdings is a member of all principal securities and commodities
exchanges in the United States and the National Association of
Securities Dealers, Inc. In addition, it holds memberships or
associate memberships on several principal foreign securities and
commodities exchanges.
Shearson Holdings was incorporated in Delaware on December 29,
1983.
The American Express Company owns 100 percent of Shearson
Holdings'
issued and outstanding common stock, which represents 92 percent
of
its issued and outstanding voting stock. The 8 percent remaining
shares of Shearson Holdings' issued and outstanding voting stock
is
preferred stock which is owned by Nippon Life Insurance Company.
Although Shearson Holdings is not an operating company and, as
such,
it maintains no assets under management, as of December 31, 1991,
Shearson Lehman and its subsidiaries rendered investment advisory
services with respect to $91 billion in assets.
2. On April 12, 1991, Shearson Lehman formed the Trust, a no load,
open- end, diversified management investment company registered
under
the Investment Company Act of 1940, as amended. The Trust is
organized
as a Massachusetts business trust and it has an indefinite
duration.
As of January 17, 1992, the Trust had net assets of $132,608,001.
The Trust consists of twelve different portfolios which range from
Government Money Investments to International Fixed Income
Investments
and which pay monthly or annual dividends to investors. The
Portfolios
currently have a per share value ranging from $0 per share for
Balanced Investments to $9.45 per share for Small Capitalization
Growth Equity Investments. The composition of the Portfolios
covers a
spectrum of investments which include U.S. Government-related
securities of equity or debt securities issued by foreign or
domestic
corporations. The Portfolios are further categorized under four
major
Portfolio-Types. (1)
3. Shares in the Trust are offered by Shearson Lehman, as
distributors, at no load, to participants in the TRAK Program.(2)
Although investors in the Trust currently consist of institutions
and
individuals, it is proposed that prospective investors will
include
plans for which Shearson Lehman may or may not currently maintain
investment accounts. A majority of these Plans will be IRAs or
Keogh
Plans. In addition, it is proposed that Plans for which Shearson
Lehman or an affiliate serves as a prototype sponsor and/or a
nondiscretionary trustee or custodian be permitted to invest in
the
Trust. (3)
As for voting rights, Shearson Lehman states that they are
accorded to
recordholders of Trust shares. Shearson Lehman notes that a
recordholder of Trust shares may determine to seek the submission
of
proxies by Plan participants and vote Trust shares accordingly. In
the
case of individual account plans such as Section 404(c) Plans,
Shearson Lehman notes that most Plans will pass-through the vote
to
participants on a pro-rata basis.
The applicant represents that the initial purchase of shares in
the
Trust by a Plan may give rise to a prohibited transaction where
Shearson Lehman or an affiliate has a party in interest
relationship
with the Plan. Shearson Lehman also acknowledges that a prohibited
transaction could arise upon a subsequent purchase or redemption
of
shares in the Trust by a participating Plan inasmuch as the party
in
interest relationship between Shearson Lehman and the Plan may
have
been established at that point. Accordingly, Shearson Lehman has
requested prospective exemptive relief from the Department with
respect to the purchase and redemption of shares in the Trust by
participating Plans which it does not sponsor or have
discretionary
investment authority over the Plan's assets which would be
invested in
Trust shares.(4) Such shares will be held in a brokerage account
maintained by the Plan with Shearson Lehman. No commissions or
fees
will be paid with respect to such transactions.
According to the applicant, the minimum initial investment in the
Trust is set at $20,000, and may be reduced periodically to
$10,000.
Effectively, therefore, a Plan with less than $20,000 in assets
($10,000 when the minimum has been reduced) would not be able to
participate in the TRAK Program. The minimum investment in a
Portfolio
is $100.
4. Overall responsibility for the management and supervision of
the
Trust and the Portfolios rests with the Trust's Board of Trustees
(The
Trustees) which is comprised of twelve members. The Trustees
approve
all significant agreements involving the Trust and the persons and
companies that provide services to the Trust and the Portfolios.
Three
of the Trustees and all of the Trust's executive officers are
affiliated with Shearson Lehman and/or its affiliates. The nine
remaining Trustees are not affiliated with Shearson Lehman.
5. Boston Advisors, located in Boston, Massachusetts, is a wholly
owned subsidiary of The Boston Company, a financial services
holding
company which is, in turn, wholly owned by Shearson Lehman. Boston
Advisors provides investment management, investment advisory
and/or
administrative services to investment companies with total assets
in
excess of $83 billion as of July 31, 1991. Boston Advisors serves
as
the Trust's administrator. In particular, Boston Advisors
calculates
the net asset value (5) of the Portfolios' shares and manages all
aspects of the Portfolios' administration and operation. In
addition,
Boston Advisors is responsible for managing each Portfolio's
temporary
investments in money market instruments, as well as making
arrangements for, and managing collateral received with respect
to,
the lending of securities by each Portfolio.
6. Organized within Shearson Lehman, is the Consulting Group,
which is
located in Wilmington, Delaware. The Consulting Group serves as
the
investment manager of the Trust and the underlying Portfolios.
Although the Consulting Group has not previously served as
investment
manager for a registered investment company, it and its related
division, the Consulting Services Division of Shearson Lehman
(Consulting Services), have over eighteen years of experience in
evaluating investment advisers for individual and institutional
investors. Together the Consulting Group and Consulting Services
provide various financial consulting services to over 30,000
accounts,
representing more than $30 billion in client assets. Account sizes
range from institutional accounts in excess of $1 billion to
individual accounts with $100,000 minimum investments. As of July
31,
1991, the Consulting Group rendered advisory services with respect
to
assets with a value in excess of $42.7 billion.
7. Under its investment management agreement, the Consulting Group
is
required to make recommendations to the Trustees regarding (a) the
investment policies of each Portfolio and (b) the selection and
retention of certain Sub-Advisers which exercise investment
discretion
over each Portfolio.(6) In addition, through the TRAK Program, the
Consulting Group provides investors with non-binding, generalized
asset allocation recommendations with respect to such investors'
investments in the Portfolios. For example, the Consulting Group
evaluates an investor's risk tolerances and financial goals,
provides
investment advice as to the appropriate mix of investment types
designed to balance the investor's risk tolerances as part of a
long-term investment strategy and provides the investor with
advice
about implementing its investment decisions through the Trust.
However, the applicant states that the Consulting Group does not
have
any discretionary authority or control with respect to the
allocation
of an investor's assets among the Portfolios.
In the case of an IRA, a Keogh Plan or a Title I Plan, the
applicant
represents that all of the Consulting Group's recommendations and
evaluations will be presented to a Plan fiduciary which is
independent
of Shearson Lehman and will be implemented only if accepted and
acted
upon by such Independent Plan Fiduciary. In the case of a Section
404(c) Plan, Shearson Lehman represents that participants in such
Plan
will be presented with the Consulting Group's recommendations and
evaluations only to the extent agreed to by Shearson Lehman and
the
Plan sponsor. Shearson Lehman expects that some sponsors of
Section
404(c) Plans will elect to have the Consulting Group's
recommendations
and evaluations passed-through to participants, while others will
elect to have the Independent Plan Fiduciary responsible for
selecting
the Portfolios made available to Plan participants receive such
advice. (7)
However, if investment advisory services are provided directly to
a
participant in a Section 404(c) Plan, the applicant explains (as
also
described herein above) that a Financial Consultant will provide a
participant with pre-enrollment meetings and ongoing
communications
regarding the TRAK Program. In addition, the applicant notes that
the
Consulting Group will recommend long term investment allocations
to
the participant and provide the participant with a written,
quarterly
performance monitoring report.
8. As stated above, the Consulting Group is responsible for
selecting
the Sub-Advisers which provide discretionary advisory services
with
respect to the investment of the assets of the individual
Portfolios
on the basis of their "able" performance in their respective areas
of
expertise in asset management. The applicant represents that there
are
presently eleven Sub- Advisers, all of which are independent of,
and
will remain independent of, Shearson Lehman and/or its
affiliates.(8)
The Sub-Advisers are registered investment advisers under the
Investment Adviser's Act of 1940. They maintain their principal
executive offices in the eastern and western regions of the United
States. As of June 30, 1991, the Sub-Advisers had assets under
management ranging from $62 million to $51 billion.
9. In order for a Plan to participate in the TRAK Program,
Shearson
Lehman or the Consulting Group will provide an Independent Plan
Fiduciary with a copy of the Trust Prospectus discussing the
investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, Shearson Lehman
and
its subsidiaries and the compensation paid to such entities. In
addition, upon written or oral request to Shearson Lehman, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types
of
securities and other instruments in which the Portfolios may
invest,
the investment policies and strategies that the Portfolios may
utilize
and certain risks attendant to those investments, policies and
strategies.(9) Further, each Plan will be given a copy of the
investment
advisory agreement between the Consulting Group and such Plan
relating
to participation in the TRAK Program, and upon written request to
Shearson Lehman, with a copy of the respective investment advisory
agreement between the Consulting Group and the Sub-Advisers.
With respect to a Section 404(c) Plan, Financial Consultants
affiliated with Shearson Lehman will explain the services offered
under the TRAK Program to eligible Section 404(c) Plan
participants as
well as the operation and objectives of the Portfolios, if
required by
the arrangement negotiated between the Consulting Group and the
Plan.(10)
If accepted as a Trust investor, an Independent Plan Fiduciary
will be
required by Shearson Lehman to acknowledge, in writing, prior to
purchasing Trust shares that such fiduciary has received copies of
the
aforementioned documents. With respect to a Plan that is covered
by
Title I of the Act (e.g., a defined contribution plant), where
investment decisions will be made by a trustee, investment manager
or
a named fiduciary, Shearson Lehman will require (except if relying
on
Class PTE 77-3) that such Independent Plan Fiduciary acknowledge
in writing receipt of such documents and represent to Shearson
Lehman
that such fiduciary is (a) independent of Shearson Lehman and its
affiliates, (b) capable of making an independent decision
regarding
the investment of Plan assets and (c) knowledgeable with respect
to
the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning
participation in the TRAK Program.
With respect to Section 404(c) Plan, written acknowledgment of the
receipt of such documents will be provided by the Independent Plan
Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary,
as the recordholder of Trust shares). Such Independent Plan
Fiduciary
will be required to represent, in writing, to Shearson Lehman that
such fiduciary is (a) independent of Shearson Lehman and its
affiliates and (b) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and
able
to make an informed decision concerning participation in the TRAK
Program.
10. The books of the Trust will be audited annually by independent
public accountants selected by the Trustees and approved by the
investors. All investors will receive copies of an audited
financial
report no later than 60 days after the close of each Trust fiscal
year. The books and financial records of the Trust will be open
for
inspection by any investor, as well as the Department and the
Service,
at all times during regular business hours.
11. As noted under the TRAK Program, the Consulting Group will
provide
the Independent Plan Fiduciary with asset allocation advice
related to
the Portfolios. In this regard, the applicant states that the
Consulting Group's asset allocation advice will not focus on
recommendations that a Plan's assets be allocated to a specific
Portfolio. Rather, the applicant represents that the Consulting
Group
will recommend only that Plan assets be allocated among particular
types of Portfolios (e.g., Growth, Fixed Income, etc.)
After the selection of specific Portfolios by an Independent Plan
Fiduciary, the Consulting Group will continue to render general
Portfolio-Type selection advice to Plans or Plan fiduciaries
relating
to asset allocations among the selected Portfolios. However, in
the
case of a Section 404(c) Plan in which at least three to five
Portfolios may be selected by the Plan sponsor, the Consulting
Group's
initial asset allocation advice will be limited to the suggested
Portfolio-Types offered under the Plan. The Consulting Group may
also
work with the Independent Plan Fiduciary to identify and draft
investment objectives, select investment categories or actual
Portfolios to be offered to Plan participants, if such fiduciary
is
the recipient of the Consulting Group's asset allocation advice,
or
recommend appropriate long-term investment allocations to an
individual participant, if the participant receives such advice.
12. The Consulting Group will also identify a Plan's risk
tolerances
and investment objectives, the performance of each Portfolio in
which
assets are invested, and recommend, in writing, an appropriate
allocation of assets among the Portfolio-Types that conform to
these
tolerances and objectives. The Consulting Group will not have the
authority to implement its advice or recommendations and will not
participate in the deliberations regarding the decision by an
investor
of whether or not to act upon such advice. As noted earlier, the
applicant represents that the decision of a Plan to invest in the
TRAK
Program will be made by an unrelated Plan fiduciary acting on the
basis of his or her own investigation into the advisability of
participating in the TRAK Program.
13. The Consulting Group will provide, at least quarterly,
monitoring
reports to a Title I, IRA or Keogh Plan containing an analysis and
evaluation of the Plan's account to ascertain whether the
investor's
objectives are being met and recommending, when appropriate,
changes
in the allocation among the Portfolios.
If required by the arrangement negotiated with the Independent
Plan
Fiduciary, the Consulting Group will provide an Independent Plan
Fiduciary of a Section 404(c) Plan with a written, detailed
investment
performance monitoring report, that will contain Plan level asset
allocations showing the performance of the Plan's investment
vehicles
and the performance of relevant indices for evaluating the
performance
of each Portfolio, a Plan cash flow analysis and annualized risk
adjusted rates of return for Plan investment vehicles. Such report
will be provided on a quarterly basis.
In addition, to the extent required by the arrangement negotiated
with
the Consulting Group, a Section 404(c) Plan participant will
receive a
written, quarterly performance monitoring report with his or her
quarterly benefit statement which includes the investment
performance
of the Portfolios, the investment performance for the
participant's
account, and specifies market commentary and toll-free numbers for
such participant to call Shearson Lehman in order to obtain more
information about the TRAK Program or to amend the participant's
investment allocations. Further, if required by such arrangement,
a
Financial Consultant will meet periodically with an Independent
Plan
Fiduciary of a Section 404(c) Plan to review and discuss the
investment performance monitoring report. The Financial Consultant
may
also meet periodically with an eligible participant to review the
performance of the participant's account. The applicant notes that
this intermittent contact will not prevent the participant from
contacting the Financial Consultant at any time to inquire about
his
or her participation in the TRAK Program.
Finally, on a quarterly and annual basis, the Consulting Group
will
provide written disclosures to all Plans with respect to (1) the
percentage of each Trust Portfolio's brokerage commissions that
are
paid to Shearson Lehman and its affiliates and (2) the average
brokerage commission per share paid by each Portfolio to Shearson
Lehman as compared to the average brokerage commission per share
paid
by each Portfolio to brokers other than Shearson Lehman and its
affiliates, both expressed as cents per share.
14. Shares of a Portfolio will be redeemed by Shearson Lehman, at
no
charge, and generally on a daily basis (weekends and holidays
excepted) when the Portfolio calculates its net asset value.
Redemption requests received in proper form prior to the close of
trading on the NYSE will be affected at the net asset value per
share
determined on that day. Redemption requests received after the
close
of regular trading on the NYSE will be effected at the net asset
value
at the close of business of the next day, except on weekends or
holidays when the NYSE is closed. A Portfolio is required to
transmit
redemption proceeds for credit to an investor's account with
Shearson
Lehman or to an "introducing" broker (11) within 7 days after
receipt of
the redemption request. In the case of an IRA or Keogh Plan
investor,
Shearson Lehman will not hold redemption proceeds as free credit
balances and will, in the absence of receiving investment
instructions, place all such assets in a money market fund that is
not
affiliated with Shearson Lehman. In the case of Plans that are
covered
by title I of the Act, the redemption proceeds will be invested by
Shearson Lehman in accordance with the investment directions of
the
Independent Plan Fiduciary responsible for the management of the
Plan's assets. With respect to a Section 404(c) Plan, the
treatment of
such investment assets will depend upon the arrangement for
participant investment instructions selected by the Plan sponsor.
(12) In
the event that the Independent Plan Fiduciary does not give other
investment directions, such assets will be swept weekly into a
money
market fund that is not affiliated with Shearson Lehman for the
benefit of the Plan.
Due to the high costs of maintaining small accounts, the Trust may
also redeem an account having a current value of $7,500 or less,
after
the investor has been given at least 30 days in which to increase
the
account balance to more than the $7,500 amount. Proceeds of an
involuntary redemption will be deposited in the investor's
brokerage
account unless Shearson Lehman is otherwise instructed.
15. Shares of a Portfolio may be exchanged by an investor with
another
investor in the TRAK Program without payment of any exchange fee
for
shares of another Portfolio at their respective net asset values.
However, Portfolio shares are not exchangeable with shares of
other
funds within the Shearson Lehman Group of funds or portfolio
families.
16. With respect to brokerage transactions that are entered into
under
the TRAK Program for a Portfolio, such transactions may be
executed
through Shearson-Lehman and other affiliated broker-dealers, if in
the
judgment of the Sub-Adviser, the use of such broker-dealer is
likely
to result in price and execution at least as favorable, and at a
commission charge at least as comparable to those of other
qualified
broker-dealers. In addition, Shearson Lehman may not execute
transactions for a Portfolio on the floor of any national
securities
exchange but it may effect transactions by transmitting orders to
other brokers for execution. In this regard, Shearson Lehman is
required to pay fees charged by those persons performing the floor
brokerage elements out of the brokerage compensation it receives
from
a Portfolio.
17. Each Portfolio bears its own expenses, which generally include
all
costs that are not specifically borne by the Consulting Group, the
Sub-Advisers or Boston Advisors. Included among a Portfolio's
expenses are costs incurred in connection with the Portfolio's
organization, investment management and administration fees, fees
for
necessary professional and brokerage services, fees for any
pricing
service, the costs of regulatory compliance and costs associated
with
maintaining the Trust's legal existence and shareholder relations.
No
Portfolio, however, will impose sales charges on purchases,
reinvested
dividends, deferred sales charges, redemption fees, nor will any
Portfolio incur distribution expenses.
18. The total fees that are paid to the Consulting Group and its
affiliates will constitute no more than reasonable compensation.
In
this regard, for its asset allocation and related services, the
Consulting Group charges an investor a quarterly investment
advisory
fee. This "outside fee" is negotiated between the Consulting Group
and
the investor and it varies up to an annual maximum of 1.50 percent
of
the net asset value of the investor's Trust shares computed each
quarter based on the value determined on the last calendar day of
the
previous calendar quarter. The outside fee is charged directly to
an
investor and it is not affected by the allocation of assets among
the
Portfolios nor by whether an investor follows or ignores the
Consulting Group's advice. (13) For Plan investors, the outside
fee for a
calendar quarter will be reduced by an amount equal to, for all
Portfolios in which Plan assets are invested (a) the value of Plan
assets invested in a Portfolio on the last calendar day of the
previous calendar quarter (or the value of an initial investment
in
the Portfolio, as of the day such initial investment is made
during
the calendar quarter) multiplied by (b) a reduction factor (the
Reduction Factor) which is described in below, multiplied by (c) a
fraction, the numerator of which is the number of days in the
period
for which the outside fee is being assessed and the denominator of
which is the actual number of days in the calendar year of which
that
period is a part. For subsequent investments or redemptions
aggregating to more than $5,000, the pro-rated fee for credit for
the
balance of the quarter will be calculated on the basis of the net
percentage of the outside fee paid for the quarter during which
the
subsequent investment or redemption is made.
In addition, for investment management and related services
provided
to the Trust, the Consulting Group is paid, from each Portfolio, a
management fee which computed daily and paid monthly at an annual
rate
ranging from .15 percent to .70 percent of the value of the
Portfolio's average daily net assets depending upon the
Portfolio's
objective. From these management fees, the Consulting Group
compensates the Sub-Adviser. This "inside fee," which is the
difference between the individual Portfolio's total management fee
and
the fee paid by the Consulting Group to the Sub-Adviser, varies
from
20 to 30 basis points depending on the Portfolio (except for the
Government Money Investments Portfolio which, for competitive
purposes, pays a management fee equal to the Sub-Adviser's fee).
Each
Portfolio also pays Boston Advisors a management fee that is
computed
daily and paid monthly for the services it performs as
administrator
to the Trust at an annual fixed rate of .20 percent of the value
of
the Portfolio's average daily net assets. Such fee is also
included in
the total management fee.
The management fees that are paid at the Portfolio level to Boston
Advisors, the Consulting Group and the Sub-Advisers are set forth
in
the table below. For purposes of the table, Boston Advisors is
referred to as "BA", the Consulting Group as "CG" and the Sub-
Advisers
as "SA." As noted in the table, the sum of the management fees
paid by
a Portfolio to Boston Advisors plus the fees retained by the
Consulting Group and the Sub-Advisers equals the total management
fee
paid by that Portfolio.
SA
CG
Total Total fee retained
retained
management BA fee SA/CG fee
fee
Portfolio fee (percent) (percent) (percent)
(percent)
Government money
investments 0.35 0.20 0.15 0.15
0.00
Intermediate fixed
income investments .60 .20 .40 .20
.20
Total return fixed
income investments .60 .20 .40 .20
.20
Municipal bond
investments .60 .20 .40 .20
.20
Mortgage backed
investments .70 .20 .50 .25
.25
Balanced investments .80 .20 .60 .30
.30
Large capitalization
value equity
investments .80 .20 .60 .30
.30
Large capitalization
growth investments .80 .20 .60 .30
.30
Small capitalization
value equity
investments .80 .20 .60 .30
.30
Small capitalization
growth investments .80 .20 .60 .30
.30
International equity
investments .90 .20 .70 .40
.30
International fixed
income investments .70 .20 .50 .25
.25
Shearson Lehman proposes to offset, quarterly, against the outside
fee
such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio on
investment
of assets attributable to any Plan.(14) In this way, the aggregate
of
the inside fees and the outside fees retained by the Consulting
Group
will remain constant regardless of the distribution of a Plan's
assets
among the Portfolio.
Shearson Lehman has developed the following example to demonstrate
how
the fee offset mechanism would work:
Assume that as of March 31, 1992, the average daily value of Trust
Portfolio shares held by a Plan investor was $1,000. Investment
assets
attributable to the Plan were distributed among five Trust
Portfolios:
(1) Government Money Investments in which the Plan made a $50
investment and from which the Consulting Group would not retain an
inside fee; (2) Total Return Fixed Income Investments in which the
Plan made a $200 investment and the Consulting Group would retain
an
inside fee of .20 percent; (3) Small Capitalization Growth
Investments
in which the Plan made a $250 investment and the Consulting Group
would be entitled to receive an inside fee of .30 percent; (4)
Large
Capitalization Growth Investments in which the Plan made a $250
investment and the Consulting Group would retain an inside fee of
.30
percent; and (5) International Equity Investments in which the
Plan
made a $250 investment and the Consulting Group would be entitled
to
receive an inside fee of .30 percent.
Assume that the Plan investor pays the maximum annual outside fee
of
1.50 percent so that the total outside fee for the calendar
quarter
April 1 through June 30, prior to the fee offset would be ($1,000)
1.50% (.25) = $3.75.
Under the proposed fee offset, the outside fee charged to the Plan
must be reduced by a Reduction Factor to ensure that the
Consulting
Group retains an inside fee of no more than .20% from each of the
Portfolios on investment assets attributable to the Plan. The
following table shows the Reduction Factor as applied to each of
the
Portfolios comprising the Trust:
CG
retained Fee
Reduction
fee offset
factor
Portfolio (percent) (percent)
(percent)
Government money investments 0.00 0.20
0.00
Intermediate fixed income investments .20 .20
.00
Total return fixed income investments .20 .20
.00
Municipal bond investments .20 .20
.00
Mortgage backed investments .25 .20
.05
Balanced investments .30 .20
.10
Large capitalization value equity
investments .30 .20
.10
Large capitalization growth investments .30 .20
.10
Small capitalization value equity
investments .30 .20
.10
Small Capitalization growth investments .30 .20
.10
International equity investments .30
.20
.10
International fixed income investments .25 .20
.05
Under the proposed fee offset, a Reduction Factor of .10% is
applied
against the quarterly outside fee with respect to the value of
Plan
assets that have been invested in Portfolios (3), (4) and (5)
only. As
noted above Portfolios (1) and (2) do not involve a Reduction
Factor
because the fee retained by the Consulting Group for these
Portfolios
does not exceed 20 basis points. Therefore, the quarterly offset
for
the plan investor is computed as follows: (.25)
[($250) .10%+($250) .10%+($250) .10%] = $0.1875.
In the foregoing example, the Plan investor, like all other
investors
in the TRAK Program, would receive a statement for its TRAK
account on
or about April 15, 1992. This statement would show the outside fee
to
be charged for the calendar quarter April 1, through June 30
(i.e.,
$3.75-$0.1875 = $3.5625). The Plan investor would be asked to pay
the
outside fee for that quarter by May 3, 1992 (i.e., the third day
of
the second month of the calendar quarter). If the outside fee were
not
paid by that date, Shearson Lehman would debit the account of the
Plan
investor (as with other investors) for the amount of the outside
fee
(pursuant to the authorization contained in the TRAK Investment
Advisory Agreement, and as described in the Statement of
Additional
Information appended to the Prospectus).(15)
Because the Consulting Group will retain no inside fee with
respect to
assets invested in the Government Money Investment Portfolio,
Shearson
Lehman notes that a potential conflict may exist by reason of the
variance in net inside fees among the Government Money Investments
Portfolio and the other Portfolios. Shearson Lehman also
recognizes
that this factor could result in the Consulting Group's
recommendation
of a higher-fee generating Portfolio- Type to an investing Plan.
To
address this potential conflict, Shearson Lehman will disclose to
all
participants in the TRAK Program that the Consulting Group will
retain
no inside fee for assets invested in the Government Money
Investments
Portfolio.
19. In summary, it is represented that the proposed transactions
will
meet the statutory criteria for an exemption under section 408(a)
of
the Act because: (a) The investment of a Plan's assets in the TRAK
Program will be made and approved by a Plan fiduciary which is
independent of Shearson Lehman and its affiliates such that
Independent Plan Fiduciaries will maintain complete discretion
with
respect to participating in the TRAK Program; (b) Independent Plan
Fiduciaries will have an opportunity to redeem their shares in the
Trust in such fiduciaries' individual discretion; (c) no Plan will
pay
a fee or commission by reason of the acquisition or redemption of
shares in the Trust; (d) prior to making an investment in TRAK,
each
Independent Plan Fiduciary will receive offering materials and
disclosures from either Shearson Lehman or the Consulting Group
which
disclose all material facts concerning the purpose, structure,
operation and investment in the TRAK Program; (e) the Consulting
Group
will provide written documentation to an Independent Plan
Fiduciary of
its recommendations or evaluations, including the reasons and
objective criteria forming the basis for such recommendations or
evaluations; (f) any sub-Adviser that is appointed by the
Consulting
Group to exercise investment discretion over a Portfolio will
always
be independent of Shearson Lehman and its affiliates; (g) the
annual
investment advisory fee that is paid by a Plan to the Consulting
Group
for investment advisory services rendered to such Plan will be
offset
by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio on
investment
assets attributable to the Plan investor; (h) the Consulting Group
or
Shearson Lehman will make periodic written disclosures to
participating Plans with respect to the financial condition of the
TRAK Program, the total fees that it and its affiliates will
receive
from such Plan investors and the value of the Plan's interest in
the
TRAK Program; and (i) on a quarterly and annual basis, the
Consulting
Group will provide written disclosures to all Plans with respect
to
(1) the percentage of each Trust Portfolio's brokerage commissions
that are paid to Shearson Lehman and its affiliates and (2) the
average brokerage commission per share paid by each Portfolio to
Shearson Lehman as compared to the average brokerage commission
per
share paid by each Portfolio to brokers other than Shearson Lehman
and
its affiliates, both expressed as cents per share.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the
Department,
telephone (202) 523-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under
section 408(a) of the Act and/or section 4975(c)(20) 4975(c)(20)
of
the Code does not relieve a fiduciary or other party in interest
of
disqualified person from certain other provisions of the Act
and/or
the Code, including any prohibited transaction provisions to which
the
exemption does not apply and the general fiduciary responsibility
provisions of section 404 of the Act, which among other things
require
a fiduciary to discharge his duties respecting the plan solely in
the
interest of the participants and beneficiaries of the plan and in
a
prudent fashion in accordance with section 404(a)(1)(b) of the
act,
nor does it affect the requirement of section 401(a) 401(a) of
the
Code that the plan must operate for the exclusive benefit of the
employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act
and/ or section 4975(c)(2) 4975(c)(2) of the Code, the Department
must find that the exemption is administratively feasible, in the
interests of the plan and of its participants and beneficiaries
and
protective of the rights of participants and beneficiaries of the
plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and
not in derogation of, any other provisions of the Act and/or the
Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of
whether
the transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations
contained in each application are true and complete, and that each
application accurately describes all material terms of the
transaction
which is the subject of the exemption.
Signed at Washington, DC, this 31st day of March 1992.
Ivan Strasfeld, Director of Exemption Determinations, Pension and
Welfare Benefits Administration, U.S. Department of Labor.
[FR Doc. 92-7712 Filed 4-2-92; 8:45 am] BILLING CODE 4510 4510-
29-M
Footnotes
1 Because a Portfolio is not precluded from investing in
securities
that are issued by Shearson Lehman or its affiliates, Shearson
Lehman
represents that, as a limitation, the percentage of that
Portfolio's
net assets invested in these securities will never exceed one
percent.
2 According to the Statement of Additional Information which
accompanies the Prospectus for the TRAK Program, shares in the
Trust
are not certificated for reasons of economy and convenience.
Boston
Safe Deposit and Trust Company, the Trust's custodian, however,
maintains a record of each investor's ownership of shares.
Although
Trust shares are transferable and accord voting rights to their
owners, they do not confer pre-emptive rights (i.e., the privilege
of
a shareholder to maintain a proportionate share of ownership of a
company by purchasing a proportionate share of any new stock
issues).
Shearson Lehman represents that in the context of an open-end
investment company, that continuously issues and redeems shares, a
pre- emptive right would make the normal operations of the Trust
impossible. Therefore, such right is precluded in the charter
documents of the Trust's Master Trust Agreement as well as those
of
other open-end investment companies.
3 The Department notes that the general standards of fiduciary
conduct
promulgated under the Act would apply to the participation in the
TRAK
Program by an Independent Plan Fiduciary. Section 404 of the Act
requires that a fiduciary discharge his duties respecting a plan
solely in the interest of the plan's participants and
beneficiaries
and in a prudent fashion. Accordingly, an Independent Plan
Fiduciary
must act prudently with respect to the decision to enter into the
TRAK
Program with the Consulting Group as well as with respect to the
negotiation of services that will be performed thereunder and the
compensation that will be paid to Shearson Lehman and its
affiliates.
The Department expects that an Independent Plan Fiduciary, prior
to
entering in the TRAK Program, to understand fully all aspects of
such
arrangement following disclosure by Shearson Lehman of all
relevant
information.
4 The applicant represents that employee benefit plans for are
maintained by Shearson Lehman may purchase or redeem shares in the
Trust under the provisions of Prohibited Transaction Exemption
(PTE)
77-3 (42 FR 18734, April 8, 1977). The applicant further
represents
that, although the exemptive relief proposed above would not
permit
Shearson Lehman or an affiliate, while serving as a Plan fiduciary
with discretionary authority over the management of a Plan's
assets,
to invest a Plan's assets in the Trust shares, a purchase or
redemption of Trust shares under such circumstances will comply
with
the terms and conditions of class PTE 77-4 (42 FR 18732, April
8, 1977). The Department expresses no opinion herein as to whether
such transactions will comply with the terms and conditions of
PTEs
77-3 and 77-4.
5 Each Portfolio's net asset value per share is calculated by
Boston
Advisors on each weekday, except on days on which the New York
Stock
Exchange (the NYSE) is closed. In general, the net asset value for
securities is determined as of the close of trading on the NYSE or
a
foreign exchange by dividing the value of a Portfolio net assets
by
the total number of its shares outstanding. Typically, a
Portfolio's
investments are valued at market value. However, in the absence of
a
market value, Portfolio investments are valued at fair market
value as
determined by, or under the direction of, the Trustees.
6 Subject to the supervision and direction of the Trustees,
the
Consulting Group was required to perform initial "due diligence"
on
prospective Sub-Advisers for each Portfolio and thereafter to
monitor
each Sub-Adviser's performance through qualitative and
quantitative
analysis as well as through periodic, in person, telephonic and
written consultations. The Consulting Group is also required to
communicate its performance expectations and evaluations to the
Sub-Advisers and ultimately recommend whether a Sub-Adviser's
contract
should be renewed, modified or terminated. In this regard, the
Consulting Group is further obligated to provide written reports
to
the Trustees of its evaluation and monitoring functions.
7 If the Independent Plan Fiduciary of a Section 404(c) Plan
is the
recipient of the Consulting Group's investment advice, the
applicant
explains that the Consulting Group will work with the Independent
Plan
Fiduciary by identifying and drafting investment objectives,
selecting
investment categories or actual Portfolios to be offered to Plan
participants. In addition to these services (and as described
above),
the applicant explains that the Consulting Group will provide an
Independent Plan Fiduciary with a detailed investment performance
monitoring report on a quarterly basis. Furthermore, a Financial
Consultant affiliated with Shearson Lehman will meet periodically
with
the Independent Plan Fiduciary to discuss the investment
performance
monitoring report.
8 Although there are presently twelve Portfolios comprising
the Trust,
there are only eleven Sub-Advisers. One Sub-Adviser, Standish,
Ayer
and Wood, Inc., advises both the Government Money Investments
Portfolio and the Intermediate Fixed Income Investments Portfolio.
9 In the case of a Section 404(c) Plan, the applicant
represents that
the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, will make available the Trust's
Prospectus to Section 404(c) Plan participants. In addition,
Shearson
Lehman will make available to such Independent Plan Fiduciaries
sufficient quantities of Prospectuses for this purpose, as well as
provide Statements of Additional Information to any party upon
request.
10 The Department is expressing no opinion as to whether the
information provided under the TRAK Program is sufficient to
enable a
participant to exercise independent control over assets in his or
her
account as contemplated by section 404(c) of the Act.
11 According to the applicant, Shearson Lehman provides
clearance,
settlement and other back office services to other broker-dealers.
The
applicant notes that Shearson Lehman may also provide
confirmations
and account statements to clients of brokers who have "introduced"
clients to Shearson Lehman such as The Robinson Humphrey Company,
Inc.
a wholly-owned broker-dealer subsidiary of Shearson Lehman.
12 Shearson Lehman explains that, under one alternative, Plan
participants who give instructions to redeem shares of a Portfolio
must give corresponding instructions to reinvest proceeds in
another
investment vehicle made available under the Plan, thus ensuring
that a
participant's investment assets are continually invested. Under a
second alternative which is described above, Shearson Lehman
represents that participants will not be required to give
corresponding instructions and all investment assets for which no
investment instructions have been given will be swept into a money
market fund that is not affiliated with Shearson Lehman. In this
regard, the Department is expressing no opinion regarding whether
any
of the arrangements described above comply with the requirements
of
section 404(c) of the Act.
13 The applicant represents that the outside fee is not imposed
on
accounts of employees of American Express and its subsidiaries,
including Shearson Lehman, accounts of their immediate families
and
IRAs and certain employee pension benefit plans for these persons.
The
applicant states that this fee is waived to encourage employees to
invest in Shearson Lehman. With respect to IRAs or Plans
maintained by
Shearson Lehman and its affiliates, the applicant asserts that
such
waiver would be required by PTE 77-3.
14 Shearson Lehman asserts that it chose 20 basis points as the
maximum
net fee retained for management services rendered to the
Portfolios
because this amount represents the lowest percentage management
fee
charged by Shearson Lehman among the Portfolios (excluding the
Government Money Investments Portfolio for which Shearson Lehman
charges no management fee).
15 The applicant explains that the foregoing example
illustrates the
fact that the outside fee and the fee offset are computed
contemporaneously and that Plan investors will get the benefit of
the
fee offset contemporaneously upon the payment of the outside fee.
Because the inside fee is paid monthly and the fee offset is
computed
quarterly, the applicant also explains that Shearson Lehman does
not
receive the benefit of a "float" as a result of such calculations
because the fee offset will always be realized no later than the
time
that the outside fee is paid (i.e., on or about the third day of
the
second month of the calendar quarter). Since the inside fee is
paid at
the end of each calendar month, the applicant further explains
that
Plan investors will realize the full benefit of the offset before
the
time that the inside fee is paid for the second and third months
of
the calendar quarter.
DOL Prohibited Transaction Exemption 92-77
Final Exemption 92-77
10/05/1992
[57 FR 45833, October 5, 1992]
Shearson Lehman Brothers, Inc. (Shearson Lehman), Located in New
York,
NY
[Prohibited Transaction Exemption 92-77; Exemption Application No.
D-8723]
Exemption
Section I. Covered Transactions
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by
reason of section 4975(c)(1) (A) through (D) shall not apply to
the
proposed purchase or redemption of shares by an employee benefit
plan,
an individual retirement account (the IRA) or a retirement plan
for a
self-employed individual (the Keogh Plan; collectively, the Plans)
in
the Shearson Lehman-established Trust for TRAK Investments (the
Trust)
in connection with such Plans' participation in the TRAK
Personalized
Investment Advisory Service (the TRAK Program). In addition, the
restrictions of section 406 (b)(1) and (b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the
Code by reason of section 4975(c)(1)(E) shall not apply to the
provision, by the Consulting Group Division of Shearson Lehman
(the
Consulting Group), of investment advisory services to an
independent
fiduciary of a participating Plan (the Independent Plan Fiduciary)
which may result in such fiduciary's selection of a portfolio
grouping
(the Portfolio-Type) in the TRAK Program for the investment of
Plan
assets.
This exemption is subject to the following conditions that are set
forth below in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be
approved by
an Independent Plan Fiduciary. For purposes of this requirement,
an
employee, officer or director of Shearson Lehman and/or its
affiliates
covered by an IRA not subject to title I of the Act will be
considered
an Independent Plan Fiduciary with respect to such IRA.
(2) The total fees paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the
acquisition
or redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall
remain at least as favorable to an investing Plan as those
obtainable
in an arm's length transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations
based
upon objective criteria.
(6) Any recommendation or evaluation made by the Consulting Group
to
an Independent Plan Fiduciary will be implemented only at the
express
direction of such independent fiduciary.
(7) The Consulting Group will generally give investment advice to
an
Independent Plant Fiduciary with respect to Portfolio-Types.
However,
in the case of a Plan providing for participant-directed
investments
(the Section 404(c) Plan), the Consulting Group will provide
investment advice that is limited to the Portfolios made available
under the Plan.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise investment discretion over a Portfolio will be
independent of
Shearson Lehman and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any
securities that are issued by Shearson Lehman and/or its
affiliates,
the percentage of that Portfolio's net assets invested in such
securities will not exceed one percent.
(10) The quarterly investment advisory fee that is paid by a Plan
to
the Consulting Group for investment advisory services rendered to
such
Plan will be offset by such amount as is necessary to assure that
the
Consulting Group retains no more than 20 basis points from any
Portfolio which contains investments attributable to the Plan
investor.
(11) The Consulting Group will not retain an investment advisory
or
management fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior
to
purchasing Trust shares,
(a) Each Plan will receive the following written or oral
disclosures
from the Consulting Group:
(1) A copy of the prospectus (The Prospectus) for the Trust
discussing
the investment objectives of the Portfolios comprising the Trust,
the
policies employed to achieve these objectives, the corporate
affiliation existing between the Consulting Group, Shearson Lehman
and
its subsidiaries and the compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement
of
Additional Information supplementing the Prospectus which
describes
the types of securities and other instruments in which the
Portfolios
may invest, the investment policies and strategies that the
Portfolios
may utilize and certain risks attendant to those investments,
policies
and strategies.
(3) A copy of the investment advisory agreement between the
Consulting
Group and such Plan relating to participation in the TRAK Program.
(4) Upon written request of Shearson Lehman, copy of the
respective
investment advisory agreement between the Consulting Group and the
Sub- Advisers.
(5) In the case of a Section 404(c) Plan, if required by the
arrangement negotiated between the Consulting Group and the Plan,
an
explanation by a Shearson Lehman Financial Consultant (the
Financial
Consultant) to eligible participants in such Plan, of the services
offered under the TRAK Program and the operation and objectives of
the
Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, will be required to
acknowledge, in writing, prior to purchasing Trust shares that
such
fiduciary has received copies of such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement
of
the receipt of such documents will be provided by the Independent
Plan
Fiduciary (i.e., the Plan administrator, trustee or named
fiduciary,
as the recordholder of Trust shares). Such Independent Plan
Fiduciary
will be required to represent in writing to Shearson Lehman that
such
fiduciary is (1) independent of Shearson Lehman and its affiliates
and
(2) knowledgeable with respect to the Plan in administrative
matters
and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under Title I of the
Act,
where investment decisions are made by a trustee, investment
manager
or named fiduciary, and Independent Plan Fiduciary will be
required to
acknowledge, in writing, receipt of such documents and represent
to
Shearson Lehman that such fiduciary is (1) independent of Shearson
Lehman and its affiliates, (2) capable of making an independent
decision regarding the investment of Plan assets and (3)
knowledgeable
with respect to the Plan in administrative matters and funding
matters
related thereto, and able to make an informed decision concerning
participation in the TRAK Program.
(13) Each Plan will receive the following written or oral
disclosures
with respect to its ongoing participation in the TRAK Program:
(a) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees
paid
by each Portfolio.
(b) A written quarterly monitoring report containing an analysis
and
an evaluation of a Plan investor's account to ascertain whether
the
Plan's investment objectives have been met and recommending, if
required, changes in Portfolio allocations.
(c) If required by the arrangement negotiated between the
Consulting
Group and a Section 404(c) Plan, a quarterly, detailed investment
performance monitoring report, in writing, provided to an
Independent
Plan Fiduciary of such Plan showing Plan level asset allocations,
Plan
cash flow analysis and annualized risk adjusted rates of return
for
Plan investments. In addition, if required by such arrangement,
Financial Consultants will meet periodically with Independent Plan
Fiduciaries of Section 404(c) Plans to discuss the performance
monitoring report as well as with eligible participants to review
their accounts' performance.
(d) If required by the arrangement negotiated between the
Consulting
Group and a Section 404(c) Plan, a quarterly participant
performance
monitoring report provided to a Plan participant which accompanies
the
participant's benefit statement and describes the investment
performance of the Portfolios, the investment performance of the
participant's individual investment in the TRAK Program, and gives
market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or
to
amend his or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all
Plans
of the (1) percentage of each Portfolio's brokerage commissions
that
are paid to Shearson Lehman and its affiliates and (2) the average
brokerage commission per share paid by each Portfolio to Shearson
Lehman and its affiliates, as compared to the average brokerage
commission per share paid by the Trust to brokers other than
Shearson
Lehman and its affiliates, both expressed as cents per share.
(14) Shearson Lehman shall maintain, for a period of six years,
the
records necessary to enable the persons described in paragraph
(16) of
this section to determine whether the conditions of this exemption
have been met, except that (a) a prohibited transaction will not
be
considered to have occurred if, due to circumstances beyond the
control of Shearson Lehman and/or its affiliates, the records are
lost
or destroyed prior to the end of the six year period, and (b) no
party
in interest other than Shearson Lehman shall be subject to the
civil
penalty that may be assessed under section 502(i) of the Act, or
to
the taxes imposed by section 4975 (a) and (b) of the Code, if the
records are not maintained, or are not available for examination
as
required by paragraph (15) below.
(15)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (14)
of
this section shall be unconditionally available at their customary
location during normal business hours by:
(1) Any duly authorized employee or representative of the
Department
or the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any
duly
authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or
any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4)
of
this paragraph (15) shall be authorized to examine the trade
secrets
of Shearson Lehman or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(1) An "affiliate" of Shearson Lehman includes--
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common
control
with Shearson Lehman. (For purposes of this subsection, the term
"control" means the power to exercise a controlling influence over
the
management or policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an
officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Shearson Lehman and its affiliates and is either
(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests
in
Trust shares, or
(d) A trustee, investment manager or named fiduciary responsible
for
investment decisions in the case of a title I Plan that does not
permit individual direction as contemplated by Section 404(c) of
the
Act.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption,
refer to
the notice of proposed exemption (the Notice) published on April
3,
1992 at 57 FR 11514.
EFFECTIVE DATE: This exemption is effective as of April 3, 1992.
Written Comments
The Department received one comment letter with respect to the
Notice
and no requests for a public hearing. The letter, which was
submitted
by Shearson Lehman, addresses certain clarifications to the
Notice,
including clarifications to the General Conditions and the Summary
of
Facts and Representations. Discussed below are the changes
suggested
by Shearson Lehman and the Department's responses thereto. In
addition, the Department has made several clarifying changes to
the
final exemption which are also discussed below.
With respect to the General Conditions that are set forth in
Section
II of the Notice, Shearson Lehman wishes to make several
clarifications. In this regard, Shearson Lehman notes that, in
general, in the case of IRAs that are maintained by employees of
Shearson Lehman or its affiliates, such employees should be
considered
"Independent Plan Fiduciaries." In addition, Shearson Lehman
requests
that Condition (1) should read as follows in order that it will
conform to the other General Conditions:
The participation of plans in the TRAK Program will be approved by
an
Independent Plan Fiduciary.
To clarify that Sub-Advisers act for the Trust after having been
approved by the Trust in accordance with the terms of section 15
(a)
and (c) of the Investment Company Act of 1940, as amended (the
1940
Act), or any exemption granted by the Securities and Exchange
Commission, Shearson Lehman recommends that Condition (8) of the
General Conditions be modified to read as follows:
Any sub-adviser (the Sub-Adviser) that acts for the Trust to
exercise
investment discretion over a Portfolio will be independent of
Shearson
Lehman and its affiliates.
In the case of a Plan covering one or more employees of the Plan
sponsor (such as a Section 404(c) Plan), Shearson Lehman notes
that
Condition (10) requires only that the investment advisory fee paid
by
the Plan be offset in the manner described in the condition (i.e.,
the
offset will be determined based on the aggregate investment of the
Plan accounts). Shearson Lehman represents that it does not have
control over how the Plan, for internal expenses, allocates the
offset
among individual accounts. As long as the fee is offset at the
Plan
level, Shearson Lehman represents that it cannot be construed to
have
any economic incentive to provide investment allocation advice
favoring one Portfolio over another.
Shearson Lehman observes that several of the General Conditions
refer
to "Shearson Lehman and its affiliates" but the Notice does not
define
the term "affiliate." After giving due consideration to this
comment,
the Department has determined to add a new Section III to the
exemption titled "Definitions" in which the terms "affiliate," and
"Independent Plan Fiduciary" are defined as follows:
An "affiliate" of Shearson Lehman includes (a) any person directly
or
indirectly through one or more intermediaries, controlling,
controlled
by, or under common control with Shearson Lehman (For purposes of
this
subsection, the term "control" means the power to exercise a
controlling influence over the management or policies of a person
other than an individual.) (b) any officer, director or partner in
such person, and (c) any corporation or partnership of which such
person is an officer, director or a 5 percent partner or owner.
An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Shearson Lehman and its affiliates and is either
(a) a
Plan administrator, trustee or named fiduciary, as the
recordholder of
Trust shares of a Section 404(c) Plan, (b) a participant in a
Keogh
Plan, (c) an individual covered under a self-directed IRA which
invests in Trust shares, or (d) a trustee, investment manager or
named
fiduciary responsible for investment decisions in the case of a
Title
I Plan that does not permit individual direction as contemplated
by
section 404(c) of the Act.
With respect to modifications to the Summary of Facts and
Representations, Shearson Lehman represents that the first
paragraph
of Item 1 of the Notice which was based on the application for
exemption confuses the descriptions of Shearson Holdings, Shearson
Lehman and Shearson Lehman Brothers. Accordingly, Shearson Lehman
requests that the third, fourth and fifth sentences of that
paragraph
be amended to read as follows:
Shearson Holdings conducts its principal businesses through two
divisions of Shearson Lehman--Shearson Lehman Brothers and Lehman
Brothers. Shearson Lehman Brothers is responsible for individual
investor services and asset management while Lehman Brothers is
responsible for securities underwriting, financial advisory,
investment and merchant banking services and securities and
commodities trading as principal and agent. Shearson Lehman is a
member of all principal securities and commodities exchanges in
the
United States and the National Association of Securities Dealers,
Inc.
Shearson Lehman also wishes to update the second sentence of the
second paragraph under Item 2 of the Notice by noting that the
Balanced Investments Portfolio is expected to be offered in July
1992
at an initial per share value of $8.00.
In order that Footnote 1 of the Notice more closely tracks the
language of Condition (9), Shearson Lehman suggests the following
modification:
Because a Portfolio is not precluded from investing in securities
that
are issued by Shearson Lehman or its affiliates, Shearson Lehman
represents that, as a limitation, immediately following the
acquisition by a Portfolio of any securities that are issued by
Shearson Lehman and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will not exceed
one
percent.
Since Shearson Lehman cannot assure that Section 404(c) Plans
participating in the TRAK Program will pass through voting rights
to
participants on a pro rata basis, it recommends that the second
paragraph of Footnote 2 of the Notice be amended to read as
follows:
In the case of individual account plans such as Section 404(c)
Plans,
Shearson Lehman believes that most Plans will pass-through the
vote to
participants on a pro rata basis.
Shearson Lehman also represents that it may serve as prototype
sponsor
for Plans participating in the TRAK Program. Therefore, the third
sentence of the second paragraph under Item 3 of the Notice should
be
amended by adding the following language:
Accordingly, Shearson Lehman has requested prospective exemptive
relief from the Department with respect to the purchase and
redemption
of shares in the Trust by participating Plans which it does not
sponsor (other than only as prototype sponsor) or have
discretionary
investment authority over the Plan's assets which would be
invested in
Trust shares.
To clarify that Plans for which Shearson Lehman has a pre-existing
relationship will be able to participate in TRAK, Shearson Lehman
asks
that the second sentence of Footnote 4 be amended to read as
follows:
The applicant further represents that, although the exemptive
relief
proposed above would not permit Shearson Lehman or an affiliate,
while
serving as a Plan fiduciary with discretionary authority over the
management of a Plan's assets, to invest in Trust shares those
assets
over which it exercises discretionary authority, a purchase or
redemption of Trust shares under such circumstances would be
permissible if made in compliance with the terms and conditions of
Class Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732,
April
8, 1977).
Shearson Lehman represents that the Trust's Board of Directors
consists of seven members, four of whom are not affiliated with
Shearson Lehman and three of whom are affiliated with Shearson
Lehman,
all in accordance with the provisions of section 10(b) of the 1940
Act. Accordingly, Shearson Lehman recommends that Item 4 of the
Notice
be amended to read as follows:
Overall responsibility for the management and supervision of the
Trust
and the Portfolios rests with the Trust's Board of Trustees (the
Trustees) which currently is comprised of seven members. The
Trustees
approve all significant agreements involving the Trust and the
persons
and companies who provide services to the Trust and the
Portfolios.
Three of the Trustees and all of the Trust's executive officers
are
affiliated with Shearson Lehman and/or its affiliates. The four
remaining Trustees are not affiliated with Shearson Lehman.
Because the applicant now represents that not all services
described
in Footnote 7 of the Notice will be provided to every Section
404(c)
Plan, Shearson Lehman believes that an updated, clarifying
paragraph
should be added to the footnote which would read as follows:
The applicant notes that not all of the services described in the
preceding two paragraphs will be provided to every Section 404(c)
Plan. The services provided to each Plan will depend on the
arrangement negotiated between Shearson Lehman and the Independent
Plan Fiduciary.
Shearson Lehman represents that it cannot assure that the Plan
administrator, trustee or named fiduciary of a Section 404(c) Plan
will make available a copy of the Trust Prospectus to each
participant. Therefore, it requests that Footnote 9 of the Notice
be
amended to read as follows:
In the case of a Section 404(c) Plan, the applicant represents
that
the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, will receive a copy of the Trust
Prospectus. If requested by such Plan administrator, trustee or
named
fiduciary, Shearson Lehman will make available to such Independent
Plan Fiduciary sufficient quantities of Prospectuses for a
distribution to Plan participants, as well as provide Statements
of
Additional Information to any party upon request.
Item 15 of the Notice inadvertently states that investors in the
TRAK
Program may exchange Portfolio shares with one another. Shearson
Lehman wishes to clarify that the first sentence of Item 15 should
be
amended to read as follows:
Shares of a Portfolio may be exchanged by an investor, without any
exchange fee, for shares of another Portfolio at their respective
net
asset values.
Shearson Lehman states that PTE 77-3 applies only to employee
benefit plans and is, therefore, inapplicable to IRAs maintained
by
employees of Shearson Lehman or its affiliates. In addition,
Shearson
Lehman states that it does not currently charge an outside fee for
such IRA accounts but it may do so in the future. Accordingly,
Shearson Lehman recommends that the first and last sentences of
Footnote 13 of the Notice be amended to read as follows:
The applicant represents that the outside fee is not currently
imposed
on accounts of American Express and its subsidiaries, including
Shearson Lehman, accounts of their immediate families and IRAs and
certain employee pension benefit plans for these persons * * *
With
respect to employee pension benefit plans maintained by Shearson
Lehman or its affiliates for their employees, the applicant
asserts
that such waiver would be required by PTE 77-3.
With respect to the TRAK fee structure described in the Notice in
Item
18 and the accompanying example, Shearson Lehman wishes to make
two
clarifications. First, because the TRAK fee and corresponding fee
offset for a calendar quarter are based on the "net asset value"
of
Trust Portfolio shares at the end of the immediately preceding
calendar quarter rather than the "average daily value" of Trust
Portfolio shares, Shearson Lehman requests that the first sentence
of
the example be amended to read as follows:
Assume that as of March 31, 1992, the net asset value of Trust
Portfolio shares held by a Plan investor was $1,000.
Second, Shearson Lehman has updated its submission by representing
that the last parenthetical of the last paragraph of the example
should not refer to the "Statement of Additional Information" but
should instead refer to the "TRAK Program Description." Therefore,
Shearson Lehman recommends that the parenthetical read as follows:
(pursuant to the authorization contained in the TRAK Investment
Advisory Agreement, and as described in the TRAK Program
Description
appended to the Prospectus).
Finally, Shearson Lehman suggests that Clause (e) under Item 19
should
be modified to track the language of Condition (5) as follows:
the Consulting Group will provide written documentation to an
Independent Plan Fiduciary of its recommendations or evaluations
based
on objective criteria.
The Department has reviewed the clarifications and amendments as
described above, and concurs with these changes. Accordingly, upon
consideration of the entire record, including the written comment
received, the Department has determined to grant the exemption
subject
to the aforementioned changes.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the
Department,
telephone (202) 523-8881. (This is not a toll-free number.)
