<PAGE>
Consulting Group
Capital Markets Funds
Global Sciences and Technology
Investments
Prospectus [LOGO CONSULTING GROUP]
November 10, 2000
INVESTMENT PRODUCTS: NOT FDIC INSURED, NO BANK GUARANTEE, MAY LOSE VALUE
TRAK
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.
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Table of Contents
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Page
<S> <C>
Investments, Risks and Performance 2
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Investment objective 2
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Principal investment strategies 2
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Fee table 4
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More on the Portfolio's Investments 5
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The Manager 7
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Asset Allocation Programs 9
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Investment and Account Information 10
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Account Transactions 10
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Valuation of shares 11
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Dividends and distributions 11
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Taxes 11
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Appendix A A-1
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Appendix B B-1
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</TABLE>
An investment in the Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
1
Global Sciences and Technology Investments
<PAGE>
Investments, Risks and Performance
Investment objective
Global Sciences and Technology Investments (the "Portfolio") seeks capital ap-
preciation by investing primarily in equity securities of both domestic and
foreign companies.
Principal investment strategies
The Portfolio invests primarily in the securities of companies principally en-
gaged in the technology, telecommunications and healthcare sectors. The broad
industry categories in which these companies may be found include, but are not
limited to, computer software and hardware; network and capital broadcasting;
internet and internet-related businesses; the ownership, operation, develop-
ment, production, sale, and distribution of goods or services used in the
broadcast and media industries; communications services or equipment; the de-
sign, manufacture, or sale of electric components; defense and data storage and
retrieval; pharmaceuticals; medical diagnostic, biochemical or other healthcare
research and development; healthcare facilities, healthcare products and serv-
ices and biotechnology. The relative size of the Portfolio's investments within
these industries will vary from time to time, and at times, some of these in-
dustries may not be represented in the Portfolio's holdings.
The Portfolio may invest without limitation in securities of foreign issuers
and will invest in securities of issuers located in at least three different
countries, including the U.S. The Portfolio may also invest up to 20% of its
assets in companies located in emerging markets and may invest in securities
denominated in one or more currencies. It may invest in companies of any size
or market capitalization.
The Portfolio may invest a portion of its assets in debt securities and may in-
vest up to 20% of its assets in debt securities rated below investment grade
(commonly known as "junk bonds").
How the subadvisers select the Portfolio's investments
The manager has selected two subadvisers to manage the Portfolio. The
subadvisers seek to invest in companies focused on the future, with favorable
long-term growth potential from new or innovative products or services. The
subadvisers analyze specific companies within the technology, telecommunication
and healthcare sectors. To determine whether a company is principally doing
business in a sector, it must meet at least one of the following tests:
. At least 50% of its gross income or its net sales must come from activities
in the sector;
. At least 50% of its assets must be devoted to producing revenues from the
sector; or
. Based on other available information, a subadviser determines that the
company's primary business is within the sector.
In analyzing specific companies, the subadvisers look for several of the fol-
lowing characteristics:
. Above average per share earnings growth
. High return on invested capital
. Sound financial and accounting policies
. Overall financial strength
. Strong competitive advantage
. Effective research and product development
. Effective marketing
. Strong management
The Portfolio may, but is not required to, use various techniques such as buy-
ing and selling futures and options contracts to increase or decrease its expo-
sure to changing security prices or other factors that affect security values.
If the Portfolio's strategies do not work as intended, the Portfolio may not
achieve its objective.
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 or the Portfolio may not perform as
well as other investments
. Stock markets are volatile and can decline significantly in response to ad-
verse issuer, political, regulatory, market or economic developments. Differ-
ent parts of the market can react differently to these developments
. The Portfolio may invest a substantial portion of its assets in foreign secu-
rities. Foreign markets can be more volatile than the U.S. market because of
increased risks of adverse issuer, political, regulatory, market or economic
developments. Currency fluctuations may adversely impact the Portfolio's in-
vestments. These risks are more pronounced to the extent
2
Global Sciences and Technology Investments
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Investments, Risks and Performance, continued
the Portfolio invests in issuers located in emerging markets. Most emerging
markets are smaller, less liquid and more volatile than developed markets. In
addition, political or economic instability, lack of market liquidity and gov-
ernment actions such as currency controls or seizure of private businesses or
property may be more likely in emerging markets
. The technology sector is subject to greater volatility than the overall stock
market. Technology companies can be significantly affected by obsolescence of
existing technology, short product cycles, falling prices and profits and
competition from new market entrants. The technology sector may be subject to
greater governmental regulation than many other industry sectors, and changes
in governmental policies and the need for regulatory approvals may have a ma-
terial adverse effect on the sector
. The biotechnology sector can be significantly affected by patent considera-
tions, intense competition, rapid technological change and obsolescence and
governmental regulation. Biotechnology companies can have persistent losses
during a new product's transition from development to production and revenue
patterns may be erratic
. Telecommunications companies may be significantly affected by the federal de-
regulation of cable and broadcasting and are subject to competitive pressures
and strict government regulation of rates of return and services that may be
offered
. The Portfolio can invest in issuers with a broad range of market capitaliza-
tions. Small and medium market capitalization companies are those companies
with market capitalizations under $5 billion. The value of medium and smaller
capitalized companies may involve greater risks, such as limited product
lines, markets or managerial resources. To the extent the Portfolio invests
in medium and smaller capitalized companies, the Portfolio's investments may
be more volatile and less liquid than funds investing primarily in securities
of large capitalization companies
. To the extent the Portfolio invests in debt securities, it is subject to the
risks of investing in debt securities. These include the risk that an issuer
may default on its obligation to pay principal and/or interest; the
security's credit rating may be downgraded; an issuer of a security may pre-
pay principal earlier than scheduled, which could force the Portfolio to re-
invest in lower yielding securities (call or prepayment risk) and slower than
expected payments may extend a security's life, locking in below-market in-
terest rates, increasing the security's duration and reducing its value
. Investment in high yield securities, commonly known as "junk bonds" involves
a high degree of risk. These securities are considered speculative with re-
spect to the issuer's ability to pay interest and principal and are suscepti-
ble to default and decline in market value because of adverse economic and
business developments. The market values for these securities tend to be very
volatile and they are less liquid than investment grade debt securities
. The Portfolio is "non-diversified" which means that it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the Portfolio concentrates its assets in fewer issuers, the Portfolio will be
more susceptible to negative events affecting those issuers. In addition, be-
cause the Portfolio invests in narrow segments of the economy, its invest-
ments are not as diversified as most mutual funds and far less diversified
than the broad securities market. This means that the Portfolio tends to be
more volatile than other mutual funds and the value of its portfolio holdings
tend to increase or decrease more rapidly. As a result, the value of your in-
vestment in the Portfolio may rise or fall rapidly
3
Global Sciences and Technology Investments
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Investments, Risks and Performance, continued
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 in 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.
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Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee* 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fee 1.10%
Other expenses 0.20%
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Total annual Portfolio operating
expenses 1.30%
</TABLE>
* Fee payable under the TRAK(R) Personalized Investment Advisory Service for
asset allocation services. See "Asset Allocation Programs."
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:
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After 1 After 3
year years
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$282 $870
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4
Global Sciences and Technology Investments
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More on the Portfolio's Investments
The section entitled "Investments, Risks and Performance" describes the Portfo-
lio's investment objectives and its principal investment strategies and risks.
This section provides some additional information about the Portfolio's invest-
ments and certain investment management techniques the Portfolio may use. More
information about the Portfolio's investments and portfolio management tech-
niques, some of which entail risk, is included in the Statement of Additional
Information (SAI). To find out how to obtain an SAI, please turn to the back
cover of this prospectus.
Equity Investments. The Portfolio may invest in all types of equity securities.
Equity securities include exchange-traded and over-the-counter common and pre-
ferred stocks, warrants, rights, convertible securities, depositary receipts
and shares, trust certificates, limited partnership interests, shares of other
investment companies and real estate investment trusts and equity participa-
tions.
Fixed Income Investments. The Portfolio may invest a portion of its assets in
fixed income securities. Fixed income investments include bonds, notes (includ-
ing structured notes), convertible securities, eurodollar and yankee dollar in-
struments, preferred stocks and money market instruments. The Portfolio does
not invest in mortgage backed, asset backed or municipal securities. Fixed in-
come 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 interest
rates. The longer a security's duration, the more sensitive that security's
price will be to changes in interest rates.
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 possible imposition of
exchange controls or other restrictions on investments. If the 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 in more developed countries. Investing in
the emerging markets involves exposure to potentially unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities and therefore may be illiquid. In addition, emerging
markets may present the risk of nationalization of businesses, restrictions on
foreign ownership, and repatriation of assets and may have less protection of
personal property. The Consulting Group generally considers all of the western
European countries, Canada, 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 emerging 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.
5
Global Sciences and Technology Investments
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More on the Portfolio's Investments, continued
Credit Quality
The Portfolio's rating criteria
are applied at the time of pur-
chase. If a security is subse-
quently downgraded, the
subadviser may, but is not re-
quired to, sell the security. If
a security is rated differently
by two or more rating organiza-
tions, the subadviser 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
subadviser 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. The Portfolio may, but is not required to, use derivative
contracts for any of the following purposes:
. 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 the Portfolio.
. As a substitute for purchasing or selling securities.
. To shorten or lengthen the effective maturity or duration of the Portfolio's
fixed income investments.
. To enhance the Portfolio's potential gain in non-hedging situations.
. To increase the Portfolio's liquidity.
The Portfolio may use various types of derivative instruments, including op-
tions on securities and securities indices, futures and options on futures,
forward currency contracts, currency futures contracts and options on curren-
cies and currency futures. A derivative contract will obligate or entitle the
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 the Portfo-
lio's interest rate, stock market and currency exposure. Therefore, using de-
rivatives can disproportionately increase Portfolio losses and reduce opportu-
nities for gains when interest rates, stock prices or currency rates are chang-
ing. 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 Portfolio's holdings. The other party to certain derivative contracts
presents the same types of credit risk as issuers of fixed income securities.
Derivatives can also make the Portfolio's assets less liquid and harder to val-
ue, especially in declining markets.
High Yield Securities. The Portfolio can invest in high yield securities. These
are commonly known as "junk bonds" and involve a substantial risk of loss.
These securities are considered speculative with respect to the issuer's abil-
ity 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. The Portfolio may expe-
rience increased price sensitivity to changing interest rates and greater risk
of loss because of default or declining credit quality. In addition, adverse
company specific events are more likely to render the issuer unable to make in-
terest and/or principal payments. A negative perception of the high yield mar-
ket may develop, depressing the price and liquidity of high yield securities.
This negative perception could last for a significant period of time.
Defensive investing. The Portfolio may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short
term debt securities. The Portfolio's investments in these assets are managed
by SSB Citi Fund Management LLC.
Impact of high portfolio turnover. The Portfolio may engage in active and fre-
quent trading to achieve its principal investment strategies. This may lead to
the realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from the Portfolio's performance.
Investment Policies. The Portfolio's non-fundamental investment policies gener-
ally may be changed by the Board of Trustees without shareholder approval.
6
Global Sciences and Technology Investments
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The Manager
The manager. The Consulting Group, a division of SSB Citi Fund Management LLC
("SSB Citi"), serves as the manager for the Portfolio. 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 Portfolio. 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 Portfolio is 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 Portfolio and the following additional portfolios which are of-
fered in separate prospectuses, copies of which can be obtained from any Salo-
mon Smith Barney Financial Consultant:
. Government Money Investments
. Intermediate Fixed Income Investments
. Long-Term Bond Investments
. Municipal Bond Investments
. Mortgage Backed Investments
. High Yield Investments
. Balanced Investments
. Large Capitalization Value Equity Investments
. Large Capitalization Growth Investments
. Small Capitalization Value Equity Investments
. Small Capitalization Growth Investments
. International Equity Investments
. International Fixed Income Investments
. Emerging Markets Equity Investments
. Multi-Strategy Market Neutral Investments
. Multi-Sector Fixed Income Investments
. S & P 500 Index Investments
The subadvisers. INVESCO Funds Group, Inc. ("INVESCO") and Elijah Asset
Management, LLC ("Elijah"), as subadvisers, are responsible for the day-to-day
investment operations of the Portfolio in accordance with the Portfolio's
investment objectives and policies. The Portfolio's assets are allocated among
each subadviser according to the following percentages: INVESCO 50% and Elijah
50%. Changes to this allocation of greater than 10% of the Portfolio's assets
will be made by the Board of Trustees. The names and addresses of the
subadvisers are included below:
CO-SUBADVISERS
INVESCO Funds Group, Inc.
7800 East Union Avenue
Suite 1100
Denver, CO 80237
PORTFOLIO MANAGERS
INVESCO utilizes a team manage-
ment approach
Elijah Asset Management, LLC
100 Pine Street
Suite 420
San Francisco, CA 94111
PORTFOLIO MANAGERS
Ronald Elijah
Andrew Roediger
Roderick Berry
Prior to founding Elijah in
1999, Mr. Elijah was a
portfolio manager at Robertson,
Stephens & Company. Messrs.
Roediger and Berry are also
founding members of Elijah and
previously served as portfolio
managers at Robertson, Stephens
& Company.
The subadviser selection process. Subject to the review and approval of the
Portfolio's Trustees, the Consulting
7
Global Sciences and Technology Investments
<PAGE>
The Manager, continued
Group is responsible for selecting, supervising and evaluating subadvisers who
manage the Portfolio's assets. The Consulting Group employs a rigorous
evaluation process to select those subadvisers that have distinguished
themselves through consistent and superior performance. The Consulting Group is
also responsible for communicating performance expectations and evaluations to
each subadviser and ultimately recommending to the Board of Trustees whether
the subadviser's contract should be renewed. The Consulting Group provides
written reports to the Trustees regarding the results of its evaluation and
monitoring functions.
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.
Generally, shareholders must approve any change in subadvisers. However, the
Portfolio relies upon an exemptive order from the Securities and Exchange Com-
mission which permits the manager to select new subadvisers or replace existing
subadvisers without first obtaining shareholder approval for the change. The
Trustees, including a majority of the "non-interested" Trustees, must approve
each new subadvisory contract. This allows the manager to act more quickly to
change subadvisers when it determines that a change is beneficial to sharehold-
ers by avoiding the delay of calling and holding shareholder meetings to ap-
prove each change. In accordance with the exemptive order, the Portfolio will
provide investors with information about each new subadviser and its
subadvisory contract within 90 days of the engagement of a new subadviser.
Management Fees. The Consulting Group receives fees from the Portfolio for its
services at an annual rate of 0.90% of its average daily net assets. In turn,
the Consulting Group pays the subadvisers a portion of these fees for their
services. In addition, the Portfolio pays SSB Citi a fee at an annual rate of
0.20% of the Portfolio's average daily net assets for administration services.
Possible Conflict of Interest. The advisory fee paid by each portfolio in the
Trust to the manager and the portion of that advisory fee paid by the manager
to each subadviser 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.
8
Global Sciences and Technology Investments
<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 advisers 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.
9
Global Sciences and Technology Investments
<PAGE>
Investment and Account Information
Account Transactions
Purchase of Shares. You may purchase shares of the Portfolio if you are a par-
ticipant in an advisory program 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 the Portfolio must be
made through a brokerage account maintained with Salomon Smith Barney or
through a broker that clears securities transactions through Salomon Smith Bar-
ney (an introducing broker). You may establish a brokerage account with Salomon
Smith Barney free of charge in order to purchase shares of the Portfolio.
. The minimum initial aggregate investment in the TRAK program is $10,000. The
minimum investment in the Portfolio is $100.
. There is no minimum on additional investments.
. The minimum initial aggregate investment in the TRAK program for employees of
Salomon Smith Barney and members of their immediate families, and retirement
accounts or plans for those persons, is $5,000.
. The Portfolio and the TRAK program may vary or waive the investment minimums
at any time.
. You may establish a Systematic Withdrawal/Investment Schedule. For more in-
formation, contact your Investment Professional or consult the SAI.
Shares of the Portfolio are sold at net asset value per share without imposi-
tion of a sales charge but will be subject to any applicable advisory program
fee. All orders to purchase accepted by Salomon Smith Barney or the introducing
broker before 4:00 p.m., Eastern time, will receive that day's share price. Or-
ders accepted after 4:00 p.m. will receive the next day's share price. All pur-
chase orders must be in good order to be accepted. This means you have provided
the following information:
. Name of the portfolio
. Account Number
. Dollar amount or number of shares to be purchased
. Signatures of each owner exactly as the account is registered
The Portfolio reserves the right to reject purchase orders or to stop offering
its shares without notice. No order will be accepted unless Salomon Smith Bar-
ney has received and accepted an advisory agreement signed by 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 the Portfolio at net asset value
on any day the New York Stock Exchange is open by contacting your broker. All
redemption requests accepted by Salomon Smith Barney or an introducing broker
before 4:00 p.m. Eastern time on any day will be executed at that day's share
price. Orders accepted after 4:00 p.m. will be executed at the next day's
price. All redemption orders must be in good form, which may require 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 Portfolio.
The Portfolio has the right to suspend redemptions of shares and to postpone
the transmission of redemption proceeds to a shareholder's account at Salomon
Smith Barney or at an introducing broker for up to seven days, as permitted by
law. Redemption proceeds held in an investor's brokerage account generally will
not earn any income and Salomon Smith Barney or the introducing broker may ben-
efit from the use of temporarily uninvested funds. A shareholder who pays for
shares of the Portfolio by personal check will be credited with the proceeds of
a redemption of those shares after the purchaser's check has cleared, which may
take up to 15 days.
Exchange of Shares. An investor that participates in an advisory program may
exchange shares in the Portfolio for shares in any other portfolio in the Trust
at net asset value without payment of an exchange fee. Be sure to consider the
investment objectives and policies of any portfolio into which you make an ex-
change. An exchange is a taxable transaction except for exchanges within a re-
tirement account.
The Consulting Group may limit additional exchanges and/or purchases by a
shareholder if it determines that the shareholder is pursuing a pattern of fre-
quent exchanges. Excessive exchange transactions can adversely affect the Port-
folio's performance, hurting the Portfolio's other shareholders. If the Con-
sulting Group discovers a pattern of frequent exchanges, it will provide notice
in writing or by telephone to the shareholder at least 15 days before sus-
pending his or her exchange privilege. During the 15-day period the shareholder
will be re-
10
Global Sciences and Technology Investments
<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
The Portfolio offers its shares at its net asset value per share. The Portfolio
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 as-
set value and transaction deadlines to the actual closing time.
The Portfolio generally values its fund securities based on market prices or
quotations. The Portfolio's currency conversions, if any, are done when the
London stock exchange closes. When reliable market prices or quotations are not
readily available, or when the Consulting Group believes they are unreliable or
that the value of a security has been materially affected by events occurring
after the securities or currency exchanges close, the Portfolio may price those
securities at fair value. Fair value is determined in accordance with proce-
dures approved by the Portfolio's Board of Trustees. A mutual fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities.
International markets may be open, and trading may take place, on days when
U.S. markets are closed. For this reason, the values of foreign securities
owned by the Portfolio could change on days when shares of the Portfolio cannot
be bought or redeemed.
Dividends and distributions
The Portfolio intends to distribute all or substantially all of its net invest-
ment income and realized capital gains, if any, for each taxable year.
The Portfolio declares and pays dividends, if any, from net investment income
annually. The Portfolio declares and distributes realized net capital gains, if
any, annually, typically in December. All dividends and capital gains are rein-
vested in shares of the Portfolio unless the shareholder elects to receive them
in cash.
The Portfolio expects distributions to be primarily from capital gains.
Taxes
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions Federal Tax Status
------------------------------------------------------------------------------
<S> <C>
Sales or exchange of shares Usually capital gain
or loss; long-term
only if shares owned
more than one year
------------------------------------------------------------------------------
Distributions of long term Long-term capital
capital gain gain
------------------------------------------------------------------------------
Distributions of short term Ordinary income
capital gain
------------------------------------------------------------------------------
Dividends from net Ordinary income
investment income
------------------------------------------------------------------------------
Any of the above received by Not a taxable event
a retirement account
------------------------------------------------------------------------------
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the Portfolio is about to declare a capital gain distribu-
tion or a taxable dividend, because it will be taxable to you even though it
may actually be a return of a portion of your investment.
After the end of each year, you will receive a Form 1099 indicating your divi-
dends and distributions for the prior year, which are taxable as described
above even if reinvested, and your redemptions during that year. If you do not
provide the Portfolio with your correct taxpayer identification number and any
required certifications, you may be subject to backup withholding of 31% of the
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 the Portfolio.
As noted above, investors, out of their own assets, will pay an advisory serv-
ice fee. For most investors who are individuals, this fee will be treated as a
"miscellaneous
11
Global Sciences and Technology Investments
<PAGE>
Investment and Account Information, continued
itemized deduction" for federal income tax purposes. Under current federal in-
come tax law, an individual's miscellaneous itemized deductions for any taxable
year will be allowed as a deduction only to the extent the aggregate of these
deductions exceeds 2% of adjusted gross income. Such deductions are also sub-
ject to the general limitation on itemized deductions for individuals having,
in 2000, adjusted gross income in excess of $128,950 ($64,475 for married indi-
viduals filing separately).
12
Global Sciences and Technology Investments
<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 investing 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 their 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
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
A-1
<PAGE>
APPENDIX A
Investment Indices--(Continued)
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.
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 values 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 values 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. The
average market capitalization for a company in this index is $526.4 million,
with the largest being $1.35 billion.
A-2
<PAGE>
APPENDIX A
Investment Indices--(Continued)
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, low price-to-book 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
because of their high price-to-earnings and price-to-book ratios, or low yield.
A-3
<PAGE>
(This page is intentionally left blank)
<PAGE>
APPENDIX B
The following are copies of the proposed and final exemption and a technical
amendment to the final exemption from the Department of Labor from certain
provisions of the Employee Retirement Income Security Act of 1974 relating to
the purchase of shares and participation in TRAK by certain retirement plans
and individual retirement accounts.
--------------------------------------------------------------------------------
PENSION AND WELFARE BENEFITS ADMINISTRATION
[Application Nos. D-10809 and D-10865]
Notice of Proposed Individual Exemption to Amend and Replace Prohibited
Transaction Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc., Located
in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of Labor.
ACTION: Notice of proposed individual exemption to modify and replace PTE 99-
15.
--------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed and replacement individual exemption
which, if granted, would amend PTE 99-15 (64 FR 1648, April 5, 1999), an
exemption granted to Salomon Smith Barney. PTE 99-15 relates to the operation
of the TRAK Personalized Investment Advisory Service product (the TRAK Program)
and 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 amendment will be effective as of
April 1, 2000.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before July 17, 2000.
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, NW, Washington, DC 20210, Attention: Application Nos. D-
10809 and D-10865. 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-5507, 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 amend and replace PTE 99-15. PTE
99-15, 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 99-15 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), a
retirement plan for a self-employed individual (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). PTE 99-15 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 Salomon Smith
Barney (the Consulting Group), of (1) investment advisory services or (2) an
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./1/
-------
/1/ PTE 99-15 also (a) described a series of corporate mergers which changed
the names of the parties identified in two prior TRAK exemptions which it
superseded [i.e., PTE 94-50 (59 FR 32024, June 21, 1994) and PTE 92-77 (55 FR
45833, October 5, 1992)] and which would permit broader distribution of TRAK-
related products; (b) implemented a recordkeeping reimbursement offset
procedure under the TRAK Program; (c) adopted an automated reallocation option
under the TRAK Program that would reduce the asset allocation (or "outside")
fee paid to Salomon Smith Barney by a Plan investor; and (d) expanded the scope
of the exemption to include Section 403(b) Plans. PTE 94-50 permitted Smith,
Barney Inc. (Smith Barney), Salomon Smith Barney's predecessor, 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. PTE 94-
50 also replaced references to Shearson Lehman Brothers, Inc. (Shearson Lehman)
with Smith Barney and amended and replaced PTE 92-77. Finally, PTE 92-77
permitted Shearson Lehman to make the TRAK Program available to Plans that
acquired shares in the former Trust for TRAK Investments and allowed the
Consulting Group to provide investment advisory services to an Independent Plan
Fiduciary which might result in such fiduciary's selection of a Portfolio in
the TRAK Program for the investment of Plan assets.
As of December 31, 1998, the TRAK Program held assets that were in excess of
$9.6 billion. Of those assets, approximately $1.9 billion were held in 407 Plan
accounts having cash or deferred compensation arrangements and approximately
$4.2 billion were held in more than 59,000 employee benefit plan and IRA/Keogh-
type Plan accounts. At present, the Trust consists of 17 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 requests a modification of PTE 99-15 and a replacement of
that exemption with a new exemption for purposes of uniformity./2/
Specifically, Salomon Smith Barney requests that the term "affiliate," as set
forth in PTE 99-15, in Section II(h) of the General Conditions and in Section
III(b) of the Definitions, be amended and clarified to avoid possible
misinterpretation. In this regard, Salomon Smith Barney also requests that the
term "officer" be defined and incorporated into the proposed exemption, in new
Section III(d), to limit the affiliate definition to persons who have a
significant management role. Further, Salomon Smith Barney requests that
Section II(i) of PTE 99-15 be amended to permit an independent sub-adviser (the
Sub-Adviser), under certain circumstances, to exceed the current one percent
limitation on the acquisition of securities that are issued by Salomon Smith
Barney and/or its affiliates, notably in the Sub-Adviser's replication of a
third-party index. If granted, the proposed exemption would be effective as of
April 1, 2000.
The proposed exemption has been requested in an application filed on behalf of
Salomon Smith Barney pursuant to section 408(a) of the Act and section
4975(c)(2) of the Code, and in accordance with the procedures set forth in 29
CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990). Effective December 31,
1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October
17, 1978) transferred the authority of the Secretary of the Treasury to issue
exemptions of the type requested to the Secretary of Labor. Accordingly, the
proposed exemption is being issued solely by the Department.
-------
/2/ The Department deems PTE 94-50 as having been effectively superseded by
PTE 99-15. Therefore, the proposed amendments described herein will not apply
to PTE 94-50.
B-1
<PAGE>
I. Proposed Modification of the Term "Affiliate"
Salomon Smith Barney represents that in early December 1999, Citigroup and
State Street Corporation announced an agreement to form a joint venture called
CitiStreet LLC, a Delaware limited liability company (the Joint Venture). The
Joint Venture, which was closed on April 1, 2000, is each 50 percent owned by
Keeper Holdings LLC (Citi), a wholly owned subsidiary of Citigroup, and by
State Street Bank and Trust Company (State Street), a wholly owned subsidiary
of State Street Corporation. Both Citigroup and State Street Corporation are
publicly-held corporations.
Salomon Smith Barney explains that the formation of the Joint Venture may have
resulted in the disqualification of State Street Global Advisers (SSgA), a
division of State Street, from acting as a Sub-Adviser in the TRAK Program due
to certain ambiguities in the meaning of the word "affiliate." Salomon Smith
Barney represents that SSgA is currently a Sub-Adviser with respect to
approximately $800 million in assets in the International Equity Investments
Portfolio and the Emerging Markets Equity Investments Portfolio.
A. Sections II(h) and III(b)
Section II(h) of PTE 99-15 provides that--
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.
Although the term "independent" is not defined in the exemption, Salomon Smith
Barney notes that this condition was added to the original Shearson Lehman
exemption request when Shearson Lehman agreed not to use affiliated Sub-
Advisers. Therefore, Salomon Smith Barney presumes that the term "independent"
means "not an affiliate." Salomon Smith Barney represents that Section III(b)
of PTE 99-15 defines the term "affiliate" of Salomon Smith Barney to include:
(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 subparagraph, 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.
Salomon Smith Barney notes that problems of interpretation have arisen because
subparagraphs (2) and (3) of the affiliate definition use the term "such
person" rather than referring directly to Salomon Smith Barney. Salomon Smith
Barney explains that when defining an "affiliate" of Salomon Smith Barney, the
definition may be construed to encompass only relationships with Salomon Smith
Barney that involve shared control, influence or economic interests or it could
be interpreted to cover affiliates of Salomon Smith Barney's affiliates, where
there is no basis for common management or identical economic interests,
because subparagraphs (2) and (3) have no clear antecedents.
Salomon Smith Barney asserts that State Street is not under common corporate
control with either it or any of its corporate affiliates. Instead, State
Street is a subsidiary of an independently-owned and managed public company.
Therefore, there is no control relationship, as contemplated in subparagraph
(1) of Section III(b), between Citigroup and State Street Corporation, the
respective parent companies of Salomon Smith Barney and of State Street.
Salomon Smith Barney also states that the Joint Venture is not necessarily its
affiliate under subparagraph (1) of the definition because Salomon Smith
Barney's indirect 50 percent ownership interest in the Joint Venture is not a
"controlling interest." Therefore, if the Joint Venture is not an affiliate,
Salomon Smith Barney believes that State Street is not a partner of Salomon
Smith Barney, nor an officer or director of Salomon Smith Barney, as
contemplated in subparagraph (2) of Section III(b). Further, Salomon Smith
Barney explains that State Street's exclusive ownership by State
Street Corporation does not trigger the ownership provisions of subparagraph
(3) of Section III(b).
In addition to the above, Salomon Smith Barney states that it will not
exercise control or influence in the operation of the Joint Venture that will
inure to State Street. In addition, Salomon Smith Barney represents that Citi
will not exercise control of the Joint Venture because it has only a 50 percent
interest. Further, since all significant corporate actions of the Joint Venture
will require unanimity, Salomon Smith Barney explains that neither Citi nor
State Street will be able to exercise exclusive control over the Joint Venture.
B. Proposed Amendment
Salomon Smith Barney submits that subparagraph (1) of Section III(b) does not
require any clarification. However, it proposes that subparagraphs (2) and (3)
of the affiliate definition be modified to cover only those persons and
entities that have a significant role in the decisions made by Salomon Smith
Barney or which are managed or influenced by Salomon Smith Barney. These
entities or persons include individual officers, directors and partners in
Salomon Smith Barney and its corporate affiliates, and corporations and
partnerships in which Salomon Smith Barney and its corporate affiliates have a
10 percent or greater interest. Salomon Smith Barney believes that this
tailoring of the affiliate definition will avoid future problems in determining
the independence of the Sub-Advisers, including SSgA.
Thus, on the basis of the foregoing, Section III(b) of PTE 99-15 is hereby
modified in this notice of proposed exemption to read as follows:
(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 subparagraph, 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 individual who is an officer, director or partner in Salomon Smith
Barney or a person who is described in subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney or an
affiliate described in subparagraph (b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney, is a 10 percent or more partner or owner.
In connection with the revised affiliate definition, Salomon Smith Barney
requests that the term "officer" be defined in new subparagraph (d) of Section
III to limit this portion of the affiliate definition to individuals who have a
significant management role. Salomon Smith Barney points out that there are job
titles at fairly modest levels of authority within it as well as in any
company, and it wishes to ensure that future factual inquiries into an
B-2
<PAGE>
individual's status as an affiliate do not require that it contact virtually
every official in its corporate population in a due diligence effort.
Therefore, Salomon Smith Barney proposes that Section III(d) should read as
follows:
The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policy-making function for the
entity.
Under the foregoing modifications, Salomon Smith Barney believes that Sections
II(h) and III(b) of the proposed exemption will no longer have conflicting
meanings.
II. Proposed Modification of the One Percent Limitation on Stock Issued by
Salomon Smith Barney and/or Its Affiliates
Salomon Smith Barney represents that there are a number of established market
indexes that have been created by parties which are unaffiliated with
Citigroup, its indirect parent. For example, the S&P 500 Index is a widely-used
benchmark index of domestic equity performance. This index consists of 500
stocks that have been selected by the Standard & Poor's Company (S&P) for
market capitalization, liquidity and industry group representation. The index
is market-value weighted so the performance of the larger of the included
companies has a greater impact on the performance of the index as a whole.
Currently, the common stock (the Common Stock) of Citigroup represents 1.57
percent of the S&P 500 Index.
In addition to the S&P 500 Index, Salomon Smith Barney explains that the
Russell 3000 Index is composed of the 3,000 largest United States companies,
based upon total market capitalization. Salomon Smith Barney also points out
that there are a number of Russell Indexes which are based on subsets of the
Russell 3000 Index. These Indexes include (a) the Russell 2000 Index, which
measures the performance of the smallest 2,000 United States companies in the
Russell 3000 Index and therefore, excludes Citigroup; and (b) the Russell 1000
Index, which measures the performance of the 1,000 largest United States
companies in the Russell 3000 Value Index and includes Citigroup. In addition,
Salomon Smith Barney represents that there are further subsets of the Russell
Indexes which are based upon Russell's characterization of stock as either
"Growth" or "Value." For example, Salomon Smith Barney explains that Citigroup
is included within these subsets. As of March 31, 2000, Citigroup Common Stock
represented 3.8981 percent of the Russell 1000 Value Index and 3.6343 percent
of the Russell 3000 Value Index.
A. Section II(i)
Based upon the foregoing descriptions of the stock indexes, Salomon Smith
Barney requests that Section II(i) of PTE 99-15 be modified in order to permit
an independent Sub-Adviser which manages the assets in a Portfolio to exceed
the one percent investment limitation on securities issued by Salomon Smith
Barney and/or its affiliates under certain circumstances. As currently drafted,
Section II(i) states that--
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.
In other words, the exception will apply to "any higher percentage" which may
result from a Sub-Adviser's management of an index fund (the Index Fund)
Portfolio which includes Citigroup Common Stock. The index will be an
established third party index and the Sub-Adviser will track the index results
using the "passive full replication" trading method./3/
Because the Sub-Adviser will purchase and sell Citigroup Common Stock to
approximate the performance of an index rather than reflect the Sub-Adviser's
evaluation of the Common Stock in its individual merits, Salomon Smith Barney
states that any additional investment by a Portfolio in Citigroup Common Stock
over the one percent threshold will result from the implementation of the
trading method and not from the Sub-Adviser's exercise of investment
discretion.
Due to the one percent limitation of Section II(i), Salomon Smith Barney
states that active Sub-Advisers for the Consulting Group may not own or trade
Citigroup Common Stock and they will continue to be prohibited from trading in
Citigroup Common Stock. However, Salomon Smith Barney proposes that passive or
pure Index Fund Sub-Advisers be permitted to hold Citigroup Common Stock in
their portfolios which exceed the one percent limitation to the extent such
higher percentage is
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/3/ According to Salomon Smith Barney, there are two forms of index trading--
passive full replication (wherein each stock in the same weightings as the in-
dex is owned by a mutual fund) and sampling (in which each sector, but not nec-
essarily all stocks in such sector, in the same weightings as the index is also
owned by a mutual fund). Salomon Smith Barney notes that sampling is used most
often when a portfolio is smaller and cannot efficiently replicate the entire
index.
necessary to replicate the underlying index./4/ Salomon Smith Barney points out
that pure index Sub-Advisers that are responsible for investing only a portion
of the assets in the Consulting Group Capital Markets Large Cap Value Fund and
the Large Cap Growth Consulting Group Capital Markets Fund, are currently in
compliance with the one percent limitation. These Portfolios, which consist of
both an actively-managed portion and a distinct, passively-managed portion,
held less than one percent of the their total assets in Citigroup Common Stock.
If an index-based Sub-Adviser were to manage a greater portion or all of
either of the aforementioned Portfolios, Salomon Smith Barney explains that the
total Portfolio may include Citigroup Common Stock which breaches the one
percent threshold. Similarly, Salomon Smith Barney notes that if the entire
Portfolio, such as the Consulting Group Capital Markets S&P 500 Index
Investment Fund Portfolio, has the investment objective of providing results
that correspond to the price and yield performance of the S&P 500 Index, the
Sub-Adviser would be expected to approximate the cited percentage of 1.57
percent for Citigroup Common Stock in the S&P 500 Index. This would also
violate the one percent investment limitation.
Salomon Smith Barney states that the present one percent limitation placed on
Citigroup Common Stock increases the likelihood that the performance of an
Index Fund Portfolio will not replicate the applicable index. Because Citigroup
is among the largest companies on the basis of capitalization in the S&P 500,
Salomon Smith Barney states that Citigroup's performance can have a significant
impact in index performance calculations. However, if Citigroup Common Stock is
not proportionately represented, Salomon Smith Barney explains that Index Fund
performance will deviate from the index whether Citigroup Common Stock does
well or underperforms.
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/4/ In its management of a "pure" Index Fund, the Sub-Adviser does not
evaluate individual companies to identify attractive investment candidates or
to eliminate underperforming investments. Instead, the Sub-Adviser attempts to
mirror the composition of the relevant index as closely as possible by
adjusting the Portfolio holdings daily to reflect the companies included in the
index and their relative weightings. Because performance of the Index Fund is
tied to the performance of the index that it tracks, investors are advised that
this investment strategy may mean losses if the applicable index performs
poorly relative to other indexes or individual stocks.
The performance of a pure Index Fund generally does not mirror the index
performance exactly. The index is merely a composite performance figure, based
upon an established selection of companies. It does not represent actual assets
being managed so there are no expenses deducted from its performance results.
In contrast, an Index Fund Portfolio represents actual assets under management
and has liquidity requirements associated with Fund operation. To meet
redemption requests and to pay expenses, the Index Fund must maintain a portion
of its assets in cash and cash equivalents.
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In any event, Salomon Smith Barney believes that the one percent limitation
has the effect of depriving a Plan of the opportunity to invest in a Fund
(available to non-Plan investors) that might otherwise track the applicable
index more exactly. Because many Plan sponsors are anxious to have an Index
Fund available through the TRAK Program, Salomon Smith Barney wishes to move
quickly to accommodate the Plan market's design preferences.
For these reasons, Salomon Smith Barney requests that the current one percent
restriction be lifted and allowed to be exceeded with respect to Portfolio
investments that are made by passive Sub-Advisers in Citigroup Common Stock in
their replication of third-party indexes. In addition, Salomon Smith Barney
seeks the flexibility to have the Portfolios consist, in whole or in part, of
Index Funds that are managed by passive Sub-Advisers. However, the ownership by
a Portfolio of Citigroup Common Stock which is in excess of the one percent
limitation would result solely from the activities of the passive Sub-Adviser
in replicating an index.
B. Exemptive Safeguards
Section II(i) of the proposed exemption has been further expanded to include a
number of substantive safeguards for the protection of Plans investing under
the TRAK Program. In this regard, Section II(i) requires that the amount held
by the Sub-Adviser in managing an Index Fund Portfolio be held in order to
replicate an established third party index. In addition, Section II(i) states
that the index must represent the investment performance of a specific segment
of the public market for equity securities in the United States and/or foreign
countries. In this regard, the organization creating the index must be (a)
engaged in the business of providing financial information; (b) a publisher of
financial news information; or (c) a public stock exchange or association of
securities dealers. The index must also be created and maintained by an
organization independent of Salomon Smith Barney and its affiliates and must be
a generally-accepted standardized index of securities which is not specifically
tailored for use by Salomon Smith Barney and its affiliates.
Moreover, Section II(i) requires that the acquisition or disposition of
Citigroup Common Stock must not include any agreement, arrangement or
understanding regarding the design or operation of the Portfolio acquiring the
Citigroup Common Stock, which is intended to benefit Salomon Smith Barney or
any party in which Salomon Smith Barney may have an interest.
Finally, Section II(i) requires that an Independent Plan Fiduciary authorize
the investment of a Plan's assets in an Index Fund Portfolio which purchases
and/or holds Citigroup Common Stock while the Sub-Adviser will be responsible
for voting any shares of Citigroup Common Stock that are held by an Index Fund
on any matter in which shareholders of Citigroup Common Stock are required or
permitted to vote.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first class mail to the
Independent Plan Fiduciary 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 extend to transactions prohibited
under section 406(b)(3) of the 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 facts and representations set forth in the notice of proposed
exemption relating to PTE 99-15 and this notice, accurately describe, where
relevant, the material terms of the transactions to be consummated pursuant to
this exemption.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or requests for
a hearing on the pending exemption to the address above, within the time frame
set forth above, after the publication of this proposed exemption in the
Federal Register. All comments will be made a part of the record. Comments
received will be available for public inspection with the referenced
applications at the address set forth above.
Proposed Exemption
Based on the facts and representations set forth in the application, the
Department is considering granting the requested exemption under the authority
of section 408(a) of the Act and section 4975(c)(2) of the Code and in
accordance with the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR
32836, August 10, 1990).
Section I. Covered Transactions
A. If the exemption is granted, the restrictions of section 406(a) of the Act
and the sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not apply, to
the purchase or redemption of shares by an employee benefit
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<PAGE>
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; collectively, the Plans)
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
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, such as
Citigroup Inc. common stock (the Citigroup Common Stock), the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent. However, this percentage limitation may be exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is held in order
to replicate an established third party index.
(2) The index represents the investment performance of a specific segment of
the public market for equity securities in the United States and/or foreign
countries. The organization creating the index must be--
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers. The index
is created and maintained by an organization independent of Salomon Smith
Barney and its affiliates and is a generally-accepted standardized index of
securities which is not specifically tailored for use by Salomon Smith Barney
and its affiliates.
(3) The acquisition or disposition of Citigroup Common Stock does not include
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any agreement, arrangement or understanding regarding the design or operation
of the Portfolio acquiring the Citigroup Common Stock, which is intended to
benefit Salomon Smith Barney or any party in which Salomon Smith Barney may
have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a Plan's
assets in an Index Fund which purchases and/or holds Citigroup Common Stock and
the Sub-Adviser is responsible for voting any shares of Citigroup Common Stock
that are held by an Index Fund on any matter in which shareholders of Citigroup
Common Stock are required or permitted to vote.
(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./5/
(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.
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/5/ 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 the fees and expenses to be paid by the
Plan, including the fees paid directly to Salomon Smith Barney or to other
third parties.
(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 the proposed exemption and the final exemption, if granted,
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) 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.
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(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 subparagraphs (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this Section II shall be
unconditionally available at their customary location during normal business
hours by:
(A) Any duly authorized employee or representative of the Department or the
Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of Salomon Smith
Barney or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term "Salomon Smith Barney" means Salomon Smith Barney Inc. and any
affiliate of Salomon Smith Barney, as defined in paragraph (b) of this Section
III.
(b) An "affiliate" of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney;
(For purposes of this subparagraph, 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 individual who is an officer (as defined in Section III(d) hereof),
director or partner in Salomon Smith Barney or a person described in
subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney or an
affiliate described in subparagraphs(b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney, is a 10 percent or more 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 (i) a self-directed IRA or (ii) 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.
(d) The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policymaking function for the
entity.
Section IV. Effective Dates
If granted, this proposed exemption will be effective as of April 1, 2000,
with respect to the amendments to Section II(i) and Section III(b) and the
inclusion of new Section III(d).
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 PTE 92-77, PTE 94-50 and PTE 99-15, refer to the
proposed exemptions and the grant notices which are cited above.
Signed at Washington, D.C., this 25th day of May, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-13643 Filed 5-31-00; 8:45 am]
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--------------------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-45; Exemption Application Nos. D-10809
and D-10865]
Grant of Individual Exemption To Amend and Replace Prohibited Transaction
Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc. (Salomon Smith
Barney), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, Department of Labor.
ACTION: Grant of individual exemption to modify and replace PTE 99-15.
--------------------------------------------------------------------------------
SUMMARY: This document contains a final exemption (the Final Exemption) by the
Department of Labor (the Department) which amends and replaces PTE 99-15 (64 FR
1648, April 5, 1999), an exemption granted to Salomon Smith Barney. PTE 99-15
relates to the operation of the TRAK Personalized Investment Advisory Service
product (the TRAK Program) and the Trust for Consulting Group Capital Markets
Funds (the Trust). These transactions are described in a notice of pendency
(the Proposed Exemption) that was published in the Federal Register on June 1,
2000 at 65 FR 35138.
EFFECTIVE DATES: This exemption is effective as of April 1, 2000 with respect
to the amendments to Section II(i) and Section III(b) of the grant notice. In
addition, this exemption is effective as of April 1, 2000 with respect to the
inclusion of new Section III(d) in the grant notice.
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 June 1, 2000, the Department published, in the
Federal Register, the above referenced Proposed Exemption which would amend and
replace PTE 99-15. PTE 99-15, 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 99-15 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), a retirement plan for
a self-employed individual, 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; collectively, the Plans).
PTE 99-15 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 Salomon Smith Barney (the
Consulting Group), of (1) investment advisory services or (2) an 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./1/
In the Proposed Exemption, Salomon Smith Barney requested a modification of
PTE 99-15 and a replacement of that exemption with a new exemption for purposes
of uniformity./2/ Specifically, Salomon Smith Barney requested that the term
"affiliate," as set forth in PTE 99-15, in Section II(h) of the General
Conditions and in Section III(b) of the Definitions, be amended and clarified
to avoid possible misinterpretation. In this regard, Salomon Smith Barney also
requested that the term
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/1/PTE 99-15 also (a) described a series of corporate mergers which changed
the names of the parties identified in two prior TRAK exemptions which it
superseded [i.e., PTE 94-50 (59 FR 32024, June 21, 1994) and PTE 92-77 (55 FR
45833, October 5, 1992)] and which would permit broader distribution of TRAK-
related products; (b) implemented a recordkeeping reimbursement offset
procedure under the TRAK Program; (c) adopted an automated reallocation option
under the TRAK Program that would reduce the reallocation option under the TRAK
Program that would reduce the Plan-level investment advisory fee (the Outside
Fee) paid to Salomon Smith Barney by a Plan investor; and (d) expanded the
scope of the exemption to include Section 403(b) Plans.
PTE 94-50 permitted Smith, Barney Inc. (Smith Barney), Salomon Smith Barney's
predecessor, to add a daily-traded collective investment fund (the GIC Fund) to
the existing portfolios (the Portfolios) of mutual funds (the Funds) comprising
the Trust, and to describe the various entities operating the GIC Fund. PTE 94-
50 also replaced references to Shearson Lehman Brothers, Inc. (Shearson Lehman)
with Smith Barney and amended and replaced PTE 92-77.
Finally, PTE 92-77 permitted Shearson Lehman to make the TRAK Program
available to Plans that acquired shares in the former Trust for TRAK
Investments and allowed the Consulting Group to provide investment advisory
services to an Independent Plan Fiduciary which might result in such
fiduciary's selection of a Portfolio in the TRAK Program for the investment of
Plan assets.
/2/The Department deems PTE 94-50 as having been effectively superseded by PTE
99-15. Therefore, the amendments described herein do not apply to PTE 94-50.
"officer" be defined and incorporated into the Proposed Exemption, in new
Section III(d), to limit the affiliate definition to persons who have a
significant management role. Further, Salomon Smith Barney requested that
Section II(i) of PTE 99-15 be amended to permit an independent sub-adviser (the
Sub-Adviser), under certain circumstances, to exceed the current one percent
limitation on the acquisition of securities that are issued by Salomon Smith
Barney and/ or its affiliates, notably in the Sub-Adviser's replication of a
third- party index (the Index). The Final Exemption is effective as of April 1,
2000 with respect to the amendments to Sections II(i) and III(b) of the grant
notice, and is effective as of July 10, 2000 with respect to Section III(d) of
the grant notice.
The Proposed Exemption was requested in an application filed on behalf of
SalomonSmith 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 Final Exemption is being issued solely by the
Department.
The Proposed Exemption gave interested persons an opportunity to comment and
to request a hearing. During the comment period, the Department received two
written comments and no requests for a hearing. One of the comments was
submitted by the holder of an IRA which participates in the TRAK Program. The
commenter said he concurred with the modifications proposed by Salomon Smith
Barney to amend and clarify the terms "affiliate" and "officer." The commenter
also stated that he supported the proposed modification of the one percent
limitation on the acquisition, by an independent Sub-Adviser, of securities
that are issued by Salomon Smith Barney and/or its affiliates in the Sub-
Adviser's replication of an Index. The commenter explained that he believed the
requested changes made sense and would be beneficial to all TRAK Program
participants. Therefore, the commenter urged the Department to approve the
Final Exemption.
The second comment was submitted by Salomon Smith Barney. The comment is
intended to clarify and modify the preamble (the Preamble) of the Proposed
Exemption.
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Following is a discussion of Salomon Smith Barney's comment letter and the
Department's responses with respect thereto.
1. Modifications to the Proposed Exemption. On page 35139 of the Proposed
Exemption, the first paragraph of the Preamble states that "As of December 31,
1998, the TRAK Program held assets that were in excess of $9.6 billion." Also,
in that same paragraph, the last sentence states, in part, that "one or more
unaffiliated [S]ub-advisers [is] selected by Salomon Smith Barney." Salomon
Smith Barney notes that the December 31, 1998 valuation date at the beginning
of the paragraph should be changed to September 30, 1999 and the last words of
the paragraph should be changed from "Salomon Smith Barney" to "the Consulting
Group," which actually chooses the Sub-Advisers.
In addition, on page 35140 of the Proposed Exemption, the last paragraph of
the Preamble states, in part, that--
Due to the one percent limitation of Section II(i), Salomon Smith Barney
states that active Sub-Advisers for the Consulting Group may not own or trade
Citigroup Common Stock and they will continue to be prohibited from trading in
Citigroup Common Stock. Salomon Smith Barney wishes to clarify that active Sub-
Advisers also do not trade in Citigroup Common Stock because of restrictions
that apply under Rule 12d3-1(c) of the Investment Company Act of 1940 (the
ICA)./3/
On page 35141 of the Proposed Exemption, the third sentence of the first
"carry-over" paragraph of the Preamble identifies two Funds which currently
comply with the one percent limitation on investments in Citigroup Common
Stock. These Funds are the "Consulting Group Capital Markets Large Cap Value
Fund" and the "Large Cap Growth Consulting Group Capital Markets Fund."
However, Salomon Smith Barney suggests, for the purpose of clarity, that the
formal names of the subject Funds be specified. Thus, Salomon Smith Barney
explains that the proper names for the Funds are the "Consulting Group Capital
Markets Funds Large Capitalization Value Equity Investments" and the
"Consulting Group Capital Markets Funds Large Capitalization Growth
Investments." Similarly, in the next paragraph of the Proposed Exemption on
page
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/3/Rule 12d3-1(c) of the ICA states that an acquiring company, such as a
registered investment company, may not acquire a general partnership interest
or a security issued by the acquiring company's investment adviser, promoter,
or principal underwriter, or by any affiliated person of such investment
adviser, promoter, or principal underwriter.
35141 of the Preamble, Salomon Smith Barney wishes to clarify that the formal
name for the S&P Fund designated as the "Consulting Group Capital Markets S&P
500 Index Investment Fund Portfolio" is the "Consulting Group Capital Markets
S&P Index Investment Fund Portfolio."
In response to these comments, the Department acknowledges the foregoing
clarifications to the names for the Funds identified in the Preamble of the
Proposed Exemption.
2. General Information. As a matter of general information, Salomon Smith
Barney states that beginning with the billing cycle commencing on January 1,
2001, the Outside Fee charged to 401(k) Plan clients will be calculated on the
average daily asset value for the quarter for which the fee is billed rather
than the asset value on the last day of the quarter. Salomon Smith Barney
explains that this change generally conforms to the billing procedure in the
industry generally and is believed to be more equitable since it reflects the
asset value over time rather than on a single day during a calendar quarter
which may not be representative of the account balance during the period.
In response to this comment, the Department notes Salomon Smith Barney's
modification to the billing procedure in the calculation of the Outside Fee for
participants in the TRAK Program that are section 401(k) Plans.
For further information regarding the comments or other matters discussed
herein, interested persons are encouraged to obtain copies of the exemption
application files (Exemption Application Nos. D-10809 and D-10865) the
Department is maintaining in this case. The complete application files, 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) The exemption is subject to the express condition that the Summary of
Facts and Representations set forth in the notice of proposed exemption
relating to PTE 99-15, as amended by this Final Exemption, 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 99-15 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
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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; collectively, the Plans) 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 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
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, such as
Citigroup Inc. common stock (the Citigroup Common Stock), the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent. However, this percentage limitation may be exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is held in order
to replicate an established third party index (the Index).
(2) The Index represents the investment performance of a specific segment of
the public market for equity securities in the United States and/or foreign
countries. The organization creating the Index must be--
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers.
The Index is created and maintained by an organization independent of Salomon
Smith Barney and its affiliates and is a generally-accepted standardized Index
of
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securities which is not specifically tailored for use by Salomon Smith Barney
and its affiliates.
(3) The acquisition or disposition of Citigroup Common Stock does not include
any agreement, arrangement or understanding regarding the design or operation
of the Portfolio acquiring the Citigroup Common Stock, which is intended to
benefit Salomon Smith Barney or any party in which Salomon Smith Barney may
have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a Plan's
assets in an Index Fund which purchases and/or holds Citigroup Common Stock and
the Sub-Adviser is responsible for voting any shares of Citigroup Common Stock
that are held by an Index Fund on any matter in which shareholders of Citigroup
Common Stock are required or permitted to vote.
(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./4/
(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
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/4/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 the fees and expenses to be paid by the
Plan, including the fees paid directly to Salomon Smith Barney or to other
third parties.
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 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) 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
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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 subparagraphs (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 subparagraph, 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 individual who is an officer (as defined in Section III(d) hereof),
director or partner in Salomon Smith Barney or a person described in
subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney, or an
affiliate described in subparagraphs(b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney is a 10 percent or more 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 (i) a self-directed IRA or (ii) 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.
(d) The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policymaking function for the
entity.
Section IV. Effective Dates
This exemption is effective as of April 1, 2000 with respect to the amendments
to Section II(i) and Section III(b) of this grant notice. In addition, this
exemption is effective as of April 1, 2000 with respect to the inclusion of new
Section III(d) in the grant notice.
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 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, PTE 94-50 and PTE 99-15, refer to the
proposed exemptions and the grant notices which are cited above.
Signed at Washington, D.C., this 31st day of August, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits Administra-
tion, U.S. Department of Labor.
[FR Doc. 00-22853 Filed 9-6-00; 8:45 am]
B-12
<PAGE>
--------------------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-45; Exemption Application Nos. D-10809
and D-10865]
Grant of Individual Exemption to Amend and Replace Prohibited Transaction
Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc. (Salomon Smith
Barney), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of Labor
(the Department).
ACTION: Notice of Technical Correction.
--------------------------------------------------------------------------------
On September 7, 2000, the Department published in the Federal Register (65 FR
54315) a final exemption which amends and replaces PTE 99-15 (64 FR 1648, April
5,
1999), an exemption granted to Salomon Smith Barney. PTE 99-15 relates to the
operation of the TRAK Personalized Investment Advisory Service product (the
TRAK Program) and the Trust for Consulting Group Capital Markets Funds (the
Consulting Group).
On page 54316 of the grant notice, the last sentence of the third paragraph of
the Supplementary Information, erroneously refers to an effective date of July
10, 2000 with respect to Section III(d) of the grant notice. Thus, the sentence
should be revised to read as follows:
The Final Exemption is effective as of April 1, 2000 with respect to the
amendments to Sections II(i) and III(b) of the grant notice and the inclusion
of new Section III(d) of the grant notice.
Also on page 54316 of the grant notice, clause (c) of Footnote 1, should be
revised as follows to describe more accurately the purpose of the automated
reallocation option:
(c) adopted an automated reallocation option under the TRAK Program which
would afford an Independent Plan Fiduciary the option of having his or her
asset allocation adjusted automatically whenever the Consulting Group changes
an allocation model;
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department at (202)
219-8881. (This is not a toll-free number.)
Signed at Washington, DC, this 18th day of September, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 00-24388 Filed 9-21-00; 8:45 am]
TK 2088S
B-13
<PAGE>
For More Information
If you want more information about the Portfolio, the following resources are
available upon request.
Annual and Semiannual Reports
Additional information about the Portfolio's investments will be available in
the Portfolio's annual and semiannual reports to shareholders. The Portfolio's
annual report will contain a discussion of the market conditions and investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year.
Statement of Additional Information
The Statement of Additional Information provides more detailed information about
the Portfolio and is incorporated into this prospectus by reference.
Investment Professional
The investor's Financial Consultant is available to answer questions about the
Portfolio or the investor's overall asset allocation program.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the Portfolio by contacting their Financial
Consultant, or the Portfolio's sub-transfer agent, PFPC Global Fund
Services at:
Consulting Group Capital Markets Funds
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
Or calling the Portfolio's transfer agent at
Telephone: 1-800-451-2010
Information about the Portfolio (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 Portfolio are 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 Portfolio that is not in this prospectus,
you should not rely upon that information. Neither the Portfolio nor the
distributor is offering to sell shares of the Portfolio to any person to whom
the Portfolio may not lawfully sell its shares.
Investment Company Act File No. 811-06318
[LOGO SALOMON SMITH BARNEY]
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)2000 Salomon Smith Barney Inc. TK2096 11/00
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
GLOBAL SCIENCES AND TECHNOLOGY INVESTMENTS
NOVEMBER 10, 2000
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 Global Sciences and Technology
Investments (the "Portfolio"), a separate series of
Consulting Group Capital Markets Funds (the "Trust"),
dated November 10, 2000, and should be read in
conjunction with the Prospectus. The Trust is a
series company that consists of the Portfolio and
seventeen other portfolios offered in separate
prospectuses. The Prospectus for the Portfolio 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
1
Investment Objectives, Management Policies and Risk Factors
3
Investment Restrictions
20
Portfolio Transactions
21
Portfolio Turnover
22
Investment Management and Other Services
23
Distributor
26
Purchase of Shares
26
Redemption of Shares
27
Redemptions in Kind
27
Net Asset Value
27
Determination of Performance
28
Taxes
30
Appendix
34
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.
Walter E. Auch, Director (Age 79). Consultant
to companies in the financial services industry;
Director of Brinson Partners; Nicholas-Applegate
(each a registered investment adviser); Legend
Properties, a real estate management company; Banyan
Realty Trust; Banyan Land Fund II; Geotek
Communications Inc., an international wireless
communications company. 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, Director (Age 79). Consultant,
HMK Associates; Retired Vice Chairman of the Board of
Restaurant Associates Industries, Inc. Director or
trustee of 21 investment companies associated with
Citigroup. His address is c/o HMK Associates, 30
Columbia Turnpike, Florham Park, New Jersey 07932.
H. John Ellis, Jr., Director (Age 73).
Retired. Director or trustee of 2 investment
companies associated with Citigroup. His address is
858 East Crystal Downs Drive, Frankfort, Michigan
49635.
Stephen E. Kaufman, Director (Age 68).
Attorney. Director or trustee of 13 investment
companies associated with Citigroup. His address is
277 Park Avenue, New York, New York 10172.
Armon E. Kamesar, Director (Age 73). Chairman
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, California 92037.
*Heath B. McLendon, Chairman of the Board (Age
67). Managing Director of Salomon Smith Barney,
President of SSB Citi Fund Management LLC ("SSB Citi")
and Travelers Investment Adviser, Inc. ("TIA"). Mr.
McLendon also serves as Chairman, Co-Chairman or
Director of 71 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 42). Managing Director of Salomon Smith
Barney; Director and Senior Vice President of SSB Citi
and TIA. Mr. Daidone also serves as Senior Vice
President or Executive Vice President and Treasurer of
61 investment companies associated with Citigroup. His
address is 125 Broad Street, New York, New York 10004.
Frank L. Campanale, Investment Officer (Age
46). President and Chief Executive Officer of Salomon
Smith Barney's Consulting Group. Prior to 1996,
National Sales Director for Consulting Group. His
address is 222 Delaware Avenue, Wilmington, Delaware,
19801.
LeRoy T. Pease, CFA, Investment Officer (Age
40). 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 49).
Managing Director of Salomon Smith Barney; General
Counsel and Secretary of SSB Citi and TIA. Ms. Sydor
also serves as Secretary of 61 investment companies
associated with Citigroup. Her address is 388
Greenwich Street, New York, New York 10013.
Irving David, Controller (Age 39). Director of
Salomon Smith Barney. Controller or Assistant
Treasurer of 43 investment companies associated with
Citigroup. His address is 125 Broad Street, New
York, New York 10004.
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, 1999, such fees and expenses
totaled $25,287.00.
For the calendar year ended December 31, 1999, the
Trustees of the Trust were paid the following
compensation:
Total
Pension or Total Number
Aggregate Retirement Benefits Compensation of Funds
Compensation Aggregate Accrued as
Expense From Served in
Name From Portfolio Compensation of Trust Fund Complex Complex
Heath B. McLendon* None None None None 71
Walter Auch None $36,200.00 None $50,600.00 2
Martin Brody None 34,200.00 None 138,600.00 21
H. John Ellis None 36,200.00 None 50,600.00 2
Armon E. Kamesar None 37,100.00 None 52,600.00 2
Stephen E. Kaufman None 37,200.00 None 110,650.00 13
* Designates "interested trustee".
INVESTMENT OBJECTIVES, MANAGEMENT POLICIES AND RISK
FACTORS
The Portfolio is a non-diversified, open-end
management investment company. The Prospectus
discusses the investment objectives of the Portfolio,
a 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
Portfolio may invest, the investment policies and
strategies the Portfolio may utilize and certain
risks attendant to those investments, policies and
strategies.
The Portfolio seeks to achieve its objective by
investing primarily in equity securities of both
domestic and foreign companies.
Sector Investing. The Portfolio normally invests in
the securities of companies principally engaged in
the technology, telecommunications and healthcare
sectors. The broad industry categories in which
these companies may be found include, but are not
limited to, computer software and hardware; network
and capital broadcasting; internet and internet-
related businesses; the ownership, operation,
development, production, sale, and distribution of
goods or services used in the broadcast and media
industries; communications services or equipment; the
design, manufacture, or sale of electric components;
defense and data storage and retrieval;
pharmaceuticals; medical diagnostic, biochemical or
other healthcare research and development; healthcare
facilities, healthcare products and services and
biotechnology. The relative size of the Portfolio's
investments within these industries will vary from
time to time, and at times, some of these industries
may not be represented in the Portfolio's holdings.
The subadvisers believe that because of rapid
advances in each sector, an investment in companies
with business operations in these areas may offer
substantial opportunities for long-term capital
appreciation. Of course, prices of common stocks of
even the best managed, most profitable corporations
are subject to market risk, which means their stock
prices can decline. In addition, swings in investor
psychology or significant trading by investors can
result in price fluctuations. Industries likely to be
owned by the Portfolio include computers, networking
and internetworking software, computer aided design,
telecommunications, media and information services,
medical devices and biotechnology. The Portfolio may
also invest in the stocks of companies that may
benefit from the commercialization of technological
advances, although they may not be directly involved
in research and development.
The sectors have exhibited and may continue to
exhibit rapid growth, both through increasing demand
for existing products and services and the broadening
of the sector. In general, the stocks of large
capitalized companies that are well established in
the sector and can be expected to grow with the
market will frequently be found among the Portfolio's
holdings. The expansion of each sector and its
related industries, however, also provides a
favorable environment for investment in small to
medium capitalized companies. The Portfolio's
investment policy is not limited to any minimum
capitalization requirement and the Portfolio may hold
securities without regard to the capitalization of
the issuer. The subadvisers' overall stock selection
for the Portfolio is not based on the capitalization
or size of the company but rather on an assessment of
the company's fundamental prospects.
Companies in each sector face special risks. For
example, their products or services may not prove
commercially successful or may become obsolete
quickly. The value of the Portfolio's shares may be
susceptible to factors affecting the technology and
science areas and to greater risk and market
fluctuation than an investment in a fund that invests
in a broader range of portfolio securities not
concentrated in any particular industry. As such, the
Portfolio is not an appropriate investment for
individuals who are not long-term investors and who,
as their primary objective, require safety of
principal or stable income from their investments.
Each sector may be subject to greater governmental
regulation than many other areas and changes in
governmental policies and the need for regulatory
approvals may have a material adverse effect on these
areas. Additionally, companies in each sector may be
subject to risks of developing technologies,
competitive pressures and other factors and are
dependent upon consumer and business acceptance as
new technologies evolve.
Further, the market may value companies according to
size, or market capitalization, rather than on
financial performance. The companies in each sector
may be developing or changing. They may be subject
to greater business risks and more sensitive to
changes in economic conditions than larger, more
established companies. Company earnings in these
sectors may fluctuate more than those of other
companies because of short product cycles and
competitive pricing. Investors' enthusiasm for these
stocks can also change dramatically, causing stock
prices to rise and fall sharply.
Technology Securities. Many technological products
and services are subject to rapid obsolescence, which
may lower the market value of the securities of the
companies in this sector. Also, the Portfolio holds
faster-growing, more volatile technology companies
the subadvisers believe to be emerging leaders in
their fields. The market prices of these companies
tend to rise and fall more rapidly than those of
larger, more established companies.
Telecommunications Securities. Companies in the
media and telecommunications sector are subject to
the risks of rapid obsolescence, lack of investor or
consumer acceptance, lack of standardization or
compatibility with existing technologies, an
unfavorable regulatory environment, intense
competition, and a dependency on patent and copyright
protection. The media sector can be significantly
(and adversely) affected by the federal deregulation
of cable and broadcasting, competitive pressures, and
government regulation, including regulation of the
concentration of investment in AM, FM, or TV
stations. The telecommunications industry,
particularly telephone operating companies, is
subject to both federal and state government
regulations of rates of return and services that may
be offered. Many telecommunications companies
fiercely compete for market share.
Certain of the companies in which the Portfolio
invests may allocate greater than usual financial
resources to research and product development. The
securities of such companies may experience above-
average price movements associated with the perceived
prospects of success of the research and development
programs. In addition, companies in which the
Portfolio invests may be adversely affected by lack
of commercial acceptance of a new product or process
or by technological change and obsolescence.
Healthcare and Biotechnology Securities. Many
faster-growing healthcare companies have limited
operating histories and their potential profitability
may be dependent on regulatory approval of their
products, which increases the volatility of these
companies' security prices. Many of these activities
are funded or subsidized by governments. The
withdrawal or curtailment of this support could lower
the profitability and market prices of such
companies. Changes in government regulation could
also have an adverse impact. Continuing
technological advances may mean rapid obsolescence of
products and services. Patent considerations,
intense competition, rapid technological change and
obsolescence, and government regulation can
significantly (and adversely) affect the
biotechnology sector. Biotechnology companies can
have persistent losses during a new product's
transition from development to production, and
revenue patterns can be erratic.
Equity Securities. The Portfolio may invest in all
types of equity securities, including, but not
limited to, exchange-traded and over-the-counter
common and preferred stocks, warrants, rights,
depository receipts and shares, trust certificates,
limited partnership interests, shares of other
investment companies, real estate investment trusts
and equity participations. 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.
ADRs, EDRs and GDRs. The Portfolio 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.
The Portfolio may invest in ADRs through both
sponsored and unsponsored arrangements.
Real Estate Investment Trusts ("REITs"). The
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 Portfolio may invest
in the securities of other investment companies to
the extent such investments are consistent with the
Portfolio's investment objectives and policies and
permissible under the Investment Company Act of 1940,
as amended (the "1940 Act"). Under the 1940 Act, the
Portfolio may not acquire the securities of other
domestic or foreign investment companies if, as a
result, (i) more than 10% of the Portfolio's total
assets would be invested in securities of other
investment companies, (ii) such purchase would result
in more than 3% of the total outstanding voting
securities of any one investment company being held
by the Portfolio, or (iii) more than 5% of the
Portfolio's total assets would be invested in any one
investment company. These limitations do not apply to
the purchase of shares of any investment company in
connection with a merger, consolidation,
reorganization or acquisition of substantially all
the assets of another investment company. The
Portfolio will not invest in other investment
companies for which the subadvisers or any of their
affiliates act as an investment advisor or
distributor.
The Portfolio, as a holder of the securities of other
investment companies, will bear its pro rata portion
of the other investment companies' expenses,
including advisory fees. These expenses are in
addition to the direct expenses of the Portfolio's
own operations.
Investing in Small and Medium Capitalization
Companies. The Portfolio may invest in securities of
all market capitalizations. 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
subadviser considers appropriate.
Fixed Income Securities. The Portfolio may invest a
portion of its assets in fixed income (or "debt")
securities. The market value of the obligations held
by the Portfolio can be expected to vary inversely to
changes in prevailing interest rates. Investors also
should recognize that, in periods of declining
interest rates, the Portfolio's yield will tend to be
somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Portfolio's
yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new
money to the Portfolio from the continuous sale of
its shares will tend to be invested in instruments
producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current
yield. In periods of rising interest rates, the
opposite can be expected to occur. In addition,
securities in which the Portfolio may invest may not
yield as high a level of current income as might be
achieved by investing in securities with less
liquidity, less creditworthiness or longer
maturities.
The Portfolio may also invest in U.S. Government
securities, corporate bonds, debentures, non-
convertible fixed income preferred stocks and
Eurodollar and Yankee instruments.
Eurodollar Instruments and Yankee Bonds. The
Portfolio 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.
High Yield Securities. The Portfolio 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 subadvisers, 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 than 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 subadviser
will consider the event in determining whether the
Portfolio should continue to hold the security. See
"Debt Securities Rating Criteria" below for
additional information regarding high yield
securities.
HOLDRS. HOLDRS are depository receipts issued by the
HOLDRS Trust representing individual and undivided
ownership interests in the common stock of companies
involved in a specific segment of a particular
industry. Holding Company Depository Receipts
("HOLDRS") are a service mark of Merrill Lynch and
are traded on the American Stock Exchange.
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
subadviser. Debt securities rated BBB are considered
medium grade obligations with speculative
characteristics, and adverse economic conditions or
changing circumstances may weaken the issuer's
ability to pay interest and repay principal.
Below investment grade debt securities are those
rated "BB" and below by 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 the
Portfolio's net asset value to the extent it invests
in such securities. In addition, the Portfolio may
incur additional expenses to the extent it is
required to seek recovery upon a default in payment
of principal or interest on its portfolio holdings.
The secondary market for junk bond securities, which
is concentrated in relatively few market makers, may
not be as liquid as the secondary market for more
highly rated securities, a factor which may have an
adverse effect on the Portfolio's ability to dispose
of a particular security when necessary to meet its
liquidity needs. Under adverse market or economic
conditions, the secondary market for junk bond
securities could contract further, independent of any
specific adverse changes in the condition of a
particular issuer. As a result, the Portfolio could
find it more difficult to sell these securities or
may be able to sell the securities only at prices
lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be
less than the prices used in calculating the
Portfolio's net asset value.
Since investors generally perceive that there are
greater risks associated with lower quality debt
securities of the type in which the Portfolio may
invest a portion of its assets, the yields and prices
of such securities may tend to fluctuate more than
those for higher rated securities. In the lower
quality segments of the debt securities market,
changes in perceptions of issuers' creditworthiness
tend to occur more frequently and in a more
pronounced manner than do changes in higher quality
segments of the debt securities market, resulting in
greater yield and price volatility.
Lower rated and comparable unrated debt securities
tend to offer higher yields than higher rated
securities with the same maturities because the
historical financial condition of the issuers of such
securities may not have been as strong as that of
other issuers. However, lower rated securities
generally involve greater risks of loss of income and
principal than higher rated securities. The
subadvisers will attempt to reduce these risks
through portfolio diversification and by analysis of
each issuer and its ability to make timely payments
of income and principal, as well as broad economic
trends and corporate developments.
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 Portfolio as initial
criteria for the selection of portfolio securities,
but the Portfolio will also rely upon the independent
advice of their respective investment advisers
(separately a subadviser, collectively, the
subadvisers) 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 the Portfolio, an issue
of debt obligations may cease to be rated or its
rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require
the sale of the debt obligation by the Portfolio, but
the Portfolio's subadvisers 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, the Portfolio will attempt to use comparable
ratings as standards for its investments in
accordance with its investment objectives and
policies.
Risks of Non-U.S. Investments. To the extent the
Portfolio invests in the securities of non-U.S.
issuers, those investments involve considerations and
risks not typically associated with investing in the
securities of issuers in the U.S. These risks are
heightened with respect to investments in countries
with emerging markets and economies. The risks of
investing in securities of non-U.S. issuers or
issuers with significant exposure to non-U.S. markets
may be related, among other things, to (i)
differences in size, liquidity and volatility of, and
the degree and manner of regulation of, the
securities markets of certain non-U.S. markets
compared to the securities markets in the U.S.; (ii)
economic, political and social factors; and (iii)
foreign exchange matters, such as restrictions on the
repatriation of capital, fluctuations in exchange
rates between the U.S. dollar and the currencies in
which the Portfolio's securities holdings are quoted
or denominated, exchange control regulations and
costs associated with currency exchange. The
political and economic structures in certain non-U.S.
countries, particularly emerging markets, are
expected to undergo significant evolution and rapid
development, and such countries may lack the social,
political and economic stability characteristic of
more developed countries. Unanticipated political or
social developments may affect the values of the
Portfolio's investments in such countries. The
economies and securities and currency markets of many
emerging markets have experienced significant
disruption and declines. There can be no assurances
that these economic and market disruptions will not
continue.
Foreign Securities Markets and Regulations. There
may be less publicly available information about non-
U.S. markets and issuers than is available with
respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting,
auditing and financial reporting standards, practices
and requirements comparable to those applicable to
U.S. companies. The trading markets for most non-U.S.
securities are generally less liquid and subject to
greater price volatility than the markets for
comparable securities in the U.S. The markets for
securities in certain emerging markets are in the
earliest stages of their development. Even the
markets for relatively widely traded securities in
certain non-U.S. markets, including emerging
countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume
or trades of a size customarily undertaken by
institutional investors in the U.S. Additionally,
market making and arbitrage activities are generally
less extensive in such markets, which may contribute
to increased volatility and reduced liquidity. The
less liquid a market, the more difficult it may be
for the Portfolio to accurately price its securities
holdings or to dispose of such securities at the
times determined by the subadviser to be appropriate.
The risks associated with reduced liquidity may be
particularly acute in situations in which the
Portfolio's operations require cash, such as in order
to meet redemptions and to pay its expenses.
Economic, Political and Social Factors. Certain non-
U.S. countries, including emerging markets, may be
subject to a greater degree of economic, political
and social instability than is the case in the U.S.
and Western European countries. Such instability may
result from, among other things: (i) authoritarian
governments or military involvement in political and
economic decision making; (ii) popular unrest
associated with demands for improved economic,
political and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial
disaffection and conflict. Such economic, political
and social instability could significantly disrupt
the financial markets in such countries and the
ability of the issuers in such countries to repay
their obligations. Investing in emerging countries
also involves the risk of expropriation,
nationalization, confiscation of assets and property
or the imposition of restrictions on foreign
investments and on repatriation of capital invested.
In the event of such expropriation, nationalization
or other confiscation in any emerging country, the
Portfolio could lose its entire investment in that
country.
Certain emerging market countries restrict or control
foreign investment in their securities markets to
varying degrees. These restrictions may limit the
Portfolio's investment in those markets and may
increase the expenses of the Portfolio. In addition,
the repatriation of both investment income and
capital from certain markets in the region is subject
to restrictions such as the need for certain
governmental consents. Even where this is no
outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects
of the Portfolio's operation.
Economies in individual non-U.S. countries may differ
favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product,
rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance
of payments positions. Many non-U.S. countries have
experienced substantial, and in some cases extremely
high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had,
and may continue to have, very negative effects on
the economies and securities markets of certain
emerging countries.
Economies in emerging countries generally are
dependent heavily upon international trade and,
accordingly, have been and may continue to be
affected adversely by trade barriers, exchange
controls, managed adjustments in relative currency
values and other protectionist measures imposed or
negotiated by the countries with which they trade.
These economies also have been, and may continue to
be, affected adversely by economic conditions in the
countries with which they trade.
Currency Risks. The value of the securities quoted
or denominated in international currencies may be
adversely affected by fluctuations in the relative
currency exchange rates and by exchange control
regulations. The Portfolio's investment performance
may be negatively affected by a devaluation of a
currency in which the Portfolio's investments are
quoted or denominated. Further, the Portfolio's
investment performance may be significantly affected,
either positively or negatively, by currency exchange
rates because the U.S. dollar value of securities
quoted or denominated in another currency will
increase or decrease in response to changes in the
value of such currency in relation to the U.S.
dollar.
Custodian Services and Related Investment Costs.
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 the 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 the Portfolio against
loss or theft of its assets.
Withholding and Other Taxes. The Portfolio will be
subject to taxes, including withholding taxes, on
income (possibly including, in some cases, capital
gains) that are or may be imposed by certain non-U.S.
countries with respect to the Portfolio's investments
in such countries. These taxes will reduce the return
achieved by the Portfolio. Treaties between the U.S.
and such countries may not be available to reduce the
otherwise applicable tax rates.
Currency Exchange Rates. The Portfolio's share value
may change significantly when the currencies, other
than the U.S. dollar, in which the Portfolio's
investments are quoted or denominated, strengthen or
weaken against the U.S. dollar. Currency exchange
rates generally are determined by the forces of
supply and demand in the foreign exchange markets and
the relative merits of investments in different
countries as seen from an international perspective.
Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign
governments or central banks or by currency controls
or political developments in the United States or
abroad.
Emerging Markets Countries. A developing or emerging
markets country generally is considered to be a
country that is in the initial stages of its
industrialization cycle. Investing in the equity
markets of developing countries involves exposure to
economic structures that are generally less diverse
and mature, and to political systems that can be
expected to have less stability, than those of
developed countries. Historical experience indicates
that the markets of developing countries have been
more volatile than the markets of the more mature
economies of developed countries; however, such
markets often have provided higher rates of return to
investors.
One or more of the risks discussed above could
adversely affect the economy of a developing market
or the Portfolio's investments in such a market. The
claims of many property owners against those of
governments may remain unsettled. There can be no
assurance that any investments the Portfolio might
make in such emerging markets would be expropriated,
nationalized or otherwise confiscated at some time in
the future. In such an event, the Portfolio could
lose its entire investment in the market involved.
Moreover, changes in the leadership or policies of
such markets could halt the expansion or reverse the
liberalization of foreign investment policies now
occurring in certain of these markets and adversely
affect existing investment opportunities.
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.
Forward Currency Contracts. The Portfolio may invest
in securities quoted or denominated in foreign
currencies, may hold currencies to meet settlement
requirements for foreign securities and may engage in
currency exchange transactions in order to protect
against uncertainty in the level of future exchange
rates between a particular foreign currency and the
U.S. dollar or between foreign currencies in which
the Portfolio's securities are or may be quoted or
denominated. Forward currency contracts are
agreements to exchange one currency for another, for
example, to exchange a certain amount of U.S. dollars
for a certain amount of French francs at a future
date. The date (which may be any agreed upon fixed
number of days in the future), the amount of currency
to be exchanged and the price at which the exchange
will take place will be negotiated with a currency
trader and fixed for the term of the contract at the
time the Portfolio enters into the contract. To
assure that the Portfolio's forward currency
contracts are not used to achieve investment
leverage, the Portfolio will segregate cash or high
grade securities with its custodian in an amount at
all times equal to or exceeding the Portfolio's
commitment with respect to these contracts.
Forward currency contracts (i) are traded in an
interbank market conducted directly between currency
traders (typically commercial banks or other
financial institutions) and their customers, (ii)
generally have no deposit requirements and (iii) are
typically consummated without payment of any
commissions. The Portfolio, however, may enter into
forward currency contracts containing either or both
deposit requirements and commissions.
At or before the maturity of a forward currency
contract, the Portfolio may either sell a portfolio
security and make delivery of the currency, or retain
the security and offset its contractual obligation to
deliver the currency by purchasing a second contract
pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency
that it is obligated to deliver. If the Portfolio
retains the portfolio security and engages in an
offsetting transaction, the Portfolio, at the time of
execution of the offsetting transaction, will incur a
gain or a loss to the extent movement has occurred in
forward currency contract prices. Should forward
prices decline during the period between the
Portfolio's entering into a forward currency contract
for the sale of a currency and the date it enters
into an offsetting contract for the purchase of the
currency, the Portfolio will realize a gain to the
extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent the price
of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
In hedging specific portfolio positions, the
Portfolio may enter into a forward contract with
respect to either the currency in which the positions
are denominated or another currency deemed
appropriate by the Portfolio's subadviser. The
amount the Portfolio may invest in forward currency
contracts is limited to the amount of the Portfolio's
aggregate investments in foreign currencies. Risks
associated with entering into forward currency
contracts include the possibility that the market for
forward currency contracts may be limited with
respect to certain currencies and, upon a contract's
maturity, the inability of the 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 the
Portfolio's ability to hedge against the risk of
devaluation of currencies in which the Portfolio
holds a substantial quantity of securities and are
unrelated to the qualitative rating that may be
assigned to any particular security. In addition,
although forward currency contracts limit the risk of
loss owing to a decline in the value of the hedged
currency, at the same time, they limit any potential
gain that might result should the value of the
currency increase. If a devaluation is generally
anticipated, the Portfolio may not be able to
contract to sell currency at a price above the
devaluation level it anticipates. The successful use
of forward currency contracts as a hedging technique
draws upon special skills and experience with respect
to these instruments and usually depends on the
ability of the Portfolio's subadviser to forecast
interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in
an unexpected manner, the Portfolio may not achieve
the anticipated benefits of forward currency
contracts or may realize losses and thus be in a
worse position than if those strategies had not been
used. Many forward currency contracts are subject to
no daily price fluctuation limits so adverse market
movements could continue with respect to those
contracts to an unlimited extent over a period of
time.
Options on Securities and Securities Indices. The
Portfolio may purchase put and call options on any
security in which it may invest or options on any
securities index based on securities in which it may
invest. The Portfolio would also be able to enter
into closing sale transactions in order to realize
gains or minimize losses on options it has purchased.
Writing Covered Call and Put Options on Securities
Indices. The Portfolio may also write (sell) covered
call and put options on any securities index composed
of securities in which it may invest. Options on
securities indices are similar to options on
securities, except that the exercise of securities
index options requires cash payments and does not
involve the actual purchase or sale of securities. In
addition, securities index options are designed to
reflect price fluctuations in a group of securities
or segments of the securities market rather than
price fluctuations in a single security.
The Portfolio may cover call options on a securities
index by owning securities whose price changes are
expected to be similar to those of the underlying
index, or by having an absolute and immediate right
to acquire such securities without additional cash
consideration (or for additional consideration if
cash in such amount is segregated) upon conversion or
exchange of other securities in its portfolio. The
Portfolio may cover call and put options on a
securities index by segregating assets with a value
equal to the exercise price.
Purchasing Call and Put Options. The Portfolio 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 the Portfolio, in return for the
premium paid, to purchase specified securities at a
specified price during the option period. The
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.
The 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 the 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 the Portfolio is unable to
effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will
not be able to sell the underlying securities or
dispose of its segregated assets until the options
expire or are exercised. Similarly, if the Portfolio
is unable to effect a closing sale transaction with
respect to options it has purchased, it will have to
exercise the options in order to realize any profit
and will incur transaction costs upon the purchase or
sale of underlying securities.
Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may
be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on
opening or closing transactions or both;
(iii) trading halts, suspensions or other
restrictions may be imposed with respect to
particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an
exchange or the Options Clearing Corporation (the
"OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be
compelled at some future date to discontinue the
trading of options (or a particular class or series
of options), in which event the secondary market on
that exchange (or in that class or series of options)
would cease to exist, although outstanding options on
that exchange, if any, that had been issued by the
OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their
terms.
The Portfolio may terminate its obligations under an
exchange-traded call or put option by purchasing an
option identical to the one it has written.
Obligations under over-the-counter options may be
terminated only by entering into an offsetting
transaction with the counterparty to such option.
Such purchases are referred to as "closing purchase
transactions."
The Portfolio may purchase and sell both options that
are traded on U.S. and foreign exchanges and options
traded over the counter with broker-dealers who make
markets in these options. The ability to terminate
over-the-counter options is more limited than with
exchange-traded options and may involve the risk that
broker-dealers participating in such transactions
will not fulfill their obligations. Until such time
as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, the
Portfolio will treat purchased over-the-counter
options and all assets used to cover written
over-the-counter options as illiquid securities,
except that with respect to options written with
primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of
illiquid securities may be calculated with reference
to the formula.
Transactions by the Portfolio in options on
securities and indices will be subject to limitations
established by each of the exchanges, boards of trade
or other trading facilities governing the maximum
number of options in each class which may be written
or purchased by a single investor or group of
investors acting in concert. Thus, the number of
options that the 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 subadviser's ability to
predict future price fluctuations and the degree of
correlation between the options and securities
markets.
The hours of trading for options may not conform to
the hours during which the underlying securities are
traded. To the extent the options markets close
before the markets for the underlying securities,
significant price movements can take place in the
underlying markets that cannot be reflected in the
options markets.
In addition to the risks of imperfect correlation
between the Portfolio's holdings and the index
underlying the option, the purchase of securities
index options involves the risk that the premium and
transaction costs paid by the Portfolio in purchasing
an option will be lost. This could occur as a result
of unanticipated movements in the price of the
securities comprising the securities index on which
the option is based.
Futures Contracts and Related Options. The Portfolio
may enter into futures contracts and purchase and
write (sell) options on these contracts, including
but not limited to interest rate, securities index
and foreign currency futures contracts and put and
call options on these futures contracts. These
contracts will be entered into only upon the
concurrence of the subadviser that such contracts are
necessary or appropriate in the management of the
Portfolio's assets. These contracts will be entered
into on exchanges designated by the Commodity Futures
Trading Commission ("CFTC") or, consistent with CFTC
regulations, on foreign exchanges. These
transactions may be entered into for bona fide
hedging and other permissible risk management
purposes including protecting against anticipated
changes in the value of securities the Portfolio
intends to purchase.
The Portfolio will not enter into futures contracts
and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into
account unrealized profits and unrealized losses on
any contracts it has entered into. All futures and
options on futures positions will be covered by
owning the underlying security or segregation of
assets. With respect to long positions in a futures
contract or option (e.g., futures contracts to
purchase the underlying instrument and call options
purchased or put options written on these futures
contracts or instruments), the underlying value of
the futures contract at all times will not exceed the
sum of cash, short-term U.S. debt obligations or
other high quality obligations set aside for this
purpose.
The Portfolio may lose the expected benefit of these
futures or options transactions and may incur losses
if the prices of the underlying securities or
commodities move in an unanticipated manner. In
addition, changes in the value of the Portfolio's
futures and options positions may not prove to be
perfectly or even highly correlated with changes in
the value of its portfolio securities. Successful use
of futures and related options is subject to a
subadviser's ability to predict correctly movements
in the direction of the securities markets generally,
which ability may require different skills and
techniques than predicting changes in the prices of
individual securities. Moreover, futures and options
contracts may only be closed out by entering into
offsetting transactions on the exchange where the
position was entered into (or a linked exchange), and
as a result of daily price fluctuation limits there
can be no assurance that an offsetting transaction
could be entered into at an advantageous price at any
particular time. Consequently, the Portfolio may
realize a loss on a futures contract or option that
is not offset by an increase in the value of its
portfolio securities that are being hedged or the
Portfolio may not be able to close a futures or
options position without incurring a loss in the
event of adverse price movements.
The Portfolio will incur brokerage costs whether or
not its hedging is successful and will be required to
post and maintain "margin" as a good-faith deposit
against performance of its obligations under futures
contracts and under options written by the Portfolio.
Futures and options positions are marked to the
market daily and the Portfolio may be required to
make subsequent "variation" margin payments depending
upon whether its positions increase or decrease in
value. In this context margin payments involve no
borrowing on the part of the Portfolio.
When-Issued and Delayed Delivery Securities. The
Portfolio may purchase securities, including U.S.
government securities, on a when-issued basis or may
purchase or sell securities for delayed delivery. In
such transactions, delivery of the securities occurs
beyond the normal settlement period, but no payment
or delivery is made by the Portfolio prior to the
actual delivery or payment by the other party to the
transaction. The purchase of securities on a when-
issued or delayed delivery basis involves the risk
that the value of the securities purchased will
decline prior to the settlement date. The sale of
securities for delayed delivery involves the risk
that the prices available in the market on the
delivery date may be greater than those obtained in
the sale transaction. When-issued and delayed
delivery transactions will be fully collateralized by
segregated liquid assets.
Repurchase Agreements. The Portfolio may enter into
repurchase agreements. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an
underlying debt obligation for a relatively short
period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed upon
price and time, thereby determining the yield during
the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding
period. The Portfolio may enter into repurchase
agreements with respect to U.S. Government Securities
with member banks of the Federal Reserve System and
certain non-bank dealers approved by the board of
trustees. Under each repurchase agreement, the
selling institution is required to maintain the value
of the securities subject to the repurchase agreement
at not less than their repurchase price. The
Portfolio's subadvisers, acting under the supervision
of the Board of Trustees, review on an ongoing basis
the value of the collateral and the creditworthiness
of those non-bank dealers with whom the Portfolio
enters into repurchase agreements. The Portfolio
will not invest in a repurchase agreement maturing in
more than seven days if the investment, together with
illiquid securities held by the Portfolio, exceeds
15% of the Portfolio's net assets. In entering into
a repurchase agreement, the Portfolio bears a risk of
loss if the other party to the transaction defaults
on its obligations and the Portfolio is delayed or
prevented from exercising its rights to dispose of
the underlying securities, including the risk of a
possible decline in the value of the underlying
securities during the period in which the Portfolio
seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those
rights and the risk of losing all or a part of the
income from the agreement.
Borrowing. Leverage increases investment risk as
well as investment opportunity. If the income and
investment gains on securities purchased with
borrowed money exceed the interest paid on the
borrowing, the net asset value of the Portfolio's
shares will rise faster than would otherwise be the
case. On the other hand, if the income and
investment gains fail to cover the cost, including
interest, of the borrowings, or if there are losses,
the net asset value of the Portfolio's shares will
decrease faster than otherwise would be the case.
Lending Portfolio Securities. Consistent with
applicable regulatory requirements, the Portfolio may
lend portfolio securities to brokers, dealers and
other financial organizations. The Portfolio will not
lend securities to Salomon Smith Barney unless the
Portfolio has applied for and received specific
authority to do so from the SEC. The Portfolio's
loan of securities will be collateralized by cash,
letters of credit or U.S. Government Securities. The
Portfolio will maintain the collateral in an amount
at least equal to the current market value of the
loaned securities. From time to time, the Portfolio
may pay a part of the interest earned from the
investment of collateral received for securities
loaned to the borrower and/or a third party that is
unaffiliated with the Portfolio and is acting as a
"finder." The Portfolio will comply with the
following conditions whenever it loans securities:
(i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the
borrower; (ii) the borrower must increase the
collateral whenever the market value of the
securities loaned rises above the level of the
collateral; (iii) the Portfolio must be able to
terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on
the loaned securities and any increase in market
value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi)
voting rights on the loaned securities may pass to
the borrower except that, if a material event
adversely affecting the investment in the loaned
securities occurs, the Trust's Board of Trustees must
terminate the loan and regain the right to vote the
securities.
Illiquid Securities. The Portfolio will not invest
more than 15% of its net assets in illiquid and other
securities that are not readily marketable.
Repurchase agreements maturing in more than seven
days will be included for purposes of the foregoing
limit. Securities subject to restrictions on resale
under the Securities Act of 1933, as amended (the
"1933 Act") are considered illiquid unless they are
eligible for resale pursuant to Rule 144A or another
exemption from the registration requirements of the
1933 Act and are determined to be liquid by the
subadvisers. The subadvisers determine the liquidity
of Rule 144A and other restricted securities
according to procedures adopted by the Board of
Trustees. The Board of Trustees monitors the
subadvisers' application of these guidelines and
procedures. The inability of 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 the subadvisers of the
Portfolio, in consultation with the Manager, believe
that pursuing the Portfolio's basic investment
strategy may be inconsistent with the best interests
of its shareholders, the Portfolio may invest its
assets in the following money market instruments:
U.S. Government Securities (including those purchased
in the form of custodial receipts), repurchase
agreements, certificates of deposit and bankers'
acceptances issued by U.S. banks or savings and loan
associations having assets of at least $500 million
as of the end of their most recent fiscal year and
high quality commercial paper. The Portfolio's U.S.
dollar-denominated temporary investments are managed
by SSB Citi. The Portfolio also may hold a portion
of its assets in money market instruments or cash in
amounts designed to pay expenses, to meet anticipated
redemptions or pending investment in accordance with
its objectives and policies. Any temporary
investments may be purchased on a when-issued basis.
The Portfolio's investment in any other short-term
debt instruments would be subject to the Portfolio's
investment objectives and policies, and to approval
by the Trust's Board of Trustees.
Non-Diversified Classification. The Portfolio is
classified as a non-diversified fund under the 1940
Act which means the Portfolio is not limited in the
proportion of its assets it may invest in the
obligations of a single issuer. As a result, the
Portfolio may be subject to greater volatility with
respect to its securities holdings than funds that
are more broadly diversified. The Portfolio intends
to conduct its operations, however, so as to qualify
as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the
"Code"), which will relieve the Portfolio of any
liability for Federal income tax to the extent its
earnings are distributed to shareholders. To qualify
as a regulated investment company, the Portfolio
will, among other things, limit its investments so
that, at the close of each quarter of the taxable
year (a) not more than 25% of the market value of the
Portfolio's total assets will be invested in the
securities of a single issuer and (b) with respect to
50% of the market value of its total assets, not more
than 5% of the market value of its total assets will
be invested in the securities of a single issuer and
the Portfolio will not own more than 10% of the
outstanding voting securities of a single issuer.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 6
below have been adopted by the Trust as fundamental
policies of the Portfolio. Under the 1940 Act, a
fundamental policy may not be changed without the
vote of a majority of the outstanding voting
securities of the Portfolio, which is defined in the
1940 Act as the lesser of (i) 67% or more of the
shares present at 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 7 through 11 may
be changed by a vote of a majority of the Board of
Trustees at any time.
Under the investment restrictions adopted by the
Portfolio:
1. 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.
2. The Portfolio will not borrow money, except
that (a) the Portfolio may borrow from banks for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 33 1/3% of the
value of the Portfolio's total assets (including the
amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount
borrowed) 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.
3. The Portfolio will not make loans. This
restriction does not apply to: (a) the purchase of
debt obligations in which a Portfolio may invest
consistent with its investment objectives and
policies (including participation interests in such
obligations); (b) repurchase agreements; and (c)
loans of its portfolio securities.
4. The 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.
5. The 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.
6. The Portfolio will not purchase any
securities on margin (except for such short-term
credits as are necessary for the clearance of
purchases and sales of Portfolio securities). 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.
7. The Portfolio will not invest in oil, gas or
other mineral leases or exploration or development
programs.
8. The 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.
9. The Portfolio will not make investments for
the purpose of exercising control or management.
10. Purchase or otherwise acquire any
security if, as a result, more than 15% of its net
assets would be invested in securities that are
illiquid.
11. The 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 2 above) apply at the time of purchase of
securities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the
Portfolio are made by the subadvisers, subject to the
overall review of the manager and the Board of
Trustees. Although investment decisions for the
Portfolio are made independently from those of the
other accounts managed by the subadvisers investments
of the type that the Portfolio may make also may be
made by those other accounts. When the Portfolio and
one or more other accounts managed by the subadvisers
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 subadvisers to be equitable to each.
In some cases, this procedure may adversely affect
the price paid or received by the Portfolio or the
size of the position obtained or disposed of by the
Portfolio.
Transactions on U.S. stock exchanges and some foreign
stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions
may vary among different brokers. On most foreign
exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities
traded in U.S. over-the-counter markets, but the
underwriters include an underwriting commission or
concession and the prices at which securities are
purchased from and sold to dealers include a dealer's
mark-up or mark-down. U.S. Government Securities
generally are purchased from underwriters or dealers,
although certain newly issued U.S. Government
Securities may be purchased directly from the U.S.
Treasury or from the issuing agency or
instrumentality.
In selecting brokers or dealers to execute securities
transactions on behalf of the Portfolio, its
subadvisers seeks the best overall terms available.
In assessing the best overall terms available for any
transaction, the subadvisers 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, the Advisory Agreement between the Trust
and the subadvisers authorize the subadvisers, 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
subadvisers or their affiliates exercise investment
discretion. The fees under the Management Agreement
and the Advisory Agreement, respectively, are not
reduced by reason of the Portfolio's subadvisers
receiving brokerage and research services. The Board
of Trustees of the Trust will periodically review the
commissions paid by the Portfolio to determine if the
commissions paid over representative periods of time
were reasonable in relation to the benefits inuring
to the Portfolio. Over-the-counter purchases and
sales by the Portfolio are transacted directly with
principal market makers except in those cases in
which better prices and executions may be obtained
elsewhere.
To the extent consistent with applicable provisions
of the 1940 Act and the rules and exemptions adopted
by the SEC under the 1940 Act, the Board of Trustees
has determined that transactions for the Portfolio
may be executed through Salomon Smith Barney and
other affiliated broker-dealers if, in the judgment
of the subadvisers, the use of an affiliated broker-
dealer is likely to result in price and execution at
least as favorable as those of other qualified
broker-dealers, and if, in the transaction, the
affiliated broker-dealer charges the Portfolio a fair
and reasonable rate.
The Portfolio will not purchase any security,
including U.S. Government Securities or Obligations,
during the existence of any underwriting or selling
group relating thereto of which Salomon Smith Barney
is a member, except to the extent permitted by the
SEC.
The Portfolio may use Salomon Smith Barney and other
affiliated broker-dealers as a commodities broker in
connection with entering into futures contracts and
options on futures contracts if, in the judgment of
the subadvisers, the use of an affiliated broker-
dealer is likely to result in price and execution at
least as favorable as those of other qualified
broker-dealers, and if, in the transaction, the
affiliated broker-dealer charges the Portfolio a fair
and reasonable rate. Salomon Smith Barney has agreed
to charge the Portfolio commodity commissions at
rates comparable to those charged by Salomon Smith
Barney to its most favored clients for comparable
trades in comparable accounts.
PORTFOLIO TURNOVER
The Portfolio does not intend to seek profits through
short-term trading. Nevertheless, the Portfolio will
not consider portfolio turnover rate a limiting
factor in making investment decisions.
The 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 Portfolio is authorized to
engage in transactions in options, it may experience
increased portfolio turnover under certain market
conditions as a result of its investment strategies.
For instance, the exercise of a substantial number of
options written by the 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 the
Portfolio's securities that are included in the
computation of turnover were replaced once during a
period of one year.
Certain practices that may be employed by the
Portfolio could result in high portfolio turnover.
For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market
decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In
addition, a security may be sold and another of
comparable quality purchased at approximately the
same time to take advantage of what a subadviser
believes to be a temporary disparity in the normal
yield relationship between the two securities. These
yield disparities may occur for reasons not directly
related to the investment quality of particular
issues or the general movement of interest rates,
such as changes in the overall demand for, or supply
of, various types of securities. Portfolio turnover
rates may vary greatly from year to year as well as
within a particular year and may be affected by cash
requirements for redemptions of the Portfolio's
shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager; Subadvisers; Administrator. The manager
serves as investment manager to the Trust pursuant to
an investment management agreement ("Management
Agreement"). The subadvisers serve as investment
advisers to the Portfolio pursuant to separate
written agreements with the manager ("Advisory
Agreement"). SSB Citi serves as administrator to the
Portfolio pursuant to a written agreement
("Administration Agreement").
The Portfolio bears its own expenses, which generally
include all costs not specifically borne by the
manager, the subadvisers, and SSB Citi. Included
among the Portfolio's expenses are costs incurred in
connection with the Portfolio's organization;
investment management and administration fees; fees
for necessary professional and brokerage services;
fees for any pricing service; the costs of regulatory
compliance; and costs associated with maintaining the
Trust's legal existence and shareholder relations.
As administrator, 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. The Portfolio
pays SSB Citi a fee for these services that is
computed daily and paid monthly at the annual rate of
0.20% of the value of the Portfolio's average daily
net assets.
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 August 31,
2000 in excess of $140 billion. The Consulting
Group, a division of SSB Citi, has extensive
experience in providing investment adviser 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.
They screen more than 3,000 registered investment
advisory firms and track the performance of more than
700 firms on the manager's comprehensive database. In
addition, the manager conducts over 300 on-site
evaluations of advisors annually. As of August 31,
2000, the Consulting Group provided services with
respect to over $226 billion in client assets
representing more than 588,007 separate accounts
under a variety of programs designed for individual
and institutional investors.
The manager and the subadvisers 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
subadvisers bear all expenses in connection with the
performance of their respective services under the
Management Agreement, the Advisory Agreement, and the
Administration Agreement.
As noted in the Prospectus, subject to the
supervision and direction of the manager and,
ultimately, the Board of Trustees, the subadvisers
manage the securities held by the Portfolio in
accordance with the Portfolio's stated investment
objectives and policies, make investment decisions
for the Portfolio and place orders to purchase and
sell securities on behalf of the Portfolio.
Subject to the supervision and direction of the Board
of Trustees, the manager provides to the Trust
investment management evaluation services principally
by performing initial due diligence on prospective
subadvisers for the Portfolio and thereafter
monitoring the subadvisers' performance through
quantitative and qualitative analysis as well as
periodic in-person, telephonic and written
consultations with subadvisers. In evaluating
prospective subadvisers, the manager considers, among
other factors, each subadviser's level of expertise;
relative performance and consistency of performance
over a minimum period of five years; level of
adherence to 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 the subadvisers and
ultimately recommending to the Board of Trustees
whether a subadviser's contract 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 a subadviser, custodian, transfer
agent, sub-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 subadvisers. However, the manager's
decisions, including the identity of the subadviser
and the specific amount of the manager's compensation
to be paid to the subadviser, are subject to review
and approval by a majority of the Board of Trustees
and separately by a majority of the Trustees who are
not affiliated with the manager or any of its
affiliates.
Investors should also be aware that through Smith
Barney Advisory Services, the Consulting Group serves
as investment adviser to each participant in such
service and receives a fee from each participant that
does not vary based on the portfolios of the Trust
recommended for the participant's investments. At
the same time, the Consulting Group serves as the
Trust's manager with responsibility for identifying,
retaining, supervising and compensating each
portfolio's subadviser and receives a fee from each
portfolio of the Trust. The portion of such fee that
is retained by the manager varies based on the
portfolio involved. Consequently, the Consulting
Group, when making asset allocation recommendations
for participants in Smith Barney Advisory Services,
may be presented with a conflict of interest as to
the specific portfolios of the trust recommended for
investment. The Consulting Group, however, is
subject to and intends to comply fully with standards
of fiduciary duty that require that it act solely in
the best interest of the participant when making
investment recommendations.
The Trust has received an exemption (the "Exemption")
from certain provisions of the 1940 Act which would
otherwise require the manager to obtain formal
shareholder approval prior to engaging and entering
into investment advisory agreements with subadvisers.
The Exemption is based on among other things: (1)
the manager will select, monitor, evaluate and
allocate assets to, the subadvisers and ensure that
the subadvisers 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 subadviser and its investment advisory
contract within 90 days of the engagement of a new
subadviser; (4) the Trust will disclose in its
prospectus the terms of the Exemption; and (5) the
Trustees, including a majority of the "non-
interested" Trustees, must approve each investment
advisory contract in the manner required under the
1940 Act. Any changes to the Management Agreement
between the Trust and the manager still require
shareholder approval.
Code of Ethics. Pursuant to Rule 17j-1 of the 1940
Act, the Portfolio, its manager, subadvisers and
principal underwriter have adopted codes of ethics
that permit personnel to invest in securities for
their own accounts, including securities that may be
purchased or held by the Portfolio. All personnel
must place the interests of clients first and avoid
activities, interests and relationships that might
interfere with the duty to make decisions in the best
interests of the clients. All personal securities
transactions by employees must adhere to the
requirements of the codes and must be conducted in
such a manner as to avoid any actual or potential
conflict of interest, the appearance of such a
conflict, or the abuse of an employee's position of
trust and responsibility.
A copy of each of these Codes of Ethics is on file
with the SEC.
Organization of the Trust. The Trust is 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 Agreement, 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.
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.
Distributor. Salomon Smith Barney, 388 Greenwich
Street, New York, NY 10013 serves as the Portfolio's
distributor on a best efforts basis pursuant to a
written agreement, which was approved by the Trustees
of the Trust.
Custodians. PFPC Trust Company ("PFPC") 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, PFPC and Chase are authorized to establish
separate accounts for foreign securities owned by the
Portfolio to be held with foreign branches of U.S.
banks as well as certain foreign banks and securities
depositories as sub-custodians of assets owned by the
Portfolio. For its custody services, PFPC and Chase
receive monthly fees charged to the Portfolio based
upon the month-end, aggregate net asset value of the
Portfolio plus certain charges for securities
transactions. PFPC and Chase are also reimbursed by
the Portfolio for out-of-pocket expenses including
the costs of any foreign and domestic sub-custodians.
Transfer Agent. Citi Fiduciary Trust Company,
located at 388 Greenwich Street, New York, New York
10013, serves as the Portfolio's transfer and
dividend-paying agent. Under the transfer agency
agreement, the transfer agent maintains the
shareholder account records for the Portfolio,
handles certain communications between shareholders
and the Portfolio, distributes dividends and
distributions payable by the Portfolio and produces
statements with respect to account activity for the
Portfolio and its shareholders. For these services,
the transfer agent receives fees from the Portfolio
computed on the basis of the number of shareholder
accounts that the transfer agent maintains for the
Portfolio during the month and is reimbursed for out-
of-pocket expenses.
Sub-Transfer Agent. PFPC Global Fund Services,
located at P.O. Box 9699, Providence, RI 02940-9699,
serves as the Portfolio's sub-transfer agent. Under
the transfer agency agreement, the sub-transfer agent
maintains the shareholder account records for the
Portfolio, handles certain communications between
shareholders and the Portfolio and distributes
dividends and distributions payable by the Portfolio.
For these services, the sub-transfer agent receives a
monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Portfolio
during the month, and is reimbursed for out-of-pocket
expenses.
PURCHASE OF SHARES
Purchases of shares of the Portfolio through an
Advisory Service must be made through a brokerage
account maintained with Salomon Smith Barney.
Payment for Portfolio shares must be made by check
directly to Salomon Smith Barney or to a broker that
clears securities transactions through Salomon Smith
Barney. No brokerage account or inactivity fee is
charged in connection with a brokerage account
through which an investor purchases shares of a
Portfolio.
Shares of the Portfolio are available exclusively to
participants in Advisory Services and are generally
designed to relieve investors of the burden of
devising an asset allocation strategy to meet their
individual needs as well as selecting individual
investments within each asset category among the
myriad choices available. Advisory Services generally
provide investment advice in connection with
investments among the 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 Portfolio based on an evaluation of an investor's
investment objective and risk tolerances. Shares of
the Portfolio are offered for purchase and redemption
at its respective net asset value next determined,
without imposition of any initial or contingent
deferred sales charge. If the Consulting Group is
paid directly by the investors purchasing Portfolio
shares based on the recommendation of investment
advisers other than the Consulting Group, or who
contract with the Consulting Group for services other
than those described above, such investors pay, in
lieu of TRAK charges, different fees for different
levels of services as agreed upon with their
investment advisers.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the
Portfolio is included in the Prospectus. The right of
redemption of shares of the Portfolio may be
suspended or the date of payment postponed (i) for
any periods during which the New York Stock Exchange,
Inc. (the "NYSE") is closed (other than for customary
weekend and holiday closings), (ii) when trading in
the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules
and regulations of the SEC, exists making disposal of
the Portfolio's investments or determination of its
net asset value not reasonably practicable or (iii)
for such other periods as the SEC by order may permit
for the protection of the Portfolio's shareholders.
REDEMPTIONS IN KIND
If the Board of Trustees determines that it would be
detrimental to the best interests of the Portfolio's
shareholders to make a redemption payment wholly in
cash, the Portfolio may pay, in accordance with rules
adopted by the SEC, any portion of a redemption in
excess of the lesser of $250,000 or 1% of the
Portfolio's net assets by a distribution in kind of
readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must
be made in cash. Shareholders receiving distributions
in kind of portfolio securities may incur brokerage
commissions when subsequently disposing of those
securities.
NET ASSET VALUE
The Portfolio's net asset value per share is
calculated by 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 the Portfolio may nevertheless be
actively traded and the value of the Portfolio's
shares could be significantly affected.
Securities listed on a national securities exchange
will be valued on the basis of the last sale on the
date on which the valuation is made or, in the
absence of sales, at the mean between the closing bid
and asked prices. Over-the-counter securities will
be valued at the mean between the closing bid and
asked prices on each day, or, if market quotations
for those securities are not readily available, at
fair value, as determined in good faith by the
Portfolio's Board of Trustees. Short-term obligations
with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as
determined by the Portfolio's Board of Trustees.
Amortized cost involves valuing an instrument at its
original cost to the Portfolio and thereafter
assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of
fluctuating interest rates on the market value of the
instrument. All other securities and other assets of
the Portfolio will be valued at fair value as
determined in good faith by the Portfolio's Board of
Trustees.
DETERMINATION OF PERFORMANCE
Average Annual Total Return
From time to time, the Trust may advertise the
Portfolio's "average annual total return" over
various periods of time. This total return figure
shows the average percentage change in value of an
investment in the Portfolio from the beginning date
of the measuring period to the ending date of the
measuring period and is reduced by the maximum
Salomon Smith Barney Advisory Service fee during the
measuring period. The figure reflects changes in the
price of the Portfolio's shares and assumes that any
income, dividends and/or capital gains distributions
made by the Portfolio during the period are
reinvested in shares of the Portfolio. Figures will
be given for recent one-, five- and ten-year periods
(if applicable) and may be given for other periods as
well (such as from commencement of the Portfolio's
operations or on a year-by-year basis). Aggregate
total returns also may be shown by means of
schedules, charts or graphs, and may indicate
subtotals of the various components of total return
(that is, the change in value of initial investment,
income dividends and capital gains distributions).
In reports or other communications to shareholders or
in advertising material, the Portfolio may quote
total return figures that do not reflect 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 the Portfolio
published by nationally recognized ranking services
and by financial publications that are nationally
recognized, such as Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investor's
Daily, Kiplinger's Personal Finance Magazine, Money,
Morningstar Mutual Fund Values, The New York Times,
USA Today and The Wall Street Journal.
The Portfolio's average annual total return figures
are computed according to a formula prescribed by the
SEC, expressed as follows:
P(1+T)n = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return,
including the effect of the maximum
annual fee for participation in
TRAK.
n= number of years
ERV= Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or 10-
year period at the end of a 1-, 5-
or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and the effect of the
maximum annual fee for participation
in TRAK.
The ERV assumes complete redemption of the
hypothetical investment at the end of the measuring
period. The Portfolio's 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 the Portfolio's performance for
any specified period in the future.
The Portfolio's performance will vary from time to
time depending upon market conditions, the
composition of its portfolio and its operating
expenses. Consequently, any given performance
quotation should not be considered representative of
the 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 the Portfolio with certain bank
deposits or other investments that pay a fixed yield
for a stated period of time. Investors comparing the
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 Portfolio's shares,
including data from Lipper Analytical Services, Inc.,
Standard & Poor's 500 Composite Stock Price Index and
other industry publications.
Yield and Equivalent Taxable Yield
From time to time, the Trust may also quote the
Portfolio's yield in advertisements or in reports and
other communications to shareholders. The 30-day
yield figure 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 the 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.
The 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.
Investors should recognize that in periods of
declining interest rates, the Portfolio's yield will
tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates will
tend to be somewhat lower. In addition, when interest
rates are falling, the inflow of net new money to the
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.
TAXES
The following is a summary of certain federal income
tax considerations that may affect the Portfolio and
its shareholders. In addition to the considerations
described below, there may be other federal, state,
local or foreign tax applications to consider. The
summary does not address all of the potential federal
income tax consequences that may be applicable to the
Portfolio or to all categories of investors, some of
which may be subject to special tax rules. The
summary is not intended as a substitute for
individual tax advice and investors are urged to
consult their own tax advisors as to the tax
consequences of an investment in the Portfolio. The
summary is based on the laws in effect on the date of
this SAI, which are subject to change.
The Portfolio intends to qualify in each year as a
separate "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the
"Code"), by complying with certain requirements
regarding the sources and distribution of its income
and the diversification of its assets. Provided that
the Portfolio (i) is a regulated investment company
and (ii) distributes to its shareholders at least 90%
of its taxable net investment income (including, for
this purpose, any excess of its net short-term
capital gain over its net long-term capital loss) for
a taxable year and 90% of its tax-exempt interest
income (reduced by certain expenses for that year),
it will not be liable for federal income taxes to the
extent its taxable net investment income and its net
realized long-term and short-term capital gains, if
any, are distributed to its shareholders in
compliance with the Code's timing and other
requirements.
If, in any taxable year, the 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, the Portfolio's distributions, to
the extent derived from the Portfolio's 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
would otherwise (at least in part) be treated as
long-term capital gains. If the 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 the
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 with respect to certain of its assets
(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, the
Portfolio may make an additional distribution shortly
before or shortly after December 31 in each year of
any undistributed ordinary income or capital gains.
The Portfolio generally will seek to pay any
additional dividends and distributions necessary to
avoid the application of this tax.
As described above, the Portfolio may invest in
certain types of warrants, foreign currencies,
forward contracts, options and futures contracts. The
Portfolio anticipates that these investment
activities will not prevent it from qualifying as a
regulated investment company.
The Portfolio's transactions in foreign currencies,
forward contracts, options and futures contracts
(including options and futures contracts on foreign
currencies) will be subject to special provisions of
the Code that, among other things, may affect the
character of gains and losses realized by the
Portfolio (i.e., may affect whether gains or losses
are ordinary or capital and, if capital, the extent
to which they are long-term or short-term),
accelerate recognition of income to the Portfolio and
defer Portfolio losses. These rules could therefore
affect the character, amount and timing of
distributions to shareholders. These provisions also
(i) will require the Portfolio to mark-to-market
certain types of positions in its portfolio (i.e.,
treat them as if they were closed out), and (ii) may
cause the Portfolio to recognize income without
receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and
excise taxes that are referred to above. The
Portfolio will monitor its transactions, will make
the appropriate tax elections, if any, and will make
the appropriate entries in its books and records when
it acquires any foreign currency, forward contract,
option, futures contract or hedged investment in
order to mitigate the effect of these rules and seek
to prevent disqualification of the Portfolio as a
regulated investment company.
As a general rule, the Portfolio's gain or loss on a
sale or exchange of an investment will be a long-term
capital gain or loss if the Portfolio has held the
investment for more than one year and will be a
short-term capital gain or loss if it has held the
investment for one year or less. Gains or losses on
the sale of debt securities denominated in a foreign
currency may be recharacterized as ordinary income or
losses, as described below.
The Portfolio expects to realize a significant amount
of net long-term capital gains that will be
distributed as described in the Prospectus.
Distributions of 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 on the sale or exchange of the share,
to the extent of the capital gain dividend, will be
treated as a long-term capital loss.
Dividends or other income (including, in some cases,
capital gains) received by the 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. The Portfolio will not be
eligible to elect to treat any foreign taxes paid by
it as paid by its shareholders, who therefore will
not be entitled to deductions or credits for such
taxes on their own tax returns.
The Portfolio may be required to treat amounts as
taxable income or gain, subject to the distribution
requirements referred to above, even though no
corresponding amounts of cash are received
concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to
passive foreign investment companies or partnerships
or trusts in which the Portfolio invests or to
certain options, futures or forward contracts, or
"appreciated financial positions" or (2) the
inability to obtain cash distributions or other
amounts due to currency controls or restrictions on
repatriation imposed by a foreign country with
respect to the Portfolio's investments (including
through depositary receipts) in issuers in such
country or (3) tax rules applicable to debt
obligations acquired with "original issue discount,"
including zero-coupon or deferred payment bonds and
pay-in-kind debt obligations, or to market discount
if an election is made with respect to such market
discount. The Portfolio may therefore be required to
obtain cash to be used to satisfy these distribution
requirements by selling securities at times that it
might not otherwise be desirable to do so or
borrowing the necessary cash, thereby incurring
interest expenses.
Under Section 988 of the Code, gains or losses
attributable to fluctuations in exchange rates
between the time the Portfolio accrues income or
receivables or expenses or other liabilities
denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such
liabilities are generally treated as ordinary income
or ordinary loss. Similarly, gains or losses on
foreign currency, foreign currency forward contracts,
certain foreign currency options or futures contracts
and the disposition of debt securities denominated in
foreign currency, to the extent attributable to
fluctuations in exchange rates between the
acquisition and disposition dates, are also treated
as ordinary income or loss.
The Portfolio is permitted to carry forward any
unused capital losses to be utilized to offset its
capital gains realized during the eight-year period
following the year in which the losses arose, which
will reduce the net realized capital gains (if any)
required to be distributed to shareholders for those
years.
Dividends and Distributions
For federal income tax purposes, dividends declared
by the Portfolio in October, November or December as
of a record date in such a month and which are
actually paid in January of the following year will
be taxable to shareholders as if they were paid on
December 31 of the year in which they are declared
rather than in the year in which shareholders
actually receive the dividends.
As a general rule, a shareholder's gain or loss on a
redemption or other disposition of Portfolio shares
that is treated as a sale under the Code will be a
long-term capital gain or loss if the shareholder has
held his or her Portfolio shares for more than one
year and will be a short-term capital gain or loss if
he or she has held his or her Portfolio shares for
one year or less.
The Portfolio may realize net long-term capital
gains. Distributions of any excess of net long-term
capital gain over net short-term capital loss
("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless
of whether received in cash or reinvested in
additional shares and how long a shareholder has held
Portfolio shares. 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 the Portfolio
that are declared from net investment income and are
attributable to qualifying dividends received by the
Portfolio from domestic corporations may qualify for
the federal dividends-received deduction for
corporations.
Each shareholder will receive after the close of the
calendar year an annual statement as to the federal
income tax status of his or her dividends and
distributions for the prior calendar year. Each
shareholder will also receive, if appropriate,
various written notices after the close of the
Portfolio's prior taxable year as to the federal
income tax status of the Portfolio during the
Portfolio's prior taxable year. Shareholders should
consult their tax advisors as to any state and local
taxes that may apply to these dividends and
distributions and the possible availability of an
exemption from such state or local taxes for
dividends paid by the Portfolio attributable to
interest the Portfolio earns from U.S. Government
obligations.
If the Portfolio is the holder of record of any stock
on the record date for any dividends payable with
respect to the stock, these dividends will be
included in the Portfolio's gross income as of the
later of (i) the date the stock became ex-dividend
with respect to the dividends (i.e., the date on
which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (ii)
the date the Portfolio acquired the stock.
Accordingly, in order to satisfy its income
distribution requirements, the Portfolio may be
required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in
an earlier year than would otherwise be the case.
Investors considering buying shares of the Portfolio
on or just prior to the record date for a taxable
dividend or capital gain distribution should be aware
that even if the net asset value of the Portfolio's
shares is reduced below the investor's cost as a
result of the distribution, the amount of the
forthcoming dividend or distribution payment will be
a taxable dividend or distribution payment even
though it may represent a return of invested capital.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend
or interest income, or fails to certify that he or
she has provided a correct taxpayer identification
number and that he or she is not subject to "backup
withholding," then the shareholder may be subject to
a 31% "backup withholding" tax with respect to (i)
dividends and distributions and (ii) the proceeds of
any redemptions of Portfolio shares. An individual's
taxpayer identification number is his or her social
security number. The 31% "backup withholding" tax is
not an additional tax and may be credited against a
taxpayer's federal income tax liability.
Distributions to nonresident aliens and foreign
entities may be subject to different tax rules,
including other possible withholding taxes.
The foregoing is only a summary of certain tax
considerations generally affecting the Portfolio and
its shareholders, and is not intended as a substitute
for careful tax planning. Shareholders are urged to
consult their tax advisors with specific reference to
their own tax situations, including their state and
local tax liabilities.
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.
