As Filed with the Securities and Exchange Commission on February 28, 2000
FILE NO. 811-7884
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
THE INTERNATIONAL EQUITY PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 557-0700
Christopher J. Kelley, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933, as amended (the "1933 Act"), because such interests will
be issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant may only be made by other investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in the Registrant.
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PART A
Responses to Items 1,2,3,5 and 9 have been omitted pursuant to paragraph 2(b) of
Instruction B of the General Instructions to Form N-1A.
Item 4. Investment Objectives, Principal Investment Strategies, and Related
Risks for the International Equity Portfolio (the "Portfolio").
INVESTMENT OBJECTIVE
The Portfolio's investment objective, which is non-fundamental and can
be changed without the approval of interest holders, is to provide high total
return from a portfolio of foreign equity securities.
PORTFOLIO MANAGER
The following persons are primarily responsible for the day-to-day
management and implementation of the Advisor's process for the Portfolio (the
inception date of each person's responsibility for the Portfolio and his
business experience for the past five years is indicated parenthetically): Paul
A. Quinsee, Vice President (since April, 1993; employed by J.P. Morgan since
prior to 1993) and Nigel Emmett, Vice President (since August, 1997; previously
an assistant manager at Brown Brothers Harriman and Co. and a portfolio manager
at Gartmore Investment Management).
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
The Portfolio invests primarily in equity securities from developed countries
included in the Morgan Stanley Capital International Europe, Australasia, and
Far East Index (EAFE), which is the Portfolio's benchmark. The Portfolio
typically does not invest in U.S. companies.
The Portfolio's industry weightings generally approximate those of the EAFE
Index, although it does not seek to mirror the index in its choice of individual
securities, and may overweight or underweight countries relative to the EAFE
Index. In choosing stocks, the Portfolio emphasizes those that are ranked as
undervalued according to J.P. Morgan's proprietary research, while
underweighting or avoiding those that appear overvalued. The Portfolio makes its
currency management decisions as described below.
There can be no assurance that the investment objective of the Portfolio will be
achieved. Future returns will not necessarily resemble past performance. The
Portfolio does not represent a complete investment program.
The value of investment in the Portfolio will fluctuate in response to movements
in international stock markets and currency exchange rates. Portfolio
performance will also depend on the effectiveness of J.P. Morgan's research and
the management team's stock picking and currency management decisions.
In general, international investing involves higher risks than investing in U.S.
markets but offers attractive opportunities for diversification. Foreign markets
tend to be more volatile than those of the U.S., and changes in currency
exchange rates could reduce market performance. To the extent that the Portfolio
hedges its currency exposure into the U.S. dollar, it may reduce the effects of
currency fluctuations. The Portfolio may also hedge from one foreign currency to
another. Foreign stocks are generally riskier than their domestic counterparts.
Investors should be prepared to ride out periods of underperformance.
INVESTMENT PROCESS
The Portfolio's philosophy, developed by its advisor, focuses on allocating
assets by country, selecting stocks and managing currency exposure. The
Portfolio largely avoids using sector or market-timing strategies.
Through its extensive global equity research and analytical systems, J.P. Morgan
seeks to generate an information advantage. Using fundamental analysis as well
as macro-economic models, J.P. Morgan develops proprietary research on
countries, companies, and currencies. In these processes, the analysts focus on
a relatively long period rather than on near-term expectations alone. The team
of analysts dedicated to international equities includes more than
90 members around the world, with an average of nearly ten years of experience.
In managing the Portfolio, J.P. Morgan employs a three-step process that
combines country allocation, fundamental research for identifying portfolio
securities, and currency management decisions:
COUNTRY ALLOCATION J.P. Morgan takes an in-depth look at the relative valuations
and economic prospects of different countries, ranking the attractiveness of
their markets. Using these rankings, a team of strategists establishes a country
allocation for the Portfolio. Country allocation may vary either significantly
or moderately from the benchmark. J.P. Morgan considers the developed countries
of Europe, excluding the U.K., as a whole while monitoring the Portfolio's
exposure to any one country.
STOCK SELECTION Various models are used to quantify J.P. Morgan's fundamental
stock research, producing a ranking of companies in each industry group
according to their relative value. The Portfolio's management team then buys and
sells stocks, using the research and valuation rankings as well as its
assessment of other factors, including:
o catalysts that could trigger a change in a stock's price o potential reward
compared to potential risk o temporary mispricings caused by market
overreactions
CURRENCY MANAGEMENT The Portfolio has access to J.P. Morgan's currency
specialists in determining the extent and nature of its exposure to various
foreign currencies. The Portfolio typically maintains full currency exposure to
those markets in which it invests.
The following table discusses the main elements that make up the Portfolio's
overall risk characteristics. It also outlines the Portfolio's policies toward
various securities, including those that are designed to help the Portfolio
manage risk.
Potential risks
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Foreign and other market conditions
o The Portfolio's share price and performance will fluctuate in response to
stock and bond market movements
o The value of most bonds will fall when interest rates rise; the longer a
bond's maturity and the lower its credit quality, the more its value
typically falls
o The Portfolio could lose money because of foreign government actions,
political instability, or lack of adequate and/or accurate information
o Investment risks tend to be higher in emerging markets. These markets also
present higher liquidity and valuation risks
o Adverse market conditions may from time to time cause the Portfolio to take
temporary defensive positions that are inconsistent with its principal
investment strategies and may hinder the Portfolio from achieving its
investment objective
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Management choices
o The Portfolio could underperform its benchmark due to its securities choices
and other management decisions
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Foreign currencies
o Currency exchange rate movements could reduce gains or create losses
o Currency risks tend to be higher in emerging markets
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When-issued and delayed delivery securities
o When the Portfolio buys securities before issue or for delayed delivery, it
could be exposed to leverage risk if it does not use segregated accounts
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Derivatives
o Derivatives such as futures, options, swaps, and forward foreign currency
contracts(1) that are used for hedging the portfolio or specific securities
may not fully offset the underlying positions and this could result in losses
to the Portfolio that would not have otherwise occurred
o Derivatives used for risk management may not have the intended effects and may
result in losses or missed opportunities
o The counterparty to a derivatives contract could default
o Derivatives that involve leverage could magnify losses
o Certain types of derivatives involve costs to the Portfolio which can reduce
returns
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Securities Lending
o When the Portfolio lends a security, the loaned securities may not be returned
if the borrower defaults
o The collateral will be subject to the risks of the securities in which it is
invested
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Illiquid holdings
o The Portfolio could have difficulty valuing these holdings precisely
o The Portfolio could be unable to sell these holdings at the time or price it
desired
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Short-term trading
o Increased trading could raise the Portfolio's brokerage and related costs
o Increased short-term capital gains distributions could raise shareholders'
income tax liability
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Policies to balance risk and reward
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Foreign and other market conditions
o Under normal circumstances the Portfolio plans to remain fully invested, with
at least 65% in stocks; stock investments may include convertible securities,
preferred stocks, depository receipts (such as ADRs and EDRs), trust or
partnership interests, warrants, rights, and investment company securities
o The Portfolio seeks to limit risk and enhance performance through active
management, country allocation and diversification
o During severe market downturns, the Portfolio has the option of investing up
to 100% of assets in investment-grade short-term securities
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Management choices
o J.P. Morgan focuses its active management on securities selection, the area
where it believes its commitment to research can most enhance returns
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Foreign currencies
o Except as noted earlier in this prospectus, the Portfolio manages the currency
exposure of its foreign investments relative to its benchmark and may hedge a
portion of its foreign currency exposure into the U.S. dollar from time to time.
(see also "Derivatives")
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When-issued and delayed delivery securities
o The Portfolio uses segregated accounts to offset leverage risk
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Derivatives
o The Portfolio uses derivatives, such as futures, options, swaps, and forward
foreign currency contracts, for hedging and for risk management (i.e., to
establish or adjust exposure to particular securities, markets or currencies);
risk management may include management of the Portfolio's exposure relative to
its benchmark
o The Portfolio only establishes hedges that it expect will be highly correlated
with underlying positions
o While the Portfolio may use derivatives that incidentally involve leverage, it
does not use them for the specific purposes of leveraging its portfolio
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Securities Lending
o J.P. Morgan maintains a list of approved borrowers
o The Portfolio receives collateral equal to at least 100% of the current value
of the securities loaned
o The lending agents indemnify the Portfolio against borrower default
o J.P. Morgan's collateral investment guidelines limit the quality and duration
of collateral investment to minimize losses
o Upon recall, the borrower must return the securities loaned within the normal
settlement period
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Illiquid Holdings
o The Portfolio may not invest more than 15% of net assets in illiquid holdings
o To maintain adequate liquidity, the Portfolio may hold investment-grade
short-term securities (including
repurchase agreements and reverse repurchase agreements)and, for temporary or
extraordinary purposes, may borrow from banks up to 33 1/3% of the value of its
total assets
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Short-term trading
o The Portfolio generally avoids short-term trading, except to take advantage of
attractive or unexpected opportunities or to meet demands generated by
shareholder activity. The turnover rate for the Portfolio for its most recent
fiscal year end was 70%.
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(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on changes in the value of a securities index. An option is the right to
buy or sell a set quantity of an underlying instrument at a predetermined price.
A swap is a privately negotiated agreement to exchange one stream of payments
for another. A forward foreign currency contract is an obligation to buy or sell
a given currency on a future date and at a set price.
ITEM 6. MANAGEMENT OF THE PORTFOLIO.
BUSINESS STRUCTURE
The International Equity Portfolio (the "Portfolio") is a diversified,
open-end management investment company which was organized as a trust under the
laws of the State of New York on January 29, 1993. Beneficial interests in the
Portfolio are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may only be made by other investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
MANAGEMENT AND ADMINISTRATION
The Board of Trustees provides broad supervision over the affairs of the
Portfolio. The Portfolio has retained the services of JPMIM as investment
adviser and Morgan as administrative services agent. The Portfolio has retained
the services of Funds Distributor, Inc. ("FDI") as co-administrator (the "Co-
Administrator").
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving in this capacity.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement, dated July 11, 1996, with Pierpont Group, Inc. ("Pierpont
Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio. The fees to be paid under the agreement
approximate the reasonable cost of Pierpont Group in providing these services to
the Portfolio and certain other registered investment companies subject to
similar agreements with Pierpont Group. Pierpont Group was organized in 1989 at
the request of the Trustees of The Pierpont Family of Funds for the purpose of
providing these services at cost to those funds. See Item 14 in Part B. The
principal offices of Pierpont Group are located at 461 Fifth Avenue, New York,
New York 10017.
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Advisory Services 0.60% of the Portfolio's average daily net
assets
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Administrative Services (fee shared Portfolio's pro rata portions of 0.90% of
with Funds Distributor, Inc.) the first $7 billion of average net assets
in J.P. Morgan-advised portfolios, plus
0.04% of average net assets over $7 billion
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J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the Portfolio.
ITEM 7. SHAREHOLDER INFORMATION
INVESTING
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Item 19 of Part B as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of Morgan,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
policies of the Portfolio; (ii) be acquired by the Portfolio for investment and
not for resale; (iii) be liquid securities which are not restricted as to
transfer either by law or liquidity of market; and (iv) if stock, have a value
which is readily ascertainable as evidenced by a listing on a stock exchange,
OTC market or by readily available market quotations from a dealer in such
securities. The Portfolio reserves the right to accept or reject at its own
option any and all securities offered in payment for beneficial interests.
The Portfolio and FDI reserve the right to cease accepting investments
at any time or to reject any investment order.
ADDING TO YOUR ACCOUNT
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio at the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected at the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time on the following Portfolio Business Day.
SELLING SHARES
An investor in the Portfolio may reduce all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on the New York Stock Exchange is restricted
or, to the extent otherwise permitted by the 1940 Act, if an emergency exists.
REDEMPTION IN KIND
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
portfolio, as the case may be.
ACCOUNT AND TRANSACTION POLICIES
Business Hours and NAV Calculation
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
determination is made once each Portfolio Business Day at the close of trading
on the New York Stock Exchange (normally 4:00pm) (the "Valuation Time"). See
Item 19 in Part B.
DIVIDENDS AND DISTRIBUTIONS
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to FDI at 60 State Street, Boston
Massachusetts 02109 or by calling FDI at (617) 557-0700.
TAX CONSIDERATIONS
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code") and regulations promulgated thereunder.
ITEM 8. DISTRIBUTION ARRANGEMENTS: Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-14
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-18
Investment Advisory and Other Services . . . . . . . B-18
Brokerage Allocation and Other Practices . . . . . . B-22
Capital Stock and Other Securities . . . . . . . . . B-24
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B-25
Tax Status . . . . . . . . . . . . . . . . . . . . . B-26
Underwriters . . . . . . . . . . . . . . . . . . . . B-28
Calculations of Performance Data . . . . . . . . . . B-29
Financial Statements . . . . . . . . . . . . . . . . B-29
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The International Equity Portfolio (the
"Portfolio") is to provide high total return from a portfolio of foreign company
stocks. The Portfolio seeks to achieve its investment objective by investing
primarily in the equity securities of foreign corporations consisting of common
stocks and other securities with equity characteristics comprised of preferred
stock, warrants, rights, convertible securities, depositary receipts, trusts or
limited partnership interests and equity participations (collectively "Equity
Securities"). Under normal circumstances, the Portfolio expects to invest at
least 65% of its total assets in such securities. The Portfolio does not intend
to invest in U.S. securities (other than money-market instruments), except
temporarily, when extraordinary circumstances prevailing at the same time in a
significant number of developed foreign countries render investments in such
countries inadvisable.
The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
INVESTMENT PROCESS
Country allocation: The Advisor's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Advisor calculates this risk premium for each of the
nations in the Portfolio's universe, determines the extent of its deviation --
if any -- from its historical norm, and then ranks countries according to the
size of those deviations. Countries with high (low) rankings are overweighted
(underweighted) in comparisons to the EAFE Index to reflect the above-average
(below-average) attractiveness of their stock markets. In determining
weightings, the Advisor analyzes a variety of qualitative factors as well --
including the liquidity, earnings momentum and interest rate climate of the
market at hand. These qualitative assessments can change the magnitude but not
the direction of the country allocations called for by the risk premium
forecast. The Advisor places limits on the total size of the Portfolio's country
over- and under-weightings relative to the EAFE Index.
Stock selection: The Advisor's more than 90 international equity
analysts, each an industry and country specialist, forecast normalized earnings
and dividend payouts for roughly 1,200 non-U.S. companies -- taking a long-term
perspective rather than the short time frame common to consensus estimates.
These forecasts are converted into comparable expected returns by a dividend
discount model, and then companies are ranked from most to least attractive by
industry and country. A diversified portfolio is constructed using disciplined
buy and sell rules. The portfolio manager's objective is to concentrate the
Portfolio's holdings in the stocks deemed most undervalued, and to keep sector
weightings close to those of the EAFE Index, the Portfolio's benchmark. Once a
stock falls into the bottom third of the rankings, it generally becomes a sales
candidate. Where available, warrants and convertibles may be purchased instead
of common stock if they are deemed a more attractive means of investing in an
undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Portfolio's return. The Advisor's currency decisions are supported by a
proprietary tactical mode which forecasts currency movements based on an
analysis of four fundamental factors -- trade balance trends, purchasing power
parity, real short-term interest differentials, and real bond yields -- plus a
technical factor designed to improve the timing of transactions. Combining the
output of this model with a subjective assessment of economic, political and
market factors, the Advisor's currency specialists recommend currency strategies
that are implemented in conjunction with the Portfolio's investment strategy.
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
MONEY MARKET INSTRUMENTS
As discussed in Part A, the Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolio appears below. Also see "Quality and Diversification
Requirements".
U.S. TREASURY SECURITIES. The Portfolio may invest in direct obligations of
the U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Portfolio must look principally to the federal agency issuing
or guaranteeing the obligation for ultimate repayment and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Portfolio
may invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Bank and the U.S. Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. The Portfolio, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. These securities may be denominated in U.S. dollars or
in another currency. See "Foreign Investments".
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in assets and are organized under the laws
of the United States or any state, (ii) foreign branches of these banks or of
foreign banks (Euros) and (iii) U.S. branches of foreign banks (Yankees). The
Portfolio will not invest in obligations for which the Advisor, or any of its
affiliated persons, is the ultimate obligor or accepting bank. The Portfolio may
also invest in obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment Bank, the
Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. The Portfolio may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee,
in its capacity as investment advisor to the Portfolio and as fiduciary for
other clients for whom it exercises investment discretion. The monies loaned to
the borrower come from accounts managed by Morgan or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited to
such accounts. Morgan, acting as a fiduciary on behalf of its clients, has the
right to increase or decrease the amount provided to the borrower under an
obligation. The borrower has the right to pay without penalty all or any part of
the principal amount then outstanding on an obligation together with interest to
the date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by Morgan. Since master demand obligations typically are
not rated by credit rating agencies, the Portfolio may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Portfolio's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Portfolio to be liquid because they are payable upon demand.
The Portfolio does not have any specific percentage limitation on investments in
master demand obligations.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolio will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolio in each agreement plus accrued
interest, and the Portfolio will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Portfolio's Custodian. If the seller defaults, the Portfolio might incur a loss
if the value of the collateral securing the repurchase agreement declines and
might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, realization upon disposal of the collateral by the Portfolio may
be delayed or limited. See "Investment Restrictions".
The Portfolio may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described herein.
EQUITY INVESTMENTS
As discussed in Part A, the Portfolio invests primarily in Equity
Securities. The Equity Securities in which the Portfolio invests include those
listed on any domestic or foreign securities exchange or traded in the
over-the-counter (OTC) market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may be
purchased by the Portfolio appears in Part A and below.
EQUITY SECURITIES. The Equity Securities in which the Portfolio may invest
may or may not pay dividends and may or may not carry voting rights. Common
stock occupies the most junior position in a company's capital structure.
The convertible securities in which the Portfolio may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock
warrants that entitle the holder to buy common stock from the issuer of the
warrant at a specific price (the strike price) for a specific period of time.
The market price of warrants may be substantially lower than the current market
price of the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not represent any rights
in the assets of the issuing company. A warrant will expire worthless if it is
not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may invest in securities of foreign issuers directly or
in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other similar
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs include American Depositary Shares and New York Shares.
EDRs are receipts issued by a European financial institution. GDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies,
the value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Portfolio may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the underlying
currency exposure related to foreign investments. The Portfolio will not enter
into such commitments for speculative purposes.
The Portfolio may also invest in countries with emerging economies or
securities markets. Political and economic structures in many of such countries
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of such countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the value of the Portfolio's investments in those countries and the
availability to the Portfolio of additional investments in those countries. The
small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make the Portfolio's investments in such countries illiquid and more volatile
than investments in more developed countries, and the Portfolio may be required
to establish special custodial or other arrangements before making certain
investments in those countries. There may be little financial or accounting
information available with respect to issuers located in certain of such
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers.
For a description of the risks associated with investing in foreign
securities, see "Additional Investment Information and Risk Factors" in Part A.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for fixed income securities no interest accrues to the Portfolio
until settlement takes place. At the time the Portfolio makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining
its net asset value and, if applicable, calculate the maturity for the purposes
of average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, the Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, the Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account and/or
from cash flow. If the Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio obligation, incur a gain or loss due to market
fluctuation. Also, the Portfolio may be disadvantaged if the other party to the
transaction defaults.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the 1940 Act or
any order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio. As a shareholder of another investment
company, the Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Portfolio bears directly in connection with its own operations.
The Securities and Exchange Commission ("SEC") has granted the
Portfolio an exemptive order permitting it to invest its uninvested cash in any
of the following affiliated money market funds: J.P. Morgan Institutional Prime
Money Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P.
Morgan Institutional Federal Money Market Fund and J.P. Morgan Institutional
Treasury Money Market Fund. The order sets forth the following conditions: (1)
the Portfolio may invest in one or more of the permitted money market funds up
to an aggregate limit of 25% of its assets; and (2) the Advisor will waive
and/or reimburse its advisory fee from the Portfolio in an amount sufficient to
offset any doubling up of investment advisory and shareholder servicing fees.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Portfolio and, therefore, a form of
leverage. Leverage may cause any gains or losses for a Portfolio to be
magnified. The Portfolio will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, except for liquidity purposes, the Portfolio
will enter into a reverse repurchase agreement only when the expected return
from the investment of the proceeds is greater than the expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio will establish and maintain with the custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. See
"Investment Restrictions" for the Portfolio's limitations on reverse repurchase
agreements and bank borrowings.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
investors. The Portfolio may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances, including the creditworthiness of the borrowing financial
institution, and the Portfolio will not make any loans in excess of one year.
The Portfolio will not lend its securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolio, the Advisor or the placement
agent, unless otherwise permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in Part A.
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act"), before it may be sold, the Portfolio may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between the
time of the decision to sell and the time the Portfolio may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio intends to meet the diversification requirements of the
1940 Act. Current 1940 Act diversification requirements require that with
respect to 75% of the assets of the Portfolio: (1) the Portfolio may not invest
more than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (2)
the Portfolio may not own more than 10% of the outstanding voting securities of
any one issuer. As for the other 25% of the Portfolio's assets not subject to
the limitation described above, there is no current limitation on investment of
these assets under the 1940 Act, so that all of such assets may be invested in
securities of any one issuer, subject to the limitation of any applicable state
securities laws. Investments not subject to the limitations described above
could involve an increased risk to the Portfolio should an issuer, or a state or
its related entities, be unable to make interest or principal payments or should
the market value of such securities decline.
The Portfolio may invest in convertible debt securities, for which
there are no specific quality requirements. In addition, at the time the
Portfolio invests in any commercial paper, bank obligation or repurchase
agreement, the issuer must have outstanding debt rated A or higher by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("Standard & Poor's"), the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion. At the time the Portfolio invests
in any other short-term debt securities, they must be rated A or higher by
Moody's or Standard & Poor's, or if unrated, the investment must be of
comparable quality in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased or
sold by the Portfolio will be traded on a securities exchange or will be
purchased or sold by securities dealers (OTC options) that meet creditworthiness
standards approved by the Portfolio's Board of Trustees. While exchange-traded
options are obligations of the Options Clearing Corporation, in the case of OTC
options, the Portfolio relies on the dealer from which it purchased the option
to perform if the option is exercised. Thus, when the Portfolio purchases an OTC
option, it relies on the dealer from which it purchased the option to make or
take delivery of the underlying securities. Failure by the dealer to do so would
result in the loss of the premium paid by the Portfolio as well as loss of the
expected benefit of the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
futures and options transactions the Portfolio may purchase or sell futures
contracts and purchase and sell put and call options, including put and call
options on futures contracts. Futures contracts obligate the buyer to take and
the seller to make delivery at a future date of a specified quantity of a
financial instrument or an amount of cash based on the value of a securities
index. Currently, futures contracts are available on various types of fixed
income securities, including but not limited to U.S. Treasury bonds, notes and
bills, Eurodollar certificates of deposit and on indexes of fixed income
securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolio's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and Over the Counter
Options" above for a discussion of the liquidity of options not traded on an
exchange).
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. Although the
Portfolio will not be a commodity pool, certain derivatives subjects the
Portfolio to the rules of the Commodity Futures Trading Commission which limit
the extent to which the Portfolio can invest in such derivatives. The Portfolio
may invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, the Portfolio may not invest in such contracts
and options for other purposes if the sum of the amount of initial margin
deposits and premiums paid for unexpired options with respect to such contracts,
other than for bona fide hedging purposes, exceeds 5% of the liquidation value
of the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on such contracts and options; provided, however, that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation.
In addition, the Portfolio will comply with guidelines
established by the SEC with respect to coverage of options and futures contracts
by mutual funds, and if the guidelines so require, will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures
contract or option is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of the Portfolio's assets could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
SWAPS AND RELATED SWAP PRODUCTS. The Portfolio may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Portfolio may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. The Portfolio
will not sell interest rate caps, floors or collars if it does not own
securities with coupons which provide the interest that the Portfolio may be
required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Portfolio is obligated to make payments more frequently than it
receives payments from the other party, it will incur incremental credit
exposure to that swap counterparty. This risk may be mitigated somewhat by the
use of swap agreements which call for a net payment to be made by the party with
the larger payment obligation when the obligations of the parties fall due on
the same date. Under most swap agreements entered into by the Portfolio,
payments by the parties will be exchanged on a "net basis", and the Portfolio
will receive or pay, as the case may be, only the net amount of the two
payments.
The amount of the Portfolio 's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio 's potential loss if it sells a cap or collar. If the Portfolio
buys a cap, floor or collar, however, the Portfolio 's potential loss is limited
to the amount of the fee that it has paid. When measured against the initial
amount of cash required to initiate the transaction, which is typically zero in
the case of most conventional swap transactions, swaps, caps, floors and collars
tend to be more volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Portfolio will be less favorable than if these techniques had
not been used. These instruments are typically not traded on exchanges.
Accordingly, there is a risk that the other party to certain of these
instruments will not perform its obligations to the Portfolio or that the
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its position under certain of these instruments when it
wishes to do so.
Such occurrences could result in losses to the Portfolio.
The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.
The Portfolio will maintain cash or liquid assets in a segregated
account with its custodian in an amount sufficient at all times to cover its
current obligations under its swap transactions, caps, floors and collars. If
the Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the Portfolio
's accrued obligations under the swap agreement over the accrued amount the
Portfolio is entitled to receive under the agreement. If the Portfolio enters
into a swap agreement on other than a net basis, or sells a cap, floor or
collar, it will segregate assets with a daily value at least equal to the full
amount of the Portfolio 's accrued obligations under the agreement.
The Portfolio will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Portfolio 's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Portfolio will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Portfolio 's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which the
Portfolio may engage in such transactions.
PORTFOLIO TURNOVER. The portfolio turnover rates for the Portfolio for
the fiscal years ended October 31, 1998 and 1999 were 74% and 70%, respectively.
A rate of 100% indicates that the equivalent of all of the Portfolio's assets
have been sold and reinvested in a year. High portfolio turnover may result in
the realization of substantial net capital gains. To the extent net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. See Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a security holders meeting if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, or (b) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
The Portfolio:
1. May not make any investments inconsistent with its classification as a
diversified investment company under the Investment Company Act of 1940;
2. May not purchase any security which would cause the Portfolio to concentrate
its investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Portfolio may (a) invest in securities or other instruments
directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Portfolio from purchasing, selling and entering into financial
futures contracts (including futures contracts on indices of securities,
interest rates and currencies), options on financial futures contracts
(including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to
physical commodities; and
8. May make loans to other persons, in accordance with its investment objective
and policies and to the extent permitted by applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by the Trustees. These non-fundamental investment policies require that the
Portfolio:
(i) May not acquire any illiquid securities, such as repurchase
agreements with more than seven days to maturity or fixed time deposits with a
duration of over seven calendar days, if as a result thereof, more than 10% of
the ^ market value of the Portfolio's total assets would be in investments which
are illiquid;
(ii) May not purchase securities on margin, make short sales of
securities, or maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of when-issued or delayed
delivery securities.
(iii) May not acquire securities of other investment companies, except
as permitted by the 1940 Act or any order pursuant thereto.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
TRUSTEES
The mailing address of the Trustees of the Portfolio is c/o Pierpont
Group, Inc., 461 Fifth Avenue, New York, New York 10017. Their names, principal
occupations during the past five years and dates of birth are set forth below:
Frederick S. Addy -- Trustee; Retired; Former Executive Vice President and
Chief Financial Officer, Amoco Corporation. His date of birth is January 1,
1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His date of birth is May 23, 1934.
Matthew Healey1 -- Trustee; Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc. ("Pierpont Group") since prior to 1993. His date of birth
is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His date of
birth is March 17, 1934.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Master Portfolios (as defined below), the J.P. Morgan Funds, the
J.P. Morgan Institutional Funds and J.P. Morgan Series Trust and is reimbursed
for expenses incurred in connection with service as a Trustee. The Trustees may
hold various other directorships unrelated to the Portfolio.
Trustee compensation expenses paid by the Portfolio for the calendar
year ended December 31, 1999 are set forth below.
TOTAL TRUSTEE COMPANSATION
ACCRUED BY THE MASTER
PORTFOLIOS (*),J.P. MORGAN
AGGREGATE TRUSTEE FUNDS, J.P. MORGAN
COMPENSATION INSTITUTIONAL FUNDS AND
PAID BY THE J.P. MORGAN SERIES TRUST
NAME OF TRUSTEE TRUST DURING 1999 DURING 1999 (**)
- --------------- ----------------- -------------------------
- --------------------------------- -------------------- -------------------------
Frederick S. Addy, Trustee
$ 821 $ 75,000
- --------------------------------- -------------------- -------------------------
- --------------------------------- -------------------- -------------------------
William G. Burns, Trustee $ 821 $ 75,000
- --------------------------------- -------------------- -------------------------
- --------------------------------- -------------------- -------------------------
Arthur C. Eschenlauer, Trustee $ 821 $ 75,000
- --------------------------------- -------------------- -------------------------
- --------------------------------- -------------------- -------------------------
Matthew Healey, Trustee(***), $ 821 $ 75,000
Chairman and Chief Executive
Officer
- --------------------------------- -------------------- -------------------------
- --------------------------------- -------------------- -------------------------
Michael P. Mallardi, Trustee $ 821 $ 75,000
- --------------------------------- -------------------- -------------------------
(*) Includes the Portfolio and 18 other portfolios (collectively, the
"Master Portfolios") for which JPMIM acts as investment advisor.
(**) During 1999, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $153,800, contributed
$23,100 to a defined contribution plan on his behalf and paid $17,300
in insurance premiums for his benefit.
(***)No investment company within the fund complex has a pension or retirement
plan. Currently there are 17 investment companies (14 investment companies
comprising the Master Portfolios, the J.P. Morgan Funds, J.P. Morgan
Institutional Funds, and J.P. Morgan Series Trust) in the fund complex.
The Trustees of the Portfolio are the same as the Trustees of each of
the other Master Portfolios, the J.P. Morgan Funds and J.P. Morgan Institutional
Funds and J.P. Morgan Series Trust. A majority of the disinterested Trustees
have adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
Trustees of the Master Portfolios, the J.P. Morgan Funds and J.P. Morgan
Institutional Funds, up to and including creating a separate board of trustees.
The Trustees of the Portfolio, in addition to reviewing actions of the
Portfolios' various service providers, decide upon matters of general policy.
The Portfolio has entered into a Portfolio Fund Services Agreement with Pierpont
Group to assist the Trustees in exercising their overall supervisory
responsibilities over the affairs of the Portfolio. Pierpont Group was organized
in July 1989 to provide services for the J.P. Morgan Family of Funds (formerly,
"The Pierpont Family of Funds"), currently an investor in the Portfolio. The
Portfolio has agreed to pay Pierpont Group a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees. The aggregate fees paid to Pierpont Group by the
Portfolio for the fiscal years ended October 31, 1997, 1998 and 1999 were
$32,439, $18,453 and $9,765, respectively. The Portfolio has no employees; its
executive officers (listed below), other than the Chief Executive Officer and
the officers who are employees of the Advisor, are provided and compensated by
Funds Distributor, Inc. ("FDI"), a wholly owned, indirect subsidiary of Boston
Institutional Group. The Portfolio's officers conduct and supervise the business
operations of the Portfolio.
ADVISORY BOARD
The Trustees determined as of January 26, 2000 to establish an advisory
board and appoint four members ("Members of the Advisory Board") thereto. Each
member serves at the pleasure of the Trustees. The advisory board is distinct
from the Trustees and provides advice to the Trustees as to investment,
management and operations of the Portfolio; but has no power to vote upon any
matter put to a vote of the Trustees. It is also the current intention of the
Trustees that the Members of the Advisory Board will be proposed at the next
shareholders' meeting, expected to be held within a year from the date hereof,
for election as Trustees of the Portfolio. The creation of the Advisory Board
and the appointment of the members thereof was designed so that the Board of
Trustees will continuously consist of persons able to assume the duties of
Trustees and be fully familiar with the business and affairs of the Portfolio,
in anticipation of the current Trustees reaching the mandatory retirement age of
seventy. Each member of the Advisory Board is paid an annual fee of $75,000 for
serving in this capacity and is reimbursed for expenses incurred in connection
for such service. The members of the Advisory Board may hold various other
directorships unrelated to the Portfolio. The mailing address of the Members of
the Advisory Board is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New
York 10017. Their names, principal occupations during the past five years and
dates of birth are set forth below:
Ann Maynard Gray - President, Diversified Publishing Group and Vice
President, Capital Cities/ABC, Inc. Her date of birth is August 22, 1945.
John R. Laird -- Retired; Former Chief Executive Officer, Shearson
Lehman Brothers and The Boston Company. His date of birth is June 21, 1942.
Gerard P. Lynch -- Retired; Former Managing Director, Morgan Stanley
Group and President and Chief Operating Officer, Morgan Stanley Services, Inc.
His date of birth is October 5, 1936.
James J. Schonbachler -- Retired; Prior to September, 1998, Managing
Director, Bankers Trust Company and Chief Executive Officer and Director,
Bankers Trust A.G., Zurich and BT Brokerage Corp. His date of birth is January
26, 1943.
OFFICERS
The officers of the Portfolio, their principal occupations during the
past five years and their dates of birth are set forth below. The business
address of each of the officers unless otherwise noted is 60 State Street,
Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Country Club Estates, 10286 Saint
Andrews Road, Boynton Beach, Florida 33436. His date of birth is August 23,
1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. His date of birth is March 31,
1969.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in their Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only. Managing Director, State Street Cayman Trust Company, Ltd.
since October 1994. Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor,
Shedden Road, George Town, Grand Cayman, Cayman Islands, BWI. Her date of birth
is March 24, 1942.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Her date of birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and Client Development Manager for FDI since April 1998. From April 1997 to
March 1998, Ms. Pierce was employed by Citibank, NA as an officer of Citibank
and Relationship Manager on the Business and Professional Banking team handling
over 22,000 clients. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of Business Development
for First Data Corporation. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Portfolio. In the case of
settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of January 31, 2000, J.P. Morgan Institutional International Equity
Fund (the "Fund") and J.P. Morgan International Equity Fund, series of the J.P.
Morgan Institutional Funds and the J.P. Morgan Funds respectively, owned 88% and
12%, respectively, of the outstanding beneficial interests in the Portfolio. So
long as the Fund controls the Portfolio, the Fund may take actions without the
approval of any other holder of beneficial interests in the Portfolio.
Each of the Portfolio's investors has informed the Portfolio that
whenever it is requested to vote on matters pertaining to the Portfolio (other
than a vote by the Portfolio to continue the operation of the Portfolio upon the
withdrawal of another investor in the Portfolio), it will hold a meeting of its
shareholders and will cast its vote as instructed by those shareholders.
The officers and Trustees of the Portfolio own none of the outstanding
beneficial interests in the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is JPMIM, a
wholly-owned subsidiary of J.P. Morgan. Subject to the supervision of the
Portfolio's Trustees, the Advisor makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Prior to October 1, 1998, Morgan was the
investment advisor. JPMIM, a wholly owned subsidiary of J.P. Morgan, is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended, manages employee benefit funds of corporations, labor unions and state
and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which Morgan serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $349 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 120 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ approximately 380
capital market researchers, portfolio managers and traders.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by employees of the Advisor who
may also be acting in similar capacities for the Portfolio. See Item 17 below.
Sector weightings are generally similar to the Portfolio's benchmark
with the emphasis on security selection as the method to achieve investment
performance superior to the benchmark. The benchmark for the Portfolio is
currently the EAFE index.
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank
holding company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and abroad,
Morgan offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the United
States and throughout the world.
The Portfolio is managed by employees of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of
certain other investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.60% of the
Portfolio's average daily net assets. For the fiscal years ended October 31,
1997, 1998 and 1999 the advisory fees paid by the Portfolio to Morgan or JPMIM,
as applicable, were $5,305,885, $3,581,301 and $2,881,754.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
annually thereafter (i) by a vote of the holders of a majority of the
Portfolio's outstanding securities or by its Trustees and (ii) by a vote of a
majority of the Portfolio's Trustees who are not parties to the Investment
Advisory Agreement or "interested persons" as defined by the 1940 Act cast in
person at a meeting called for the purpose of voting on such approval. The
Investment Advisory Agreement will terminate automatically if assigned and is
terminable at any time without penalty by a vote of a majority of the Trustees
of the Portfolio or by a vote of the holders of a majority of the Portfolio's
securities on 60 days' written notice to the Advisor and by the Advisor on 90
days' written notice to the Portfolio.
The Glass-Steagall Act and other applicable laws generally prohibit
banks and their subsidiaries, such as the Advisor, from engaging in the business
of underwriting or distributing securities, and the Board of Governors of the
Federal Reserve System has issued an interpretation to the effect that under
these laws a bank holding company registered under the federal Bank Holding
Company Act or subsidiaries thereof may not sponsor, organize, or control a
registered open-end investment company continuously engaged in the issuance of
its shares, such as the Trust. The interpretation does not prohibit a holding
company or a subsidiary thereof from acting as investment advisor and custodian
to such an investment company. The Advisor believes that it may perform the
services for the Portfolio contemplated by the Advisory Agreement without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations. On November 12, 1999, the Gramm-Leach-Bliley Act was signed into
law, the relevant provisions of which go into effect March 11, 2000. Until March
11, 2000, federal banking law, specifically the Glass-Steagall Act and the Bank
Holding Company Act, generally prohibits banks and bank holding companies and
their subsidiaries, such as the Advisor, from engaging in the business of
underwriting or distributing securities. Pursuant to interpretations issued
under these laws by the Board of Governors of the Federal Reserve System, such
entities also may not sponsor, organize or control a registered open-end
investment company continuously engaged in the issuance of its shares (together
with underwriting and distributing securities, the "Prohibited Activities"),
such as the Trust. These laws and interpretations do not prohibit a bank holding
company or a subsidiary thereof from acting as investment advisor and custodian
to such an investment company. The Advisor believes that it may perform the
services for the Portfolio contemplated by the Advisory Agreement without
violation of the laws in effect until March 11, 2000. Effective March 11, 2000,
the sections of the Glass-Steagall Act which prohibited the Prohibited
Activities are repealed, and the Bank Holding Company Act is amended to permit
bank holding companies which satisfy certain capitalization, managerial and
other criteria (the "Criteria") to engage in the Prohibited Activities; bank
holding companies which do not satisfy the Criteria may continue to engage in
any activity that was permissible for a bank holding company under the Bank
Holding Company Act as of November 11, 1999. Because the services to be
performed for the Portfolio under the Advisory Agreement were permissible for a
bank holding company as of November 11, 1999, the Advisor believes that it also
may perform such services after March 11, 2000 whether or not the Advisor's
parent satisfies the Criteria. State laws on this issue may differ from the
interpretation of relevant federal law, and banks and financial institutions may
be required to register as dealers pursuant to state securities laws.
Under a separate agreement, Morgan provides administrative and related
services to the Portfolio. See "Administrative Services Agent" in Part A above.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement
dated August 1, 1996, FDI serves as the Portfolio's Co-Administrator. The
Co-Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio on not more
than 60 days' written notice nor less than 30 days' written notice to the other
party. The Co-Administrator, subject to the consent of the Trustees of the
Portfolio, may subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of the J.P. Morgan Funds, the J.P. Morgan Institutional
Funds, the Master Portfolios, and other investment companies subject to similar
agreements with FDI. For the fiscal years ended October 31, 1997, 1998 and 1999,
the following administrative fees were paid by the Portfolio to FDI: $21,379,
$11,630 and $6,065, respectively.
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. ("SBDS") (which provided placement agent
and administrative services to the Portfolio prior to August 1, 1996):
For the period November 1, 1995 through July 31, 1996: $70,197.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their aggregate average daily net assets
in excess of $7 billion, less the complex-wide fees payable to FDI. The portion
of this charge payable by the Portfolio is determined by the proportionate share
that its net assets bear to the total net assets of the J.P. Morgan Funds, the
J.P. Morgan Institutional Funds, the Master Portfolios, the other investors in
the Master Portfolios for which Morgan provides similar services and J.P. Morgan
Series Trust.
For the fiscal years ended October 31, 1997, 1998 and 1999, the Portfolio
paid Morgan $274,750, $174,789 and $124,528, respectively, in administrative
service fees.
CUSTODIAN. The Bank of New York ("BONY"), One Wall Street, New York,
New York 10286, serves as the Portfolio's custodian and fund accounting agent.
Pursuant to the Custodian Contracts, BONY is responsible for holding portfolio
securities and cash and maintaining the books of account and records of
portfolio transactions. In the case of foreign assets held outside the United
States, the custodian employs various subcustodians.
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as transfer and dividend disbursing
agent. As transfer agent and dividend disbursing agent, State Street is
responsible for maintaining account records detailing the ownership of shares
and for crediting income, capital gains and other changes in share ownership to
shareholder accounts.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio
are PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036; PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Portfolio, assists in the preparation and/or review of the
Portfolio's federal and state income tax returns and consults with the Portfolio
as to matters of accounting and federal and state income taxation.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees, registration fees under federal securities laws, and
extraordinary expenses applicable to the Portfolio. Such expenses also include
registration fees under foreign securities laws and brokerage expenses.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best execution on a competitive basis for both purchases
and sales of securities.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of the Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolio in light of facts and circumstances deemed relevant from time to time,
and, in that connection, will receive reports from the Advisor and published
data concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Advisor has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists and political
analysts. Research services furnished by brokers are used for the benefit of all
the Advisor's clients and not solely or necessarily for the benefit of the
Portfolio. The Advisor believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Portfolio
does not reduce its fee to the Advisor by any amount that might be attributable
to the value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's portfolio securities will not be purchased from or
through or sold to or through the Exclusive Placement Agent or Advisor or any
other "affiliated person" (as defined in the 1940 Act) of the Exclusive
Placement Agent or Advisor when such entities are acting as principals, except
to the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
investors, including other Portfolios, the Advisor, to the extent permitted by
applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including lower
brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The Portfolio paid the following brokerage commissions for the fiscal
years ended October 31, 1997, 1998 and 1999: $2,008,842, $1,920,469 and
$1,073,526, respectively. The increases in brokerage commissions reflected above
were due to increased portfolio activity and an increase in net investments in
the Portfolio.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange are
valued at the last quoted sale prices on such exchange. Unlisted securities are
valued at the average of the quoted bid and asked prices in the OTC market. The
value of each security for which readily available market quotations exist is
based on a decision as to the broadest and most representative market for such
security. For purposes of calculating net asset value, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S.
dollars at the prevailing currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
(normally 4:00pm) and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rule of the SEC. If interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The Portfolio is in the process of seeking exemptive relief
from the SEC with respect to redemptions in kind. If the requested relief is
granted, the Portfolio would then be permitted to pay redemptions to investors
owning 5% or more of the outstanding beneficial interests in the Portfolio in
securities, rather than in cash, to the extent permitted by the SEC and
applicable law. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. The Portfolio will not
redeem in kind except in circumstances in which an investor is permitted to
redeem in kind.
The net asset value of the Portfolio will not be computed on a day on
which no orders to purchase or withdraw beneficial interests in the Portfolio
has been received or on the days the following legal holidays are observed: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On days
when U.S. trading markets close early in observance of these holidays, the
Portfolio would expect to close for purchases and withdrawals at the same time.
The Portfolio may also close for purchases and withdrawals at such other times
as may be determined by the Trustees to the extent permitted by applicable law.
The days on which net asset value is determined are the Portfolio's business
days.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York. However, each
investor in the Portfolio will be subject to U.S. Federal income tax in the
manner described below on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Code. To ensure that investors will be able to satisfy
the requirements of subchapter M, the Portfolio must satisfy certain gross
income and diversification requirements.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. Long-term capital gain of individual investors
will be subject to a reduced rate of tax if the portfolio securities have been
held by the Portfolio for more than one year at the time of sale and will be
subject to a further reduced rate of tax if the portfolio securities have been
held by the Portfolio for more than eighteen months at the time of sale. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Gains and losses on the sale, lapse or other termination of options on
securities will be treated as gains and losses from the sale of securities. If
an option written by the Portfolio lapses or is terminated through a closing
transaction, such as a repurchase by the Portfolio of the option from its
holder, the Portfolio will realize a short-term capital gain or loss, depending
on whether the premium income is greater or less than the amount paid by the
Portfolio in the closing transaction. If securities are purchased by the
Portfolio pursuant to the exercise of a put option written by it, the Portfolio
will subtract the premium received from its cost basis in the securities
purchased.
Under the Code, gains or losses attributable to disposition of foreign
currency or to foreign currency contracts, or 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 treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition of debt
securities held by the Portfolio, if any, 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.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes--i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
The Portfolio may invest in equity securities of foreign issuers. If
the Portfolio purchases shares in certain foreign investment funds (referred to
as passive foreign investment companies ("PFICs") under the Code), investors who
are U.S. persons generally would be subject to special rules on any "excess
distribution" from such foreign investment fund, including any gain from the
disposition of such shares. Under these special rules, (i) the gain or excess
distribution would be allocated ratably over the investor's holding period for
such shares, (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income, (iii) the
amount allocated to each prior year, with certain exceptions, would be subject
to tax at the highest tax rate in effect for that year and (iv) the interest
charge generally applicable to underpayments of tax would be imposed in respect
of the tax attributable to each such year. Alternatively, an investor may, if
certain conditions are met, include in its income each year a pro rata portion
of the foreign investment fund's income, whether or not distributed to the
Portfolio.
For taxable years of the Portfolio beginning after 1997, the Portfolio
will be permitted to "mark to market" any marketable stock held by the Portfolio
in a PFIC. If the Portfolio made such an election, the investor in the Portfolio
would include in income each year an amount equal to its share of the excess, if
any, of the fair market value of the PFIC stock as of the close of the taxable
year over the adjusted basis of such stock. The investor would be allowed a
deduction for its share of the excess, if any, of the adjusted basis of the PFIC
stock over its fair market value as of the close of the taxable year, but only
to the extent of any net mark-to-market gains with respect to the stock included
by the investor for prior taxable years.
FOREIGN INVESTORS. It is intended that the Portfolio will conduct its
affairs such that its income and gains will not be effectively connected with
the conduct of a U.S. trade or business. Provided the Portfolio conducts its
affairs in such a manner, allocations of U.S. source dividend income to an
investor who, as to the United States, is a foreign trust, foreign corporation
or other foreign investor will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate), and allocations of portfolio interest (as defined in
the Code) or short term or net long term capital gains to such investors
generally will not be subject to U.S.
tax.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding taxes
with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The exclusive placement agent for the Portfolio is FDI, which receives
no additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's current annual report to investors filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
incorporated herein by reference (Accession No. 0000912057-00-001127) filed
January 13, 2000.
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
SHORT-TERM TAX-EXEMPT NOTES
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest
rating assigned by Standard & Poor's and has a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which 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 edge." 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 which 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 which make the long term risks
appear somewhat larger than in Aaa securities.
A - Bonds which 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 which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which 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.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity 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.
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
<PAGE>
PART C
ITEM 23. EXHIBITS.
(a). Declaration of Trust, as amended, of the Registrant.3
(b). Amended and Restated By-Laws of the Registrant (filed herwith).
(c). None.
(d)(1). Investment Advisory Agreement between the Registrant and Morgan Guaranty
Trust Company of New York.3
(d)(2). Investment Advisory Agreement between the Registrant and J.P. Morgan
Investment Management Inc.4
(e). None.
(f). N/A
(g)(1). Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street").2
(g)(2). Custodian Contract between the Registrant and The Bank of New York
(filed herewith).
(h)(1). Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996 ("Co-Administration Agreement").1
(h)(1)(i). Amended Exhibit I to Co-Administration Agreement.2
(h)(2). Transfer Agency and Service Agreement between the Registrant and State
Street.2
(h)(3). Restated Administrative Services Agreement between the Registrant and
Morgan dated August 1, 1996 ("Administrative Services Agreement").1
(h)(3)(i). Amended Exhibit I to Administrative Services Agreement.2
(h)(4). Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. dated July 11, 1996.1
(j). None.
(k). N/A
(l). Investment representation letters of initial investors.3
(m). N/A
(n). N/A
(o). None.
(p). Code of Ethics (to be filed by amendment).
- -------------------
1 Incorporated herein by reference from Amendment No. 5 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and
Exchange Commission on October 9, 1996. (Accession No. 000912057-96-022352)
2 Incorporated herein by reference from Amendment No. 6 to The U.S. Fixed
Income Portfolio's Registration Statement on Form N-1A as filed with
the Securities and Exchange Commission on February 14, 1997.
(Accession No. 00001016964-97-000020)
3 Incorporated herein by reference from Amendment No. 6 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and
Exchange Commission on February 27, 1997. (Accession No.
00001016964-97-000023)
4 Incorporated herein by reference from Amendment No. 9 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and
Exchange Commission on October 1, 1998. (Accession No.
00001042058-98-000104)
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
JPMIM is a Delaware corporation which is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors or executive
officers of JPMIM is or has been during the past two fiscal years engaged in any
other business, profession, vocation or employment of a substantial nature,
except that certain officers and directors of JPMIM also hold various positions
with, and engage in business for, J.P. Morgan & Co. Incorporated, which owns all
the outstanding stock of JPMIM.
ITEM 27. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
J.P. Morgan Investment Management Inc. and Morgan Trust Guaranty Company of
New York, 522 Fifth Avenue, New York, New York 10036 and/or 60 Wall Street, New
York, New York 10260-0060 (records relating to their functions as investment
adviser and administrative services agent).
The Bank of New York, 1 Wall Street, New York, New York 10086 (records
relating to its functions as custodian and fund accounting agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as transfer agent).
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 or c/o State Street Cayman Trust Company, Ltd., Elizabethan
Square, Shedden Road, George Town, Grand Cayman, Cayman Islands, BWI (records
relating to its functions as co-administrator and exclusive placement agent).
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017
(records relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in New York, New York, on the 28th day of February, 2000.
THE INTERNATIONAL EQUITY PORTFOLIO
By /S/GEORGE A. RIO
----------------------------------------
George A. Rio
President
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ------------- ------------------------
EX-99.(b)(1) Amendment to By-laws
EX-99.(g) Custodian Agreement
JPM345A
AMENDED AND RESTATED BY-LAWS
OF
EACH MASTER TRUST LISTED ON SCHEDULE I
AND
EACH FEEDER TRUST LISTED ON SCHEDULE II
AND
EACH STAND ALONE TRUST LISTED ON SCHEDULE III
ARTICLE I
DEFINITIONS
Each Trust listed on Schedule I is referred to in these By-Laws as a
"Master Trust". Each Trust listed on Schedule II is referred to in these By-Laws
as a "Feeder Trust". Each Trust listed on Schedule III is referred to in these
By-Laws as a "Stand Alone Trust".
In the case of each Trust, unless otherwise specified, capitalized
terms have the respective meanings given them in the Declaration of Trust of
such Trust dated as of the date set forth in Schedule I, II or III, as amended
from time to time. In the case of each Feeder Trust and each Stand Alone Trust,
the term "Holder" has the meaning given the term "Shareholder" in the respective
Declarations of Trust.
ARTICLE II
OFFICES
Section 1. Principal Office. In the case of each Master Trust, the
principal office of the Trust shall be in such place as the Trustees may
determine from time to time, provided that the principal office shall be outside
the United States of America if the Trustees determine that the Trust is
intended to be operated so that it is not engaged in United States trade or
business for United States federal income tax purposes. In the case of each
Feeder Trust and each Stand Alone Trust, until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other
places without as well as within the state of its organization and the United
States of America as the Trustees may from time to time determine.
ARTICLE III
HOLDERS
Section 1. Meetings of Holders. Meetings of Holders may be called at
any time by a majority of the Trustees and shall be called by any Trustee upon
written request of Holders holding, in the aggregate, not less than 10% of the
Interests in the case of each Master Trust or 10% of the voting securities
entitled to vote thereat in the case of each Feeder Trust and each Stand Alone
Trust, such request specifying the purpose or purposes for which such meeting is
to be called.
Any such meeting shall be held within or without the state of
organization of the Trust and within, or, if applicable, in the case of a Master
Trust only without, the United States of America on such day
<PAGE>
and at such time as
the Trustees shall designate. Holders of one third of the Interests in the case
of each Master Trust or one third of the voting securities entitled to vote
thereat in the case of each Feeder Trust and each Stand Alone Trust, present in
person or by proxy, shall constitute a quorum for the transaction of any
business, except as may otherwise be required by the 1940 Act, other applicable
law, the Declaration or these By-Laws. If a quorum is present at a meeting, an
affirmative vote of the Holders present in person or by proxy, holding more than
50% of the total Interests in the case of each Master Trust, or 50% of the
voting securities entitled to vote thereat in the case of each Feeder Trust and
each Stand Alone Trust, present, either in person or by proxy, at such meeting
constitutes the action of the Holders, unless a greater number of affirmative
votes is required by the 1940 Act, other applicable law, the Declaration or
these By-Laws.
All or any one or more Holders may participate in a meeting of Holders
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting by means of such communications equipment shall
constitute presence in person at such meeting.
In the case of The Series Portfolio or any Feeder Trust or any Stand
Alone Trust, whenever a matter is required to be voted by Holders of the Trust
in the aggregate under Section 9.1 and Section 9.2 of the Declaration of The
Series Portfolio or Section 6.8 and Section 6.9 and Section 6.9(g) of the
Declaration of the Feeder Trust and the Stand Alone Trust, the Trust may either
hold a meeting of Holders of all series, as defined in Section 1.2 of the
Declaration of The Series Portfolio or Section 6.9 of the Declaration of the
Feeder Trust and the Stand Alone Trust, to vote on such matter, or hold separate
meetings of Holders of each of the individual series to vote on such matter,
provided that (i) such separate meetings shall be held within one year of each
other, (ii) a quorum consisting of the Holders of one third of the voting
securities of the individual series entitled to vote shall be present at each
such separate meeting except as may otherwise be required by the 1940 Act, other
applicable law, the Declaration or these By-Laws and (iii) a quorum consisting
of the Holders of one third of all voting securities of the Trust entitled to
vote, except as may otherwise be required by the 1940 Act, other applicable law,
the Declaration or these By-Laws, shall be present in the aggregate at such
separate meetings, and the votes of Holders at all such separate meetings shall
be aggregated in order to determine if sufficient votes have been cast for such
matter to be voted.
Section 2. Notice of Meetings. Notice of each meeting of Holders,
stating the time, place and purpose of the meeting, shall be given by the
Trustees by mail to each Holder, at its registered address, mailed at least 10
days and not more than 60 days before the meeting. Notice of any meeting may be
waived in writing by any Holder either before or after such meeting. The
attendance of a Holder at a meeting shall constitute a waiver of notice of such
meeting except in the situation in which a Holder attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting was not lawfully called or convened. At any meeting, any
business properly before the meeting may be considered whether or not stated in
the notice of the meeting. Any adjourned meeting may be held as adjourned
without further notice.
In the case of The Series Portfolio and each Feeder Trust and each
Stand Alone Trust, where separate meetings are held for Holders of each of the
individual series to vote on a matter required to be voted on by
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<PAGE>
Holders of the
Trust in the aggregate, as provided in Article III, Section 1 above, notice of
each such separate meeting shall be provided in the manner described above in
this Section 2.
Section 3. Record Date for Meetings. For the purpose of determining the
Holders who are entitled to notice of and to vote at any meeting, the Trustees
may from time to time fix a date, not more than 90 days prior to the date of any
meeting of Holders as a record date for the determination of the Persons to be
treated as Holders for such purpose.
In the case of The Series Portfolio and each Feeder Trust and each
Stand Alone Trust, where separate meetings are held for Holders of each of the
individual series to vote on a matter required to be voted on by Holders of the
Trust in the aggregate, as provided in Article III, Section 1 above, the record
date of each such separate meeting shall be determined in the manner described
above in this Section 3.
Section 4. Voting, Proxies, Inspectors of Election. At any meeting of
Holders, any Holder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Secretary, or with such other officer or agent of the Trust as the
Secretary may direct, for verification prior to the time at which such vote is
to be taken. A proxy may be revoked by a Holder at any time before it has been
exercised by placing on file with the Secretary, or with such other officer or
agent of the Trust as the Secretary may direct, a later dated proxy or written
revocation. Pursuant to a resolution of a majority of the Trustees, proxies may
be solicited in the name of the Trust or of one or more Trustees or of one or
more officers of the Trust. No proxy shall be valid after one year from the date
of its execution, unless a longer period is expressly stated in the proxy.
In the case of each Master Trust, only Holders on the record date shall
be entitled to vote and each such Holder shall be entitled to a vote
proportionate to its Interest. In the case of each Feeder Trust, (i) only
Holders on the record date shall be entitled to vote, and (ii) each whole Share
shall be entitled to vote as to any matter on which it is entitled to vote and
each fractional Share shall be entitled to a proportionate fractional vote,
except that Shares held in the treasury of the Trust shall not be voted. In the
case of each Stand Alone Trust, unless the Trustees determine that each Share
will entitle Holders to one vote per Share, on any matter submitted to a vote of
Holders of Shares of any series or class thereof, if any, each dollar of net
asset value (number of Shares owned times net asset value per Share of such
series or class, as applicable) shall be entitled to one vote on any matter on
which such shares are entitled to vote and each fractional dollar amount shall
be entitled to a proportionate fractional vote, except that Shares held in the
treasury of the Trust shall not be voted. In the case of each Feeder Trust and
each Stand Alone Trust, (i) Shares shall be voted by individual series or
classes thereof, if any, on any matter submitted to a vote of the Holders of the
Trust except as provided in Section 6.9(g) of the Declaration, and (ii) at any
meeting of Holders of the Trust or of any series or class thereof, if any, a
Shareholder Servicing Agent may vote any Shares as to which such Shareholder
Servicing Agent is the agent of record.
The Chairman of the meeting may, and upon the request of the Holders of
10% of the Interests or Shares, as the case may be, entitled to vote at such
election shall, appoint one or three inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after
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<PAGE>
the election certify the result of the vote taken. No
candidate for Trustee shall be appointed such inspector. If there are three
inspectors of election, the decision, act or certification of a majority is
effective in all respects as the decision, act or certificate of all.
At every meeting of the Holders, all proxies shall be required and
taken in charge of and all ballots shall be required and canvassed by the
Secretary of the meeting, who shall decide all questions touching the
qualification of voters, the validity of the proxies, the acceptance or
rejection of votes and any other questions related to the conduct of the vote
with fairness to all Holders, unless inspectors of election shall have been
appointed, in which event the inspectors of election shall decide all such
questions. On request of the Chairman of the meeting, or of any Holder or his
proxy, the Secretary shall make a report in writing of any question determined
and shall execute a certificate of facts found, unless inspectors of election
shall have been appointed, in which event the inspectors of election shall do
so.
When an Interest is held or Shares are held jointly by several Persons,
any one of them may vote at any meeting in person or by proxy in respect of such
Interest or Shares, but if more than one of them is present at such meeting in
person or by proxy, and such joint owners or their proxies so present disagree
as to any vote to be cast, such vote shall not be received in respect of such
Interest or Shares. A proxy purporting to be executed by or on behalf of a
Holder shall be deemed valid unless challenged at or prior to its exercise, and
the burden of proving invalidity shall rest on the challenger.
Section 5. Holder Action by Written Consent. In the case of each Master
Trust, any action which may be taken by Holders may be taken without a meeting
if Holders of all Interests entitled to vote consent to the action in writing
and the written consents are filed with the records of the meetings of Holders.
In the case of each Feeder Trust and each Stand Alone Trust, any action which
may be taken by Holders may be taken without a meeting if Holders holding a
majority of Shares entitled to vote on the matter (or such larger proportion
thereof as shall be required by law, the Declaration or these By-Laws for
approval of such matter) consent to the action in writing and the written
consents are filed with the records of the meetings of Holders.
Such consents shall be treated for all purposes as a vote taken at a
meeting of Holders. Each such written consent shall be executed by or on behalf
of the Holder delivering such consent and shall bear the date of such execution.
No such written consent shall be effective to take the action referred to
therein unless, within one year of the earliest dated consent, written consents
executed by a sufficient number of Holders to take such action are filed with
the records of the meetings of Holders.
Section 6. Conduct of Meetings. The meetings of the Holders shall be
presided over by the Chairman, or if he is not present, by a Chairman to be
elected at the meeting. The Secretary of the Trust, if present, shall act as
secretary of such meetings, or if he is not present, an Assistant Secretary
shall so act; if neither the Secretary nor any Assistant Secretary is present,
then the meeting shall elect its secretary
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<PAGE>
ARTICLE IV
TRUSTEES
Section 1. Place of Meeting, etc. The Trustees may hold their meetings,
have one or more offices, and keep the books of the Trust, inside or outside the
state of organization of the Trust or the United States of America, at any
office of the Trust or at any other place as they may from time to time
determine, or in the case of meetings, as they may from time to time determine
or as shall be specified or fixed in the respective notices or waivers of notice
thereof.
Section 2. Meetings. Meetings of the Trustees shall be held from time
to time upon the call of the Chairman or any two Trustees. The President, the
Secretary or an Assistant Secretary may call meetings only upon the written
direction of the Chairman or two Trustees. The Trustees shall hold an annual
meeting for the election of officers and transaction of other business which may
come before such meeting. Regular meetings of the Trustees may be held without
call or notice at a time and place fixed by resolution of the Trustees. Notice
of any other meeting shall be mailed or otherwise given not less than 24 hours
before the meeting but may be waived in writing by any Trustee either before or
after such meeting. Notice shall be given of any proposed action to be taken by
written consent. Notice of a meeting or proposed action to be taken by written
consent may be given by telegram (which term shall include a cablegram), by
telecopier or delivered personally (which term shall include by telephone), as
well as by mail. The attendance of a Trustee at a meeting shall constitute a
waiver of notice of such meeting except in the situation in which a Trustee
attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting was not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any meeting of the
Trustees need be stated in the notice or waiver of notice of such meeting.
Section 3. Quorum. A quorum for all meetings of the Trustees shall be a
majority of the Trustees. Unless provided otherwise in the Declaration, the 1940
Act or other applicable law, any action of the Trustees may be taken at a
meeting by vote of a majority of the Trustees present (a quorum being present).
In the absence of a quorum, a majority of the Trustees present may adjourn the
meeting from time to time until a quorum shall be present. Notice of an
adjourned meeting need not be given.
With respect to actions of the Trustees, Trustees who are Interested
Persons of the Trust or otherwise interested in any action to be taken may be
counted for quorum purposes and shall be entitled to vote to the extent
permitted by the 1940 Act.
Section 4. Committees. The Trustees, by the majority vote of all the
Trustees then in office, may appoint from the Trustees committees which shall in
each case consist of such number of Trustees (not less than two) and shall have
and may exercise such powers as the Trustees may determine in the resolution
appointing them. Unless provided otherwise in the Declaration or by the
Trustees, a majority of all the members of any such committee may determine its
actions and fix the time and place of its meetings. With respect to actions of
any committee, Trustees who are Interested Persons of the Trust or otherwise
interested in any action to be taken may be counted for quorum purposes and
shall be entitled to vote to the extent permitted by the 1940 Act. The Trustees
shall have power at any time to change the members and powers of any such
committee, to fill vacancies and to discharge any such committee. Each committee
5
<PAGE>
shall keep regular minutes of its meetings and cause them to be filed with the
minutes of the proceedings of the Trustees.
Section 5. Telephone Meetings. All or any one or more Trustees may
participate in a meeting of the Trustees or any committee thereof by means of a
conference telephone or similar communications equipment by means of which all
individuals participating in the meeting can hear each other, and participating
in a meeting by means of such communications equipment shall constitute presence
in person at such meeting. Any conference telephone meeting shall be deemed to
have been held at a place designated by the Trustees at the meeting.
Section 6. Action without a Meeting. Any action required or permitted
to be taken at any meeting of the Trustees or any committee thereof may be taken
without a meeting, if a written consent to such action is signed either by all
the Trustees or all members of such committee then in office or by an 80%
majority of the Trustees or an 80% majority of members of such committee,
provided that no action by 80% majority consent shall be effective unless and
until (i) each Trustee or committee member signing such consent shall have been
advised in writing of the following information: the identity of any Trustee or
committee member not signing such consent and the reasons for his not signing;
and (ii) after receiving such information signing Trustees or committee members
who represent an 80% majority then in office indicate in writing that the
consent shall become effective by 80% majority, rather than unanimous, consent.
All such effective written consents shall be filed with the minutes of the
proceedings of the Trustees and treated as a vote for all purposes.
Section 7. Compensation. The Trustees shall be entitled to receive
such compensation from the Trust for their services as may from time to time
be voted by the Trustees.
Section 8. Chairman. The Trustees may, by a majority vote of all the
Trustees, elect from their own number a Chairman, to serve until his successor
shall have been duly elected and qualified; the Chairman may serve on committees
of the Trustees. The Chairman shall not be an officer of the Trust solely by
virtue of his serving as Chairman. The Chairman shall preside at all meetings of
the Trustees at which he is present, shall serve as the liaison between the
Trustees and the officers of the Trust and between the Trustees and their staff
and shall have such other duties as from time to time may be assigned to him by
the Trustees.
Section 9. Trustees' Staff; Counsel for the Trust and Trustees, etc.
The Trustees may employ or contract with one or more Persons to serve as their
staff and to provide such services related thereto as may be determined from
time to time. The Trustees may employ attorneys as counsel for the Trust and/or
the Trustees and may engage such other experts or consultants as may be
determined from time to time.
Section 10.Advisory Boards; The Trustees may from time to time establish an
advisory board and appoint a member or members thereof. Each member shall serve
at the pleasure of the Trustees. Any advisory board shall be distinct from the
Board of Trustees and shall provide advise as to investments, management and
operations of the Trust and such other roles as may be designed by the Trustees,
but shall have no power to determine that any security or other investment shall
be purchased or sold by any Fund, to conduct any business of the Trust, or to
vote upon any matter put to a vote of the Trustees. Each advisory board member
may be indemnified in respect of claims arising in connection with his or her
services as such, in accordance with the indemnification provisions of the
Trust's Declaration of Trust and By-Laws, as then in effect with respect to the
Trustees. Any member of an advisory board shall be compensated in accordance
with policies in respect thereof adopted b the Trustees. Service by a person on
an advisory board shall not preclude such person's subsequent service as an
Independent Trustee.
ARTICLE V
OFFICERS
Section 1. General Provisions. The Trustees may elect or appoint such
officers or agents as the business of the Trust may require, including without
limitation a Chief Executive Officer, a President, one or more Vice Presidents,
a Treasurer, a Secretary, one or more Assistant Treasurers and one or more
Assistant Secretaries. The Trustees may delegate to any officer or committee the
power to appoint any subordinate officers or agents.
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<PAGE>
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration or these ByLaws, each of the principal
executive officer described in Section 4 below, the Treasurer and the Secretary
shall hold office until a successor shall have been duly elected and qualified,
and any other officers shall hold office at the pleasure of the Trustees. Any
two or more offices may be held by the same Person, provided that at least two
different individuals shall serve as officers. Any officer may be, but does not
need be, a Trustee.
Section 3. Removal. The Trustees may remove any officer with or without
cause by a vote of a majority of the Trustees. Any subordinate officer or agent
appointed by any officer or committee may be removed with or without cause by
such appointing officer or committee.
Section 4. Powers and Duties of the Chief Executive Officer; President.
The Chief Executive Officer, if any, shall be the principal executive officer of
the Trust. Subject to the control of the Trustees, the Chief Executive Officer
shall (i) at all times exercise general supervision and direction over the
affairs of the Trust, (ii) have the power to grant, issue, execute or sign such
documents as may be deemed advisable or necessary in the ordinary course of the
Trust's business and (iii) have such other powers and duties as from time to
time may be assigned by the Trustees.
If there is no Chief Executive Officer, the President shall be the
principal executive officer of the Trust and shall have the powers and duties
set forth above in this Section 4. If there is a Chief Executive Officer and a
President, the President shall have such powers and duties as from time to time
may be assigned by the Trustees or the Chief Executive Officer.
Section 5. Powers and Duties of Vice Presidents. In the absence or
disability of the President, any Vice President designated by the Trustees or
the President shall perform all the duties, and may exercise any of the powers,
of the President. Each Vice President shall perform such other duties as from
time to time may be assigned to him by the Trustees or the Chief Executive
Officer.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his hands to the Trust's
custodian. The Treasurer shall render a statement of condition of the finances
of the Trust to the Trustees as often as they shall require the same and shall
in general perform all the duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to him by the Trustees.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Holders in proper books provided for that
purpose; shall keep the minutes of all meetings of the Trustees; shall have
custody of the seal of the Trust, if any; and shall have charge of the Holder
lists and records unless the same are in the charge of the Transfer Agent. The
Secretary shall attend to the giving and serving of notices by the Trust in
accordance with the provisions of these By-Laws and as required by law; and
subject to these By-Laws, shall in general perform all the duties incident to
the office of Secretary and such other duties as from time to time may be
assigned to him by the Trustees.
Section 8. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise
7
<PAGE>
any of the powers, of the Treasurer. Each Assistant Treasurer shall perform such
other duties as from time to time may be assigned to him by the Trustees.
Section 9. Powers and Duties of Assistant Secretaries. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all of the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. Compensation of Officers. Subject to any applicable law or
provision of the Declaration, any compensation of any officer may be fixed from
time to time by the Trustees. No officer shall be prevented from receiving any
such compensation as such officer by reason of the fact that he is also a
Trustee. If no such compensation is fixed for any officer, such officer shall
not be entitled to receive any compensation from the Trust.
Section 11. Bond and Surety. As provided in the Declaration, any
officer may be required by the Trustees to be bonded for the faithful
performance of his duties in the amount and with such sureties as the Trustees
may determine.
ARTICLE VI
SEAL
The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE VII
FISCAL YEAR
The Trust may have different fiscal years for its separate and distinct
series, if applicable. The fiscal year(s) of the Trust shall be determined by
the Trustees, provided that the Trustees (or the Treasurer subject to
ratification by the Trustees) may from time to time change any fiscal year.
ARTICLE VIII
CUSTODIAN
Section 1. Appointment and Duties. The Trustees shall at all times
employ one or more banks or trust companies having a capital, surplus and
undivided profits of at least $50,000,000 as custodian with authority as the
Trust's agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the Declaration, these By-Laws and
the 1940 Act:
(i) to hold the securities owned by the Trust and deliver the same upon
written order; (ii) to receive and receipt for any monies due to the
Trust and deposit the same in its own banking department or elsewhere
as the Trustees may direct; (iii) to disburse such funds upon orders or
vouchers; (iv) if authorized by the Trustees, to keep the books and
accounts of the Trust and furnish clerical and accounting services; and
(v) if authorized by the Trustees, to compute the net income of
8
<PAGE>
the
Trust and the net asset value of the Trust or, in the case of each
Feeder Trust and each Stand Alone Trust, Shares; all upon such basis of
compensation as may be agreed upon between the Trustees and the
custodian.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees. Subject to the
approval of the Trustees, the custodian may enter into arrangements with
securities depositories. All such custodial, sub-custodial and depository
arrangements shall be subject to, and comply with, the provisions of the 1940
Act and the rules and regulations promulgated thereunder.
Section 2. Successor Custodian. The Trust shall upon the resignation
or inability to serve of its custodian or upon change of the custodian:
(i) in case of such resignation or inability to serve, use its best
efforts to obtain a successor custodian; (ii) require that the cash and
securities owned by the Trust be delivered directly to the successor
custodian; and (iii) in the event that no successor custodian can be
found, submit to the Holders before permitting delivery of the cash and
securities owned by the Trust otherwise than to a successor custodian,
the question whether the Trust shall be liquidated or shall function
without a custodian.
ARTICLE IX
INDEMNIFICATION
In the case of each Master Trust, insofar as the conditional advancing
of indemnification monies under Section 5.4 of the Declaration for actions based
upon the 1940 Act may be concerned, such payments will be made only on the
following conditions:
(i) the advances must be limited to amounts used, or to be used, for
the preparation or presentation of a defense to the action, including
costs connected with the preparation of a settlement; (ii) advances may
be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay the amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive
from the Trust by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayment may be
obtained by the Trust without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient
of the advance, or (b) a majority of a quorum of the Trust's
disinterested, nonparty Trustees, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be
found entitled to indemnification.
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<PAGE>
ARTICLE X
AMENDMENTS, ADDITIONAL TRUSTS, ETC.
The Trustees shall have the power to alter, amend or repeal
these By-Laws or adopt new By-Laws at any time to the extent such power is not
reserved to the Holders by the 1940 Act, other applicable law or the
Declaration. Action by the Trustees with respect to these By-Laws shall be taken
by an affirmative vote of a majority of the Trustees. The Trustees shall in no
event adopt By-Laws which are in conflict with the Declaration.
One or more additional trusts may be added to Schedule I or Schedule II
by resolution of the trustees of such trust(s), provided that the trustees of
such trust(s) are identical to the Trustees of the Master Trusts, the Feeder
Trusts and the Stand Alone Trusts immediately prior to such addition.
In the case of each Master Trust, the Declaration refers to the
Trustees as Trustees, but not as individuals or personally; and no Trustee,
officer, employee or agent of the Trust shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Trust. In
the case of each Feeder Trust and each Stand Alone Trust, the Declaration refers
to the Trustees not individually, but as Trustees under the Declaration, and no
Trustee, officer, employee or agent of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or its
Holders, in connection with Trust Property or the affairs of the Trust, save
only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust.
JPM345A
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<PAGE>
SCHEDULE I
MASTER TRUSTS
State of Date of Date
Organiza- Declara- By-Laws
Trust tion tion Adopted
The Treasury Money Market New York 11/4/92 10/10/96
Portfolio
The Money Market Portfolio New York 1/29/93 10/10/96
The Tax Exempt Money Market New York 1/29/93 10/10/96
Portfolio
The Short Term Bond Portfolio New York 1/29/93 10/10/96
The U.S. Fixed Income Portfolio New York 1/29/93 10/10/96
The Tax Exempt Bond Portfolio New York 1/29/93 10/10/96
The Selected U.S. Equity Portfolio New York 1/29/93 10/10/96
The U.S. Small Company Portfolio New York 1/29/93 10/10/96
The Non-U.S. Equity Portfolio New York 1/29/93 10/10/96
The Diversified Portfolio New York 1/29/93 10/10/96
The Non-U.S. Fixed Income New York 6/13/93 10/10/96
Portfolio
The Emerging Markets Equity New York 6/13/93 10/10/96
Portfolio
The New York Total Return Bond New York 6/13/93 10/10/96
Portfolio
The Series Portfolio New York 6/14/94 10/10/96
The Global Strategic Income
Portfolio New York 1/9/97 2/13/97
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<PAGE>
SCHEDULE II
FEEDER TRUSTS
State of Date of Date
Organization Declara- By-Laws
Trust tion Adopted
The JPM Pierpont Funds Massachusetts 11/4/92 10/10/96
The JPM Institutional
Funds Massachusetts 11/4/92 10/10/96
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<PAGE>
SCHEDULE III
STAND ALONE TRUSTS
State of Date of Date
Organization Declara- By-Laws
Trust tion Adopted
JPM Series Trust Massachusetts 8/15/96 10/10/96
13
CUSTODIAN AND FUND ACCOUNTING AGREEMENT
Between
THE INTERNATIONAL EQUITY PORTFOLIO
and
THE BANK OF NEW YORK
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It....................................................1
2. Duties of the Custodian with Respect to Property of the Portfolios Held By the Custodian in the United
States...................................................................................................2
2.1 Holding Securities..............................................................................2
2.2 Deliveries of Securities........................................................................2
2.3 Registration of Securities......................................................................5
2.4 Bank Accounts...................................................................................6
2.5 Availability of Federal Funds...................................................................6
2.6 Collection of Income............................................................................7
2.7 Payment of Portfolio Monies.....................................................................7
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.............................9
2.9 Appointment of Agents...........................................................................9
2.10 Deposit of Portfolio Assets in Securities Systems..............................................10
2.11 Portfolio Assets Held in the Custodian's Direct Paper System...................................11
2.12 Segregated Account.............................................................................12
2.13 Ownership Certificates for Tax Purposes........................................................12
2.14 Proxies........................................................................................12
2.15 Communications Relating to Portfolio Securities................................................13
3. Duties of the Custodian with Respect to Property of the Portfolios Held Outside of the United States....13
3.1 Appointment of Foreign Sub-Custodians..........................................................13
3.2 Assets to be Held..............................................................................13
3.3 Foreign Securities Systems.....................................................................14
3.4 Holding Assets.................................................................................14
3.5 Agreements with Foreign Banking Institutions...................................................14
3.6 Access of Independent Accountants of the Portfolio(s)..........................................15
3.7 Reports by Custodian...........................................................................15
3.8 Transactions in Foreign Custody Account........................................................16
3.9 Liability of Foreign Sub-Custodians............................................................16
3.10 Reimbursement for Advances.....................................................................16
3.11 Foreign Custody Manager........................................................................17
3.12 Tax Law........................................................................................17
4. Payments for Redemptions or Withdrawals of Interests....................................................18
5. Proper Instructions.....................................................................................18
6. Actions Permitted without Express Authority.............................................................19
7. Evidence of Authority...................................................................................19
8. Duties of Custodian with Respect to the Books of Account................................................19
9. Records.................................................................................................19
10. Opinion of Fund's Independent Accountants...............................................................20
11. Reports to Fund by Independent Accountants..............................................................20
12. Compensation of Custodian...............................................................................20
13. Responsibility of Custodian.............................................................................21
14. Effective Period, Termination and Amendment.............................................................23
15. Successor Custodian.....................................................................................24
16. Additional Portfolios...................................................................................25
17. Prior Agreements........................................................................................25
18. Investor Communications Election........................................................................25
19. Limitation of Liability.................................................................................26
20. Confidentiality.........................................................................................26
21. Year 2000...............................................................................................27
22. Miscellaneous...........................................................................................28
SCHEDULE A (NAME OF FUND/PORTFOLIOS)............................................................................A-1
SCHEDULE B (FOREIGN SUB-CUSTODIANS).............................................................................B-1
SCHEDULE C (FUND ACCOUNTING ARRANGEMENTS).......................................................................C-1
SCHEDULE D (FOREIGN CUSTODY MANAGER)............................................................................D-1
SCHEDULE E (CASH MANAGEMENT PROVISIONS).........................................................................E-1
</TABLE>
<PAGE>
CUSTODIAN AND FUND ACCOUNTING AGREEMENT
This Agreement between the registered investment company named on
Schedule A hereto (the "Fund") and The Bank of New York, having its principal
place of business at One Wall Street, New York, New York 10286 (the "Custodian"
and with the Fund and the Custodian being referred to individually as a "Party"
and collectively as the "Parties").
WITNESSETH:
WHEREAS, the Fund desires to retain the Custodian to render custody and
fund accounting services to the subtrusts or series of the Fund named on
Schedule A hereto (such subtrusts or series together with all other subtrusts or
series subsequently established by the Fund and made subject to this Agreement
in accordance with Article 16 being herein referred to as the "Portfolio(s)" and
where no Portfolios are enumerated on Schedule A the term "Portfolio" shall
refer to the Fund); and
WHEREAS, each Portfolio's assets are composed of money and property
contributed thereto by the holders ("Investors") of interests (whether in the
form of beneficial interests, shares or any other evidence of ownership) in the
Portfolio ("Interest(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the Parties agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of each
Portfolio, including , securities, other instruments, including, without
limitation, options, futures contracts, options on futures contracts and swaps,
and, as the context requires, currencies which the Portfolio desires to be held
in places within the United States (collectively, "domestic securities") and
securities, other instruments, including options, futures contracts, options on
futures contracts and swaps, and, as the context requires, currencies it desires
to be held outside the United States (collectively, "foreign securities" and,
together with domestic securities, "securities") pursuant to the provisions of
the Fund's organizational documents. The Fund agrees to deliver to the Custodian
all securities and cash of each Portfolio, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Fund from time to time, and the cash consideration
received by it for such Interests as may be issued or sold from time to time.
The Custodian shall not be responsible, as custodian, for any property of a
Portfolio held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States, but only in
accordance with an applicable vote by the Fund's Board. The Custodian may employ
as sub-custodian for the Portfolio's foreign securities foreign banking
institutions and foreign securities depositories designated in Schedule B hereto
but only in accordance with the provisions of Article 3. 2. Duties of the
Custodian with Respect to Property of the Portfolios Held By the Custodian in
the United States 2.1 Holding Securities The Custodian shall hold and physically
segregate for the account of each
Portfolio all non-cash property to be held by it in the United
States, including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system contemplated
by Rule 17f-4(b)(1) or (2) under the Investment Company Act of
1940, as amended (the "1940 Act") (each, a "U.S. Securities
System"), (b) commercial paper of an issuer for which the
Custodian acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper
System of the Custodian pursuant to Section 2.11, (c) whole
mortgages of which the Fund is the mortgagor that are serviced
by a servicer that is not an "affiliate" (as such term is
defined in the 1940 Act), of the Fund, and (d) such other
property as the Fund identifies by Proper Instructions.
2.2 Deliveries of Securities. The Custodian shall release and
deliver domestic securities owned by each Portfolio held by
the Custodian or in a U.S. Securities System account of the
Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund with respect to the
Portfolio, which may be standing instructions (other than in
the case of Sections 2.2(4), 2.2(5), and 2.2(9)) when deemed
appropriate by the Parties, and only in the following cases:
(1) Upon sale of such securities for the account of the
Portfolio and receipt of payment
therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Portfolio;
(3) In the case of a sale effected through a U.S.
Securities System, in accordance with the provisions
of Section 2.10 hereof;
(4) To the depository agent in connection with tender or
other similar offers for securities of the Portfolio;
(5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise
become payable; provided that, in any such case, the
cash or other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer
into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for
exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units and in the
same registered form (e.g., with respect to
restrictions); provided that, in any such case, the
new securities are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of
the Portfolio, to the broker or dealer or its
clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from
the delivery of such securities prior to receiving
payment for such securities except as may arise from
the Custodian's own negligence or willful misconduct;
(8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuers of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar
securities, upon the surrender thereof in the
exercise of such warrants, rights or similar
securities or the surrender of interim receipts or
temporary securities for definitive securities;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
(10) For delivery in connection with any loans of
securities made by the Portfolio, but only in
accordance with the terms of a securities lending
agreement to which the Fund is a party;
(11) For delivery as security in connection with any
borrowings by the Fund on behalf of the Portfolio
requiring a pledge of assets by the Portfolio, but
only against receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any
agreement relating to the Portfolio among the Fund,
the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and a member of The National
Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with (a) the rules of The
Options Clearing Corporation and of any registered
national securities exchange, or of any similar
organization or organizations or (b) the rules or
positions of the Securities and Exchange Commission
or its staff, in each case regarding escrow or other
arrangements in connection with transactions by the
Portfolio;
(13) For delivery in accordance with the provisions of any
agreement relating to the Portfolio between the Fund
and a futures commission merchant registered under
the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading
Commission and/or any contract market, or any similar
organization or organizations, and Rule 17f-6 of the
1940 Act, regarding account deposits in connection
with transactions in futures contracts and options on
such contracts by the Portfolio;
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Portfolio, for delivery to
such Transfer Agent or to the Investors in connection
with distributions in kind, as may be described from
time to time in the Fund's currently effective
registration statement on Form N-1A (which, as
applicable, shall include the Fund's current
prospectus and statement of additional
information)(the "Registration Statement") under the
1940 Act, in satisfaction of requests by Investors
for redemption or withdrawal, as the case may be; and
(15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from
the Fund, a certified copy of a resolution of the
Fund's Board or a subcommittee of the Board signed by
an officer of the Fund and certified by the Secretary
or an Assistant Secretary.
In the circumstances described in Sections 2.2(4), 2.2(5) and 2.2(9),
if the Fund shall have given the Custodian standing instructions to do
so, the Custodian also shall release and deliver domestic securities
following the Custodian's receipt of notice from the issuer of the
securities or a Securities System of one or more of the events
described in such Section. For purposes of Section 2.2(5), the
Custodian shall be deemed to have received notice (and thus to have
received actual knowledge for purposes of this Agreement) from the
issuer of the Securities upon publication of notice of the events
described in such Section in a publication identified in Exhibit 1.
Such Exhibit may be revised from time to time by notice from the Fund
to the Custodian requesting the addition of a publication and such
Exhibit shall be deemed amended if the Custodian does not object (which
objection shall be made only if the request places an unreasonable
burden on the Custodian after taking into account increased charges) to
the request at a meeting of representatives of the parties to be held
within ten days of its being made. Unless the parties agree otherwise,
such Exhibit shall not be amended unless such meeting shall have taken
place. The Custodian shall not be deemed to have received notice of any
such event based solely on the receipt of notice by a Securities System
or foreign sub-custodian. The Custodian agrees to furnish promptly to
the Fund copies of notices it receives.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of a
nominee of the Custodian or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities received
by the Custodian under the terms of this Agreement shall be in "street
name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian shall
use commercially reasonable best efforts only to timely collect income
due the Portfolio on such securities and to notify the Fund on a
commercially reasonable best efforts basis only of relevant corporate
actions, including, without limitation, pendency of calls, maturities,
tender offers or exchange offers; provided, however, if, in respect of
one or more securities, it is not customary in the relevant market to
hold securities in "street name" and the Fund nonetheless directs the
Custodian to do so, the Custodian, as to such security or securities,
shall have no such obligation to collect income or to give the
Portfolio any such notice of any corporate actions relating to such
securities.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Portfolio,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the
Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the 1940 Act. Funds held by the Custodian for a
Portfolio in accordance with said Rule 17f-3 may be deposited by it to
its credit as Custodian in the banking department of the Custodian or
in such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank trust
company shall be qualified to act as a custodian under the 1940 Act and
that each such bank or trust company shall be approved by vote of a
majority of the Fund's Board. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund on behalf of a Portfolio, (i) invest in such
money market funds offered by the Custodian as institutional sweep
vehicles as may be set forth in such Proper Instructions, on the same
day as received, all federal funds received after a time agreed upon by
the Custodian and the Fund and (ii) make federal funds available to the
Fund for the Portfolio as of specified times agreed upon from time to
time by the Fund and the Custodian in the amount of checks received in
payment for Interests in such Portfolio(s) which are deposited into the
account of the Portfolio.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which
a Portfolio shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to bearer domestic securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to such Portfolio's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on
securities held hereunder. Except as otherwise may be provided in any
securities lending agreement to which the Fund and the Custodian are
party, (i) income due the Portfolio on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the responsibility of the
Fund and (ii) the Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging
for the timely delivery to the Custodian of the income to which each
Portfolio is properly entitled.
2.7 Payment of Portfolio Monies. Upon receipt of Proper Instructions from
the Fund on behalf of the applicable Portfolio, which may be standing
instructions when deemed appropriate by the Parties, the Custodian
shall pay out monies of a Portfolio in the following cases only: (1) In
connection with transactions involving securities for the account of
the Portfolio, but only
(a) against the delivery of such securities or evidence of
title, if any, to options, futures contracts, options on
futures contracts, swaps or other instruments to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the 1940
Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a U.S. Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements entered
into on behalf of the Portfolio between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities, (ii) against delivery of the receipt evidencing
purchase by the Portfolio of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Portfolio or (iii)
against such delivery as is customarily used for third-party
repurchase agreements, (e) for transfer to a time deposit
account of the Custodian, as custodian for the Portfolio, in
any bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined in Article 5, or (f) in the case of
futures contracts, in accordance with the agreement between
the Fund and a futures commission merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
contract market, or any similar organization or organizations,
and Rule 17f-6 of the 1940 Act, regarding account deposits in
connection with transactions in futures contracts and options
on such contracts by the Portfolio;
(2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
(3) In connection with the deposit of margin in connection with a short
sale of securities; (4) For the redemption or withdrawal of the
Portfolio's Interests as set forth in Article 4 hereof; (5) For the
payment of any expense or liability incurred by the Portfolio,
including but not
limited to the following payments for the account of the
Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Portfolio
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
(6) For the payment of any distributions pursuant to the governing
documents of the Fund; (7) For payment of the amount of dividends
received in respect of securities sold short; and (8) For any other
proper purpose, but only upon receipt of, in addition to Proper
Instructions from
the Fund, a certified copy of a resolution of the Fund's Board
or a subcommittee of the Board signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary.
Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain possession of any instrument or
certificate representing any futures contract, and option, or any
futures contract option until after it shall have determined, or shall
have received Proper Instructions from the Fund stating, that any such
instruments or certificates are available. The Fund, if practicable,
shall deliver to the Custodian Proper Instructions to such effect no
later than the business day preceding the availability of any such
instrument or certificate. Before such availability, the Custodian
shall make payments or deliveries specified in Proper Instructions
received by the Custodian in connection with any such purchase, sale,
writing, settlement or closing-out of any futures contract, option or
futures contract option upon its receipt of the Proper Instructions.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Agreement, in any and
every case where payment for purchases of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund with respect to the Portfolio to pay in
advance, the Custodian shall be absolutely liable to the Portfolio for
any and all Losses (as defined hereinafter) resulting therefrom.
Notwithstanding the foregoing, settlement and payment for securities
received for the account of the Portfolio and delivery of securities
maintained for the account of the Portfolio may be effected in
accordance with the best customary established securities trading or
securities processing practices and procedures in the market in which
the transaction occurs, including delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or
dealer.
2.9 Appointment of Agents. Except as otherwise may be provided herein, the
Custodian may not appoint any other entity to act as its agent to carry
out the provisions of this Article 2. The appointment of an agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder and the Custodian shall be liable for the acts or omissions
of any agent to the same extent as if the Custodian had acted or
omitted to act.
2.10 Deposit of Portfolio Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a U.S.
Securities System in accordance with applicable Federal Reserve Board
and Securities and Exchange Commission rules and regulations, if any,
and subject to the following provisions: (1) The Custodian may keep
securities of the Portfolio in a U.S. Securities System provided that
such securities are represented in an account ("Account") of
the Custodian in the U.S. Securities System which shall not
include any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
(2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
(3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account
of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the Fund
at the Fund's request. Upon request, the Custodian shall
furnish the Fund on behalf of the Portfolio confirmation of
each transfer to or from the account of the Portfolio in the
form of a written advice or notice and shall furnish to the
Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio on the next
business day;
(4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting controls and procedures for
safeguarding securities deposited in the U.S. Securities
System; and
(5) The Custodian shall have received from the Fund the initial
certificate required by Article 14 hereof.
2.11 Portfolio Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Portfolio
in the Direct Paper System of the Custodian subject to the following
provisions: (1) No transaction relating to securities in the Direct
Paper System will be effected in the
absence of Proper Instructions from the Portfolio;
(2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an Account of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
(3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
(4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
(5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of each Portfolio, in the form
of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's
transaction in the U.S. Securities System for the account of
the Portfolio; and
(6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of each Portfolio, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 or 2.11 hereof, (i) in accordance with the provisions of
any agreement relating to the Portfolio among the Fund, the Custodian
and a broker-dealer registered under the Exchange Act and a member of
the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
by the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Fund and/or the Portfolio with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Fund's Board or a subcommittee of
the Board signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Portfolio(s) held
by it and in connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the names of the Portfolio(s) or a nominee of the Portfolio(s), all
proxies it receives, without indication of the manner in which such
proxies are to be voted, and shall promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices relating to
such securities.
2.15 Communications Relating to Portfolio Securities. The Custodian shall
transmit promptly to the Fund all information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Portfolio and the maturity of
futures contracts purchased or sold by the Portfolio) received by the
Custodian from issuers of the securities being held for the Portfolio.
With respect to tender or exchange offers or any other similar
transaction, the Custodian shall transmit promptly to the Fund all
information received by the Custodian from issuers of the securities
whose tender or exchange or other transaction is sought and from the
party (or its agents) making the tender or exchange offer or engaging
in the other similar transaction. If the Portfolio desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall give the Custodian such written
notice as the parties from time may agree before the time by which the
Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Portfolios Held
3.1 Outside of the United States Appointment of Foreign Sub-Custodians.
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for each Portfolio's securities and other assets
maintained outside the United States the foreign banking institutions,
foreign branches of U.S. banks and foreign securities depositories
designated on Schedule B hereto ("foreign sub-custodians"), as Schedule
B may be amended from time to time by the Custodian, provided no such
amendment shall be effective until the Fund shall have actually
received the amended Schedule B. The Custodian agrees to use its best
efforts to provide the Fund at least three days' prior notice of any
change to Schedule B. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of a Portfolio's assets. If the
Custodian has not been appointed as the Foreign Custody Manager (as
defined in Rule 17f-5 under the 1940 Act) in respect of a particular
foreign sub-custodian, the delivery of Proper Instructions by the Fund
to the Custodian directing it to hold Portfolio assets with such
foreign sub-custodian shall constitute a representation and warranty by
the Fund that its Board or a Foreign Custody Manager has determined
that the use of such foreign sub-custodian is not a violation of the
1940 Act and Rule 17f-5 thereunder.
3.2 Assets to be Held.
The Custodian shall limit the securities and other assets maintained in
the custody of the foreign sub-custodians to those permitted by Rule
17f-5(c) under the 1940 Act; provided that the Custodian shall not be
responsible for determining whether the amount of cash held in the
custody of a foreign sub-custodian in a particular jurisdiction exceeds
what would be reasonably necessary to effect the Portfolio's
transactions in such jurisdiction. The Custodian shall identify on its
books as belonging to the Portfolio, the foreign securities of the
Portfolio held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of a Portfolio shall be
maintained in a clearing agency which acts as a securities depository
or in a book-entry system for the central handling of securities
located outside the United States (each, a "Foreign Securities System")
only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof or
through Foreign Securities Systems in which the Custodian is a direct
participant (Foreign Securities Systems, together with U.S. Securities
Systems, are collectively referred to herein as the "Securities
Systems"). Where possible, such arrangements shall include entry into
agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Holding Assets. The Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to
the Custodian for the benefit of its customers, provided, however, that
(i) the records of the Custodian with respect to securities and other
non-cash property of a Portfolio which are maintained in such account
shall identify by book-entry those securities and other non-cash
property belonging to the Portfolio and (ii) the Custodian shall
require that securities and other non-cash property so held by the
foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others who are not customers of the Custodian. The
Custodian shall hold foreign currency and other cash property for a
Portfolio with foreign sub-custodians in an account in the name of the
Custodian, for the benefit of its customers, which account shall be
interest bearing in jurisdictions in which the Custodian, in accordance
with its customary practices, holds the cash of customers that are
investment companies in interest-bearing accounts.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the forms set
forth in Exhibit 1 hereto and shall provide, in substance, for
indemnification or insurance arrangements (or any combination of the
foregoing) such that each Portfolio will be adequately protected
against the risk of loss of assets held in accordance with such
agreement and that: (a) the assets of each Portfolio will not be
subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agents, except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or rights in
favor of creditors of the foreign banking institution arising under
bankruptcy, insolvency or similar laws; (b) beneficial ownership for
the assets of each Portfolio will be freely transferable without the
payment of money or value other than for custody or administration; (c)
adequate records will be maintained identifying the assets as belonging
to each Portfolio or being held by the Custodian for the benefit of its
customers; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent accountants for each Portfolio,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian or confirmation of the contents of such records; (e) assets
of each Portfolio held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents; and (f) the
Fund will receive periodic reports with respect to the safekeeping of
each Portfolio's assets, including notification of any transfer to or
from a Portfolio's account or a third party account containing assets
held for the benefit of the Portfolio.
3.6 Access of Independent Accountants of the Portfolio(s). Upon request of
the Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Portfolio(s) to be afforded access to
the books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including an identification of entities having
possession of the Portfolio(s) securities and other assets and advices
or notifications of any transfers of securities to or from each
custodial account maintained by a foreign banking institution for the
Custodian on behalf of the Portfolio indicating, as to securities
acquired for the Portfolio, the identity of the entity having physical
possession of such securities.
3.8 Transactions in Foreign Custody Account.
(a) Except as otherwise provided in paragraph (b) of this
Section 3.8, the provision of Sections 2.2 and 2.7 of this Agreement
shall apply, mutatis mutandis, to the foreign securities of the
Portfolio(s) held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for securities received for the
account of the Portfolio and delivery of securities maintained for the
account of the Portfolio may be effected in accordance with the best
customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to
the same extent as set forth in Section 2.3 of this Agreement.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise at least
reasonable care in the performance of its duties and to indemnify and
hold harmless the Custodian and the Fund and/or the Portfolio(s) from
and against any loss, damage, cost, expense, liability or claim arising
out of or in connection with the institution's performance of such
obligations. At the election of the Fund and to the extent permitted by
the Custodian's agreement with the foreign banking institution, it
shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense, liability or claim
if and to the extent that the Fund and/or the Portfolio(s) have not
been made whole for any such loss, damage, cost, expense, liability or
claim.
3.10 Reimbursement for Advances. If the Custodian, in its discretion,
advances cash on behalf of a Portfolio in connection with transactions
in securities and foreign currency and in connection with advances or
overdrafts arising out of the cash management services provided for in
Schedule E, any property at any time held for the account of the
applicable Portfolio shall be security therefor (and the Custodian
shall have a continuing lien and security interest therein to the
extent the Custodian shall have possession or control thereof) and,
should the Portfolio fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of
the Portfolio's assets to the extent necessary to obtain reimbursement.
Any such advances shall bear interest at such rate as the Fund and the
Custodian shall agree in writing from time to time.
3.11 Foreign Custody Manager. The Custodian shall serve as Foreign Custody
Manager as provided in Schedule D
hereto.
3.12 Tax Law.
(a) United States Taxes.
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Portfolio or the Custodian
as custodian of the Portfolio by the tax law of the United States of
America or any state or political subdivision thereof, except to the
extent such obligations have been imposed as a result of the
Custodian's breach of this Agreement or as a result of its negligence
or willful misconduct. The Custodian will be responsible for informing
the Fund of the income received by the Portfolio which is United States
source income and which is not United States source income and of such
other tax characteristics of such income as the Fund may request from
time to time. (b) Claiming for Exemption or Refund under the Tax Laws
of Non-United States Jurisdictions. The sole responsibility of the
Custodian with regard to the tax laws of non-United States
jurisdictions shall be to identify the income of each Portfolio which
has been subject to withholding and other tax assessments or other
governmental charges by such jurisdictions and the amount thereof and
as to the allocated amount of such income that is attributable to each
Portfolio's Investors, to use reasonable efforts to assist the
Portfolio or its Investors with respect to any claim for exemption or
refund of such charges that can be made on behalf of the Portfolio or
its Investors.
4. Payments for Redemptions or Withdrawals of Interests.
The Custodian shall receive and deposit into the account of each
Portfolio such payments as are received for Interests in the Portfolio issued or
sold from time to time by the Portfolio. The Custodian will provide notification
to the Fund, and, if requested by the Fund, to any Transfer Agent, of any
receipt by it of payments for Interests.
From such funds as may be available for the purpose but subject to the
limitations of the Fund's organizational documents and any applicable votes of
the Fund's Board pursuant thereto, the Custodian shall, upon receipt of
instructions from the Fund, make funds available to an account for each
Portfolio for payment to Investors in the Portfolio who have delivered to the
Fund and/or Portfolio a request for redemption or withdrawal of their Interests.
5. Proper Instructions.
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons the Custodian reasonably
believes have been authorized to do so by the Fund's Board from time to time.
Each such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Fund's Board has authorized J.P. Morgan
Investment Management Inc. ("Morgan"), as investment adviser of the Portfolios,
to deliver Proper Instructions with respect to all matters for which Proper
Instructions are required by Sections 2.2(1) through 2.2(14), 2.5, 2.7(1)
through 2.7(3), 2.7(7), 2.12(i) through 2.12(iii) and 3.8(a). The Custodian may
rely upon the certificate of an officer of Morgan with respect to the person or
persons authorized on behalf of Morgan to sign, initial or give Proper
Instructions for the purposes of such paragraphs. Proper Instructions also may
include communications effected directly between such electro-mechanical or
electronic devices as the Fund and the Custodian may agree to use. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided that all such payments
shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in definitive
form;
(3) endorse for collection, in the name of the Fund and/or a
Portfolio, checks, drafts and other negotiable instruments;
and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolios except as otherwise directed by the Fund's
Board.
7. Evidence of Authority
The Custodian shall be protected in acting, in good faith and without
negligence, upon any instruction, notice, request, consent, certificate or other
instrument or paper reasonably believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may receive and
accept a certified copy of a vote of the Fund's Board as conclusive evidence (a)
of the authority of any person to act in accordance with such vote or (b) of any
determination or of any action by the Fund's Board pursuant to the Fund's
organizational documents as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of written
notice to the contrary. 8. Duties of Custodian with Respect to the Books of
Account.
The Custodian shall keep the books of account of the Fund, as fund
accounting agent, in accordance with such written procedures as shall be agreed
to from time to time by the Custodian and the Fund, including those set forth on
Schedule C hereto.
9. Records.
The Custodian shall create, maintain and retain, with respect to each
Portfolio, all records and information relating to the performance of custodial
services under this Agreement in a manner that complies with applicable law and
is at least as stringent and at least as protective to the Fund as the manner in
which the Custodian creates, maintains and retains records for customers
similarly situated to the Fund and, at a minimum, the Custodian shall (a)
create, maintain and retain an inventory, index and status of all records so as
to allow retrieval within a reasonable period of time and (b) create, maintain
and retain records in secure on-site or off-site locations which provide at a
minimum for secure storage protecting against unauthorized access and protecting
against fire, moisture and destruction. The Custodian shall also comply with its
own record maintenance and retention policies (including as they relate to
destruction of records) to the extent more stringent or more protective to the
Fund than the procedures in the immediately preceding sentence, and the
Custodian shall make its policies available to the Fund upon reasonable notice.
All records created and maintained hereunder shall be the Fund's property. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation(s) of
securities owned by the Portfolio(s) and held by the Custodian and shall, when
requested to do so by the Fund, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountants. The Custodian shall take all
commercially reasonable actions, as the Fund or its independent accountants may
from time to time request, to assist the Fund in obtaining from year to year
favorable opinions for each Portfolio from the Fund's independent accountants
with respect to its activities hereunder in connection with the preparation of
the Registration Statement and the Fund's Form N-SAR or other periodic reports
to the Securities and Exchange Commission and with respect to any other
requirements of such Commission or any other regulatory body to which the Fund
may be subject. 11. Reports to Fund by Independent Accountants.
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent accountants on the accounting
system, internal accounting controls and procedures for safeguarding each
Portfolio's securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities System,
relating to the services provided by the Custodian under this Agreement; such
reports shall be of sufficient scope and in sufficient detail as may reasonably
be required by the Fund to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state. 12. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as custodian and fund accounting agent, as agreed upon
from time to time between the Fund and the Custodian.
13. Responsibility of Custodian.
The Custodian shall indemnify the Fund against, and hold harmless the
Fund from, any Losses (as defined below) suffered, incurred or sustained by the
Fund or to which the Fund becomes subject, resulting from, arising out of or
relating to:
(a) the negligence (whether through action or inaction) or willful
misconduct of the Custodian under this Agreement, the negligence (whether
through action or inaction) or willful misconduct of any of the Custodian's
agents or the breach or negligence (whether through action or inaction) of any
sub-custodian under its sub-custodian agreement with the Custodian as determined
under the law governing such agreement;
(b) any assertion that the services that the Custodian is responsible
for providing hereunder or the intellectual property, including hardware,
software and trade secrets, employed by the Custodian in connection therewith
infringe upon the proprietary rights of any third party (except as may have been
caused by a direct instruction by the Fund or by Morgan);
(c) any assertion by a third party arising from the Custodian's
negligence or willful misconduct in providing services;
(d) the material inaccuracy, untruthfulness or breach of any
representation or warranty made by the Custodian under this Agreement; and
(e) personal injury (including death) or property damage or loss
resulting from the Custodian's or its agents' acts or omissions.
In no event shall the Custodian be liable for (a) Country Risks (as
defined in Schedule D), (b) any sub-custodian selected by the Fund, (c) the
continued use by the Fund of any sub-custodian after the thirtieth day after the
Fund has been notified of the Custodian's intention to replace such
sub-custodian, (d) Losses due to fire, flood, earthquake, elements of nature or
acts of God, acts of war, terrorism, riots, civil disorders, rebellions or
revolutions, or any other similar cause beyond the reasonable control of the
Custodian or its agents, including failures, interruptions or malfunctions of
utilities not caused by the Custodian or its agents, but only to the extent such
Losses could not have been prevented by reasonable precautions and provided the
Custodian or its agents continue to use their commercially reasonable best
efforts to recommence performance whenever and to whatever extent possible
without delay, including through the use of alternate sources, workaround plans
or other means (the Custodian hereby agreeing to notify the Fund immediately of
the occurrence of any such event and describe in reasonable detail the nature of
such event), or (e) the insolvency of any sub-custodian, provided that the
Custodian has acted without negligence or bad faith in the selection or
retention of such sub-custodian.
Notwithstanding anything to the contrary contained herein, the
Custodian shall have no obligation hereunder for Losses which are sustained or
incurred by reason of any action or inaction by a Securities System, unless such
action or inaction is caused by the negligence or willful misconduct of the
Custodian or from the failure of the Custodian or any of its agents to enforce
against the Securities System effectively such rights as it may have. At the
Fund's election, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities System or any other
person that the Custodian may have as a consequence of any such loss or damage
if and to the extent the Fund has not been made whole for any such loss or
damage: provided that the Custodian shall, notwithstanding such subrogation,
reimburse the Fund for its reasonable expenses in connection with such claim. In
no event shall either Party be liable to the other or any third party for
indirect, incidental, special or consequential damages arising out of or
relating to its performance or failure to perform under this Agreement.
Without limiting the generality of the foregoing, the Custodian shall
be under no obligation to inquire into, and shall not be liable for, the
validity of any securities purchased or sold by the Fund, the legality of their
purchase or sale, the propriety of the amount paid therefor upon purchase or
sale, or any actions of third parties with respect to the negotiability of
securities.
The Custodian may, with respect to questions of law specifically
regarding this Agreement, obtain the written advice of outside counsel
reasonably acceptable to the Fund, and shall be fully protected with respect to
anything done or omitted by it in good faith in conformity with such advice.
As soon as is commercially reasonable after receiving notice from the
Fund, the Custodian shall, and shall use reasonable efforts to cause its agents
to, provide the Fund with access to, and any assistance or information that it
may require with respect to, information related to the services provided under
this Agreement and the Custodian's control structure policies and procedures to
enable the Fund or any person it reasonably designates (a) to examine all
records and materials of the Custodian pertaining to such services, including an
examination of the operation of the Custodian's equipment, (b) to take extracts
from any record, redacted to remove references to matters other than those under
this Agreement, (c) to visit and inspect the Custodian's premises, (d) to
interview the Custodian's employees and agents regarding such services, (e) to
run computer programs and perform any other functions necessary for control
assessments and/or investigations, (f) to verify the integrity of any data
maintained by the Custodian under this Agreement, (g) to examine the systems
that process, store, support and transmit such data (provided that the Fund
shall not have rights described in this paragraph to the extent prohibited by
any binding third party (that is not an affiliate of the Custodian)
confidentiality agreements, license restrictions or limitations, or trade secret
obligations) and (h) to examine the Custodian's performance of such services
including, to the extent applicable to such services and to the charges
therefor, audits of practices and procedures, systems, applications development
and maintenance procedures and practices, general controls (e.g., organizational
controls, input/output controls, system modification controls, processing
controls, system design controls and access controls) and security practices and
procedures, disaster recovery and back-up procedures, as necessary to enable the
Fund to meet applicable regulatory requirements.
"Losses" shall mean any and all damages, fines, penalties,
deficiencies, losses, liabilities (including settlements, approved by the
Custodian, and judgments) and expenses (including interest, court costs,
reasonable fees and expenses of attorneys, accountants and other experts and
other reasonable fees of litigation and other proceedings and of any claim,
default or assessment).
The provisions of this Article 13 shall survive any termination of this
Agreement.
14. Effective Period, Termination and Amendment.
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided and
may be amended at any time by mutual agreement of the Parties; provided,
however, that the Custodian shall not with respect to the Fund act under Section
2.10 hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Fund's Board has approved the initial use by
each Portfolio of a particular Securities System, as required in each case by
Rule 17f-4 under the 1940 Act, and that the Custodian shall not with respect to
a Portfolio act under Section 2.11 hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the Fund's
Board has approved the initial use by each Portfolio of the Direct Paper System
by such Portfolio; provided further, however, that the Fund shall not amend or
terminate this Agreement in contravention of any applicable federal or state
regulations, or any provision of the Fund's organizational documents, and
further provided, that the Fund may at any time by action of its Board (i) with
respect to any Portfolio substitute another bank or trust company for the
Custodian by giving notice as described below to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
The Custodian may terminate this Agreement only if it ceases to
provide, or to offer to provide, services substantially similar to those
provided herein to customers that are not affiliates of the Custodian, and then
only upon 180 days' prior written notice to the Fund. The Fund may terminate
this Agreement at any time upon at least 30 days' prior written notice to the
Custodian, except that no notice shall be necessary if the Fund terminates this
Agreement as a result of any act by the Custodian that could give rise to a
claim for indemnification under Article 13. Upon termination of this Agreement,
the Fund shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements. 15. Successor Custodian.
If a successor custodian for a Portfolio shall be appointed by the
Fund's Board, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities and other instruments of such Portfolio then held by it
hereunder, shall transfer to an account of the successor custodian all of the
securities of the Portfolio held in a Securities System and otherwise shall use
its best efforts to assist the Fund in completing a timely transfer of its
responsibilities as custodian to the successor custodian.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Fund's Board,
deliver at the office of the Custodian and transfer such securities, funds and
other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Fund's Board shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the 1940 Act, doing business in New York, New
York, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $50,000,000,
all securities, funds and other properties held by the Custodian on behalf of a
Portfolio and all instruments held by the Custodian relative thereto and all
other property held by it under this Agreement on behalf of the Portfolio and to
transfer to an account of such successor custodian all of the securities of the
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Agreement.
In the event that securities, funds and other property remains in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Fund's Board to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other property and
the provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect. 16. Additional Portfolios.
In the event that the Fund establishes one or more subtrusts or series,
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and the Custodian shall provide such services under the terms hereof. 17. Prior
Agreements.
This Agreement supersedes and terminates, as of the date hereof, all
prior agreements between the Fund and the Custodian relating to the custody of
the assets of the Portfolio(s).
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, microcard,
miniature photographic or other similar process. The Parties hereto each agree
that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a Party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
18. Investor Communications Election.
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. To comply with the Rule,
the Custodian needs the Fund to indicate whether it authorizes the Custodian to
provide the name, address, and share positions of the Portfolio(s) to requesting
companies whose securities are owned by the Portfolio. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either "yes",
or "no" below, the Custodian is required by the Rule to treat the Fund as
consenting to disclosure of this information for all securities owned by the
Portfolio or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's or
Portfolio's name and address for any purpose other than corporate
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release such names, address, and
share position(s). NO [x] The Custodian is not authorized to release
such names, address, and share position(s).
19. Limitation of Liability.
The references herein to the Board of the Fund are to the
Board members of the Fund as Board members and not individually or personally.
The obligations of the Fund entered into in the name of or on behalf of each
Portfolio by any of the Board members are not made individually but in their
capacity as Board members and are not binding on any of the Board members
personally. All persons dealing with a Portfolio must look solely to the assets
of that Portfolio for the enforcement of any claims against the Portfolio.
20. Confidentiality.
.........All information relating to the Fund or obtained by the
Custodian pursuant to this Agreement which is designated by the Fund as
confidential or is deemed confidential pursuant to the Services Agreement
(collectively, "Confidential Information") shall be considered and shall remain
a trade secret of, and the sole property of, the Fund and shall be held in
strict confidence by the Custodian and shall be treated in at least the most
restrictive of (a) the same manner as the Custodian protects its own
confidential information and (b) industry standards. The Custodian shall abide
fully by the constraints and requirements of confidentiality and privacy laws
and in particular take all precautions required under such laws to preserve the
security of Confidential Information. The Custodian agrees not to disclose,
publish, release, transfer or otherwise make available Confidential Information
of, or obtained from, the Fund in any form to, or for the use or benefit of, any
person or entity without the Fund's consent. The Custodian shall, however, be
permitted to disclose relevant aspects of Confidential Information to officers,
directors, agents, professional advisers, contractors, sub-contractors and
employees of it and its affiliates to the extent that such disclosure is not
restricted by law or by contract and only to the extent that such disclosure is
reasonably necessary for the performance of its duties and obligations, or the
exercise of its rights and remedies, under this Agreement; provided, however,
that the recipient agrees that the Confidential Information will not be
disclosed or duplicated in contravention of this Agreement by such officers,
directors, agents, professional advisers, contractors, sub-contractors and
employees. The obligations in this Section shall not restrict any disclosure
pursuant to any law (provided that Custodian shall give prompt notice to Fund of
the basis therefor and shall reasonably assist the Fund in resisting such
disclosure). The provisions of this Article 20 shall survive the termination of
this Agreement.
21. Year 2000.
The Custodian represents and warrants that it has used commercially
reasonable efforts to ensure that the Systems (as hereinafter defined) that are
owned by the Custodian and used to provide the custodial and fund accounting
services to be provided hereunder (the "Services") are 2000 Compliant (as
hereinafter defined). With respect to Systems that the Custodian leases or
licenses from third parties and uses in providing the Services ("Third Party
Systems"), the Custodian has used commercially reasonable efforts to test the
same, and, upon request, will certify, in accordance with the Custodian's
standard practices, that the Third Party Systems are 2000 Compliant. With
respect to the Custodian's use of third party service providers to provide the
Services or any portion thereof ("Third Party Services"), the Custodian
represents and warrants that it has used commercially reasonable efforts to
contact such service providers and to obtain from them assurances that the
systems used in providing Third Party Services are 2000 Compliant. If the
Custodian has not obtained such assurance as of the date of this Agreement, the
Custodian will use commercially reasonable efforts to replace such Third Party
Services with services for which the Custodian has received assurances that such
services are 2000 Compliant, if such replacement is available, compatible with
the Custodian's Systems and deemed by the Custodian as appropriate under the
circumstances, and if replacement is not available, the Custodian shall
institute a workaround. The Custodian agrees to provide the Fund, within 10
days' of the date hereof, with a list of all workarounds that are being sought.
Notwithstanding the foregoing, the Parties acknowledge and agree that the
Custodian cannot and does not warrant that the Systems, Third Party Systems or
Third Party Services will continue to interface with the hardware, firmware,
software (including operating systems), records or data used by Morgan or third
parties, nor does the Custodian make any warranties hereunder with respect to
any public utility, communications service provider, securities or commodities
exchange, or funds transfer network.
As used herein, the term "2000 Compliant" means that software and machines
will function without material error caused by the introduction of dates falling
on or after January 1, 2000 and the term "Systems" means all intellectual
property and all computers, related equipment and other equipment used to
provide the services for which the Custodian is responsible for providing
hereunder.
22. Miscellaneous
(a) Except as otherwise specified in this Agreement, all notices,
requests, consents, approvals, agreements, authorizations, acknowledgments,
waivers and other communications required or permitted under this Agreement
shall be in writing and shall be deemed given when sent by facsimile to the
facsimile number specified below or delivered by hand to the address specified
below. A copy of any such notice shall also be sent by express air mail on the
date such notice is transmitted by facsimile to the address specified below:
In the case of the Fund:
George A. Rio
President and Treasurer
Telephone No.: (617) 557-0700
Facsimile No.: (617) 557-0709
with a copy to:
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Attention: Delphine Jones
Telephone No.: (212) 837-9319
Facsimile No.: (212) 837-8963
In the case of the Custodian:
The Bank of New York
1 Wall Street
New York, New York 10086
Attention: Andrew Bell
Facsimile No.: 212-635-6190
Either Party may change its address or facsimile number for notification
purposes by giving the other Party five days' notice of the new address or
facsimile number and the date upon which it will become effective.
(b) EACH OF THE PARTIES HEREBY WAIVES THE RIGHT TO REQUEST A JURY
TRIAL.
(c) No delay or omission by either Party to exercise any right or power
it has under this Agreement shall impair or be construed as a waiver of such
right or power. A waiver by any Party of any breach or covenant shall not be
construed to be a waiver of any succeeding breach or any other covenant. All
waivers must be signed by the Party waiving its rights.
(d) No right or remedy herein conferred upon or reserved to either
Party (including any termination) is intended to be exclusive of any other right
or remedy, and each and every right and remedy shall be cumulative and in
addition to any other right or remedy under this Agreement, or under law,
whether now or hereafter existing.
(e) No amendment to, or change or discharge of, any provision of this
Agreement shall be valid unless in writing and signed by an authorized
representative of each of the Parties.
(f) This Agreement and the rights and obligations of the Parties under
this Agreement shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to the principles thereof relating
to the conflict of laws.
(g) Each Party irrevocably agrees that any legal action, suit or
proceeding brought by it in any way arising out of this Agreement must be
brought solely and exclusively in the United States District Court for the
Southern District of New York or in the state courts of the State of New York in
New York County and irrevocably accepts and submits to the sole and exclusive
jurisdiction of each of the aforesaid courts in personam, generally and
unconditionally with respect to any action, suit or proceeding brought by it or
against it by the other Party; provided, however, that this Section shall not
prevent a Party against whom any legal action, suit or proceeding is brought by
the other Party in the state courts of the State of New York in New York County
from seeking to remove such legal action, suit or proceeding, pursuant to
applicable Federal law, to the district court of the United States for the
district and division embracing New York County, and in the event an action is
so removed each Party irrevocably accepts and submits to the jurisdiction of the
aforesaid district court. Each Party hereto further irrevocably consents to the
service of process from any of the aforesaid courts by mailing copies thereof by
registered or certified mail, postage prepaid, to such Party at its address
designated pursuant to this Agreement, with such service of process to become
effective 30 days after such mailing.
(h) Each Party agrees that after the execution and delivery of this
Agreement and, without any additional consideration, each Party shall execute
and deliver any further legal instruments and perform any acts that are or may
become necessary to effectuate the purposes of this Agreement.
IN WITNESS WHEREOF, each of the Parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of October 18, 1999.
THE INTERNATIONAL EQUITY PORTFOLIO
By _________________________
THE BANK OF NEW YORK
By _________________________
<PAGE>
SCHEDULE A (NAME OF FUNDS/PORTFOLIOS AND EFFECTIVE DATE)
The International Equity Portfolio .....................1/24/99
<PAGE>
SCHEDULE C (FUND ACCOUNTING ARRANGEMENTS)
Pursuant to Article 8, the Custodian agrees to perform the following
duties in accordance with the requirements of the Portfolio's Registration
Statement, the 1940 Act, applicable Internal Revenue Service ("IRS")
regulations, and procedures as may be agreed upon from time to time, including
without limitation those set forth in the Service Level Agreement pertaining to
the Fund to which the Custodian is a party. In all instances, the Custodian
agrees to perform such services in accordance with the highest industry
standards and best practices, which may include those enumerated in the Audits
of Investment Companies Audit and Accounting Guide, as in effect from time to
time. Where appropriate, the Custodian agrees to keep all records on a Portfolio
class-by-class basis. The Custodian agrees to: (a) keep and maintain the books
and records of each Portfolio pursuant to Rule 31a-1 under the 1940 Act, other
than those to be maintained by the Fund's transfer agent, including the
following:
(i) journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash
and all other debits and credits, as required by subsection (b)(1) of said
Rule;
(ii) general and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued
and interest received, as required by subsection (b)(2)(i) of said Rule;
(iii) separate ledger accounts required by subsections (b)(2)(ii) and (iii)
of said Rule; and
(iv) a monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of said
Rule.
(b) perform the following accounting services daily for each Portfolio:
(i) calculate the net asset value per share;
(ii) obtain security prices from independent pricing services, or
if such quotes are unavailable, obtain such prices from each
Portfolio's investment adviser or its designee, as approved by
the Fund's Board;
(iii) provide exception, stale and halted price reporting to Morgan;
(iv) verify and reconcile with the Custodian's custody records all
daily trade activity;
(v) compute, as appropriate, each Portfolio's net income and
capital gains, dividend payables, dividend factors, 7-day
yields, 7-day effective yields, 30-day yields, weighted
average portfolio maturity and such other agreed-upon rates
and yields;
(vi) review daily the net asset value calculation and dividend
factor (if any) for each Portfolio, check and confirm the net
asset values and dividend factors for reasonableness and
deviations against agreed-upon benchmarks and tolerance
levels;
(vii) distribute net asset values and yields to NASDAQ, the Transfer
Agent, the Fund's administrator and such other third parties
as are agreed upon;
(viii) report to the Fund, at least weekly, about the daily market
pricing of securities in any money market funds, with the
comparison to the amortized cost basis;
(ix) determine unrealized appreciation and depreciation on
securities held in variable net asset value Portfolios;
(x) record all corporate actions affecting securities held by each
Portfolio, including dividends, stock splits and
recapitalizations;
(xi) amortize premiums and accrete discounts on securities
purchased at a price other than face value, if requested by
the Fund;
(xii) record and reconcile with the Transfer Agent all capital stock
activity; (xiii) update fund accounting system to reflect rate changes
on variable interest rate instruments; (xiv) post Portfolio
transactions to appropriate categories; (xv) accrue expenses of each
Portfolio according to instructions received from the Fund's
administrator;
(xvi) calculate book capital account balances; (xvii) maintain tax
books and records;
(xviii) prepare capital allocation reports in accordance with
Regulation 1.704-3(e)(3) (special aggregation rule for
securities partnerships) under the U.S. Internal Revenue Code,
based upon tax adjustments supplied by the Portfolio's
administrator;
<PAGE>
C-3
S:\Funds L egal\DSFNDLGL\MASTFEED\ie\CUSTODYintEQ.doc
(xix) determine the outstanding receivables and payables for all (1)
security trades, (2) Portfolio share transactions and (3)
income and expense accounts;
(xx) provide accounting reports in connection with the Fund's
regular annual audit and other audits and examinations by
regulatory agencies;
(xxi) advise the Fund and Morgan daily of the amount of any
overdraft and the circumstances giving rise to each such
overdraft; and
(xxii) provide such periodic reports as the Fund shall reasonably
request. In connection with the provision of these services, the Custodian
agrees:
(a) to maintain, in a format acceptable to the Fund, documents in
accordance with the applicable provisions of Rule 31a-2 of the 1940 Act,
and with requirements of other applicable domestic regulators, such as the
IRS, or Applicable Foreign Regulators (as hereinafter defined). The
Custodian agrees to make such documents available upon reasonable request
for inspection by officers, employees and auditors of the Fund during the
Custodian's normal business hours. For purposes of this subclause (a),
Applicable Foreign Regulator shall mean a foreign regulator designated as
such by the Fund by Proper Instructions and a foreign regulator actually
known to the Custodian to have authority over the Fund or its operations.
Promptly after the identification of an Applicable Foreign Regulator,
appropriate representatives of the Custodian and the Fund shall meet and
determine the requirements to which the Applicable Foreign Regulator would
subject the Fund. If the Custodian and the Fund determine, in the exercise
of their reasonable judgment, that complying with such requirements would
impose a substantial additional burden on the Custodian, the Fund and the
Custodian agrees to negotiate in good faith, taking into account all
relevant circumstances, an appropriate change in the fees payable
hereunder.
(b) that all records maintained and preserved by the Custodian pursuant to
this Agreement which the Portfolio is required to maintain and preserve
shall be and remain the property of the Portfolio and shall be
surrendered to the Portfolio promptly upon request in the form in which
such records have been maintained and preserved. Upon reasonable
request of the Portfolio, the Custodian shall provide, in the form
reasonably requested by the Fund, any records included in any such
delivery, and the Fund shall reimburse the Custodian for its expenses
of providing such records in such form;
<PAGE>
(c) to make reasonable efforts to determine (i) the taxable nature of
any distribution or amount received by or deemed received by, or payable to
the Portfolio; (ii) the taxable nature or effect on the Portfolio or its
shareholders of any corporate actions, class actions, tax reclaims, tax
refunds, or similar events; (iii) the taxable nature or taxable amount of
any distribution or dividend paid, payable, or deemed paid by the Portfolio
to its shareholders; or (iv) the effect under any federal, state or foreign
income tax laws of the Portfolio making or not making any distribution or
dividend payment or any election with respect thereto, in each case subject
to review by the Fund or a designee of the Fund, subject to the following:
(w) with respect to determinations contemplated by this clause (c) that a
Prudent Fund Accountant would reasonably consider to be, and that the
Custodian considers to be, non-routine in nature, the Custodian may seek in
writing the approval or authorization of the Fund or a designee of the Fund
and shall not be required to act in respect of any such determination (as
to which a written request for approval or authorization shall have been
made) without such approval or authorization; (x) the Custodian need not
make any such accrual, unless and until such accrual has been approved and
authorized by the Fund or its designee; (y) the Fund shall, or shall cause
its designee, to provide such approval and authorization, or approval and
authorization of different determinations(s), promptly; and (z) provided
the Custodian has made the reasonable efforts described in this clause (c)
and thereafter has acted in accordance with the approvals and
authorizations of the Fund or its designee, the Custodian shall have no
liability for any such accrual if it otherwise, in performing its services
hereunder, is not in breach of this Agreement. The Custodian shall accrue
for these actions appropriately; and
(d) to provide such records and assistance, including office space within
the Custodian's premises, to the Fund's independent accountants in
connection with the services such accountants provide to the Fund, as
such accountants shall reasonably request.
The parties further agree as follows with respect to the provision of services
pursuant to this Schedule C: (a) The Custodian may provide services similar or
identical to those covered in this Schedule C to other
corporations, associations or entities of any kind. Any and all
operational procedures, techniques and devices developed by the
Custodian in connection with the performance of its duties and
obligations under this Schedule C, including those developed in
conjunction with the Fund (other than those for which the Fund has
<PAGE>
paid the Custodian in whole or in part to develop), shall be and remain
the Custodian's property, and the Custodian shall be free to employ
such procedures, techniques and devices in conjunction with the
performance of any other contract with any other person, whether or not
the provisions of such contract are similar or identical to this
provision of this Schedule C.
(b) The Custodian may rely on the Fund's then currently effective
Prospectus, and the Fund shall promptly advise the Custodian of any
amendments thereto and provide copies of such amendments to the
Custodian.
(c) Both the Custodian and the Fund or its designee shall use reasonable
efforts to identify any changes in domestic and foreign laws and
regulations applicable to the Custodian's providing of services under
this Schedule C, each shall promptly advise the other of any changes it
identifies, and upon any such identification the Fund and the Custodian
shall agree on any reasonable alteration to the services to be provided
by the Custodian under this Schedule C.
(d) The Fund or its designee shall (i) furnish promptly to the Custodian
(and the Custodian may rely upon) the amounts of, or written formulas
or methodologies to be used by the Custodian to calculate the amounts
of, Fund liabilities and (ii) specify the timing for accruals of such
liabilities. The Custodian shall request such additional information as
it deems reasonably necessary for it to perform its services under this
Schedule C.
(e) The Custodian shall not be required to include as Fund liabilities and
expenses, nor use in its calculations hereunder, including, without
limitation, as a reduction of net asset value, any accrual for any U.S.
federal or state income taxes, unless and until the Fund or its
designee shall have specified to the Custodian the precise amount of
the same to be included in liabilities and expenses or used to reduce
net asset value. The Custodian agrees to include as a Fund liability
proper accruals for foreign taxes, unless, after being advised of the
amount and the basis for the accrual, the Fund by Proper Instructions
directs the Custodian not to do so.
(f) The Fund or its designee shall furnish to the Custodian, and the
Custodian may rely upon, the following types of information (and
explanations thereof): (i) the Fund's tax basis in debt obligations
acquired by the Fund before the Custodian's becoming custodian
hereunder, the dates of such acquisitions, and the amount of premium
previously amortized and the discount previously included in income,
(ii) the amounts credited to any capital accounts, (iii) the amount of
any reserves, and (iv) similar information which is required by the
<PAGE>
Custodian for performing the services and is neither possessed by the
Custodian as custodian nor available from a third party.
(g) References to corporate actions in clause (b)(x) are limited to
corporate actions of which the Custodian has or is deemed to have
knowledge under Section 2.2.
(h) The Custodian shall not be responsible for, and shall not incur
any loss or liability with respect to: any errors or omissions in
information supplied by the Fund or its designee that the Custodian has
reviewed and has concluded is free of manifest error; any improper use by
the Fund, its designees, agents, distributor or investment adviser of any
valuations or computations supplied by the Custodian under this Agreement;
any valuations of securities supplied by the Fund or an independent pricing
service approved by the Fund's Board, provided that, with respect to such
valuations, the Custodian has otherwise complied with this Schedule C, has
reviewed the valuations and has concluded they are free of manifest error;
any tax determination authorized and approved by the Fund or its designee
that the Custodian has reviewed and has concluded is free of manifest
error; or any changes in U.S. law or regulations applicable to the
Custodian's performance not identified by the Custodian's use of reasonable
efforts which are not identified to the Custodian by the Fund.
<PAGE>
SCHEDULE D (FOREIGN CUSTODY MANAGER)
A. Definitions
Whenever used in this Schedule, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1........"Eligible Foreign Custodian" shall have the meaning provided in
Rule 17f-5.
2........"Monitoring System" shall mean a system established by BNY to
fulfill the Responsibilities specified in clauses 1(d) and 1(e) of Section C.
3........"Qualified Foreign Bank" shall have the meaning provided in Rule
17f-5.
4........"Responsibilities" shall mean the responsibilities delegated to
the Custodian as a Foreign Custody Manager with respect to each Specified
Country and each Eligible Foreign Custodian selected by the Custodian, as such
responsibilities are more fully described in Section C.
5........"Rule 17f-5" shall mean Rule 17f-5 under the 1940 Act.
6........"Securities Depository" shall mean any securities depository
or clearing agency within the meaning of Section (a)(1)(ii) or (a)(1)(iii) of
Rule 17f-5.
7........"Specified Country" shall mean each country listed on Schedule B
of this Agreement and each country, other than the United States, constituting
the primary market for a security with respect to which the Fund has given
settlement instructions to the Custodian.
B. The Custodian as a Foreign Custody Manager
1........The Fund on behalf of its Board hereby delegates to the
Custodian with respect to each Specified Country the Responsibilities.
2........The Custodian accepts the Board's delegation of
Responsibilities and agrees in performing the Responsibilities to exercise
reasonable care, prudence and diligence such as a person having responsibility
for the safekeeping of the Fund's assets would exercise.
.................. D-1
3........The Custodian shall provide to the Board at such times as the
Board deems reasonable and appropriate based on the circumstances of the Fund's
foreign custody arrangements written reports notifying the Board of the
placement of assets of the Fund with a particular Eligible Foreign Custodian
within a Specified Country and of any material change in the arrangements
(including, in the case of Qualified Foreign Banks, any material change in any
contract governing such arrangements and in the case of Securities Depositories,
any material change in the established practices or procedures of such
Securities Depositories) with respect to assets of the Fund with any such
Eligible Foreign Custodian. C. Responsibilities..1. Subject to the provisions of
this Schedule D, the Custodian shall with respect to each Specified Country
select an Eligible Foreign Custodian. In connection therewith the Custodian
shall: (a) determine that assets of each Portfolio held by such Eligible Foreign
Custodian will be subject to reasonable care, based on the standards applicable
to custodians in the relevant market in which such Eligible Foreign Custodian
operates, after considering all factors relevant to the safekeeping of such
assets, including, without limitation, those contained in paragraph (c)(1) of
Rule 17f-5, (b) determine that the Fund's foreign custody arrangements with each
Qualified Foreign Bank are governed by a written contract with the Custodian
(or, in the case of a Securities Depository, by such a contract, by the rules or
established practices or procedures of the Securities Depository, or by any
combination of the foregoing) which will provide reasonable care for the Fund's
assets based on the standards specified in paragraph (c)(1) of Rule 17f-5; (c)
determine that each contract with a Qualified Foreign Bank shall include the
provisions specified in paragraphs (c)(2)(i)(A) through (F) of Rule 17f-5 or
alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F)
provisions, such other provisions as the Custodian determines will provide, in
their entirety, the same or a greater level of care and protection for the
assets of the Fund as such specified provisions; (d) monitor pursuant to the
Monitoring System the appropriateness of maintaining the assets of the Fund with
a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of Rule
17f-5 and, in the case of a Qualified
D-2
Foreign Bank, any material change in the contract governing such arrangement
and, in the case of a Securities Depository, any material change in the
established practices or procedures of such Securities Depository; and (e)
advise the Fund whenever an arrangement (including, in the case of a Qualified
Foreign Bank, any material change in the contract governing such arrangement and
in the case of a Securities Depository, any material change in the established
practices or procedures of such Securities Depository) described in preceding
clause (d) no longer meets the requirements of Rule 17f-5. Anything in this
Agreement to the contrary notwithstanding the Custodian in no event shall be
deemed to have selected any Securities Depository the use of which is mandatory
by law or regulation or because securities cannot be withdrawn from such
Securities Depository or because maintaining securities outside the Securities
Depository is not consistent with prevailing custodial practices in the relevant
market (each, a "Compulsory Depository"); it being understood however, that for
each Compulsory Depository utilized or intended to be utilized by the Fund, the
Custodian shall provide the Fund from time to time with information addressing
the factors set forth in Section (c)(1) of Rule 17f-5 and the Custodian's
opinions with respect thereto so that the Fund may determine the appropriateness
of placing Fund assets therein.
2........For purposes of clause (d) of preceding Section 1, the
Custodian's determination of appropriateness shall not include, nor be deemed to
include, any evaluation of Country Risks associated with investment in a
particular country. For purposes hereof, "Country Risks" shall mean systemic
risks of holding assets in a particular country including, but not limited to,
(a) the use of Compulsory Depositories, (b) such country's financial
infrastructure, (c) such country's prevailing custody and settlement practices,
(d) nationalization, expropriation or other governmental actions, (e) regulation
of the banking or securities industry, (f) currency controls, restrictions,
devaluations or fluctuations, and (g) market conditions which affect the orderly
execution of securities transactions or affect the value of securities.
.................. D-3
<PAGE>
SCHEDULE E (CASH MANAGEMENT PROVISIONS)
A. DEFINITIONS
Whenever used in this Schedule, unless the context otherwise requires,
the following words shall have the meanings set forth below:
1........"Account" shall mean an account in the name of the Fund or its
transfer agent for receiving and disbursing money as provided in this Agreement.
2........"ACCESS" shall mean any on-line communication system provided
by the Custodian hereunder whereby either the receiver of such communication is
able to verify by codes or otherwise with a reasonable degree of certainty the
identity of the sender of such communication, or the sender is required to
provide a password or other identification code.
3........"Authorized Person" shall mean either (A) any person duly
authorized by corporate resolutions of the Fund's Board to give Oral and/or
Written Instructions on behalf of the Fund, such persons to be designated in
Proper Instructions, which contain a specimen signature of such person, or (B)
any person sending or transmitting any instruction or direction through ACCESS.
4........"Federal Funds" shall mean immediately available same day funds.
5........"Omnibus Account" shall mean (A) an account at the Custodian
for the benefit of the Fund and the other investment companies listed on Exhibit
E-1 into which money to be deposited into an Account is initially credited
pending its transfer to such Account pursuant to Section C hereof, and (B) an
account at the Custodian for the benefit of the Fund and such other investment
companies in which money to be transferred from an Account pursuant to Section C
is deposited pending its disbursement pursuant to Section C.
6........"Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Authorized Person or from a person reasonably
believed by the Custodian to be an Authorized Person.
7........"Written Instructions" shall mean written instructions
actually received by the Custodian from an Authorized Person or from a person
reasonably believed by the Custodian to be an Authorized Person by letter,
memorandum, telegram, cable, telex, facsimile or through ACCESS.
B. APPOINTMENT OF THE CUSTODIAN
The Fund hereby appoints the Custodian as its agent for the term of
this Contract to perform the cash management services set forth herein. The
Custodian hereby accepts appointment as such agent for the Fund and agrees to
establish and maintain one or more Accounts and/or Omnibus Accounts as the
parties shall determine are necessary to receive and disburse money as provided
in this Agreement.
C. CASH MANAGEMENT SERVICES
1........Receipt of Money. The Custodian shall receive money pursuant to
this Schedule E for credit to an Account only:
<PAGE>
(i) by wire transfer to an account maintained at the Federal
Reserve Bank of New York as identified in writing by the
Custodian to the Fund;
(ii) by transfer from another Account maintained by the Fund
with the Custodian under this Agreement;
(iii) by transfer from another account maintained by the Fund
with the Custodian, including the Fund's custodian account
under this Contract; or
(iv) ....by transfer from any other account maintained with the
Custodian.
All money received by the Custodian shall be credited upon receipt, but subject
to final payment and receipt by the Custodian of immediately available funds,
and receipt by the Custodian of such forms, documents and information as are
required by the Custodian from time to time and received in the appropriate time
frames. If an Omnibus Account has been established for the Fund for the receipt
of money, such money shall be initially credited to the Omnibus Account pending
its allocation to, and deposit in, an Account. The Custodian, upon 24 hours'
prior notice to the Fund, shall be entitled to reverse any credits previously
made to the Fund's Account or an Omnibus Account where money is not finally
collected or where a credit to such account was in error.
2........Disbursement of Money. The Custodian shall disburse money
credited to an Account pursuant to this Schedule E only pursuant to Written
Instructions of the Fund transmitted through ACCESS to transfer funds as
directed by the Fund. The Custodian shall be required to disburse money in
accordance with the foregoing only insofar as such money is immediately
available and on deposit with the Custodian. If an Omnibus Account has been
established hereunder for the disbursement of money, such money shall be
credited to the Omnibus Account pending such disbursement. All instructions
directing the disbursement of money credited to an Account or Omnibus Account
under this Agreement (whether through ACCESS or by Oral Instructions pursuant to
Section D hereof) must identify an account to which such money shall be
transferred, and include all other information reasonably required by the
Custodian from time to time. It is understood and agreed that with respect to
any such instructions, when instructed to credit or pay a party by both name and
a unique numeric or alpha-numeric identifier (e.g., ABA number or account
number), the Custodian and any other financial institution participating in the
funds transfer may rely solely on the unique identifier, even if it identifies a
party different than the party named. Such reliance on a unique identifier shall
apply to beneficiaries named in such instructions as well as any financial
institution which is designated in such instruction to act as an intermediary in
a funds transfer.
3........Advances. In the event of any advance, overdraft or other
indebtedness in connection with an Omnibus Account in excess of a minimum to be
agreed upon from time to time by the Fund and the Custodian, the Custodian shall
be furnished on the next Business Day after such advance, overdraft or
indebtedness with Written Instructions identifying the Portfolio and each other
investment company to which such advance, overdraft or indebtedness relates, and
the amount allocable to each of them. Any overdraft, advance or indebtedness
arising in any Omnibus Account for the disbursement of money in connection with
any redemption of a Portfolio's shares shall be allocated to such Portfolio,
except that, if such Portfolio invests primarily in the shares of another
investment company, such overdraft, advance or indebtedness shall be allocated
to such other investment company.
4........Compliance with Law. The Fund agrees that upon allocation of
all advances, overdrafts or indebtedness to its account pursuant to Section C.3,
the total borrowings of each Portfolio from all sources (including the
Custodian) shall be in conformity with the requirements and limitations set
forth in the 1940 Act and each Portfolio's prospectus. The Fund shall promptly
(and in any event within one Business Day) notify the Custodian in writing
whenever it fails to comply with any of the foregoing requirements.
<PAGE>
D. ACCESS; CALL-BACK SECURITY PROCEDURE.
1........Services Generally. The Fund shall be permitted to utilize
ACCESS to obtain direct on-line access to its Accounts and Omnibus Accounts.
ACCESS shall permit the Fund at the times mutually agreed upon by the Custodian
and the Fund to receive reports, make inquiries, instruct the Custodian to
disburse money in accordance with Section C, and perform such other functions as
are more fully set forth in Exhibit E-2 hereto.
2........Permitted Use; Proprietary Information; Equipment. (a) Upon
delivery to the Fund of software enabling it to utilize ACCESS (the "Software"),
the Custodian grants to the Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Written
Instructions, receiving reports, making inquiries or otherwise communicating
with the Custodian in connection with the Account(s) or the Omnibus Account. The
Fund shall use the Software solely for its own internal and proper business
purposes and not in the operation of a service bureau. Except as set forth
herein, no license or right of any kind is granted to the Fund with respect to
the Software. The Fund acknowledges that the Custodian and its suppliers retain
and have title and exclusive proprietary rights to the Software, including any
trade secrets or other ideas, concepts, know-how, methodologies, or information
incorporated therein and the exclusive rights to any copyrights, trademarks and
patents (including registrations and applications for registration of either),
or other statutory or legal protections available in respect thereof. The Fund
further acknowledges that all or a part of the Software may be copyrighted or
trademarked (or a registration or claim made therefor) by the Custodian or its
suppliers. The Fund shall not take any action with respect to the Software
inconsistent with the foregoing acknowledgments, nor shall the Fund attempt to
decompile, reverse engineer or modify the Software. The Fund may not copy, sell,
lease or provide, directly or indirectly, any of the Software or any portion
thereof to any other person or entity without the Custodian's prior written
consent. The Fund may not remove any statutory copyright notice or other notice
included in the Software or on any media containing the Software. The Fund shall
reproduce any such notice on any reproduction of the Software and shall add any
statutory copyright notice or other notice to the Software or media upon the
Custodian's reasonable request.
3........Limited Representations or Warranties. The Software does not
infringe upon the proprietary rights of any third party and the Custodian has no
actual knowledge that a Destructive Element (as defined below) has been coded or
introduced into the Software. A Destructive Element means code or data (a)
intentionally designed to disrupt, disable, harm, or otherwise impede in any
manner, including aesthetical disruptions or distortions, the operation of the
Software or the computers and related equipment used to provide the services to
be provided under this Schedule E (sometimes referred to as "viruses" or
"worms"), (b) that would disable the Software or the computers and related
equipment used to provide the services to be provided under this Schedule E or
impair in any way their operation based on the elapsing of a period of time,
exceeding an authorized number of copies, advancement to a particular date or
other numeral (sometimes referred to as "time bombs", "time locks", or "drop
dead" devices), (c) that would permit the Custodian to access the Software or
computers and related equipment used to provide the services to be provided
under this Schedule E to cause such disablement or impairment (sometimes
referred to as "traps", "access codes" or "trap door" devices), or (d) which
contains any other similar harmful, malicious or hidden procedures, routines or
mechanisms which would cause such programs to cease functioning or to damage or
corrupt data, storage media, programs, equipment or communications, or otherwise
interfere with operations. Other than provided above, the Custodian and its
manufacturers and suppliers make no warranties or representations, express or
implied, in fact or in law, including but not limited to warranties of
merchantability and fitness for a particular purpose, in connection with the
Fund's use of ACCESS or the Software.
4........Security; Reliance; Unauthorized Use. The Fund will, and will
cause all persons utilizing ACCESS to, treat the user and authorization codes,
passwords and authentication keys applicable to ACCESS with extreme care. The
Custodian is hereby irrevocably authorized to act in accordance with and rely on
Written Instructions received by it through ACCESS. The Fund acknowledges that
it is its sole responsibility to assure that only Authorized Persons use ACCESS
and that the Custodian shall not be responsible nor liable for any unauthorized
use thereof, and agrees that the security procedures to be followed in
connection with the Fund's transmission of Written Instructions through ACCESS
provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
<PAGE>
5........Funds Transfer Back-Up Procedure. (a) In the event ACCESS is
inoperable and the Fund is unable to utilize ACCESS for the transmission of
Written Instructions to the Custodian to transfer funds, the Fund may give Oral
Instructions regarding funds transfers, it being expressly understood and agreed
that the Custodian's acting pursuant to such Oral Instructions shall be
contingent upon the Custodian's verification of the authenticity thereof
pursuant to the Call-Back Security Procedures annexed as Exhibit E-3 hereto. In
this regard, the Fund shall deliver to the Custodian a Funds Transfer Telephone
Instruction Authorization in the form of Exhibit E-4 hereto, identifying the
individuals authorized to deliver and/or confirm all such Oral Instructions. The
Fund understands and agrees that the Procedure is intended to determine whether
Oral Instructions received pursuant to this Section are authorized but is not
intended to detect any errors contained in such instructions. The Fund hereby
accepts the Procedure and confirms its belief that the Procedure is commercially
reasonable.
(b)......In the absence of negligence, the Custodian shall have no
liability whatsoever for any funds transfer executed in accordance with Oral
Instructions delivered and confirmed pursuant to this Schedule E.
(c)......The Custodian reserves the right to suspend acceptance of Oral
Instructions pursuant to this Schedule E if conditions exist which the
Custodian, in its sole discretion, reasonably believes have created an
unacceptable security risk. The Custodian agrees to provide one Business Day's
prior notice of its intention to suspend such acceptance, to advise the Fund in
writing of the specific conditions giving rise to its determination and to
cooperate fully with the Fund in correcting the conditions.
6........Export Restrictions. EXPORT OF THE SOFTWARE IS PROHIBITED BY
UNITED STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES
RESELL, DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY
FORM) IN OR TO ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERED THE SOFTWARE TO THE
FUND OUTSIDE OF THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED
STATES IN ACCORDANCE WITH THE EXPORT ADMINISTRATION REGULATIONS. DIVERSION
CONTRARY TO U.S. LAW IS PROHIBITED. The Fund hereby authorizes the Custodian to
report its name and address to government agencies to which the Custodian is
required to provide such information by law.
7........Encryption. The Fund acknowledges and agrees that encryption
may not be available for every communication through ACCESS, or for all data.
The Fund agrees that Custodian may deactivate any encryption features at any
time, without notice or liability to the Fund, for the purpose of maintaining,
repairing or troubleshooting ACCESS or the Software. The Custodian shall use
reasonable efforts to notify the Fund before deactivating any encryption
feature. If it is unable to provide prior notice, the Custodian agrees to give
the Fund notice of such deactivation as promptly as practicable thereafter and,
in any event, within three days thereafter.
E. CONCERNING THE BANK.
For purposes of this Schedule E only, provided it has acted in good
faith and without negligence, the Custodian shall not be liable for:
(a)......the due authority of any Authorized Person acting on behalf of the
Fund in connection with the services to be provided pursuant to this Schedule E;
(b)......any disbursement directed by the Fund, regardless of the purpose
therefor; or
(c)......the propriety of any transaction in any Account or Omnibus
Account.
