As filed with the Securities and Exchange Commission on April 28, 2000
Securities Act File No. 33-75116
Investment Company Act of 1940 File No. 811-8352
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 11
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
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LKCM FUNDS
(Exact Name of Registrant)
c/o Luther King Capital Management
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
(Address of Principal Executive Office)
Registrant's Telephone Number (817) 332-3235
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c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street, Milwaukee, WI 53202
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to Paragraph (b)
[X] on May 1, 2000 pursuant to Paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on May 1, 2000 pursuant to Paragraph (a)(1)
[ ] 75 days after filing pursuant to Paragraph (a)(2)
[ ] on ________________ pursuant to Paragraph (a) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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LKCM FUNDS
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
1-800-688-LKCM
P R O S P E C T U S
MAY 1, 2000
THE LKCM SMALL CAP EQUITY FUND - seeks to maximize long-term capital
appreciation
THE LKCM EQUITY FUND - seeks to maximize long-term capital appreciation
THE LKCM BALANCED FUND - seeks current income and long-term capital
appreciation
THE LKCM FIXED INCOME FUND - seeks current income
THE LKCM INTERNATIONAL FUND - seeks a total return in excess of the
total return of the Morgan Stanley Capital
International Europe, Australasia and Far
East Index
This Prospectus contains information you should consider before you invest
in the funds. Please read it carefully and keep it for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED BY
THIS PROSPECTUS, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY..........................................................3
FEES AND EXPENSES OF THE FUNDS...............................................8
INVESTMENT OBJECTIVES........................................................9
HOW THE FUNDS INVEST.........................................................9
FUND MANAGEMENT.............................................................11
PURCHASE OF SHARES..........................................................14
REDEMPTION OF SHARES........................................................15
VALUATION OF SHARES.........................................................16
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES ...................................17
FINANCIAL HIGHLIGHTS........................................................18
IN DECIDING WHETHER TO INVEST IN A FUND, YOU SHOULD RELY ON INFORMATION IN
THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION (THE "SAI"). THE
FUNDS HAVE NOT AUTHORIZED OTHERS TO PROVIDE ADDITIONAL INFORMATION. THE FUNDS DO
NOT AUTHORIZE THE USE OF THIS PROSPECTUS IN ANY STATE OR JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LEGALLY BE MADE.
2
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RISK/RETURN SUMMARY
GOALS OF THE FUNDS
Each fund has its own goal. This goal is sometimes referred to as a fund's
investment objective. The funds are managed by Luther King Capital Management
Corporation (the "Adviser").
The Small Cap Equity Fund's goal is to maximize long-term capital
appreciation. The fund attempts to achieve this goal by primarily choosing
investments that the Adviser believes are likely to have above-average growth in
revenue and/or earnings and potential for above-average capital appreciation.
The fund invests primarily in equity securities of smaller companies (those with
market values at the time of investment of less than $1 billion). These equity
securities include common stocks, preferred stocks, securities convertible into
common stock, rights and warrants.
The Equity Fund's goal is to maximize long-term capital appreciation. The
fund attempts to achieve this goal by primarily choosing investments that the
Adviser believes are likely to have above-average growth in revenue and/or
earnings, above average returns on shareholders' equity and under-leveraged
balance sheets, and potential for above-average capital appreciation. The fund
invests primarily in equity securities. These equity securities include common
stocks, preferred stocks, securities convertible into common stocks, rights and
warrants.
The Balanced Fund's goal is current income and long-term capital
appreciation. The fund attempts to achieve this goal by investing primarily in a
diversified portfolio of equity and fixed-income securities, including common
stocks, income producing securities convertible into common stocks, fixed-income
securities and cash equivalent securities. The fund's investments in fixed
income securities will consist of investment grade, intermediate-term fixed
income securities.
The Fixed Income Fund's goal is current income. The fund attempts to
achieve this goal by investing primarily in a diversified portfolio of
investment grade, intermediate-term debt securities and cash equivalent
securities.
The International Fund's goal is total return in excess of the total return
of the Morgan Stanley Capital International Europe, Australasia and Far East
Index. The fund attempts to achieve this goal by investing primarily in equity
and equity-related securities in non-U.S. markets that TT International
Investment Management (the "Subadviser") believes represent value in the form of
assets and earnings. These equity and equity-related securities include
securities listed on recognized exchanges, convertible bonds, warrants, equity
and stock index futures contracts and options and forward currency exchange
contracts.
The funds cannot guarantee that they will achieve their goals. For more
information, see "How the Funds Invest."
STRATEGIES OF THE FUNDS
The Adviser's primary strategy in managing the Small Cap Equity, Equity and
Balanced Funds is to identify high quality companies based on various financial
and fundamental criteria such as consistently high profitability, strong balance
sheets and prominent market share positions. The Adviser's primary strategy in
managing the Fixed Income Fund is to select debt securities based on factors
such as price, yield and credit quality. For the Balanced and Fixed Income
Funds, the Adviser invests in investment grade corporate and government issues
with intermediate effective maturities for the Funds' portfolios.
The International Fund is managed by TT International, Subadviser of the
fund. The Subadviser invests primarily in equity securities listed on recognized
exchanges and uses a top-down and a bottom-up approach in selecting those
securities. The Subadviser analyzes various countries and chooses to invest in
countries that indicate growth potential of various economies and securities
markets, as well as positive currency and taxation policies of those countries.
Further, the Subadviser selects those companies within a country that display
fundamental investment value.
3
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RISKS OF INVESTING IN THE FUNDS
The main risks of investing in Small Cap Equity, Equity, Balanced and
International Funds are:
o Stock Market Risk: Funds that invest in equity securities are
subject to stock market risks and significant
fluctuations in value. If the stock market
declines in value, a fund is likely to decline in
value. Decreases in the value of stocks are
generally greater than for bonds or other debt
investments.
o Stock Selection Risk: Value stocks selected by the Adviser may
decline in value or not increase in value when the
stock market in general is rising.
In addition, the Small Cap Equity Fund is subject to additional risks:
o Small-Cap Risk: Small capitalization companies may not have the
size, resources or other assets of large
capitalization companies. These small
capitalization companies may be subject to greater
market risks and fluctuations in value than large
capitalization companies and may not correspond to
changes in the stock market in general.
The International Fund is also subject to additional risks:
o Foreign Investment Risk: The International Fund's foreign investments may
decrease in value depending on foreign exchange
rates, foreign political and economic developments
and U.S. and foreign laws relating to foreign
investments. In addition, foreign laws and
accounting standards typically are not as strict
as they are in the United States, and there may be
less public information available about foreign
companies. Many foreign securities are less liquid
and their prices are more volatile than comparable
U.S. securities. From time to time foreign
securities may be difficult to liquidate rapidly
without adverse price effects. The costs of
foreign investing also tend to be higher than the
costs of investing in domestic securities. In
addition, a number of European countries have
entered into an economic and monetary union which
may have adverse effects on foreign securities if
a country withdraws from the union or if the
accounting and trading systems used by the fund do
not recognize the new currency adopted in the
union. The use of index future and foreign
currency contracts may present risks unique to and
in addition to the risks discussed above.
o Portfolio Turnover Risk: The Subadviser may engage in active trading of
its portfolio securities to achieve the fund's
investment goals. This practice could result in
the fund experiencing a high turnover rate (100%
or more). High portfolio turnover rates lead to
increased costs, could cause you to pay higher
taxes and could negatively affect the fund's
performance.
The main risks of investing in the Fixed Income Fund and additional risks
of the Balanced Fund are:
o Interest Rate Risk: The market values of fixed income securities
are inversely related to actual changes in
interest rates. When interest rates rise, the
market value of the funds' fixed-income securities
will decrease. If this occurs, the funds' net
asset values also may decrease. Moreover, the
longer the remaining maturity of a security, the
greater the effect of interest rate changes on the
market value of the security.
o Credit Risk: If issuers of fixed income securities in which a
fund invests experience unanticipated financial
problems, the issue is likely to decline in value.
In addition, the funds are subject to the risk
that the issuer of a fixed-income security will
fail to make timely payments of interest or
principal.
You should be aware that you may lose money by investing in the funds.
4
<PAGE>
PAST PERFORMANCE
The performance information that follows gives some indication of how each
fund's performance can vary. The bar charts indicate the risks of investing in
the funds by showing the performance of each fund from year to year (on a
calendar year basis). The tables show each fund's average annual returns
compared to a broad-based securities market index. Please remember that a fund's
past performance does not reflect how the fund may perform in the future.
SMALL CAP EQUITY FUND
Total Returns
1995 31.81%
1996 25.67%
1997 23.07%
1998 -6.26%
1999 16.83%
BEST AND WORST QUARTERLY RETURNS
15.87% (3rd quarter, 1997)
-18.98% (3rd quarter, 1998)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year 5 Years Since Inception(1)
------ ------- ---------------
Small Cap Equity Fund 16.83% 17.43% 16.85%
Russell 2000 Index(2) 21.26% 16.69% 15.71%
S&P 500 Index(3) 21.04% 28.56% 26.42%
- -------
(1) The fund commenced operations on July 14, 1994.
(2) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 8% of the Russell 3000 total
market capitalization.
(3) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
Index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
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EQUITY FUND
Total Returns
1997 23.57%
1998 13.11%
1999 23.07%
BEST AND WORST QUARTERLY RETURNS
17.83% (4th quarter, 1999)
-11.93% (3rd quarter, 1998)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year Since Inception(1)
------ ---------------
Equity Fund 23.07% 19.11%
The S&P 500 Index(2) 21.04% 26.40%
- -------
(1) The fund commenced operations on January 3, 1996.
(2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
Index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
BALANCED FUND
Total Returns
1998 12.84%
1999 13.53%
BEST AND WORST QUARTERLY RETURNS
11.07% (4th quarter, 1998)
-5.39% (3rd quarter, 1999)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1Year Since Inception(1)
------- ---------------------
Balanced Fund 13.53% 13.18%
Lehman Bond Index(2) 0.39% 4.33%
S&P 500 Index(3) 21.04% 24.75%
- -------
(1) The fund commenced operations on December 30, 1997.
(2) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged market value weighted index measuring both the principal price
changes of, and income provided by, the underlying universe of securities
that comprise the index. Securities included in the index must meet the
following criteria: fixed as opposed to variable rate; remaining maturity
of one to ten years; minimum outstanding par value of $100 million; and
rated investment grade or higher by Moody's, Standard & Poor's or Fitch, in
that order.
(3) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The
Index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
6
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FIXED INCOME FUND
Total Returns
1998 7.27%
1999 -0.34%
BEST AND WORST QUARTERLY RETURNS
4.23% (3rd quarter, 1998)
-0.87% (2nd quarter, 1999)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year Since Inception(1)
------ ---------------
Fixed Income Fund -0.34% 3.40%
Lehman Bond Index(2) 0.39% 4.33%
- -------
(1) The fund commenced operations on December 30, 1997.
(2) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged market value weighted index measuring both the principal price
changes of, and income provided by, the underlying universe of securities
that comprise the index. Securities included in the index must meet the
following criteria: fixed as opposed to variable rate; remaining maturity
of one to ten years; minimum outstanding par value of $100 million; and
rated investment grade or higher by Moody's, Standard & Poor's or Fitch, in
that order.
INTERNATIONAL FUND
Total Returns
1998 10.10%
1999 42.71%
BEST AND WORST QUARTERLY RETURNS
36.27% (4th quarter, 1999)
-12.82% (3rd quarter, 1998)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 Year Since Inception(1)
------ ---------------
International Fund 42.71% 25.35%
Morgan Stanley Capital International
Europe, Australasia and Far East Index(2) 26.96% 23.43%
- -------
(1) The fund commenced operations on December 30, 1997.
(2) The Morgan Stanley Capital International Europe, Australasia and Far East
Index ("MSCI/EAFE") is an unmanaged index composed of securities from 20
European and Pacific Basin countries. The MSCI/EAFE Index is the most
recognized international index and is weighted by market capitalization.
7
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FEES AND EXPENSES OF THE FUNDS
The following table illustrates the fees and expenses that you may pay if
you buy and hold shares of the funds.
SHAREHOLDER FEES (fees paid directly from your investment)
None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)(1)
<TABLE>
<CAPTION>
Small Cap Equity Balanced Fixed Income International
Equity Fund Fund Fund Fund Fund
----------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees(2) 0.75% 0.70% 0.65% 0.50% 1.00%
Distribution and Service (12b-1) Fees(3) None None None None None
Other Expenses(2) 0.15% 0.23% 1.30% 0.39% 0.52%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses(2) 0.90% 0.93% 1.95% 0.89% 1.52%
====== ====== ====== ====== ======
</TABLE>
(1) Fund operating expenses are deducted from fund assets before computing the
daily share price or making distributions. As a result, they will not appear
on your account statement, but instead reduce the amount of total return you
receive.
(2) The Adviser has agreed to waive all or a portion of its management fee
and/or reimburse the funds' other expenses to limit the total annual operating
expenses. The Adviser may choose to terminate the waiver or revise the limit
on total annual operating expenses at any time. If the waivers or
reimbursements were included in the calculation above, "Management Fees",
"Other Expenses" and "Total Net Annual Fund Operating Expenses" would be as
follows:
<TABLE>
<CAPTION>
Small Cap Equity Balanced Fixed Income International
Equity Fund Fund Fund Fund Fund
----------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Management Fees 0.75% 0.57% 0.00% 0.26% 0.68%
Other Expenses 0.15% 0.23% 0.80% 0.39% 0.52%
------ ------ ------ ------ ------
Total Net Annual Fund Operating Expenses 0.90% 0.80% 0.80% 0.65% 1.20%
====== ====== ====== ====== ======
</TABLE>
(3) The funds have adopted a Rule 12b-1 Plan under which each fund may pay up to
0.75% of its average daily net assets for distribution and other services. The
funds have not implemented the plan and, thus, are neither accruing nor paying
any fees under the plan.
EXAMPLE
The following Example is intended to help you compare the costs of
investing in a fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in a fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year, that all dividends and
distributions have been reinvested, and that a fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be as follows:
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Small Cap Equity Fund $ 92 $ 288 $ 500 $1,110
Equity Fund $ 95 $ 297 $ 515 $1,144
Balanced Fund $198 $ 612 $1,052 $2,274
Fixed Income Fund $ 91 $ 284 $ 493 $1,096
International Fund $155 $ 481 $ 829 $1,812
</TABLE>
8
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INVESTMENT OBJECTIVES
The investment objective of the Small Cap Equity Fund is to maximize
long-term capital appreciation.
The investment objective of the Equity Fund is to maximize long-term
capital appreciation.
The investment objective of the Balanced Fund is current income and
long-term capital appreciation.
The investment objective of the Fixed Income Fund is current income.
The investment objective of the International Fund is total return in
excess of the total return of the Morgan Stanley Capital International Europe,
Australasia and Far East Index (MSCI/EAFE).
HOW THE FUNDS INVEST
SMALL CAP EQUITY, EQUITY, BALANCED AND FIXED INCOME FUNDS
The Adviser follows a long-term investment philosophy grounded in the
fundamental analysis of individual companies. The Adviser's primary approach to
equity-related investing has two distinct but complementary components. First,
the Adviser seeks to identify high quality companies based on various financial
and fundamental criteria. Companies meeting these criteria will exhibit most of
the following characteristics:
o Consistently high profitability levels;
o Strong balance sheet quality;
o Prominent market share positions;
o Ability to generate excess cash flow after capital expenditures;
o Management with a significant ownership stake in the company; and
o Under-valuation based upon various quantitative criteria.
The Adviser also invests in companies whose assets the Adviser has
determined are undervalued in the marketplace. These include companies with
tangible assets as well as companies that own valuable intangible assets. As
with the primary approach described above, both qualitative as well as
quantitative factors are important criteria in the investment analysis.
For the Balanced and Fixed Income Funds, the Adviser's fixed-income
approach concentrates on investment grade corporate and government issues with
intermediate effective maturities. The Adviser's fixed-income philosophy
combines noncallable bonds with callable bonds in an attempt to enhance returns
while controlling the level of risk. The security selection process for
noncallable corporate bonds is heavily credit driven and focuses on the issuer's
earning trends, its competitive positioning and the dynamics of its industry. A
second component of the Adviser's fixed-income philosophy is the identification
of undervalued securities with a combination of high coupons and various early
redemption features. These defensive issues can offer high levels of current
income with limited price volatility due to the possibility that they will be
retired by the issuer much sooner than the final maturity. Callable bonds are
used as alternatives to traditional short-term noncallable issues. Maturity
decisions are primarily a function of the Adviser's macroeconomic analysis and
are implemented utilizing intermediate maturity, noncallable securities.
Finally, the credit analysis performed by the Adviser on individual companies,
as well as industries, is enhanced by the Adviser's experience in the equity
market. The analytical effort concentrates on market dominant, consistently
profitable, well financed debt issuers.
THE LKCM SMALL CAP EQUITY FUND. The Small Cap Equity Fund seeks to achieve
its investment objective by investing primarily in equity securities of smaller
companies which the Adviser believes are likely to have above-average growth in
revenue and/or earnings and potential for above-average capital appreciation.
Smaller companies are those with market values at the time of investment of less
than $1 billion. Under normal market conditions, 65% or more of the fund's total
assets will consist of equity securities of smaller companies. These equity
securities include common stocks, preferred stocks, securities convertible into
common stock, rights and warrants.
THE LKCM EQUITY FUND. The Equity Fund seeks to achieve its investment
objective by investing primarily in equity securities of companies which the
Adviser believes are likely to have above-average growth in revenue and/or
earnings with above average returns on shareholders' equity and under-leveraged
balance sheets, and potential for above-average capital appreciation. The fund
invests a portion of its assets in companies whose public market value
9
<PAGE>
is less than the Adviser's assessment of the companies' value. These equity
securities include common stocks, preferred stocks, securities convertible into
common stocks, rights and warrants.
THE LKCM BALANCED FUND. The Balanced Fund seeks to achieve its investment
objective by investing primarily in a diversified portfolio of equity and
fixed-income securities, including common stocks, income producing securities
convertible into common stocks, fixed-income securities and cash equivalent
securities. The fund primarily invests in equity and debt securities of
companies with established operating histories and strong fundamental
characteristics. By utilizing both equity and fixed-income securities, the fund
will normally achieve an income yield in excess of the dividend income yield of
the Standard & Poor's 500 Composite Stock Price Index(TM) ("S&P 500"). Under
normal circumstances, 25% or more of the fund's total assets will consist of
fixed-income securities. Corporate debt securities in which the fund invests
will have a rating within the four highest grades as determined by Moody's
Investor Services, Inc. ("Moody's") or Standard & Poor's ("S&P's").
The fund does not presently intend to invest more than 20% of its total
assets in equity securities that do not pay a dividend. A majority of the equity
securities in which the fund invests will typically be listed on a national
securities exchange or traded on the Nasdaq National Market ("Nasdaq") or in the
U.S. over-the-counter markets. The fund may also invest in U.S. and foreign
government securities, corporate bonds and debentures, high-grade commercial
paper, preferred stocks, certificates of deposit or other securities of U.S.
issuers when the Adviser perceives attractive opportunities from such
securities, or so that the fund may receive a competitive return on its
uninvested cash. The fund may invest in debt securities of U.S. and foreign
issuers.
THE LKCM FIXED INCOME FUND. The Fixed Income Fund seeks to achieve its
investment objective by investing primarily in a diversified portfolio of
investment grade, intermediate-term debt securities issued by corporations, the
U.S. Government, agencies or instrumentalities of the U.S. Government and cash
equivalent securities. Under normal market conditions, 65% or more of the fund's
total assets will consist of such fixed-income securities. Investment grade debt
securities are considered to be those rated Baa or better by Moody's or BBB or
better by S&P.
The fund seeks to maintain a dollar-weighted average expected maturity
between three and 10 years under normal market and economic conditions. The
expected maturity of securities with sinking fund or other early redemption
features shall be estimated by the Adviser, based upon prevailing interest rate
trends and the issuer's financial position. The average expected maturity may be
less than three years if the Adviser believes a temporary, defensive posture is
appropriate.
The fund may invest in all types of domestic or U.S. dollar denominated
foreign fixed-income securities in any proportion, including bonds, notes,
convertible bonds, mortgage-backed and asset-backed securities, government and
government agency securities, zero coupon bonds and short-term obligations such
as commercial paper and notes, bank deposits and other financial obligations,
and repurchase agreements. In determining whether or not to invest in a
particular debt security, the Adviser considers factors such as the price,
coupon, yield to maturity, the credit quality of the issuer, the issuer's cash
flow and related coverage ratios, the property, if any, securing the obligation
and the terms of the debt instrument, including subordination, default, sinking
fund and early redemption provisions. The Fund intends to purchase securities
that are rated investment grade at the time of its purchase. If an issue of
securities is downgraded, the Adviser will consider whether to continue to hold
the obligation.
THE LKCM INTERNATIONAL FUND. The Adviser has obtained the expertise of a
specialist to manage the International Fund. TT International Investment
Management, doing business as TT International, is the Subadviser for the
International Fund. The Subadviser uses both a "top-down" and a "bottom-up"
investment strategy in managing the fund's investment portfolio.
The Subadviser's investment strategy begins by using geopolitical analysis
to eliminate countries where the Subadviser believes it is unsafe to invest; it
also highlights countries where change is likely to occur. In conducting the
geopolitical analysis, the Subadviser may consider such factors as the condition
and growth potential of the various economies and securities markets, currency
and taxation policies and other pertinent financial, social, national and
political factors. Under certain adverse investment conditions, the fund may
restrict the number of securities markets in which it invests, although under
normal market circumstances the fund's investments will involve securities
principally traded in at least three different countries. Otherwise, there are
no prescribed limits on geographical asset distribution.
10
<PAGE>
The Subadviser currently intends to focus the fund's investments in
securities of companies located in Denmark, France, Germany, Hong Kong, Italy,
Japan, the Netherlands, Sweden, Switzerland and the United Kingdom. This is a
non-exclusive list of countries in which the fund can invest, and the fund
expects to invest in companies located in other countries as well.
Once the Subadviser has completed the geopolitical analysis, it examines
how it will allocate fund assets among various sectors and industries. There are
no specific limits on sector or industry weightings and no minimum or maximum
guidelines versus any index.
The Subadviser then uses a systematic three-stage process to select
securities in which the fund will invest. First, the Subadviser seeks companies
that display value in the form of assets or earnings. Second, the Subadviser
seeks to verify a security's valuation through the use of various models and
information obtained from industry or academic experts. Finally, the Subadviser
assesses the potential for realizing the value it has identified.
Principal Investment Policies and Strategies. The International Fund seeks
to achieve its investment objective by investing in a diversified portfolio of
equity securities issued by corporations located outside the United States and
that possess fundamental investment value. Under normal circumstances, 65% or
more of the fund's total assets will consist of these securities.
The fund invests primarily in equity securities that are listed on
recognized exchanges. In pursuing its investment objective, the fund may also
invest in U.S. markets through American Depositary Receipts ("ADRs") and similar
instruments issued by non-U.S. corporations. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying foreign
security and denominated in U.S. dollars.
The Subadviser may use foreign currency contracts to hedge the fund's
currency exposure at its discretion. Hedging is used to protect against price
movements in a security that the fund owns or intends to acquire that are
attributable to changes in the value of the currency in which the security is
denominated. The Subadviser may hedge anywhere from 0% to 100% of the fund's
currency exposure. In determining whether to engage in foreign currency
contracts, the Subadviser carefully considers fundamental macro-economic
factors, as well as the geopolitical factors and capital flows. In addition, the
Subadviser may purchase and sell stock index futures contracts to hedge against
the fund's exposure to the volatility of securities prices in a particular
market or to reallocate the fund's equity market exposure.
TEMPORARY INVESTMENTS
To respond to adverse market, economic, political or other conditions, the
Small Cap Equity, Equity, Balanced and Fixed Income Funds may invest in time
deposits, commercial paper, certificates of deposits, short term corporate and
government obligations, repurchase agreements and bankers' acceptances. To the
extent that a fund engages in a temporary, defensive strategy, the fund may not
achieve its investment objective.
FUND MANAGEMENT
INVESTMENT ADVISER
Luther King Capital Management Corporation, 301 Commerce Street, Suite
1600, Fort Worth, Texas 76102, serves as the investment adviser to the funds.
The Adviser was founded in 1979 and provides investment counseling services to
employee benefit plans, endowment funds, foundations, common trust funds, and
high net-worth individuals. As of the date of this Prospectus, the Adviser had
in excess of $6 billion in assets under management.
Under an Investment Advisory Agreement ("Agreement") with the funds, the
funds pay the Adviser an advisory fee set forth below under "Contractual Fee,"
calculated by applying a quarterly rate, equal on an annual basis to the
following numbers shown as a percentage of average daily net assets for the
quarter. However, until further notice, the Adviser has voluntarily agreed to
waive its advisory fees and reimburse expenses to the extent necessary to keep
the total operating expenses from exceeding the respective caps also shown as a
percentage of average daily net assets for the quarter.
11
<PAGE>
Contractual Fee Fee Actually Charged Cap
---------------- -------------------- -------
Small Cap Equity Fund 0.75% 0.75% 1.00%
Equity Fund 0.70% 0.57% 0.80%
Balanced Fund 0.65% 0.00% 0.80%
Fixed Income 0.50% 0.26% 0.65%
International Fund 1.00% 0.68% 1.20%
Any waivers or reimbursements will have the effect of lowering the overall
expense ratio for the applicable fund and increasing its overall return to
investors at the time any such amounts were waived and/or reimbursed.
The Agreement permits the Adviser to delegate its duties to one or more
investment advisers with respect to some or all of the International Fund's
assets. As described below, the Adviser has exercised its authority to delegate
certain duties with respect to all of the International Fund's assets to the
Subadviser.
INVESTMENT SUBADVISER
TT International, 5 Martin Lane, London, England EC4R ODP, serves as the
Subadviser to the International Fund. The Subadviser was founded in 1993 and
offers investment counseling services to investment companies, pension plans,
trusts and charitable organizations. As of the date of this Prospectus, the
Subadviser had in excess of $7.3 billion in assets under management. The
Subadviser is registered as an investment adviser under the Investment Advisers
Act of 1940 and is authorized to conduct its investment business in the United
Kingdom by the Investment Management Regulatory Organization Limited (IMRO).
Pursuant to an Investment Subadvisory Agreement ("Subadvisory Agreement")
entered into between the Adviser and the Subadviser, the Adviser, and not the
fund, pays the Subadviser a subadvisory fee calculated by applying a quarterly
rate, equal on an annual basis to 0.50% of the International Fund's average
daily net assets for the quarter. To the extent that the advisory fee received
by the Adviser is reduced pursuant to the fee waiver and/or expense
reimbursement arrangements described above, the subadvisory fee to be paid to
the Subadviser will be reduced proportionately. However, the Subadviser will
have no obligation to otherwise reimburse the fund in order to maintain the
operating expense limitations described above.
12
<PAGE>
PORTFOLIO MANAGERS
J. LUTHER KING, JR. is primarily responsible for the day-to-day management
of the Small Cap Equity and Equity Funds and has been since the funds'
inception. Mr. King also shares day-to-day management responsibility of the
Balanced Fund and the Fixed Income Fund. Mr. King has been President, Principal
and Portfolio Manager of the Adviser since 1979.
SCOT C. HOLLMANN is primarily responsible for the day-to-day management of
the Balanced Fund together with Mr. King. Mr. Hollmann has been a portfolio
manager of the Adviser since 1983.
ROBERT M. HOLT, JR. is primarily responsible for the day-to-day management
of the Fixed Income Fund together with Mr. King and Joan M. Maynard. Mr. Holt
has been a portfolio manager of the Adviser since 1983.
JOAN M. MAYNARD is primarily responsible for the day-to-day management of
the Fixed Income Fund. Ms. Maynard has been a Portfolio Manager of the Adviser
since 1991 and employed by the Adviser since 1986.
The Subadviser uses a team of individuals who are primarily responsible for
the day-to-day management of the International Fund. The individuals are
described below.
MR. TACCHI has been the Controlling Partner of the Subadviser since its
formation in 1993. Previously, he was the sole proprietor of the Subadviser's
predecessor firm (1988-1993), and an Investment Manager at Fidelity
International Investment Advisers Ltd. (1983-1988).
MR. TONNER has been a Partner and Investment Manager at the Subadviser
since 1993. Previously, he was an Investment Manager at Chemical Investment
Group (1989-1990) and President of Fidelity International Investment Advisers
Ltd. (1976-1988).
MR. ROBERTSON has been an Investment Manager at the Subadviser since 1996.
Previously he was Chief Executive Officer of Dah Sing M&G Asset Management
(1995-1996) and Director of M&G Investment Management (1972-1995).
MS. NGOR PONG has been an Investment Manager at the Subadviser since 1996.
Previously, she was a Portfolio Manager at Dah Sing M&G Asset Management
(1984-1996).
DISTRIBUTOR
Provident Distributors, Inc., Four Falls Corporate Center, 6th Floor, West
Conshocken, PA 19428, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., distributes the funds' shares.
DISTRIBUTION PLAN
The funds have adopted a distribution plan under Rule 12b-1 of the
Investment Company Act of 1940 that allows the funds to pay distribution and
service fees for the sale and distribution of their shares and for services
provided to shareholders. The distribution plan allows the funds to finance
activities that promote the sale of the funds' shares such as printing
prospectuses and reports and preparing and distributing advertising material and
sales literature with fund assets.
The funds have not implemented the plan and as a result they are currently
neither accruing nor paying any fees under the plan. If the funds were using the
plan, the fees paid under the plan could, over time, increase the cost of your
investment and could cost you more than paying other types of sales charges.
13
<PAGE>
PURCHASE OF SHARES
You may purchase shares of each fund at the net asset value per share next
determined after receipt of the purchase order. Each fund determines net asset
value as of the close of normal trading of the New York Stock Exchange ("NYSE")
(currently 4:00 P.M. Eastern Time) each day that the NYSE is open for business.
INITIAL INVESTMENTS
THROUGH YOUR FINANCIAL ADVISER. You may invest in shares of a fund by
contacting your financial adviser. Your financial adviser can help you open a
new account and help you review your financial needs and formulate long-term
investment goals and objectives. You may be charged a fee if you effect fund
transactions through a financial adviser.
The funds have authorized certain broker-dealers to receive on their behalf
purchase and redemption orders of fund shares. These broker-dealers may
designate intermediaries to receive fund orders. The funds are deemed to have
received purchase and redemption orders for fund shares when an authorized
broker-dealer or its designee receives such orders. All such orders are executed
at the next net asset value calculated after the order is received by an
authorized broker-dealer or its designee.
BY MAIL. You may open an account by completing and signing an Account
Registration Form, and mailing it, together with a check ($10,000 minimum)
payable to LKCM Funds.
<TABLE>
<CAPTION>
By regular mail to: By express, registered or certified mail to:
-------------------------------------------- --------------------------------------------
<S> <C>
LKCM Funds LKCM Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 East Michigan Street, 3rd Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
</TABLE>
Once the fund receives and accepts your application in the mail, your
payment for shares will be credited to your account at the net asset value per
share of the fund next determined after receipt. If you purchase shares using a
check and soon after request a redemption, LKCM will honor the redemption
request at the next determined NAV, but will not mail you the proceeds until
your purchase check has cleared (usually within 15 days). The funds will not
accept cash, drafts or third party checks. Payment should be made by check or
money order drawn on a U.S. bank, savings and loan or credit union. If your bank
does not honor your check, you could be liable for any loss sustained by the
funds, as well as a service charge imposed by the fund's transfer agent
("Transfer Agent") in the amount of $25.
BY WIRE. You may purchase shares of the fund by wiring Federal funds
($10,000 minimum) to the funds' custodian. To make an initial purchase by wire,
you should use the following procedures:
o Telephone the funds at 800-688-LKCM (option 1) for instructions and to
receive an account number.
o Instruct a Federal Reserve System member bank to wire funds to:
Firstar Bank, N.A.
ABA #075000022
For credit to Firstar Mutual Fund Services, LLC
Account #112-952-137
For further credit to LKCM Funds
[Name of Fund]
[Shareholder account number]
o Notify the funds by calling the telephone number listed above prior to
4:00 P.M. (Eastern Time) on the wire date.
o Promptly complete and mail an Account Registration Form to the address
shown above under "Initial Investments - By Mail."
Federal fund purchases will be accepted only on a day on which the funds
and the custodian are open for business. The funds are not responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
system.
14
<PAGE>
SUBSEQUENT INVESTMENTS
BY MAIL OR WIRE. You may make additional investments at any time (minimum
subsequent investment $1,000) by mailing a check payable to LKCM Funds to the
address noted under "Initial Investments--By Mail." Additional investments may
also be made by instructing your bank to wire monies as outlined above and
notifying the applicable fund prior to 4:00 P.M. (Eastern Time) on the wire
date.
BY TELEPHONE. To make additional investments by telephone, you must check
the appropriate box on your Account Registration Form authorizing telephone
purchases. If you have given authorization for telephone transactions and your
account has been open for at least 15 days, you may call the fund toll free at
1-800-688-LKCM to move money from your bank account to your fund account upon
request. Only bank accounts held at U.S. institutions that are Automated
Clearing House ("ACH") members may be used for telephone transactions. For
security reasons, requests by telephone will be recorded.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits investors who own shares of a fund
with a value of $10,000 or more to purchase shares (minimum of $100 per
transaction) at regular intervals selected by the investor. To establish the
Automatic Investment Program, an investor must complete the appropriate sections
of the Account Registration Form. For additional information on the Automatic
Investment Program, please call 1-800-688-LKCM.
RETIREMENT PLANS
The funds make available Individual Retirement Accounts ("IRAs"), including
Simplified Employee Pension Plans, traditional IRAs, Roth IRAs and IRA "Rollover
Accounts," offered by Firstar Mutual Fund Services, LLC. Detailed information on
these plans is available from the funds by calling the funds at 800-688-LKCM
(option 1). Investors should consult with their own tax advisers before
establishing a retirement plan.
OTHER PURCHASE INFORMATION
Each fund reserves the right, in its sole discretion, to suspend the
offering of its shares, to reject any purchase order, or to waive any minimum
investment requirements when, in the judgment of management, such action is in
the best interests of the fund.
Purchases of each fund's shares will be made in full and fractional shares
of the fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares will not be
issued, however.
REDEMPTION OF SHARES
You may redeem shares of the funds by mail or, if authorized, by telephone
or wire. The funds do not charge a fee for making redemptions, except with
respect to wire redemptions.
BY MAIL. You may redeem your shares by mailing a written request to:
LKCM Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
After your request is in "good order" the fund will redeem your shares at
the next NAV.
To be in "good order," redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying
the number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(c) Any required signature guarantees; and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit
sharing plans, and other organizations.
15
<PAGE>
SIGNATURE GUARANTEES. To protect your account, the funds and Firstar Mutual
Fund Services, LLC from fraud, signature guarantees are required to enable the
funds to verify the identity of the person who has authorized a redemption from
an account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) or
the registered address, (2) share transfer requests, and (3) any redemption
request if a change of address request has been received by the funds' Transfer
Agent within the last 15 days. Please contact the funds at 800-688-LKCM (option
1) for further details.
BY TELEPHONE OR WIRE. If you indicated on your Account Registration Form,
or have subsequently arranged in writing to do so, you may redeem shares by
calling the funds and requesting that the redemption proceeds be mailed to the
primary registration address or wired directly to your bank. The funds' Transfer
Agent imposes a $12.00 fee for each wire redemption, which is deducted from the
proceeds of the redemption. The redemption proceeds will be paid to the same
bank and account as designated on the Account Registration Form or in written
instructions subsequently received by the funds. No telephone redemptions may be
made within 15 days of any address change.
If you would like to arrange for redemption by wire or telephone or change
the bank or account designated to receive redemption proceeds, you must send a
written request to the funds at the address listed above under "Redemption of
Shares--By Mail." The investor must sign such requests, with signatures
guaranteed. Further documentation may be requested.
The funds reserve the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming shares by wire or
telephone may be modified or terminated at any time. The funds and the Transfer
Agent will not be liable for any loss, liability, cost or expense for acting
upon telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the funds will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration. To the
extent that the funds fail to use reasonable procedures as a basis for their
belief, they may be liable for instructions that prove to be fraudulent or
unauthorized.
OTHER REDEMPTION INFORMATION. Payment of the redemption proceeds will be
made within seven days after receipt of a redemption request in "good order."
Redemption proceeds for shares of the funds purchased by check may not be
distributed until payment for the purchase has been collected, which may take up
to fifteen business days. Such funds are invested and earn dividends during this
holding period. Shareholders can avoid this delay by utilizing the wire purchase
option.
Due to the relatively high cost of maintaining small accounts, the funds
reserve the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to redemption
by the investor, the shares in the account do not have a value of at least
$1,000. You will receive advance notice of a mandatory redemption and will be
given at least 30 days to bring the value of the account up to at least $1,000.
The funds may suspend the right of redemption or postpone the date at times
when the NYSE is closed (other than customary weekend and holiday closings) or
under any emergency circumstances as determined by the SEC.
The funds have reserved the right to redeem in kind (i.e., in securities)
any redemption request during any 90-day period in excess of the lesser of: (i)
$250,000 or (ii) 1% of a fund's net asset value being redeemed.
TRANSFER OF REGISTRATION
The registration of fund shares may be transferred by writing to LKCM
Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee,
Wisconsin, 53202-0701. As in the case of redemptions, the written request must
be received in "good order."
VALUATION OF SHARES
Net asset value per share is computed by dividing the total value of the
investments and other assets of a fund, less any liabilities, by the total
outstanding shares of the fund. The net asset value per share is determined as
of the close of normal trading on the NYSE (currently 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business. Net asset value is not determined
on days the NYSE is closed. The price at which a purchase order or redemption
request is effected is based on the next calculation of net asset value after
the order is received by the fund. A fund's net asset value may not be
calculated on days during which the fund receives no orders to purchase shares
and no shares are tendered for redemption. Because the International Fund
invests in securities that are primarily listed on foreign exchanges that trade
on weekends or other days when the International Fund does not
16
<PAGE>
price its shares, the net asset value of the International Fund may change on
days when shareholders will not be able to purchase or redeem shares of the
International Fund. In determining net asset value, expenses are accrued and
applied daily and investments for which market values are readily available are
valued at market value.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
The Small Cap Equity, Equity and International Funds intend to declare and
pay income dividends on an annual basis. The Balanced and Fixed Income Funds
intend to declare and pay income dividends on a quarterly basis. The funds
intend to distribute net capital gains and net gains from foreign currency
transactions, if any, on an annual basis in December. The funds may make an
additional distribution if necessary, to avoid income or excise taxes. Dividends
and other distributions, if any, will automatically be paid in additional shares
of the funds unless the shareholder elects otherwise. Such election must be made
in writing to the funds.
TAXES
GENERAL. Dividends, whether paid in cash or reinvested in additional
shares, from net investment income, net realized short-term capital gains and
net gains from certain foreign currency transactions, if any, will be taxable to
shareholders as ordinary income (unless a shareholder is exempt from income tax
or entitled to a tax deferral). Distributions of net realized long-term capital
gains in excess of net realized short-term capital losses, whether paid in cash
or reinvested in additional shares, are taxable as long-term capital gain. The
character of a capital gain distribution (and the applicable tax rate) is
determined by the length of time that a fund has held the security that
generated the gain and not the length of time you have held shares in the fund.
Shareholders are notified annually as to the federal tax status of dividends and
other distributions paid by the funds.
Any dividends and other distributions declared by a fund in December to
shareholders of record on a date in that month will be deemed to have been paid
by the fund and received by those shareholders on December 31 if the
distributions are paid before February 1 of the following year. If you purchase
shares of a fund shortly before a distribution, you will be subject to income
tax on the distribution, even though the value of your investment (plus cash
received, if any) remains the same.
When a shareholder redeems shares of a fund, the redemption may result in a
taxable gain or loss, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the shares. In addition, if fund
shares are bought within 30 days before or after selling other fund shares at a
loss, all or a portion of the loss will not be deductible and will increase the
basis of the newly purchased shares. Capital gain on redeemed shares held for
more than one year will be long-term capital gain, in which event it will be
subject to federal income tax at the rates indicated above.
Each fund is required by federal law to withhold 31% of reportable payments
(which includes dividends, capital gain distributions, and redemptions) payable
to individual and certain other non-corporate shareholders who have not complied
with certain Internal Revenue Service ("IRS") regulations. In order to avoid
this withholding requirement, you must certify on the Account Registration Form
that your Social Security or other taxpayer identification number provided is
correct and that you are not currently subject to back-up withholding, or that
you are exempt from back-up withholding.
Dividends and other distributions declared by each fund, as well as
redemptions of shares, may also be subject to state and local taxes.
The foregoing summarizes some of the important income tax considerations
generally affecting each fund and its shareholders. Potential investors in the
funds should consult their tax advisers with specific reference to their own tax
situation.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables set forth below are intended to help you
understand the funds' financial performance for their periods of operations.
Certain information reflects financial results for a single fund share. The
total returns in the tables represent the rates that an investor would have
earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). The 1999 information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the funds' financial
statements, are included in the funds' annual report, which is available upon
request. The information for periods prior to 1999 has been audited by other
independent accountants who expressed an unqualified opinion on such financial
highlights.
<TABLE>
<CAPTION>
SMALL CAP EQUITY FUND
Year Year Year Year May 1,
ended ended ended ended 1995 to July 14,
December, December, December, December, December, 1994(1) to
31, 31, 31, 31, 31, April 30,
1999 1998 1997 1996 1995(2) 1995(2)
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value--Beginning
of Period...................... $15.72 $16.89 $16.20 $13.84 $11.48 $10.00
------ ------ ------ ------ ------ ------
Net investment income............ 0.03 0.05 0.02 0.05 0.03 0.04
Net realized gain (loss) and
unrealized appreciation
(depreciation)................. 2.61 (1.10) 3.38 3.26 2.33 1.44
------ ------ ------ ------ ------ ------
Total from
investment operations.... 2.64 (1.05) 3.40 3.31 2.36 1.48
------ ------ ------ ------ ------ ------
Dividends from net
investment income.............. (0.03) (0.07) (0.07) (0.07) -- --
Distributions from net
realized gain from
investment transactions........ (0.25) (0.05) (2.64) (0.88) -- --
------ ------ ------ ------ ------ ------
Total distributions ......... (0.28) (0.12) (2.71) (0.95) -- --
------ ------ ------ ------ ------ ------
Net Asset Value--End of Period.... $18.08 $15.72 $16.89 $16.20 $13.84 $11.48
====== ====== ====== ====== ====== ======
TOTAL RETURN..................... 16.83% (6.26)% 23.07% 25.67% 20.56%(3) 14.80%(3)
Ratios and Supplemental Data:
Net assets, end of period
(thousands).................... $230,164 $284,018 $274,787 $199,088 $121,430 $66,736
Ratio of expenses to average
net assets..................... 0.90% 0.91% 0.95% 1.00% 1.00%(4) 1.00%(4)
Ratio of net investment income
to average net assets.......... 0.16% 0.35% 0.22% 0.39% 0.53%(4) 1.15%(4)
Portfolio turnover rate.......... 48% 35% 34% 66% 57% 53%
- ---------
(1) Commencement of Operations.
(2) Effective April 30, 1995, the fund changed its fiscal year end to December 31.
(3) Not Annualized.
(4) Annualized.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EQUITY FUND
Year Year Year January 3,
ended ended ended 1996(1)
December 31, December 31, December 31, December 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value-- Beginning of Period................. $14.39 $13.18 $11.70 $10.00
------ ------ ------ ------
Net investment income................................. 0.10(2) 0.10 0.10 0.15
Net realized gain and unrealized appreciation......... 2.97 1.63 2.52 1.55
------ ------ ------ ------
Total from investment operations.................. 3.07 1.73 2.62 1.70
------ ------ ------ ------
Dividends from net investment income.................. (0.15) (0.10) (0.25) --
Distributions from net realized gain from
investment transactions............................. (2.40) (0.42) (0.89) --
------ ------ ------ ------
Total distributions............................... (2.55) (0.52) (1.14) --
------ ------ ------ ------
Net Asset Value--End of Period......................... $14.91 $14.39 $13.18 $11.70
====== ====== ====== ======
Total Return.......................................... 23.07% 13.11% 23.57% 17.00%(3)
Ratios and Supplemental Data:
Net assets, end of period (thousands)................. $27,492 $41,069 $52,392 $34,608
Ratio of expenses to average net assets:
Before expense reimbursement.......................... 0.93% 1.02% 1.16% 1.32%(4)
After expense reimbursement........................... 0.80% 0.80% 0.80% 0.80%(4)
Ratio of net investment income to average net assets:
Before expense reimbursement.......................... 0.56% 0.49% 0.57% 0.98%(4)
After expense reimbursement........................... 0.69% 0.71% 0.93% 1.50%(4)
Portfolio turnover rate............................... 59% 45% 48% 79%
</TABLE>
- ----------
(1) Commencement of Operations.
(2) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(3) Not Annualized.
(4) Annualized.
19
<PAGE>
<TABLE>
<CAPTION>
BALANCED BALANCED FIXED FIXED
FUND FUND INCOME INCOME INTERNATIONAL INTERNATIONAL
Year Year FUND FUND FUND 1 FUND
ended ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value--
Beginning
of Period................... $11.05 $10.00 $10.25 $10.00 $11.01 $10.00
------ ------ ------ ------ ------ ------
Net investment income........ 0.22 0.22 0.52 0.54(1) 0.00 0.04(2)
Net realized gain (loss)
and unrealized
appreciation
(depreciation)............ 1.26 1.05 (0.55) 0.17 4.70 0.97
------ ------ ------ ------ ------ ------
Total from investment
operations......... 1.48 1.27 (0.03) 0.71 4.70 1.01
------ ------ ------ ------ ------ ------
Dividends from net
investment income......... (0.22) (0.22) (0.52) (0.46) -- --
Distributions from net
realized gain from
investment transactions... (0.01) -- (0.01) -- (0.27) --
------ ------ ------ ------ ------ ------
Total distributions....... (0.23) (0.22) (0.53) (0.46) (0.27) --
------ ------ ------ ------ ------ ------
Net Asset Value--
End of Period............... $12.30 $11.05 $9.69 $10.25 $15.44 $11.01
====== ====== ====== ====== ====== ======
Total Return................. 13.53% 12.84% (0.34)% 7.27% 42.71% 10.10%
Ratios and Supplemental
Data:
Net assets, end of period
(thousands).............. $6,851 $3,639 $26,016 $14,557 $83,892 $56,985
Ratio of expenses to
average net assets:
Before expense
reimbursement........... 1.95% 4.59% 0.89% 1.28% 1.52% 1.40%
After expense
reimbursement........... 0.80% 0.80% 0.65% 0.65% 1.20% 1.20%
Ratio of net investment
income to average
net assets:
Before expense
reimbursement........... 0.81% (1.38)% 5.34% 4.66% (0.28)% 0.34%
After expense
reimbursement........... 1.96% 2.41% 5.58% 5.29% 0.04% 0.54%
Portfolio turnover rate..... 47% 39% 68% 82% 205% 196%
</TABLE>
- ---------
(1) Net investment income per share represents net investment income divided by
the average shares outstanding through the year.
(2) Net investment income per share is calculated using the ending balance of
undistributed net investment income prior to consideration of adjustments
for permanent book and tax differences.
20
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<PAGE>
LKCM FUNDS
FOR MORE INFORMATION
You may obtain the following and other information on the LKCM Funds free
of charge:
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The annual and semi-annual reports provide the funds' most recent financial
reports and portfolio listings. The annual report contains a discussion of the
market conditions and investment strategies that affected the funds' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED MAY 1, 2000
The SAI is incorporated into this prospectus by reference (i.e., legally
made a part of this prospectus). The SAI provides more details about the funds'
policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR MAKE INQUIRIES TO THE FUNDS:
BY TELEPHONE:
1-800-688-LKCM
BY MAIL:
LKCM Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
ON THE INTERNET:
Text only versions of fund documents can be viewed online or downloaded
from the EDGAR database on the SEC's Internet site at: http://www.sec.gov
FROM THE SEC:
You may write to the SEC Public Reference Room at the regular mailing
address or the e-mail address below and ask them to mail you information about
the funds, including the SAI. They will charge you a fee for this duplicating
service. You can also visit the SEC Public Reference Room and copy documents
while you are there. For more information about the operation of the Public
Reference Room, call the SEC at the telephone number below.
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
[email protected]
1-202-942-8090
Investment Company Act File # 811-8352
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LKCM FUNDS
LKCM SMALL CAP EQUITY FUND
LKCM EQUITY FUND
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of the LKCM Funds dated May 1, 2000,
as such Prospectus may be supplemented or revised from time to time. A copy of
the Prospectus may be obtained without charge by calling the LKCM Funds at (800)
688-LKCM.
The LKCM Funds' audited financial statements for the year ended
December 31, 1999 are incorporated herein by reference to the Funds' 1999 Annual
Report. A copy of the Annual Report may be obtained without charge by calling
the LKCM Funds at (800) 688-LKCM.
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TABLE OF CONTENTS
Page
FUND ORGANIZATION...........................................................3
INVESTMENT LIMITATIONS......................................................4
INVESTMENT OBJECTIVES AND POLICIES..........................................5
TRUSTEES AND OFFICERS......................................................20
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS.................................21
INVESTMENT ADVISER.........................................................25
INVESTMENT SUBADVISER......................................................25
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................26
CUSTODIAN..................................................................26
SUBCUSTODIAN...............................................................26
ADMINISTRATOR..............................................................26
TRANSFER AGENT AND DIVIDEND- DISBURSING AGENT..............................27
DISTRIBUTOR................................................................27
DISTRIBUTION PLAN..........................................................27
CODE OF ETHICS.............................................................28
PURCHASE AND PRICING OF SHARES.............................................28
REDEMPTIONS IN KIND........................................................29
TAXATION OF THE FUNDS......................................................30
PERFORMANCE INFORMATION....................................................32
INDEPENDENT ACCOUNTANTS....................................................34
FINANCIAL STATEMENTS.......................................................34
APPENDIX...................................................................35
In deciding whether to invest in the Funds, you should rely on
information in this Statement of Additional Information and the Prospectus. The
Funds have not authorized others to provide additional information in any state
or jurisdiction in which such offering may not legally be made.
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FUND ORGANIZATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The LKCM Funds (the "Trust") is an open-end, diversified, management
investment company commonly referred to as a mutual fund. Each Fund is a series
of the Trust, a Delaware business trust that was established by a Declaration of
Trust dated February 10, 1994. Prior to February 10, 1998 the LKCM Funds was
known as the LKCM Fund. The Declaration of Trust permits the Trustees of the
Trust to issue an unlimited number of shares of beneficial interest, without par
value, from an unlimited number of series ("Funds") of shares. Currently, the
Trust offers five series. Pursuant to the Declaration of Trust, the Trustees may
also authorize the creation of additional series of shares (the proceeds of
which would be invested in separate, independently managed Funds with distinct
investment objectives and policies and share purchase, redemption and net asset
valuation procedures) with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine. All consideration received by
the Trust for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series and would be subject to
the liabilities related thereto.
The Trustees, in their discretion, may authorize the division of shares
of the Funds into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes
would have an interest in the same Fund of assets, shareholders of different
classes may bear different expenses in connection with different methods of
distribution. The Trustees have no present intention of taking the action
necessary to effect the division of shares into separate classes nor of changing
the method of distribution of shares of the Funds.
When issued, the shares of the Funds are fully paid and non-assessable,
have no preemptive or subscription rights and are fully transferable. There are
no conversion rights. Each share of a Fund is entitled to participate equally in
dividends and capital gains distributions and in the assets of the Fund in the
event of liquidation. The shares of the Funds have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books of
a Fund.
The Funds are not required, and do not intend, to hold regular annual
shareholder meetings. The Funds may hold special meetings for consideration of
proposals requiring shareholder approval, such as changing fundamental policies,
or upon the written request of 10% of the Trust's shares to replace their
Trustees. The Funds will assist in shareholder communication in such matters to
the extent required by law.
SHAREHOLDER AND TRUSTEE LIABILITY
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the Trustees, but this disclaimer may not be effective
in some jurisdictions or as to certain types of claims. The Declaration of Trust
further provides for indemnification out of the Trust's property of any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, 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 the
office.
3
INVESTMENT LIMITATIONS
In addition to the Funds' investment objectives as set forth in the
Prospectus, the Funds are subject to the following restrictions, which are
fundamental policies and may not be changed without the approval of a majority
of a Fund's outstanding voting securities. As used herein, a "majority of a
Fund's outstanding voting securities" means the lesser of: (1) at least 67% of
the voting securities of a Fund present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of a Fund.
As a matter of fundamental policy, each Fund will not:
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate, other than real
estate limited partnerships, and may purchase and sell marketable
securities that are secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objective and policies or entering into repurchase
agreements; or (ii) with respect to the Small Cap Equity, Balanced,
Fixed Income and International Funds, by lending their portfolio
securities to banks, brokers, dealers and other financial institutions,
so long as such loans are not inconsistent with the Investment Company
Act of 1940, as amended (the "1940 Act") or the rules and regulations
or interpretations of the SEC thereunder;
(4) with respect to 75% of its assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities of any single issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities);
(6) borrow money, except (i) from banks and as a temporary measure for
extraordinary or emergency purposes (not for leveraging or investment)
or (ii) with respect to the Small Cap Equity, Balanced, Fixed Income
and International Funds in connection with reverse repurchase
agreements provided that (i) and (ii) in combination do not exceed 33
1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings); and the Small Cap Equity and
Equity Funds cannot buy additional securities if they borrow more than
5% of their total assets;
(7) underwrite the securities of other issuers (except to the extent
that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act in the disposition of restricted securities);
(8) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the Fund's total assets
would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; and
(9) issue senior securities, except that this limitation shall not
apply to: (i) evidence of indebtedness which the Fund is permitted to
incur; (ii) shares of the separate classes or series of the Trust; or
(iii) collateral arrangements with respect to currency-related
contracts, futures contracts, options or other permitted investments,
including deposits of initial and variation margin.
The Funds are also subject to the following restrictions, which are
non-fundamental policies and may be changed by the Board of Trustees without
shareholder approval. As a matter of non-fundamental policy, each Fund will not:
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(a) purchase securities on margin, except for use of short-term credit
as may be necessary for the clearance of purchases and sales of
securities, but it may make margin deposits in connection with
transactions in options, futures, and options on futures; or sell
securities short unless, by virtue of its ownership of other
securities, it has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions. Transactions in futures
contracts, options and options on futures are not deemed to constitute
selling securities short;
(b) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value;
(c) invest more than an aggregate of 15% of the net assets of the Small
Cap Equity, Balanced, Fixed Income and International Funds or an
aggregate of 7% of the net assets of the Equity Fund in securities
deemed to be illiquid, including securities which are not readily
marketable, the disposition of which is restricted (excluding
securities that are not registered under the Securities Act but which
can be sold to qualified institutional investors in accordance with
Rule 144A under the Securities Act and commercial paper sold in
reliance on Section 4(2) of the Securities Act), repurchase agreements
having maturities of more than seven days and certain OTC options;
(d) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by the 1940
Act; and
(e) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
With the exception of fundamental investment limitation (6), if a
percentage limitation on the investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of a Fund's assets
will not require the sale of securities.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are described in
detail in the Prospectus under the captions "Investment Objectives" and "How the
Funds Invest." Additional information about those policies is provided below.
EQUITY SECURITIES
The equity securities in which the Funds may invest include common
stocks, preferred stocks, warrants and rights, and debt securities convertible
into or exchangeable for common stock or other equity securities.
PREFERRED STOCK. Preferred stock offers a stated dividend rate payable
from the corporation's earnings. These preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the
price of preferred stocks to decline. Preferred stock may have mandatory sinking
fund provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline. The rights of preferred stocks are
generally subordinate to rights associated with a corporation's debt securities.
Dividends on some preferred stock may be "cumulative" if stated dividends from
prior periods have not been paid. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks are generally subordinate to
rights associated with a corporation's debt securities.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities
at specific prices valid for a specific period of time. Their prices do not
necessarily move parallel to the prices of the underlying securities. Rights are
similar to warrants but normally have a short duration and are distributed by
the issuer to its shareholders.
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Warrants and rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities. Convertible securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk that the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security. A convertible
security may be subject to redemption at the option of the issuer at a
predetermined price. If a convertible security held by a Fund is called for
redemption, the Fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock, or would sell the
convertible security to a third party.
SECURITIES SUBJECT TO REORGANIZATION. The Funds may invest in equity
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of the Adviser,
there is a reasonable prospect of capital appreciation significantly greater
than the brokerage and other transaction expenses involved. Generally,
securities which are the subject of such an offer or proposal sell at a premium
to their historic market price immediately prior to the announcement of the
offer or may also discount what the stated or appraised value of the security
would be if the contemplated transaction were approved or consummated. Such
investments may be advantageous when the discount significantly overstates the
risk of the contingencies involved, significantly undervalues the securities,
assets or cash to be received by shareholders of the target company as a result
of the contemplated transaction, or fails adequately to recognize the
possibility that the offer or proposal may be replaced or superseded by an offer
or proposal of greater value. The evaluation of such contingencies requires
broad knowledge and experience on the part of the Adviser which must appraise
not only the value of the issuer and its component businesses as well as the
assets or securities to be received as a result of the contemplated transaction
but also the financial resources and business motivation of the offeror and the
dynamics and business climate when the offer or proposal is in process. Since
such investments are ordinarily short-term in nature, they will tend to increase
the turnover ratio of a Fund thereby increasing its brokerage and other
transaction expenses. The Adviser intends to select investments of the type
described which, in its view, have a reasonable prospect of capital appreciation
which is significant in relation to both the risk involved and the potential of
available alternate investments.
FOREIGN SECURITIES
The Funds may invest in securities of foreign issuers. The Balanced
Fund may invest up to 10% of its total assets in foreign securities. Investing
in foreign issuers involves certain special considerations that are not
typically associated with investing in U.S. issuers. Since the securities of
foreign issuers are frequently denominated in foreign currencies, and since the
Funds may temporarily hold invested reserves in bank deposits in foreign
currencies, the Funds will be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policies
of the Funds permit them to enter into forward foreign currency exchange
contracts in order to hedge the Funds' holdings and commitments against changes
in the level of future currency rates. Such contracts involve an obligation to
purchase or sell a specific currency at a future date at a price set at the time
of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments that could affect
U.S. investments in those countries. Although the Funds will endeavor to achieve
most favorable execution costs in their portfolio transactions, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is
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expected that the expenses for custodian arrangements of the Funds' foreign
securities will be somewhat greater than the expenses for the custodian
arrangements for handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income paid by citizens or corporations operating therein to investors
in other countries. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the holdings of the Funds.
However, these foreign withholding taxes are not expected to have a significant
impact on the Funds.
AMERICAN DEPOSITORY RECEIPTS ("ADRS")
The Funds may invest in ADRs, which are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by a
foreign issuer. ADRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR prices are denominated in U.S.
dollars; the underlying security is denominated in a foreign currency.
FIXED-INCOME SECURITIES
The fixed-income securities in which the Balanced and Fixed Income
Funds may invest include U.S. Government securities, corporate debt,
mortgage-backed securities and asset-backed securities. The Fixed Income Fund
invests at least 65% of its total assets in these types of securities under
normal market conditions. The fixed-income securities in which the Small Cap
Equity, Equity and International Funds may invest include U.S. Government
securities and corporate debt securities.
RATINGS. The International Fund and Equity Fund each limit investments
in fixed-income securities to those that are rated at the time of purchase as
investment grade by a NRSRO, such as S&P or Moody's, or, if unrated, are
determined to be of equivalent quality by the Adviser or Subadviser. Investment
grade fixed-income securities include:
o U.S. government securities;
o Bonds or bank obligations rated in one of the four highest
categories (such as BBB or higher by S&P);
o Short-term notes rated in one of the two highest categories
(such as SP-2 or higher by S&P);
o Commercial paper or short-term bank obligations rated in one
of the three highest categories (such as A-3 or higher by
S&P); and
o Repurchase agreements involving investment grade fixed-income
securities.
Investment grade fixed-income securities are generally believed to have
a lower degree of credit risk. However, certain investment grade securities with
lower ratings are considered medium quality and may be subject to greater credit
risk than the highest rated securities. If a security's rating falls below that
required at the time of purchase, the Adviser or Subadviser will consider what
action, if any, should be taken consistent with the Fund's investment objective.
Additional information concerning securities ratings is contained in the
Appendix to the SAI.
U.S. GOVERNMENT SECURITIES. U.S. Government agencies or
instrumentalities that issue or guarantee securities include, but are not
limited to, the Fannie Mae, Government National Mortgage Association ("GNMA"),
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Tennessee Valley
Authority, Inter-American Development Bank, Asian Development Bank, Student Loan
Marketing Association ("SLMA") and the International Bank for Reconstruction and
Development.
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Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the SLMA, are supported only by the credit of the instrumentality. In the case
of securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency or instrumentality 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 commitment. Each Fund will invest in
securities of such agencies or instrumentalities only when the Adviser is
satisfied that the credit risk is acceptable.
The Funds may invest in component parts of U.S. Treasury notes or
bonds, namely either the corpus (principal) of such Treasury obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of: (1) Treasury obligations from which the
interest coupons have been stripped; (2) the interest coupons that are stripped;
(3) book-entries at a Federal Reserve member bank representing ownership of
Treasury obligation components; or (4) receipts evidencing the component parts
(corpus or coupons) of Treasury obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of Treasury
obligations (corpus or coupons) purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investment Growth
Receipts" ("TIGRs") and "Certificates of Accrual on Treasury Securities"
("CATs"), and are not issued by the U.S. Treasury; therefore they are not U.S.
Government securities, although the underlying bonds represented by these
receipts are debt obligations of the U.S. Treasury.
NON-INVESTMENT GRADE DEBT SECURITIES. The Small Cap Equity, Balanced
and Fixed Income Funds' assets each may be invested in non-investment grade debt
securities. The Small Cap Equity Fund and Balanced Fund each may invest up to 5%
of the respective Fund's assets in non-investment grade debt securities. The
market values of these securities tend to be less sensitive to changes in
prevailing interest rates than high-quality securities, but more sensitive to
individual corporate developments than higher-quality securities. Such
securities also tend to be more sensitive to economic conditions than are
higher-quality securities. Accordingly, these securities are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher-quality
categories.
Even securities rated Baa or BBB by Moody's Investor Services Inc.
("Moody's") and Standard & Poor's ("S&P") respectively, which ratings are
considered investment grade, possess some speculative characteristics. There are
risks involved in applying credit ratings as a method for evaluating high yield
obligations in that credit ratings evaluate the safety of principal and interest
payments, not market value risk. In addition, credit rating agencies may not
change credit ratings on a timely basis to reflect changes in economic or
company conditions that affect a security's market value. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher grade bonds.
The Funds will rely on the judgment, analysis and experience of Luther
King Capital Management Corporation, the investment adviser to the Funds (the
"Adviser") or TT International Investment Management, the investment subadviser
to the International Fund (the "Subadviser"), in evaluating the creditworthiness
of an issuer. In this evaluation, the Adviser or Subadviser, as applicable, will
take into consideration, among other things, the issuer's financial resources
and ability to cover its interest and fixed charges, factors relating to the
issuer's industry and its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters.
The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other obligations of the
issuer. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower quality securities may experience
financial stress and may not have sufficient revenues to meet their interest
payment obligations. An issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, its inability to
meet specific projected business forecasts, or the unavailability of additional
financing.
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Factors adversely affecting the market value of securities will
adversely affect a Fund's net asset value. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal of or interest on its portfolio holdings.
The secondary trading market for lower-quality fixed-income securities
is generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the Trust's
Board of Trustees or its Adviser to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available.
CORPORATE DEBT SECURITIES. A Fund's investments in U.S. dollar or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to investment grade corporate debt securities (corporate
bonds, debentures, notes and other similar corporate debt instruments);
provided, however, that the Small Cap Equity Fund and the Balanced Fund may each
invest up to 5% of its total assets in non-investment grade securities. The rate
of return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.
MORTGAGE-RELATED SECURITIES. The Balanced and Fixed Income Funds may
invest in residential or commercial mortgage-related securities, including
mortgage pass-through securities, collateralized mortgage obligations ("CMO"),
adjustable rate mortgage securities, CMO residuals, stripped mortgage-related
securities, floating and inverse floating rate securities and tiered index
bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers in the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities:
(1) those issued by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA, and FHLMC; (2) those issued by private
issuers that represent an interest in or are collateralized by pass-through
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is authorized to guarantee, with the full faith and credit of the
U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the U.S. Government. In the case of obligations not backed by the full
faith and credit of the U.S. Government, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. FNMA and
FHLMC may borrow from
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the U.S. Treasury to meet their obligations, but the U.S. Treasury is under no
obligation to lend to FNMA or FHLMC.
Private mortgage pass-through securities are structured similarly to
GNMA, FNMA, and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
Pools created by private mortgage pass-through issuers generally offer
a higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or insured by governmental
entities, private insurers and the mortgage poolers.
Collateralized Mortgage Obligations. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral, which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call protection
through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
The Balanced and Fixed Income Funds may also invest in, among other
things, parallel pay CMOs, Planned Amortization Class CMOs ("PAC bonds"),
sequential pay CMOs and floating rate CMOs. Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
bonds generally require payments of a specified amount of principal on each
payment date. Sequential pay CMOs generally pay principal to only one class
while paying interest to several classes. Floating rate CMOs are securities
whose coupon rate fluctuates according to some formula related to an existing
marketing index or rate. Typical indices would include the eleventh district
cost-of-funds index ("COFI"), the London Interbank Offered Rate ("LIBOR"),
one-year U.S. Treasury yields, and ten-year U.S. Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage
securities ("ARMs") are pass-through securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise to levels above that of the ARMs
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely fall.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
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CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayments experience on the mortgage assets.
In part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
included a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances a Fund may fail to recoup fully its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"). CMO residuals, whether or not registered under the Securities Act, may be
subject to certain restrictions on transferability, and may therefore be deemed
"illiquid" and subject to Funds' limitations on investment in illiquid
securities as discussed herein.
Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMRS") are derivative multi-class mortgage securities. SMRS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
SMRS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMRS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the PO class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rated categories of investment-grade securities.
Although SMRS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to the Funds' limitations on investment in illiquid
securities as discussed herein.
Inverse Floaters. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction to the
interest rate on another security or index level. Changes in the interest rate
on the other security or index inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
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experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.
ASSET-BACKED SECURITIES. The Balanced and Fixed Income Funds may invest
in various types of asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objectives and policies of the Funds.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Alternatively, if the Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Adviser will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.
During periods of declining interest rates, prepayment of
mortgage-related securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in higher-yielding mortgage-related securities
will be affected by reductions in the principal amount of such securities
resulting from such prepayments, and its ability to reinvest the returns of
principal at comparable yields is subject to generally prevailing interest rates
at that time. Conversely, slower than expected prepayments may effectively
change a security that was considered short or intermediate-term at the time of
purchase into a long-term security. Long-term securities tend to fluctuate more
in response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the benefit of a security interest in the
related collateral. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payment on these securities.
TEMPORARY INVESTMENTS
The temporary investments that the Small Cap Equity, Equity, Balanced
and Fixed Income Funds may make include:
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances issued
by a commercial bank or savings and loan association. Time deposits are
non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits
maturing in more than seven days will not be purchased by the Funds.
Certificates of deposit are negotiable short-term obligations issued by
commercial banks or savings and loan associations against
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funds deposited in the issuing institution. Variable rate certificates
of deposit are certificates of deposit on which the interest rate is
periodically adjusted prior to their stated maturity based upon a
specified market rate. A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower usually in connection with an
international commercial transaction (to finance the import, export,
transfer or storage of goods).
The Small Cap Equity Fund may invest in obligations of U.S. banks,
foreign branches of U.S. banks (Eurodollars), and U.S. branches of
foreign banks (Yankee dollars). Euro and Yankee dollar investments
will involve the same risks of investing in international securities
that are discussed under "Investment Objective and Policies-Foreign
Securities." Although the Adviser carefully considers these factors
when making investments, the Small Cap Equity Fund does not limit the
amount of its assets which can be invested in any one type of
instrument or in any foreign country in which a branch of a U.S. bank
or the parent of a U.S. branch is located.
The Funds will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, or, in the case of domestic banks which
do not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the
principal amount of such investment is insured in full by the Federal
Deposit Insurance Corporation and (ii) in the case of U.S. banks, it is
a member of the Federal Deposit Insurance Corporation.
(2) Commercial paper which at the time of purchase is rated in the
highest rating category by a Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if not rated, issued by a corporation having
an outstanding unsecured debt issue that meets such rating requirement
at time of purchase;
(3) Short-term corporate obligations rated in the highest rating
category by a NRSRO at time of purchase;
(4) U.S. Government obligations, including bills, notes, bonds and
other debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in interest
rates, maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These
include securities issued by the Federal Home Loan Banks, Federal Land
Bank, Farmers Home Administration, Farm Credit Banks, Federal
Intermediate Credit Bank, Fannie Mae, Federal Financing Bank, the
Tennessee Valley Authority, and others; and
(6) Repurchase agreements collateralized by those securities listed
above.
ZERO-COUPON SECURITIES
The Balanced and Fixed Income Funds may invest in zero-coupon
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon securities are sold at a deep discount to their
face value. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of zero- coupon securities to include in income each year the portion of
the original issue discount (or deemed discount) and other non-cash income on
such securities accruing that year. In order to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, (the
"Code") and avoid a certain excise tax, each Fund may be required to distribute
a portion of such discount and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines established by the Board of Trustees of
the Trust. In a repurchase agreement, a Fund buys a security from a seller that
has agreed to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective
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for the term of the agreement. The term of these agreements is usually from
overnight to one week and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by a Fund to the seller. The
Funds always receive securities as collateral with a market value at least equal
to the purchase price, including accrued interest, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Funds might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Funds' realization upon the collateral
may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Small Cap Equity, Balanced, Fixed Income and International Funds
may enter into reverse repurchase agreements with brokers, dealers, domestic and
foreign banks or other financial institutions. In a reverse repurchase
agreement, a Fund sells a security and agrees to repurchase it at a mutually
agreed upon date and price, reflecting the interest rate effective for the term
of the agreement. It may also be viewed as the borrowing of money by the Fund.
The Funds' investment of the proceeds of a reverse repurchase agreement is the
speculative factor known as leverage. The Funds may enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement.
WHEN-ISSUED SECURITIES
The Small Cap Equity, Balanced, Fixed Income and International Funds
may purchase securities on a "when-issued" basis. In buying "when-issued"
securities, a Fund commits to buy securities at a certain price even though the
securities may not be delivered for up to 120 days. No payment or delivery is
made by the Fund in a "when-issued" transaction until the Fund receives payment
or delivery from the other party to the transaction. Although the Fund receives
no income from the above-described securities prior to delivery, the market
value of such securities is still subject to change. As a consequence, it is
possible that the market price of the securities at the time of delivery may be
higher or lower than the purchase price.
DERIVATIVE INSTRUMENTS
In pursuing their respective investment objectives, the Small Cap
Equity, Balanced, Fixed Income and International Funds may purchase and sell
(write) options on securities, securities indices, and foreign currencies and
enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts and enter into forward
foreign currency exchange contracts for hedging purposes.
OPTIONS. An option is a legal contract that gives the holder the right
to buy or sell a specified amount of the underlying instrument at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy, in return for a premium paid, and a put option conveys the right,
in return for a premium, to sell a specified quantity of the underlying
instrument. Options on indices are settled in cash and gain or loss depends on
changes in the index in question rather than on price movement in individual
securities.
There are certain risks associated with transactions in options on
securities and on indices. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
foregoes, during the life of the option, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
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If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Each Fund is authorized to purchase and sell over-the-counter options
("OTC Options") in addition to exchange listed options. OTC Options are
purchased from or sold to securities dealers, financial institutions or other
parties ("Counterparties") through direct bilateral agreement with the
Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC Option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation between the parties. A Fund will
only sell OTC Options that are subject to a buy-back provision permitting the
Fund to require the Counterparty to sell the option back to the Fund at a
formula price within seven days. The Funds expect generally to enter into OTC
Options that have cash settlement provisions, although they are not required to
do so.
There is no central clearing or guaranty function in an OTC Option. As
a result, if the Counterparty fails to make or take delivery of the security,
currency or other instrument underlying an OTC Option it has entered into with a
Fund or fails to make a cash settlement payment due in accordance with the terms
of the option, the Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Adviser must assess
the creditworthiness of each such Counterparty or any guarantor of credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC Option will be satisfied. The Funds will engage in OTC Option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of "A-1" from S&P's or "P-1" from Moody's or an equivalent rating from
any other NRSRO.
OPTIONS ON FOREIGN CURRENCIES. The Funds may purchase and write options
on foreign currencies for hedging purposes. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in the
value of portfolio securities, a Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options on the currency
involved. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Funds may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the anticipated decline occurs, the option will
most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if exchange rates move
in the expected direction. If this
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does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss, which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
a Fund also may be required to forego all or a portion of the benefits that
might otherwise have been obtained from favorable movements in exchange rates.
The Funds may write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by the Funds'
custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, or liquid assets in
a segregated account with the custodian.
The Funds also may write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the Fund owns or has the right to acquire and
which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, the Fund will collateralize
the option by maintaining in a segregated account with the custodian, cash or
liquid assets in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
FUTURES CONTRACTS. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific
security, currency or index at a specified future time and at a specified price.
Futures contracts, which are standardized as to maturity date and underlying
financial instrument, are traded on national futures exchanges. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC").
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold. Futures contracts on indices are settled in cash.
Futures traders are required to make a good faith margin deposit in
cash or acceptable securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
securities) if it is not terminated prior to the specified delivery date.
Initial margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required variation margin, resulting in a
repayment of excess variation margin to the contract holder. Variation margin
payments are made to and from the futures broker for as long as the contract
remains open.
Regulations of the CFTC applicable to the Funds require that they use
futures contracts and options on futures contracts only for bona fide hedging
purposes, or to the extent that a Fund's futures and options on futures
positions are for other than bona fide hedging purposes, as described by the
CFTC, the aggregate initial margins and premiums required to establish such
non-bona fide hedging positions other than the "in-the-money" amount in the case
of options that are "in-the-money" at the time of purchase, may not exceed 5% of
the Fund's net assets. Adherence to these guidelines does not limit a Fund's
risk to 5% of the Fund's assets. A Fund will only sell futures contracts to
protect securities owned by it against price declines or purchase contracts to
protect against an increase in the price of securities it intends to purchase.
As evidence of this hedging intent, the Funds expect that approximately 75% of
the futures contracts purchased will be "completed;" that is, equivalent amounts
of related
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securities will have been purchased or in the process of being purchased by a
Fund upon sale of open futures contracts. Although techniques other than the
sale and purchase of futures contracts could be used to control a Fund's
exposure to market fluctuations, the use of futures contracts may be a more
effective means of hedging this exposure. While the Funds will incur commission
expenses in both opening and closing out futures positions, these costs may be
lower than transaction costs incurred in the purchase and sale of the underlying
securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("Forward Contract") is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders, usually large commercial banks, and their
customers. The Funds may use Forward Contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving Forward
Contracts that the Funds may use.
In connection with purchases and sales of securities denominated in
foreign currencies, the Funds may enter into Forward Contracts to fix a definite
price for the purchase or sale in advance of the trade's settlement date
("transaction hedge" or "settlement hedge").
The Funds may also use Forward Contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value ("position hedge"). A position
hedge would tend to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other factors. The Fund
could also hedge the position by selling another currency expected to perform
similarly to the pound sterling ("proxy hedge"). A proxy hedge could offer
advantages in terms of cost, yield or efficiency, but generally would not hedge
currency exposure as effectively as a simple hedge into U. S. dollars. Proxy
hedges may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated.
The Funds' custodian will place cash or other liquid assets in a
separate account having a value equal to the aggregate amount of the Funds'
commitments under Forward Contracts entered into with respect to position hedges
and proxy-hedges. If the value of the assets placed in a segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will equal the amount of the Funds'
commitments with respect to such contracts. Alternatively, a Fund may purchase a
call option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the Forward Contract
price or a Fund may purchase a put option permitting the Fund to sell the amount
of foreign currency subject to a forward purchase contract at a price as high or
higher than the Forward Contract price. Unanticipated changes in currency prices
may result in poorer overall performance for the Funds than if they had not
entered into such contracts.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts
may be closed out only on an exchange that provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge. The Funds will minimize
the risk that they will be unable to close out a futures contract by only
entering into futures which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures trading. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to a Fund. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any
17
<PAGE>
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by the Funds involves the risk of
imperfect or no correlation where the securities underlying futures contracts
are different than the portfolio securities being hedged. It is also possible
that a Fund could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
a Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option on a futures contract.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract and options prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract or option on
a future contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
and options prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
RISKS OF OPTIONS ON FUTURES, FORWARD CONTRACTS, AND OPTIONS ON FOREIGN
CURRENCIES. Options on currencies may be traded over-the-counter and forward
currency contracts are always traded in the over-the-counter market. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. When a Fund enters into a forward currency
contract or purchases an over-the-counter option, it relies on its counterparty
to perform. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction.
Futures contracts, options on futures contracts, Forward Contracts, and
options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. The purchase and sale of
exchange-traded foreign currency options, however, is subject to the risks of
the availability of a liquid secondary market described above, as well as the
risks regarding adverse market movements, margining of options written, the
nature of the foreign currency market, possible intervention by governmental
authorities and the effect of other political and economic events. In addition,
exchange-traded options of foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise and settlement
of such options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
COMBINED TRANSACTIONS. The Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including Forward Contracts) and
18
<PAGE>
any combination of futures, options, and foreign currency transactions, instead
of a single transaction, as part of a single hedging strategy when, in the
opinion of the Adviser or Subadviser, as applicable, it is in the best interest
of the Funds to do so. A combined transaction, while part of a single hedging
strategy, may contain elements of risk that are present in each of its component
transactions.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Funds will comply
with guidelines established by the SEC with respect to coverage of options,
futures and forward contracts strategies 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, option or forward contract strategy is outstanding,
unless they are replaced with other suitable assets. Consequently, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
ILLIQUID INVESTMENTS, RESTRICTED SECURITIES AND PRIVATE PLACEMENT OFFERINGS
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot
be sold or disposed of within seven days in the ordinary course of business at
approximately the prices at which they are valued. Under the supervision of the
Board of Trustees, the Adviser or Subadviser, as applicable, determines the
liquidity of a Fund's investments and, through reports from the Adviser or
Subadviser, as applicable, and the Funds' administrator, the Board monitors
investments in illiquid securities. In determining the liquidity of the Funds'
investments, the Adviser or Subadviser, as applicable, may consider various
factors, including the frequency of trades and quotations, the number of dealers
and prospective purchasers in the marketplace, dealer undertakings to make a
market, the nature of the security, and the nature of the marketplace for
trades. Investments currently considered by the Funds to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, certain over-the-counter options, and restricted
securities (other than restricted securities pursuant to Rule 144A under the
Securities Act and commercial paper sold in reliance on Section 4(2) of the
Securities Act). With respect to over-the-counter ("OTC") options that a Fund
writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. The Funds will treat as illiquid an amount of assets used to cover
written OTC options, equal to the formula price at which the Funds would have
the absolute right to purchase the option less the amount by which the option is
"in-the-money." The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. When no market quotations are
available, illiquid investments are priced at fair value as determined in good
faith by the Adviser or Subadviser, as applicable, under the supervision of the
Board of Trustees. Disposing of these investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for the
Funds to sell them promptly at an acceptable price. If through a change in
values, net assets, or other circumstances, any of the Small Cap Equity,
Balanced, Fixed Income and International Funds were in a position where more
than 15% of its net assets were invested in illiquid securities, the Fund would
take appropriate steps to protect liquidity; for the Equity Fund, if more than
7% of its net assets were invested in illiquid securities, it would take
appropriate steps to protect liquidity.
RESTRICTED SECURITIES. Restricted securities can generally be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the Securities Act or in a registered public offering. Where registration
is required, the Fund(s) may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it or they decide
to seek registration and the time the Fund(s) may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed at the time it decided to seek registration of the
security.
PRIVATE PLACEMENT OFFERINGS. The Small Cap Equity, Balanced and Fixed
Income Funds may invest in private placement offerings. Investments in private
placement offerings are made in reliance on the "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act, and resold to
qualified institutional buyers under the Securities Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities law and generally are sold to institutional investors such as
the Funds that agree they are purchasing the securities for investment and not
with an intention to distribute to the public.
19
<PAGE>
OTHER INVESTMENT COMPANIES
The Funds may invest in other investment companies to the extent
permitted by the 1940 Act. Currently the 1940 Act permits the Funds to invest up
to 10% of their total assets in other investment companies. Not more than 5% of
each Fund's total assets may be invested in the securities of any one investment
company nor may the Funds acquire more than 3% of the voting securities of any
other investment company. In addition to the advisory fees and other expenses
the Funds bear directly in connection with their own operations, as shareholders
of another investment company, the Funds would bear their pro rata portion of
the other investment company's advisory fees and other expenses. As such, the
Funds' shareholders would indirectly bear the expenses of the Funds and the
other investment company, some or all of which would be duplicative.
SECURITIES LENDING
The Small Cap Equity, Balanced, Fixed Income and International Funds
may lend securities to qualified brokers, dealers, banks and other financial
institutions. Securities lending allows the Fund to retain ownership of the
securities loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Adviser or Subadviser, if applicable, to be of
good standing. In addition, they will only be made if, in the Adviser's or
Subadviser's, if applicable, judgment, the consideration to be earned from such
loans would justify the risk. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Fund exceed one-third of the value of
its total assets.
It is the Funds' understanding that the current view of the staff of
the SEC is that a Fund may engage in loan transactions only under the following
conditions: (1) the Fund must receive 100% collateral in the form of cash or
cash equivalents (i.e., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on the loan (which
may include the Fund investing any cash collateral in interest bearing
short-term investments) or a flat fee from the borrower, as well as amounts
equivalent to any dividends, interest, or other distributions on the securities
loaned and to any increase in market value; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees must
be able to vote proxies on the securities loaned, either by terminating the loan
or by entering into an alternative arrangement with the borrower.
TRUSTEES AND OFFICERS
Under the laws of the State of Delaware, the Board of Trustees of the
Trust has overall responsibility for management of the Funds. The officers of
the Trust conduct and supervise its daily business. The Trustees and officers of
the Trust, their ages, their business addresses and principal occupations during
the past five years are as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION DURING PAST
5 YEARS
- ------------------------------------------ ---------------------------------- -----------------------------------
<S> <C> <C>
J. Luther King, Jr.* Chairman of the Board of President, Luther King Capital
301 Commerce Street Trustees, President and Chief Management Corporation since 1979
Fort Worth, Texas 76102 Executive Officer
DOB: 1940
- ------------------------------------------ ---------------------------------- -----------------------------------
H. Kirk Downey Trustee of the Trust Dean, M.J. Neeley School of
2900 Lubbock Street Business, Texas Christian
Fort Worth, Texas 76109 University Business School since
DOB: 1942 1987
- ------------------------------------------ ---------------------------------- -----------------------------------
Earle A. Shields, Jr. Trustee of the Trust Consultant; formerly Consultant
20
<PAGE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION DURING PAST
5 YEARS
- ------------------------------------------ ---------------------------------- -----------------------------------
<S> <C> <C>
53 Westover Terrace for NASDAQ Corp. and Vice
Fort Worth, Texas 76107 President, Merrill Lynch & Co.,
DOB: 1920 Inc.
- ------------------------------------------ ---------------------------------- -----------------------------------
Paul W. Greenwell Vice President of the Trust Vice President, Luther King
301 Commerce Street Capital Management since 1983
Fort Worth, Texas 76102
DOB: 1950
- ------------------------------------------ ---------------------------------- -----------------------------------
Jacqui Brownfield Vice President, Secretary and Fund Administrator and
301 Commerce Street Treasurer of the Trust Operations Manager, Luther King
Fort Worth, Texas 76102 Capital Management since 1987
DOB: 1960
- ------------------------------------------ ---------------------------------- -----------------------------------
</TABLE>
* Mr. King is an "interested person" of the Trust (as defined in the
1940 Act) because of his affiliation with the Adviser.
The table below sets forth the compensation paid by the Trust to each
of the Trustees of the Trust during the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Trust and
Compensation As Part of Fund Benefits Upon Fund Complex
Name of Person from Trust Expenses Retirement Paid to Trustees
- -------------- ---------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
J. Luther King, Jr. $0 $0 $0 $0
H. Kirk Downey $12,000 $0 $0 $12,000
Earle A. Shields, Jr. $12,000 $0 $0 $12,000
</TABLE>
Trustees other than those who are officers or affiliated with the
Adviser will receive an annual fee of $8,000 plus a meeting fee of $1,000 for
each meeting attended and are reimbursed for expenses incurred in attending
Board meetings.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
The following person may be deemed to control the International Fund by virtue
of its ownership, of record or beneficially, of more than 25% of the outstanding
shares of the International Fund as of March 31, 2000:
Gannet 401K Savings Plan 38.53%
c/o Boston Safe Deposit & Trust
135 Santilli Highway
Everett, MA 02149
As of March 31, 2000, the following persons, in addition to those
above, owned of record or beneficially 5% or more of the shares of the funds as
shown:
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL SHAREHOLDERS
SMALL CAP EQUITY FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
<S> <C> <C>
Sid Richard Foundation 1,109,643.169 9.09%
c/o Texas Commerce Bank
P.O. Box 2558
Houston, TX 77252
<CAPTION>
PRINCIPAL SHAREHOLDERS
EQUITY FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
<S> <C> <C>
Luther King Capital Management 257,963.847 14.60%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Muir & Company 202,191.455 11.45%
c/o Frost National Bank
PO Box 2479
San Antonio, TX 78298
Luther King Capital Management 92,994.841 5.26%
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
22
<PAGE>
<CAPTION>
PRINCIPAL SHAREHOLDERS
BALANCED FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
<S> <C> <C>
Firstar Bank, N.A. Custodian FBO 93,471.072 16.30%
Ed D. Ligon Jr. IRA
25 Carmel Lane
Little Rock, AR 72212
Lau & Company 93,221.627 16.26%
c/o Frost National Bank
PO Box 2950
San Antonio, TX 78299
Luther King Capital Management 92,832.161 16.19%
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Summit Partners 52,413.351 9.14%
301 Commerce Street Suite 1600
Fort Worth, TX 76102
Lura D. Deffebach 42,670.143 7.44%
2444 Stonebridge Place
Fort Worth, TX 76110
Luther King Capital Management 41,888.747 7.31%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
First Southwest Company FBO 35,597.934 6.21%
Richard Loren Franklin
1700 Pacific Avenue, Suite 500
Dallas, TX 75201
23
<PAGE>
<CAPTION>
PRINCIPAL SHAREHOLDERS
FIXED INCOME FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
<S> <C> <C>
Luther King Capital Management 352,263.171 11.52%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Strafe & Company FBO 204,142.549 6.68%
Lena Pope Home
1900 Polaris Parkway
Columbus, OH 43240
Strafe & Company FBO 178,762.667 5.84%
Community Hospice
1900 Polaris Parkway
Columbus, OH 43240
<CAPTION>
PRINCIPAL SHAREHOLDERS
INTERNATIONAL FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
<S> <C> <C>
Balsa & Company 824,782.309 12.51%
c/o Chase Manhattan Bank
Grand Central Station
PO Box 1768
New York, NY 10163
Hamill & Company FBO 565,216.381 8.57%
Sid Richardson Foundation
c/o Texas Commerce Bank
PO Box 2558
Houston, TX 77252
Northern Trust Trustee FBO 492,560.975 7.47%
Gannett
PO Box 92956
Chicago, IL 60675
Northern Trust Company Custodian FBO 374,242.140 5.68%
Dallas Symphony
PO Box 92956
Chicago, IL 60675
</TABLE>
As of March 31, 2000, all Trustees and officers as a group owned
beneficially (as the term is defined in Section 13(d) under the Securities and
Exchange Act of 1934) less than 1% of shares of each of the Funds.
24
<PAGE>
INVESTMENT ADVISER
The investment adviser to the Funds is Luther King Capital Management
Corporation (the "Adviser"). The Adviser is controlled by J. Luther King, Jr.
Mr. King is the Chairman of the Board of Trustees, President, Chief Executive
and Manager of the Trust. Under an Investment Advisory Agreement (the
"Agreement") with the Funds, the Adviser manages the investment and reinvestment
of the Funds' assets, subject to the control and supervision of the Board of
Trustees of the Trust. The Adviser is responsible for making investment
decisions for the Funds and for placing the Funds' purchase and sale orders. In
addition, subject to any approvals required by the 1940 Act, the Adviser may
delegate its duty to make investment decisions and to place purchase and sale
orders to one or more investment subadvisers with respect to some or all of the
International Fund's assets. In the event of such a delegation, the Adviser is
obligated to monitor and review the activities of the subadviser. As described
below, the Adviser has exercised its authority to delegate certain duties with
respect to all of the International Fund's assets to a subadviser. Under the
Agreement, the Funds pay the Adviser an advisory fee calculated by applying a
quarterly rate, equal on an annual basis to the following numbers shown as a
percentage of average daily net assets for the quarter. However, until further
notice, the Adviser has voluntarily agreed to waive its advisory fees and
reimburse expenses to the extent necessary to keep the total operating expenses
from exceeding the respective caps also shown as a percentage of average daily
net assets for the quarter.
Adviser Fee Cap
----------- ---
Small Cap Equity Fund 0.75% 1.00%
Equity Fund 0.70% 0.80%
Balanced Fund 0.65% 0.80%
Fixed Income Fund 0.50% 0.65%
International Fund 1.00% 1.20%
As compensation for the services rendered by the Adviser under the
Agreement, for the years ended December 31, 1997, 1998 and 1999, the Adviser
earned and waived and/or reimbursed the following amounts:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Small Cap Equity Fund $1,813,278 $1,977,956 $1,644,113
(amount waived/reimbursed) $(0) $(0) $(0)
Equity Fund $274,166 $281,873 $282,731
(amount waived/reimbursed) $(143,411) $(86,983) $(52,465)
Balanced Fund N/A $12,623 $30,428
(amount waived/reimbursed) N/A $(73,294) $(53,613)
Fixed Income Fund N/A $52,488 $102,645
(amount waived/reimbursed) N/A $(65,831) $(49,500)
International Fund N/A $396,641 $586,147
N/A $(78,087) $(186,212)
</TABLE>
INVESTMENT SUBADVISER
The Subadviser, TT International Investment Management, is a
partnership controlled by Timothy A. Tacchi, who owns 67% of the partnership's
participation interests.
Pursuant to an Investment Subadvisory Agreement ("Subadvisory
Agreement") entered into between the Adviser and the Subadviser, the Subadviser
is responsible for making investment decisions for the International Fund and
placing purchase and sale orders. These responsibilities are subject to the
control and supervision of the Fund's Board of Trustees and the Adviser and must
be in accordance with the Fund's stated investment objective and policies. By
its terms, the Subadvisory Agreement continues for successive one-year periods
only if each renewal is specifically approved by a vote of the Board of
Trustees, including the affirmative votes of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as defined in the 1940
Act) of any such party in person at a meeting called for the purpose of
considering such approval. The Subadvisory Agreement can be terminated,
25
<PAGE>
without penalty, with respect to the International Fund on 60 days' written
notice by the Board of Trustees, by the Adviser or by vote of a majority of the
outstanding voting securities of the International Fund. The Subadviser can
terminate the Subadvisory Agreement with respect to the International Fund,
without penalty, on 90 days' written notice. In addition, the Subadvisory
Agreement will terminate automatically in the event of its assignment.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Agreement and Subadvisory Agreement authorizes the Adviser and
Subadviser to select the brokers or dealers that will execute the purchases and
sales of investment securities for the Funds and directs the Adviser and
Subadviser to use their best efforts to obtain the best execution with respect
to all transactions for the Funds. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, the Adviser or Subadviser may cause
the Funds to pay higher commission rates than the lowest available when the
Adviser or Subadviser believes it is reasonable to do so in light of the value
of the research services provided by the broker effecting the transaction. These
services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Adviser or
Subadviser in advising various clients, including the Funds, although not all of
these services are necessarily useful and of value in managing the Funds.
It is not the Adviser's or Subadviser's practice to allocate brokerage
or principal business on the basis of sales of shares that may be made through
intermediary brokers or dealers. However, the Adviser or Subadviser may place
orders with qualified broker-dealers who recommend the Funds or who act as
agents in the purchase of shares of the Funds for their clients. The aggregate
amount of brokerage commissions paid by each fund during the past three fiscal
years is as follows:
1997 1998 1999
Small Cap Equity Fund $290,682 $330,945 $314,131
Equity Fund 78,289 77,367 70,375
Balanced Fund 0 3,526 5,959
Fixed Income Fund 0 0 0
International Fund 0 578,845 614,948
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Adviser or Subadviser. If purchases
or sales of securities consistent with the investment policies of the Funds and
one or more of these other clients serviced by the Adviser or Subadviser is
considered at or about the same time, transactions in such securities will be
allocated among the Funds and clients in a manner deemed fair and reasonable by
the Adviser or Subadviser.
CUSTODIAN
As custodian of the Funds' assets, Firstar Bank, N.A., 425 Walnut
Street, Cincinnati, OH 45202, has custody of all securities and cash of the
Funds, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by the officers of the Trust.
SUBCUSTODIAN
As subcustodian of the International Fund's assets, The Chase Manhattan
Bank, 4 Chase MetroTech Center, Brooklyn, New York 11245, has custody of all
securities and cash of the International Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments, and performs other duties, all as directed by the officers of
the Trust.
ADMINISTRATOR
26
<PAGE>
Pursuant to a Fund Administration Agreement and a Fund Accounting
Agreement, Firstar Mutual Fund Services, LLC ("Firstar"), 615 East Michigan
Street, Milwaukee, Wisconsin 53202, provides each Fund with administrative and
fund accounting and dividend services pursuant to a Fund Administration
Agreement and a Fund Accounting Service Agreement. The services under these
Agreements are subject to the supervision of the Board of Trustees of the Trust
and officers, and include day-to-day administration of matters necessary to the
Funds' operations, maintenance of their records, preparation of reports,
compliance testing of the Funds' activities, and preparation of periodic updates
of the registration statement under federal and state laws. For administration
services, Firstar receives from each Fund a fee, calculated daily and paid
monthly.
<TABLE>
<CAPTION>
Fee for first $200 million Next $500 million of Average daily net assets
of average daily net assets average daily net assets in excess of $700 million
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund 0.06% 0.05% 0.03%
Equity Fund 0.06% 0.05% 0.03%
Balanced Fund 0.06% 0.05% 0.03%
Fixed Income Fund 0.06% 0.05% 0.03%
<CAPTION>
Fee for Next $300 million of Next $500 million of Average daily net
first $200 average daily net average daily net assets in excess of
million of assets assets $1 billion
average
daily net
assets
------------- ----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
International Fund 0.07% 0.05% 0.04% 0.03%
Administration fees incurred during the past 3 fiscal years follows:
<CAPTION>
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund $350,914 $156,396 $130,065
Equity Fund 125,290 26,410 26,054
Balanced Fund N/A 17,929 9,458
Fixed Income Fund N/A 19,354 20,167
International Fund N/A 35,920 40,976
</TABLE>
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar also acts as transfer agent and dividend-disbursing agent for
the Funds.
DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor"), Four Falls Corporate
Center, 6th Floor, West Conshocken, Pennsylvania 19428-2961, a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., distributes the Funds' shares. Jacqui Brownfield, an employee of the
Adviser and an officer of the Trust, is a registered representative of the
Distributor. The Distributor uses its best efforts to distribute the Funds'
shares, which shares are offered for sale by the Funds continuously at net asset
value per share without the imposition of a sales charge.
DISTRIBUTION PLAN
27
<PAGE>
As stated in the Prospectus, the Board of Trustees, including a
majority of the Trustees who were not interested persons of the Trust and who
had no direct or indirect financial interest in the operations of a distribution
plan, on behalf of the Funds, adopted a Distribution Plan, pursuant to Rule
12b-1 under the 1940 Act (the "Plan").
Pursuant to the Plan, the funds can pay up to an aggregate maximum of
0.75% per annum of each Fund's average daily net assets for actual expenses
incurred in the distribution and promotion of the shares of the Funds,
including, but not limited to, the printing of Prospectuses, Statements of
Additional Information, reports used for sales purposes, advertisements,
expenses of preparation and printing of sales literature, and other
distribution-related expenses.
Although approved, the Board of Trustees has not authorized
implementation of the plan. As a result, the Funds are neither accruing nor
paying any Rule 12b-1 fees.
CODE OF ETHICS
The Trust, the Adviser and the Sub-Adviser have each adopted a written
Code of Ethics. These Codes of Ethics govern the personal securities
transactions of trustees, directors, officers and employees who may have access
to current trading information of the Funds. The Codes permit such persons to
invest in securities for their personal accounts, including securities that may
be purchased or held by the Funds. The Codes include reporting and other
obligations to monitor personal transactions and ensure that such transactions
are consistent with the best interest of the Funds.
PURCHASE AND PRICING OF SHARES
PURCHASE OF SHARES
PURCHASING SHARES WITH LIQUID SECURITIES. Certain clients of the
Adviser may, subject to the approval of the Trust, purchase shares of the Funds
with liquid securities that are eligible for purchase by a Fund (consistent with
the Fund's investment policies and restrictions) and that have a value that is
readily ascertainable (and not established only by evaluation procedures) as
evidenced by a listing on the American Stock Exchange, the New York Stock
Exchange or The Nasdaq Stock Market. These transactions will be effected only if
the Adviser intends to retain the security in the Funds as an investment. Assets
so purchased by the Funds will be valued in generally the same manner as they
would be valued for purposes of pricing a Fund's shares, if such assets were
included in the Fund's assets at the time of purchase.
AUTOMATIC INVESTMENT PROGRAM. The Automatic Investment Program permits
investors who own shares of a Fund with a value of $10,000 or more to purchase
shares (minimum of $100 per transaction) at regular intervals selected by the
investors. Provided the investor's financial institution allows automatic
withdrawals, shares are purchased by transferring funds from an investor's
checking, bank money market or NOW account. The financial institution must be a
member of the Automatic Clearing House network. There is no charge for this
service. A $25 fee will be charged by the Transfer Agent if there are
insufficient funds in the investor's account at the time of the scheduled
transaction. At the investor's option, the account designated will be debited in
the specified amount, and shares will be purchased on a specified day or days of
a month.
The Automatic Investment Program is one means by which an investor may
use "Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or market trends. In addition,
while investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an investor ultimately redeems his or her shares at a price
that is lower than their purchase price.
28
<PAGE>
To establish the Automatic Investment Program, an investor must
complete the appropriate sections of the Account Registration Form. Please call
the Trust at 800-688-LKCM if you have questions. An investor may cancel his or
her participation in this Program or change the amount of purchase at any time
by mailing written notification to: Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, Wisconsin 53201-0701. Notification will be effective three
business days following receipt. The Trust may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An investor may also implement the Dollar Cost Averaging method on
his or her own initiative or through other entities.
PRICING OF SHARES
Shares of the Funds are sold on a continual basis at the net asset
value per share next computed following acceptance of an order by a Fund. A
Fund's net asset value per share for the purpose of pricing purchase and
redemption orders is determined as of the close of normal trading (currently
4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open for
trading. The NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities listed on a U.S. securities exchange or Nasdaq for which
market quotations are readily available are valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. Options,
futures, unlisted U.S. securities and listed U.S. securities not traded on the
valuation date for which market quotations are readily available are valued at
the mean of the most recent quoted bid and asked price. Securities listed on a
foreign exchange for which market quotations are readily available are valued at
the latest quoted sales price available before the time when assets are valued.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using net foreign exchange quotations received from
independent dealers at the time of valuation. Unlisted foreign securities are
valued at fair value as determined in accordance with policies established by
the Board of Trustees. Although the International Fund values its assets in U.S.
dollars on a daily basis, it does not intend to convert holdings of foreign
currencies into U.S. dollars on a daily basis.
Fixed-income securities (other than obligations having a maturity of 60
days or less) are normally valued on the basis of quotes obtained from pricing
services, which take into account appropriate factors such as institutional-
sized trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data.
Fixed-income securities purchased with remaining maturities of 60 days or less
are valued at amortized cost if it reflects fair value. In the event that
amortized cost does not reflect market, market prices as determined above will
be used. Other assets and securities for which no quotations are readily
available (including restricted securities) will be valued in good faith at fair
value using methods determined by the Board of Trustees of the Trust.
REDEMPTIONS IN KIND
The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of (i) $250,000 or (ii) 1% of the net assets of a
Fund at the beginning of such period. Such commitment is irrevocable without the
prior approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part in investment securities or in cash, as the Trustees may
deem advisable; however, payment will be made wholly in cash unless the Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the applicable Fund. If
redemptions are paid in investment securities the redeeming shareholders might
incur brokerage expenses if they converted these securities to cash. Securities
used to make such "in-kind" redemptions will be readily marketable. The method
of valuing such securities will be the same as the method of valuing Fund
securities described under "Pricing of Shares," and such valuation will be made
as of the same time the redemption price is determined.
29
<PAGE>
TAXATION OF THE FUNDS
Each Fund intends to continue to qualify annually as a "regulated
investment company" ("RIC") under Subchapter M of the Code, and, if so
qualified, will not be liable for federal income tax to the extent earnings are
distributed to its shareholders on a timely basis. If a Fund fails to qualify as
a RIC, it will be treated as a regular corporation for federal income tax
purposes. Accordingly, it would be subject to federal income tax, and any
distributions that it makes would be taxable as ordinary income (with no part
treated as a capital gain distribution) to the extent of its earnings and
profits and would be non-deductible by it. This would increase the cost of
investing in that Fund for shareholders and would make it more economical for
shareholders to invest directly in securities held by that Fund instead of
investing indirectly in such securities through the Funds.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year ending on October 31 of that year, plus certain other
amounts.
Certain futures and foreign currency contracts in which all Funds but
the Equity Fund may invest may be subject to section 1256 of the Code ("section
1256 contracts"). Any section 1256 contracts held by a Fund at the end of each
taxable year generally must be "market-to-market" (that is, treated as having
been sold at that time for their fair market value) for federal income tax
purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 1256 contracts also may be market-to-market for purpose of the Excise
Tax. These rules may operate to increase the amount that a Fund must distribute
to satisfy the distribution requirement applicable to RICs (i.e., with respect
to the portion treated as short-term capital gain), which will be taxable to its
shareholders as ordinary income, and to increase the net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss)
recognized by a Fund, without in either case increasing the cash available to
the Fund. A Fund may elect to exclude certain transactions from the operation of
section 1256, although doing so may have the effect of increasing the relative
proportion of net short-term capital gain (taxable as ordinary income) and/or
increasing the amount of dividends that must be distributed to meet that
distribution requirement and avoid imposition of the Excise Tax.
If a Fund has an "appreciated financial position" - generally, an
interest (including an interest through an option, futures or Forward Contract,
or short sale) with respect to any stock, debt instrument (other than "straight
debt"), or partnership interest the fair market value of which exceeds its
adjusted basis - and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or Forward Contract entered into by a Fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transactions closed within 30 days after the end of that year
and the Fund holds the appreciated financial position unhedged for 60 days after
that closing (i.e., at no time during that 60 day period is the Fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially similar or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
The Balanced and Fixed Income Funds may acquire zero coupon or other
securities issued with original issue discount ("OID"). As a holder of those
securities, a Fund must include in its gross income the OID that accrues on them
during the taxable year, even if it receives no corresponding payment on them
during the year. Because each Fund annually must distribute substantially all of
its investment company taxable income, including any OID, to satisfy the
distribution requirement applicable to RICs and avoid imposition of the Excise
Tax, it may be required in a particular year to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. Those
distributions will be made from a Fund's cash assets or from the proceeds of
sales of its portfolio securities, if necessary. A fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
30
<PAGE>
INVESTMENTS IN FOREIGN SECURITIES. Dividends and interest received by a
Fund, and gains realized thereby, may be subject to income, withholding, or
other taxes imposed by foreign countries and U.S. possessions ("foreign taxes")
that would reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors. If more than
50% of the value of the International Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, it will be eligible
to, and may, file an election with the IRS that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign taxes paid by it. Pursuant to any such election, the International Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to:
(1) include in gross income, and treat as paid by the shareholder, the
shareholder's proportionate share of those taxes,
(2) treat the shareholder's share of those taxes and of any dividend
paid by the fund that represents income from foreign or U.S.
possessions as the shareholder's own income from those sources, and
(3) either deduct the taxes deemed paid by the shareholder in computing
the shareholder's taxable income or, alternatively, use
the foregoing information in calculating the foreign tax credit
against the shareholder's federal income tax.
The International Fund will report to its shareholders shortly after
each taxable year their respective shares of its income from sources within, and
taxes paid to, foreign countries and U.S. possessions if it makes this election.
Individuals who have no more than $300 ($600 for married persons filing jointly)
of creditable foreign taxes included on Form 1099 and have no foreign source
non-passive income will be able to claim a foreign tax credit without having to
file the detailed Form 1116 that otherwise is required.
The Funds may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation, other than a "controlled
foreign corporation" (i.e., a foreign corporation in which, on any day during
its taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly or constructively, at least 10% of that
voting power) as to which a Fund is a U.S. shareholder that, in general, meets
either of the following tests:
(1) at least 75% of its gross income is passive or
(2) an average of at least 50% of its assets produce, or are held for
the production of, passive income.
Under certain circumstances, a Fund will be subject to federal income
tax on a portion of any "excess distribution" received on the stock of a PFIC or
of any gain on the disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent it distributes that income to its shareholders.
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also may deduct (as an ordinary, not capital, loss) the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock included in income by the Fund for prior
taxable years. A Fund's adjusted basis in each PFIC's stock subject to the
election would be adjusted to reflect the amounts of income included and
deductions taken thereunder (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs).
If a Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund would be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net
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<PAGE>
short-term capital loss) -- which probably would have to be distributed by the
Funds to its shareholders -- even if those earnings and gain were not
distributed to the Fund by the QEF. In most instances it will be very difficult,
if not impossible, to make this election because of certain requirements
thereof.
Gains or losses (1) from the disposition of foreign currencies, (2) on
the disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
dates of acquisition and disposition of the security, and (3) that are
attributable to exchange rate fluctuations between the time a Fund accrues
interest, dividends, or other receivables, or accrues expenses or other
liabilities denominated in a foreign currency and the time it actually collects
the receivables or pays the liabilities, generally are treated as ordinary
income or loss. These gains or losses may increase or decrease the amount of
investment company taxable income available to a Fund for distribution to its
shareholders as ordinary income, rather than increasing or decreasing the amount
of its net capital gains.
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Funds' advertising
and promotional materials are calculated according to the following formula:
P(1+T)n = ERV
where P equals a hypothetical initial payment of $1,000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1,000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Since Inception
1 Year 5 Years (Inception Date)
------------------------------ ------------ ------------ ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund 16.83% 17.43% 16.85%
(July 14, 1994)
Equity Fund 23.07% N/A 19.11%
(January 3, 1996)
Balanced Fund 13.53% N/A 13.18%
(December 30, 1997)
Fixed Income Fund -0.34% N/A 3.40%
(December 30, 1997)
International Fund 42.71% N/A 25.35%
(December 30, 1997)
</TABLE>
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<PAGE>
CUMULATIVE TOTAL RETURN. Cumulative total return represents the simple
change in value of an investment over a stated period and may be quoted as a
percentage or as a dollar amount. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship between these factors and their
contributions to total return.
YIELD
Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2[(a-b + 1)6 - 1]
---
c-d
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and "d" equals the maximum offering price per share on the
last day of the period.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date. The Fixed Income Fund's 30-day yield was 6.87% at December 31, 1999.
OTHER INFORMATION
Each Fund's performance data quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in a
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount.
If permitted by applicable law, the Funds may advertise the performance
of registered investment companies or private accounts that have investment
objectives, policies and strategies substantially similar to those of the Funds.
COMPARISON OF FUND PERFORMANCE
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
the Donoghue Organization, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of its ranking in each applicable universe. In addition, the Funds may use
performance data reported in financial and industry publications, including
Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money
Fund Report, Money Magazine, The Wall Street Journal and USA Today.
The Funds may from time to time use the following unmanaged indices for
performance comparison purposes:
S&P 500 Index - The S&P 500 Index is an unmanaged index composed of 500
stocks designed to mimic the overall equity market's industry
weightings. Most, but not all, large capitalization stocks are in the
index. There are also some small capitalization names in the index. The
list is maintained by Standard & Poor's Corporation. It is market
capitalization weighted. There are always 500 issuers in the S&P 500.
Changes are made by Standard & Poor's as needed.
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<PAGE>
Lehman Brothers Government/Corporate Index ("LB Govt/Corp") - The LB
Govt/Corp is a weighted index comprised of publicly-traded intermediate
and long-term government and corporate debt with an average maturity of
11 years.
Russell 2000 - The Russell 2000 is composed of the 2,000 smallest
stocks in the Russell 3000, a market value weighted index of the 3,000
largest U.S. publicly-traded companies.
EAFE Index - The EAFE Index is an unmanaged index representing the
market value weighted price of stocks of approximately 1100 companies
screened for liquidity, cross-ownership and industry representation and
listed on major stock exchanges in Europe, Australasia and the Far
East. The Index is compiled by Morgan Stanley Capital International.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, serves as the Funds' independent accountants, whose services
include examination of the Funds' financial statements and the performance of
other related audit and tax services.
FINANCIAL STATEMENTS
The audited financial statements for the Funds are incorporated by
reference to the Funds' Annual Report, for the year ended 1999, as filed with
the Securities and Exchange Commission on February 29, 2000.
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<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. Corporate Bond Ratings:
AAA: judged to be the best quality; carry the smallest degree of investment
risk; AA: judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; BAA: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; BA, B: protection of interest and
principal payments is questionable.
CAA: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. CA: Bonds that are rated Ca represent obligations that are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection
as to principal and interest; AA: also qualify as high grade obligations, and in
the majority of instances differs from AAA issues only in small degree; A:
regarded as upper medium grade; have considerable investment strength but are
not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe; BBB: regarded as
borderline between definitely sound obligations and those where the speculative
element begins to predominate; this group is the lowest which qualifies for
commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally rated "-,+".
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<PAGE>
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
PLUS (+) MINUS(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury
debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
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<PAGE>
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protections factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearage.
37
<PAGE>
LKCM FUNDS
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Agreement and Declaration of Trust (1)
(a.1) Amendment Number 1 to Declaration of Trust to be filed by
subsequent Amendment
(b) By-Laws (1)
(b.1) Amendment Number 1 to By-laws to be filed by subsequent
Amendment
(c) Not applicable
(d.1) Investment Advisory Agreement dated June 21, 1994 (1)
(d.2) Fee Schedule to the Investment Advisory Agreement Between LKCM
Funds and Luther King Capital Management Corporation for the
Small Cap Equity Fund dated June 21, 1994 (1)
(d.3) Fee Schedule to the Investment Advisory Agreement Between LKCM
Funds and Luther King Capital Management Corporation for the
LKCM Equity Fund dated December 5, 1995 (1)
(d.4) Fee Schedule to the Investment Advisory Agreement Between LKCM
Funds and Luther King Capital Management Corporation for the
LKCM Balanced Fund dated December 30, 1997 (2)
(d.5) Fee Schedule to the Investment Advisory Agreement Between LKCM
Funds and Luther King Capital Management Corporation for the
LKCM
Fixed Income Fund dated December 30, 1997 (2)
(d.6) Fee Schedule to the Investment Advisory Agreement Between LKCM
Funds and Luther King Capital Management for the LKCM
International Fund dated December 30, 1997 (2)
(d.7) Subadvisory Agreement Between Luther King Capital Management
Corporation and TT International Management for the LKCM
International Fund dated December 30, 1997 (2)
(e.1) Distribution Agreement between LKCM Funds and Provident
Distributors, Inc. dated November 4, 1999 filed with this
Amendment
(e.2) Consulting Agreement between Luther King Capital Management
Corporation and First Data Distributors, Inc. dated December 1,
1999 filed with this Amendment
(f) None
(g.1) Custodian Servicing Agreement between LKCM Funds and Firstar
Bank, N.A. dated July 10, 1997 (1)
(g.2) Fee Schedule to the Custodian Servicing Agreement with respect
to the LKCM Balanced Fund and LKCM Fixed Income Fund dated
December 30, 1997 (2)
(g.3) Global Custody Agreement between The Chase Manhattan Bank,
Firstar Bank, N.A. and LKCM Fund on behalf of its LKCM
International Fund dated December 31, 1997 (2)
(h.1) Fund Administration Servicing Agreement between LKCM Funds and
Firstar Mutual Fund Services, LLC dated July 10, 1997 (1)
1
<PAGE>
(h.2) Fee Schedule to the Fund Administration Servicing Agreement with
respect to the LKCM Balanced Fund and LKCM Fixed Income Fund
dated December 30, 1997 (2)
(h.3) Fee Schedule to the Fund Administration Servicing Agreement with
respect to the LKCM International Fund dated December 30, 1997
(2)
(h.4) Fund Accounting Servicing Agreement between LKCM Funds and
Firstar Mutual Fund Services, LLC dated July 10, 1997 (1)
(h.5) Fee Schedule to the Fund Accounting Servicing Agreement with
respect to the LKCM Balanced Fund, LKCM Fixed Income Fund and
LKCM International Fund dated December 30, 1997 (2)
(h.6) Transfer Agent Servicing Agreement between LKCM Funds and
Firstar Mutual Fund Services dated July 10, 1997 (1)
(h.7) Fee Schedule to the Transfer Agent Servicing Agreement with
respect to the LKCM Balanced Fund, LKCM Fixed Income Fund and
LKCM International Fund dated December 30, 1997 (2)
(i) Opinion of Kirkpatrick & Lockhart, LLP filed with this Amendment
(j.1) Consent of PricewaterhouseCoopers LLP filed with this Amendment
(j.2) Consent of Deloitte & Touche LLP filed with this Amendment
(j.3) Re-issuance of opinion by Deloitte & Touche LLP filed with this
Amendment
(k) None
(l) Purchase Agreement dated June 6, 1994 (1)
(m) LKCM Fund Distribution Plan (1)
(n) None
(o) Reserved
(p.1) Code of Ethics of LKCM Funds filed with this Amendment
(p.2) Code of Ethics of Luther King Capital Management Corporation
filed with this Amendment
(p.3) Code of Ethics of TT International Investment Management filed
with this Amendment
(1) Incorporated by reference from Post Effective Amendment No. 6 to
the Registration Statement of the Trust, SEC File No. 33-75116,
filed previously by EDGAR on Oct. 14, 1997.
(2) Incorporated by reference from Post Effective Amendment No. 8 to
the Registration Statement of the Trust, SEC File No. 33-75116,
filed previously by EDGAR on Feb. 27, 1998.
Item 24. Persons Controlled by or Under Common Control With
Registrant
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification
2
<PAGE>
Reference is made to Article VI of the Registrant's Declaration of
Trust, incorporated by reference as Exhibit 1 hereto. Registrant hereby also
makes the undertaking consistent with Rule 484 under the Securities Act of 1933,
as amended.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Advisers
Besides serving as investment advisers to private accounts, neither the
Adviser nor the Subadviser is currently and has not during the past two years
engaged in any other business, profession, vocation, or employment of a
substantial nature. Information regarding the business, vocation, or employment
of a substantial nature of the Adviser and Subadviser's directors and officers
is incorporated by reference from the information contained under "Trustees and
Officers" in Part B of this Registration Statement.
Item 27. Principal Underwriters
(a) Provident Distributors, Inc. is the general distributor of the
Registrant's shares.
(b) The principal business address of Provident Distributors,
Inc. ("Provident"), the Registrant's principal underwriter,
is Four Falls Corporate Center, 6th Floor, West Conshocken,
Pennsylvania 19428-2961. The following information relates
to each director and officer of Provident. The address of
each director and officer is the same as Provident's address
above.
<TABLE>
<CAPTION>
Positions and Offices Positions and Officers
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Philip H. Rinnander President & Treasurer None
Jane Haegele Sole Director, Secretary None
Jason A. Greim Vice President None
Barbara A. Rice Vice President None
Jennifer K. Rinnander Vice President None
Lisa M. Buono Vice President & Compliance Officer None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder will be maintained at the offices of:
Luther King Capital Management Corporation, 301 Commerce Street, Suite
1600, Fort Worth, Texas 76102 (records relating to its function as
investment advisor)
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202 (records relating to its function as administrator,
transfer agent and dividend disbursing agent)
3
<PAGE>
Firstar Bank, N.A., 615 East Michigan Street, Milwaukee, Wisconsin
53202 (records relating to its function as custodian)
TT International Investment Management, Martin House, 5 Martin Lane,
London EC4R ODP (records relating to its function as sub-adviser)
The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York
11245 (records relating to its function as sub-custodian)
Item 29. Management Services
All management-related services contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 11 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fort Worth and State of Texas on the 28th day of April, 2000.
By: /s/ J. Luther King, Jr.*
----------------------------
J. Luther King, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 11 to the Registration Statement of the Registrant
has been signed below by the following persons in the capacities and on the
date(s) indicated.
Name Title Date
/s/ J. Luther King, Jr. * Trustee, President and April 28, 2000
- --------------------------- Chief Executive Officer
J. Luther King, Jr.
/s/ H. Kirk Downey * Trustee April 28, 2000
- ---------------------------
H. Kirk Downey
/s/ Earle A. Shields, Jr. * Trustee April 28, 2000
- ---------------------------
Earle A. Shields, Jr.
/s/ Jacqui Brownfield Vice President, Treasurer April 28, 2000
- --------------------------- and Secretary
Jacqui Brownfield
- ---------------------------
*By Joseph C. Neuberger,
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(a) Agreement and Declaration of Trust (1)
(a.1) Amendment Number 1 to Declaration of Trust to be filed
by subsequent Amendment
(b) By-Laws (1)
(b.1) Amendment Number 1 to By-laws to be filed by subsequent
Amendment
(c) Not applicable
(d.1) Investment Advisory Agreement dated June 21, 1994 (1)
(d.2) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the Small Cap Equity Fund dated June
21, 1994 (1)
(d.3) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Equity Fund dated December 5,
1995 (1)
(d.4) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Balanced Fund dated December
30, 1997 (2)
(d.5) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Fixed Income Fund dated
December 30, 1997 (2)
(d.6) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
for the LKCM International Fund dated December 30,
1997 (2)
(d.7) Subadvisory Agreement Between Luther King Capital
Management Corporation and TT International Management
for the LKCM International Fund dated December 30,
1997 (2)
(e.1) Distribution Agreement between LKCM Funds and
Provident Distributors, Inc. dated
November 4, 1999
(e.2) Consulting Agreement between Luther King Capital
Management Corporation and First Data Distributors,
Inc. dated December 1, 1999
(f) None
(g.1) Custodian Servicing Agreement between LKCM Funds and
Firstar Bank, N.A. dated July 10, 1997 (1)
(g.2) Fee Schedule to the Custodian Servicing Agreement with
respect to the LKCM Balanced Fund and LKCM Fixed Income
Fund dated December 30, 1997 (2)
6
<PAGE>
(g.3) Global Custody Agreement between The Chase Manhattan
Bank, Firstar Bank, N.A. and LKCM Fund on behalf of
its LKCM International Fund dated December 31, 1997 (2)
(h.1) Fund Administration Servicing Agreement between
LKCM Funds and Firstar Mutual Fund Services, LLC dated
July 10, 1997 (1)
(h.2) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM Balanced Fund and
LKCM Fixed Income Fund dated December 30, 1997 (2)
(h.3) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM International Fund
dated December 30, 1997 (2)
(h.4) Fund Accounting Servicing Agreement between LKCM
Funds and Firstar Mutual Fund Services, LLC dated
July 10, 1997 (1)
(h.5) Fee Schedule to the Fund Accounting Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (2)
(h.6) Transfer Agent Servicing Agreement between
LKCM Funds and Firstar Mutual Fund Services, LLC
dated July 10, 1997 (1)
(h.7) Fee Schedule to the Transfer Agent Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (2)
(i) Opinion of Kirkpatrick & Lockhart LLP
(j.1) Consent of PricewaterhouseCoopers LLP
(j.2) Consent of Deloitte & Touche LLP
(j.3) Re-issuance of opinion by Deloitte & Touche LLP filed
with this Amendment
(k) None
(l) Purchase Agreement dated June 6, 1994 (1)
(m) LKCM Fund Distribution Plan (1)
(n) None
(o) Reserved
(p.1) Code of Ethics of LKCM Funds
(p.2) Code of Ethics of Luther King Capital Management
Corporation
(p.3) Code of Ethics of TT International Investment
Management
- ----------------------
(1) Incorporated by reference from Post Effective Amendment No. 6 to
the Registration Statement of the Trust, SEC File No. 33-75116, filed
previously by EDGAR on Oct. 14, 1997.
(2) Incorporated by reference from Post Effective Amendment No. 8 to the
Registration Statement of the Trust, SEC File No. 33-75116, filed previously by
EDGAR on Feb. 27, 1998.
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 4th day of November, 1999 (the
"Agreement") by and between LKCM Funds, a Delaware business trust (the
"Company") and Provident Distributors, Inc. (the "Distributor"), a Delaware
corporation.
WHEREAS, the Company is registered as a diversified, open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and is currently offering units of beneficial interest
(such units of all series are hereinafter called the "Shares"), representing
interests in investment portfolios of the Company identified on Schedule A
hereto (the "Funds") which are registered with the Securities and Exchange
Commission (the "SEC") pursuant to the Company's Registration Statement on Form
N-IA (the "Registration Statement"); and
WHEREAS, the Company desires to retain the Distributor as distributor
for the Funds to provide for the sale and distribution of the Shares of the
Funds identified on Schedule A and for such additional classes or series as the
Company may issue, and the Distributor is prepared to provide such services
commencing on the date first written above.
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
1. SERVICE AS DISTRIBUTOR
1.1 The Distributor will act on behalf of the Company for the distribution of
the Shares covered by the Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"). The Distributor will have no liability for
payment for the purchase of Shares sold pursuant to this Agreement or with
respect to redemptions or repurchases of Shares.
1.2 The Distributor agrees to use efforts deemed appropriate by the Distributor
to solicit orders for the sale of the Shares and will undertake such advertising
and promotion as it believes reasonable in connection with such solicitation;
provided, however, that each Fund will bear the expenses incurred and other
payments made in accordance with the provisions of the Agreement and any plan
now or hereafter adopted with respect to any Fund pursuant to Rule 12b-1 under
the 1940 Act (the "Plans"). To the extent that the Distributor receives
shareholder services fees under any shareholder services plan adopted by the
Company, the Distributor agrees to furnish, and/or enter into arrangements with
others for the furnishing of, personal and/or account maintenance services with
respect to the relevant shareholders of the Company as may bc required pursuant
to such plan. It is contemplated that the Distributor will enter into sales or
servicing agreements with securities dealers, financial institutions and other
industry professionals, such as investment advisers, accountants and estate
planning firms.
1.3 The Company understands that the Distributor is now, and may in the future
be, the distributor of the shares of several investment companies or series
(collectively, the "Investment Entities"), including Investment Entities having
investment objectives similar to those of the Company. The Company further
understands that investors and potential investors in the Company
1
<PAGE>
may invest in shares of such other Investment Entities. The Company agrees that
the Distributor's duties to such Investment Entities shall not be deemed in
conflict with its duties to the Company under this Section 1.3.
1.4 The Distributor shall not utilize any materials in connection with the sale
or offering of Shares except the Company's prospectus and statement of
additional information and such other materials as the Company shall provide or
approve.
1.5 All activities by the Distributor and its employees, as distributor of the
Shares, shall comply with all applicable laws, rules and regulations, including,
without limitation, all rules and regulations made or adopted by the SEC or the
National Association of Securities Dealers.
1.6 The Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent for the Company.
1.7 Whenever in its judgment such action is warranted by unusual market,
economic or political conditions or abnormal circumstances of any kind, the
Company may decline to accept any orders for, or make any sales of, the Shares
until such time as the Company deems it advisable to accept such orders and to
make such sales, and the Company advises the Distributor promptly of such
determination.
1.8 The Distributor may enter into selling agreements with selected dealers or
other institutions with respect to the offering of Shares to the public. Each
such selling agreement will provide (a) that all payments for purchases of
Shares will be sent directly from the dealer or such other institution to the
Funds' transfer agent and (b) that, if payment is not made with respect to
purchases of Shares at the customary or required time for settlement of the
transaction, the Distributor will have the right to cancel the sale of the
Shares ordered by the dealer or such other institution, in which case the dealer
or such other institution will be responsible for any loss suffered by any Fund
or the Distributor resulting from such cancellation. The Distributor may also
act as disclosed agent for a Fund and sell Shares of that Fund to individual
investors, such transactions to be specifically approved by an officer of that
Fund.
1.9 The Company agrees to pay all costs and expenses in connection with the
registration of Shares under the Securities Act of 1933, as amended, and all
expenses in connection with maintaining facilities for the issue and transfer of
Shares and for supplying information, prices and other data to be furnished by
the Fund hereunder, and all expenses in connection with the preparation and
printing of the Fund's prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders.
1.10 The Company agrees at its own expense to execute any and all documents and
to furnish any and all information and otherwise to take all actions that may be
reasonably necessary in connection with the qualification of the Shares for sale
in such states as the Distributor may designate. The Company shall notify the
Distributor in writing of the states in which the Shares may be sold and shall
notify the Distributor in writing of any changes to the information contained in
the previous notification.
2
<PAGE>
1.11 The Company shall furnish from time to time, for use in connection with the
sale of the Shares, such information with respect to the Company and the Shares
as the Distributor may reasonably request; and the Company warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Company shall also furnish the
Distributor upon request with: (a) audited annual statements and unaudited
semi-annual statements of a Fund's books and accounts prepared by the Company,
(b) quarterly earnings statements prepared by the Company, (c) a monthly
itemized list of the securities in the Funds, (d) monthly balance sheets as soon
as practicable after the end of each month, and (e) from time to time such
additional information regarding the financial condition of the Company as the
Distributor may reasonably request.
1.12 The Company represents to the Distributor that all Registration Statements
and prospectuses filed by the Company with the SEC under the 1933 Act with
respect to the Shares have been prepared in conformity with the requirements of
the 1933 Act and the rules and regulations of the SEC thereunder. As used in
this Agreement, the term "Registration Statement" shall mean any Registration
Statement and any prospectus and any statement of additional information
relating to the Company filed with the SEC and any amendments or supplements
thereto at any time filed with the SEC. Except as to information included in the
Registration Statement in reliance upon information provided to the Company by
the Distributor or any affiliate of the Distributor expressly for use in the
Registration Statement, the Company represents and warrants to the Distributor
that any Registration Statement, when such Registration Statement becomes
effective, will contain statements required to be stated herein in conformity
with the 1933 Act and the rules and regulations of the SEC; that all statements
of fact contained in any such Registration Statement will bc true and correct
when such Registration Statement becomes effective; and that no Registration
Statement when such Registration Statement becomes effective will include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading to
a purchaser of the Shares. The Company may but shall not be obligated to propose
from time to time such amendment or amendments to any Registration Statement and
such supplement or supplements to any prospectus as, in the light of future
developments, may, in the opinion of the Company's counsel, be necessary or
advisable. The Company shall promptly notify the Distributor of any advice given
to it by its counsel regarding the necessity or advisability of amending or
supplementing such Registration Statement. If the Company shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Company of a written request from the Distributor to do so,
the Distributor may, at its option, terminate this Agreement. The Company shall
not file any amendment to any Registration Statement or supplement to any
prospectus without giving the Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Company's right to file at any time such amendments to any
Registration Statements and/or supplements to any prospectus, of whatever
character, as the Company may deem advisable, such right being in all respects
absolute and unconditional.
1.13 The Company authorizes the Distributor to use any prospectus or statement
of additional information in the form furnished from time to time in connection
with the sale of the Shares. The Company agrees to indemnify and hold harmless
the Distributor, its officers, directors, and employees, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act, free
and harmless (a) from and against any and all claims, costs, expenses (including
3
<PAGE>
reasonable attorneys' fees) losses, damages, charges, payments and liabilities
of any sort or kind which the Distributor, its officers, directors, employees or
any such controlling person may incur under the 1933 Act, under any other
statute, at common law or otherwise, arising out of or based upon: (i) any
untrue statement, or alleged untrue statement, of a material fact contained in
the Company's Registration Statement, prospectus, statement of additional
information, or sales literature (including amendments and supplements thereto),
or (ii) any omission, or alleged omission, to state a material fact required to
be stated in the Company's Registration Statement, prospectus, statement of
additional information or sales literature (including amendments or supplements
thereto), necessary to make the statements therein not misleading, provided,
however, that insofar as losses, claims, damages, liabilities or expenses arise
out of or are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
furnished to the Company by the Distributor or its affiliated persons for use in
the Company's Registration Statement, prospectus, or statement of additional
information or salts literature (including amendments or supplements thereto),
such indemnification is not applicable; and (b) from and against any and all
such claims, demands, liabilities and expenses (including such costs and counsel
fees) which the Distributor, its officers and directors, or such controlling
person, may incur in connection with this Agreement or the Distributor's
performance hereunder, unless such claims, demands, liabilities and expenses
(including such costs and counsel fees) arise by reason of the Distributor's
willful misfeasance, bad faith or negligence in the performance of the
Distributor's duties hereunder. The Company acknowledges and agrees that in the
event that the Distributor, at the request of the Company, are required to give
indemnification comparable to that set forth in clause (a) of this Section 1.13
to any entity selling Shares of the Company or providing shareholder services to
shareholders of the Company and such entity shall make a claim for
indemnification against the Distributor, the Distributor shall make a similar
claim for indemnification against the Company.
1.14 The Distributor agrees to indemnify and hold harmless the Company, its
several officers and Trustees and each person, if any, who controls a Fund
within the meaning of Section 15 of the I933 Act against any and all claims,
costs, expenses (including reasonable attorneys' fees), losses, damages,
charges, payments and liabilities of any sort or kind which the Company, its
officers, Trustees or any such controlling person may incur under the 1933 Act,
under any other statute, at common law or otherwise, but only to the extent that
such liability or expense incurred by the Company, its officers or Trustees, or
any controlling person resulting from such claims or demands arose out of the
acquisition of any Shares by any person which may be based upon any untrue
statement, or alleged untrue statement, of a material fact contained in the
Company's Registration Statement, prospectus or statement of additional
information (including amendments and supplements thereto), or any omission, or
alleged omission, to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such statement or
omission was made in reliance upon information furnished or confirmed in writing
to the Company by the Distributor or its affiliated persons (as defined in the
1940 Act), or as a result of the Distributor's failure to comply with the terms
of this Agreement.
1.15 In any case in which one party hereto (the "Indemnifying Party") may be
asked to indemnify or hold the other party hereto (the "Indemnified Party")
harmless, the Indemnified Party will notify the Indemnifying Party promptly
after identifying any situation which it believes presents or appears likely to
present a claim for indemnification (an "Indemnification Claim")
4
<PAGE>
against the Indemnifying Party, although the failure to do so shall not prevent
recovery by the Indemnified Party, and shall keep the Indemnifying Party advised
with respect to all developments concerning such situation. The Indemnifying
Party shall have the option to defend the Indemnified Party against any
Indemnification Claim which may bc the subject of this indemnification, and, in
the event that the Indemnifying Party so elects, such defense shall be conducted
by counsel chosen by the Indemnifying Party and satisfactory to the Indemnified
Party, and thereupon the Indemnifying Party shall take over complete defense of
the Indemnification Claim and the indemnified Party shall sustain no further
legal or other expenses in respect of such Indemnification Claim. The
Indemnified Party will not confess any Indemnification Claim or make any
compromise in any case in which the Indemnifying Party will be asked to provide
indemnification, except with the Indemnifying Party's prior written consent. The
obligations of the parties hereto under this Section 1.15 and Section 3.1 shall
survive the termination of this Agreement.
In the event that the Company is the Indemnifying Party and the Indemnifying
Party does not elect to assume the defense of any such suit, or in case the
Distributor reasonably does not approve of counsel chosen by the Company, or in
case there is a conflict of interest between the Company or the Distributor, the
Company will reimburse the Distributor, its officers, directors and employees,
or the controlling person or persons named as defendant or defendants in such
suit, for the fees and expenses of any counsel retained by the Distributor or
them. The Company's indemnification agreement contained in this Section 1.15 and
Section 3.1 and the Company's representations and warranties in this Agreement
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Distributor, its officers, directors
and employees, or any controlling person, and shall survive the delivery of any
Shares. This agreement og indemnity will inure exclusively to the Distributor's
benefit, to the benefit of its several officers, directors and employees, and
their respective estates and to the benefit of the controlling persons and their
successors. The Company agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the issue and sale of any Shares.
1.16 No Shares shall be offered by either the Distributor or the Company under
any of the provisions of this Agreement and no orders for the purchase or sale
of Shares hereunder shall be accepted by the Company if and so long as
effectiveness of the Registration Statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by Section 5(b)(2) of
the 1933 Act is not on file with the SEC; provided, however, that nothing
contained in this Section 1.16 shall in any way restrict or have any application
to or bearing upon the Company's obligation to redeem Shares tendered for
redemption by any shareholder in accordance with the provisions of the Company's
Registration Statement, Declaration of Company, or bylaws.
1.17 The Company agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor:
(a) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement,
prospectus or statement of additional information then in effect
or the initiation by service of process on the Company of any
proceeding for that purpose;
5
<PAGE>
(b) of the happening of any event that makes untrue any statement of a
material fact made in the Registration Statement, prospectus or
statement of additional information then in effect or that
requires the making of a change in such Registration Statement,
prospectus or statement of additional information in order to make
the statements therein not misleading; and
(c) of all actions of the SEC with respect to any amendments to any
Registration Statement, prospectus or statement of additional
information which may from time to time be filed with the SEC.
For purposes of this section, informal requests by or acts of the Staff
of the SEC shall not be deemed actions of or requests by the SEC.
2. TERM
2.1 This Agreement shall become effective immediately upon the consummation of
the acquisition of First Data Investor Services Group, Inc. by a subsidiary of
PNC Bank Corp., which the parties anticipate to occur on or about December 1,
1999 and, unless sooner terminated as provided herein, shall continue for an
initial one-year term and thereafter shall be renewed for successive one-year
terms, provided such continuance is specifically approved at least annually by
(i) the Company's Board of Trustees or (ii) by a vote of a majority (as defined
in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting securities
of the Company, provided that in either event the continuance is also approved
by a majority of the Trustees who are not parties to this Agreement and who are
not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable without penalty, on at least
sixty days' written notice, by the Company's Board of Trustees, by vote of a
majority (as defined in the 1940 Act and Rule 18f-2 thereunder) of the
outstanding voting securities of the Company, or by the Distributor. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act and the rules thereunder).
2.2 In the event a termination notice is given by the Company, all reasonable
expenses associated with movement of records and materials and conversion
thereof will be borne by the Company.
3. LIMITATION OF LIABILITY
3.1 The Distributor shall not be liable to the Company for any error of judgment
or mistake of law or for any loss suffered by the Company in connection with the
performance of its obligations and duties under this Agreement, except a loss
resulting from the Distributor's willful misfeasance, bad faith or negligence in
the performance of such obligations and duties, or by reason of its reckless
disregard thereof.
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3.2 Neither party may assert any cause of action against the other party under
this Agreement that accrued more than two (2) years prior to the filing of the
suit (or commencement of arbitration proceedings) alleging such cause of action.
3.3 Each party shall have the duty to mitigate damages for which the other party
may become responsible.
3.4 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE FOR LOST PROFITS OR CONSEQUENTIAL
DAMAGES.
4. EXCLUSION OF WARRANTIES
THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, THE DISTRIBUTOR DISCLAIMS ALL OTHER REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, MADE TO THE COMPANY, A FUND OR ANY OTHER PERSON, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES REGARDING QUALITY, SUITABILITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF
ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) OF ANY SERVICES OR ANY GOODS
PROVIDED INCIDENTAL TO SERVICES PROVIDED UNDER THIS AGREEMENT. THE DISTRIBUTOR
DISCLAIMS ANY WARRANTY OF TITLE OR NON-INFRINGEMENT EXCEPT AS OTHERWISE SET
FORTH IN THIS AGREEMENT.
5. MODIFICATIONS AND WAIVERS
No change, termination, modification, or waiver of any term or
condition of the Agreement shall be valid unless in writing signed by each
party. No such writing shall be effective as against the Distributor unless said
writing is executed by a Senior Vice President, Executive Vice President or
President of the Distributor. A party's waiver of a breach of any term or
condition in the Agreement shall not be deemed a waiver of any subsequent breach
of the same or another term or condition.
6. NO PRESUMPTION AGAINST DRAFTER
The Distributor and the Company have jointly participated in the
negotiation and drafting of this Agreement. The Agreement shall be construed as
if drafted jointly by the Company and the Distributor, and no presumptions arise
favoring any party by virtue of the authorship of any provision of this
Agreement.
7. PUBLICITY
Neither the Distributor nor the Company shall release or publish news
releases, public announcements, advertising or other publicity relating to this
Agreement or to the transactions contemplated by it without prior review and
written approval of the other party; provided, however,
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that either party may make such disclosures as are required by legal, accounting
or regulatory requirements after making reasonable efforts in the circumstances
to consult in advance with the other party.
8. SEVERABILITY
The parties intend every provision of this Agreement to be severable.
If a court of competent jurisdiction determines that any term or provision is
illegal or invalid for any reason, the illegality or invalidity shall not affect
the validity of the remainder of this Agreement. In such case, the parties shall
in good faith modify or substitute such provision consistent with the original
intent of the parties. Without limiting the generality of this paragraph, if a
court determines that any remedy stated in this Agreement has failed of its
essential purpose, then all other provisions of this Agreement, including the
limitations on liability and exclusion of damages, shall remain fully effective.
9. FORCE MAJEURE
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default or delay
is caused, directly or indirectly, by (i) fire, flood, elements of nature or
other acts of God; (ii) any outbreak or escalation of hostilities, war, riots or
civil disorders in any country, (iii) any act or omission of the other party or
any governmental authority; (iv) any labor disputes (whether or not the
employees' demands are reasonable or within the party's power to satisfy); or
(v) nonperformance by a third party or any similar cause beyond the reasonable
control of such party, including without limitation, failures or fluctuations in
telecommunications or other equipment. In any such event, the non-performing
party shall be excused from any further performance and observance of the
obligations so affected only for so long as such circumstances prevai1 and such
party continues to use commercially reasonable efforts to recommence performance
or observance as soon as practicable.
10. MISCELLANEOUS
10.1 Any notice or other instrument authorized or required by this Agreement to
be given in writing to the Company or the Distributor shall be sufficiently
given if addressed to the party and received by it at its office set forth below
or at such other place as it may from time to time designate in writing.
To the Company:
LKCM Fund
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
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To the Distributor:
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Attention: Philip Rinnander
10.2 The laws of the State of Delaware, excluding the laws on conflicts of laws,
and the applicable provisions of the 1940 Act shall govern the interpretation,
validity, and enforcement of this Agreement. To the extent the provisions of
Delaware law or the provisions hereof conflict with the 1940 Act, the 1940 Act
shall control.
10.3 This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and which collectively shall be deemed to
constitute only one instrument.
10.4 The captions of this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
10.5 This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and is not intended to confer
upon any other person any rights or remedies hereunder.
11. CONFIDENTIALITY
11.1 The parties agree that the Proprietary Information (defined below) and the
contents of this Agreement (collectively "Confidential Information") are
confidential information of the parties and their respective licensers. The
Company and the Distributor shall exercise reasonable care to safeguard the
confidentiality of the Confidential Information of the other. The Company and
the Distributor may each use the Confidential Information only to exercise its
rights or perform its duties under this Agreement. The Company and the
Distributor shall not duplicate, sell or disclose to others the Confidential
Information of the other, in whole or in part, without the prior written
permission of the other party. The Company and the Distributor may, however,
disclose Confidential Information to its employees who have a need to know the
Confidential Information to perform work for the other, provided that each shall
use reasonable efforts to ensure that the Confidential Information is not
duplicated or disclosed by its employees in breach of this Agreement. The
Company and the Distributor may also disclose the Confidential Information to
independent contractors, auditors and professional advisors, provided they first
agree in writing to be bound by the confidentiality obligations substantially
similar to this Section 11. Notwithstanding the previous sentence, in no event
shall either the Company or the Distributor disclose the Confidential
Information to any competitor of the other without specific, prior written
consent.
11.2 Proprietary Information means:
(a) any data or information that is completely sensitive material, and
not generally known to the public, including, but not limited to,
information about product plans, marketing
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<PAGE>
strategies, finance, operations, customer relationships,
customer profiles, sales estimates, business plans, and internal
performance results relating to the past, present or future
business activities of the Company or the Distributor, their
respective subsidiaries and affiliated companies and the
customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable
and secret in the sense that its confidentiality affords the
Company or the Distributor a competitive advantage over its
competitors; and
(c) all confidential or proprietary concepts, documentation, reports,
data, specifications, computer software, source code, object code,
flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable.
11.3 Confidential Information includes, without limitation, all documents,
inventions, substances, engineering and laboratory notebooks, drawings,
diagrams, specifications, bills of material, equipment, prototypes and models,
and any other tangible manifestation of the foregoing of either party which now
exist or come into the control or possession of the other.
11.4 The Company acknowledges that breach of the restrictions on use,
dissemination or disclosure of any Confidential Information would result in
immediate and irreparable harm, and money damages would be inadequate to
compensate the Distributor for that harm. The Distributor shall be entitled to
equitable relief, in addition to all other available remedies, to redress any
such breach.
12. The Company and the Distributor agree that the obligations of the Company
under the Agreement shall not be binding upon any of the Trustees, shareholders,
nominees, officers, employees or agents, whether past, present or future, of the
Company individually, but are binding only upon the assets and property of the
Company, as provided in the Declaration of Trust. The execution and delivery of
this Agreement have been authorized by the Directors of the Company, and signed
by an authorized officer of the Company, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them or any shareholder of the
Company individually or to impose any liability on any of them or any
shareholder of the Company personally, but shall bind only the assets and
property of the Company as provided in the Declaration of Trust.
13. ENTIRE AGREEMENT
This Agreement, including all Schedules hereto, constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous proposals, agreements, contracts,
representations, and understandings, whether written or oral, between the
parties with respect to the subject matter hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed all as of the day and year first above written.
LKCM FUND
By: /s/ Jacqui Brownfield
Name: Jacqui Brownfield
Title: Vice President, Secretary and Treasurer
PROVIDENT DISTRIBUTORS, INC.
By: /s/ Philip H. Rinnander
Name: Philip H. Rinnander
Title: President
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SCHEDULE A
to the Distribution Agreement
between LKCM Fund
and Provident Distributors, Inc.
Name of Funds
LKCM Small Cap Equity Fund
LKCM Equity Fund
LKCM International Fund
LKCM Balanced Fund
LKCM Fixed Income Fund
CONSULTING AGREEMENT
AGREEMENT made as of this 1st day of December, 1999 between Luther King
Capital Management Corporation ("LKCM"), a Delaware corporation, and First Data
Distributors, Inc. ("FDDI"), a Massachusetts corporation.
WHEREAS, LKCM serves as investment adviser to certain investment
portfolios or series of one or more open-end management investment companies
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as listed on Schedule A, as such Schedule shall automatically be amended
from time to time (each a "Fund" and collectively the "Funds");
WHEREAS, certain employees of LKCM will be registered with the National
Association of Securities Dealers, Inc. ("NASD") as representatives of FDDI
(such persons shall hereinafter be referred to as "Registered Representatives");
WHEREAS, FDDI has entered into a selling agreement with Provident
Distributors, Inc., the distributor of the Fund's shares;
WHEREAS, such Registered Representatives will be wholesaling the Funds'
Shares and will also be actively selling investment advisory services of LKCM, a
registered investment adviser to clients;
WHEREAS, LKCM and FDDI desire to enter into this Agreement pursuant to
which LKCM will perform certain services for FDDI with regard to monitoring the
performance of Registered Representatives and FDDI will perform certain services
for LKCM with respect to Shares of each Fund; and
NOW, THERFFORE, in consideration of the mutual agreements herein
contained, the parties agree as follows:
1. Services Provided by FDDI. FDDI will assist LKCM in providing
services with respect to each Fund as may reasonably be requested by LKCM from
time to time. At the direction of LKCM, specific assignments may include any of
the following:
(a) The forwarding of sales related complaints concerning the Fund to
LKCM;
(b) Coordination of registration of the Fund with the National
Securities Clearing Corporation ("NSCC") and filing of required
Fund/SERV reports with NSCC;
(c) The provision of advice and counsel to the Funds with
respect to regulatory matters, including monitoring
regulatory and legislative developments that may affect
the Funds and assisting the Funds in routine regulatory
examinations or investigations;
(d) Assistance in the Funds' operations and provision of general
consulting services on a day to day, as needed, basis;
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<PAGE>
(e) Assistance in the preparation of quarterly board materials with
regard to sales and other distribution related data reasonably
requested by the board;
(f) Preparation of materials for the board supporting the annual renewal
of the Distribution Agreement;
(g) In connection with the foregoing activities, maintenance of an
office facility (which may be in the offices of LKCM or a corporate
affiliate); and
(h) In connection with the foregoing activities, the furnishing of
clerical services and internal executive and administrative
services, stationery and office supplies.
FDDI will keep and maintain all books and records relating to its
services in accordance with Rule 3la-l under the 1940 Act.
2. Services Provided by LKCM. In furtherance of the responsibilities
under this Agreement, LKCM will:
(a) monitor the performance of the Registered Representatives
with respect to compliance with the NASD's Rules of
Conduct, and in particular the NASD's interpretation of
the applicability of Section 3040 of the NASD's Rules of
Conduct to certain activities of persons registered as
representatives with an NASD member and an investment
adviser with the SEC, and who conduct their advisory
activities away from the NASD employer/member as described
in the NASD's Special Notice to Members 94-44;
(b) provide consulting services with regard to such advertising,
marketing and promotional activities as LKCM believes reasonable,
including but not limited to (i) development of information,
analyses and reports, (ii) preparing, printing and distributing
sales literature brochures, letters, training materials and dealer
guides and all similar materials and advertisements as defined
below; (iii) develop and implement audio and video advertising
programs; and (iv) arrange for the printing and distribution of
prospectuses and reports of the Funds to prospective shareholders;
provided that it is understood that FDDI shall have no
responsibility for strategic planning or development with respect
to such matter. For purposes of this Agreement, "sales literature"
and "advertisements" mean brochures, letters, electronic media,
training materials and dealers' guides materials for oral
presentations and all other similar materials, whether transmitted
directly to potential shareholders or published in print or audio
visual media, but does not include generic materials that do not
mention the Funds or the Shares;
(c) submit all consulting related sales literature and
advertisements prepared pursuant to Section 1(d) above to
FDDI for legal/compliance review in advance of use, and
incorporate such changes as FDDI may reasonably request
therein.
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<PAGE>
FDDI will file such materials and obtain such approvals for
their use as may be required by the SEC, NASD or state securities
commissioners;
(d) identify persons employed by Luther King that will become
Registered Representatives and assist FDDI in ascertaining
that such persons meet all requirements established for
being a Registered Representative by the SEC, NASD and
relevant state securities commissions;
(e) report sales-related complaints to FDDI and consult with FDDI
concerning the manner in which such complaints will be addressed;
(f) to the extent applicable, cause the Funds' transfer agent
to give necessary information for the presentation of
quarterly reports in a form reasonably satisfactory to
FDDI regarding any Rule 12b- 1 fees, front-end sales
loads, back-end sales loads and other data regarding sales
and sales loads as required by the 1940 Act or as
requested by the board of trustees of the applicable
investment companies listed on Schedule A;
(g) to the extent applicable, cause the Funds' transfer agent
to provide FDDI with all necessary historical information
so that FDDI can calculate the maximum sales charges
payable by the Funds pursuant to the Rules of Conduct of
the NASD and the actual sales charges paid by the Funds;
cause the Funds' transfer agent to provide FDDI with all
of the necessary information so that FDDI can calculate
the maximum sales charges payable by the Funds pursuant to
the Rules of Conduct of the NASD and the actual sales
charges paid by the Funds; and cause the Funds' transfer
agent to provide such information in a form satisfactory
to FDDI no less often than monthly for every Fund and on a
daily basis for any Fund for which FDDI determines that
the remaining limit is approaching zero;
(h) support or cause the Funds' transfer agent to support the
servicing of the shareholders; in connection therewith the
Funds' transfer agent or LKCM will provide one or more
persons during normal business hours to respond to
telephone questions concerning the Funds; and
(i) provide FDDI with copies of, or access to, any documents
that FDDI may reasonably request and notify FDDI as soon
as possible of any matter materially affecting FDDI's
performance of services under this Agreement;
3. Delivery of Documents. In order to assist FDDI in the performance of
its duties, LKCM has caused each Fund to furnish FDDI with, or provide FDDI with
access to, each of the following:
(a) Each Fund's most recent Post-Effective Amendment to its
Registration Statement on Form N-1A (the "Registration
Statement") under the Securities Act of 1933, as amended,
and under the 1940 Act as filed with the SEC relating to
each Fund's Shares;
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<PAGE>
(b) Each Fund's most recent Prospectus
(c) Each Fund's most recent Statement(s) of Additional Information;
(d) Each Fund's most recent annual and semi-annual financial
statements;
(e) Each Fund's most recent filing pursuant to Rule 24F-2/24e-2 under
the 1940 Act;
(f) Each Fund's most recent SEC examination letter to the
extent that such information contained in the SEC letter
(i) materially affects FDDI's performance under this
Agreement, or (ii) the issues identified in the letter may
result in FDDI incurring any loss, claim, damage or
liability or action in respect thereof; and
(g) The Trust's charter documents and by-laws.
LKCM will furnish FDDI from time to time with copies of, or access to,
all amendments of or supplements to the foregoing. Furthermore, LKCM will
provide FDDI with topics of, or access to, any other documents that FDDI may
reasonably request and will notify FDDI as soon as possible of any matter
materially affecting FDDI's performance of its services under this Agreement.
4. Compensation; Reimbursement of Expenses. LKCM shall pay FDDI for the
services provided under this Agreement the fees set forth in Schedule B to this
Agreement. Compensation under this Agreement shall be calculated and accrued
daily and the amounts of the daily accruals shall be paid monthly in arrears. If
this Agreement becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fees set forth above. In addition, LKCM agrees to
reimburse FDDI for FDDI's reasonable out-of-pocket expenses in providing
services hereunder, as mutually agreed to in writing by the parties from time to
time.
5. Effective Date. This Agreement shall become effective immediately
upon the consummation of the acquisition of First Data Investor Services
Group, Inc. by a subsidiary of PNC Bank Corp., which the parties anticipate to
occur on or about December 1, 1999.
6. Term.
(a) This Agreement shall continue for an initial one year
period and shall continue thereafter for successive one
year terms unless terminated pursuant to the provision of
sub-section (b) of this Section 6.
(b) This Agreement may be terminated with respect to any Fund
at any time without payment of any penalty, upon 60 days'
written notice, by vote of a majority of the Board of
Trustees of a Fund. In any event, the provisions of
Section 8 shall
4
<PAGE>
survive termination of this Agreement and continue in
fill force and effect. Compensation due FDDI and unpaid
by LKCM upon such termination shall be immediately due and
payable upon and notwithstanding such termination.
7. Standard of Care: Indemnification and Limitation on Consequential
Damages.
(a) LKCM will indemnify and hold FDDI harmless from and
against any losses, claims, damages or liabilities, or
actions in respect thereof, to which FDDI may become
subject, including amounts paid in settlement with the
prior written consent of LKCM, insofar as such losses,
claims, damages or liabilities, or actions is respect
thereof, arise out of or result from:
(i) the failure of LKCM to comply with the terms of this
Agreement; and
(ii) any use of sales materials or advertisements or any
oral or written misrepresentations or any unlawful
sales practices concerning the Shares by a Registered
Representative if such misrepresentations or unlawful
sales practices were the direct result of LKCM's bad
faith, willful misfeasance, negligence or reckless
disregard of their duties and obligations under this
Agreement.
(b) FDDI will indemnify and hold harmless LKCM from and
against any losses, claims, damages or liabilities, or
actions in respect thereof, to which LKCM may become
subject, including amounts paid in settlement with the
prior written consent of FDDI, insofar as such losses,
claims, damages or liabilities, or actions in respect
thereof, arise out of or result from:
(i) the failure of FDDI to comply with the terms of this
Agreement;
(ii) the failure of FDDI to comply with the NASD's Rules of
Conduct; and
(iii) any use of sales materials or advertisements or any
oral or written misrepresentations or any unlawful
sales practices concerning the Shares by a Registered
Representative if such misrepresentations or unlawful
sales practices were the direct result of FDDI's bad
faith, willful misfeasance, negligence or reckless
disregard of their duties and obligations under this
Agreement.
(c) LKCM will reimburse FDDI for reasonable legal or other
expenses reasonably incurred by FDDI in connection with
investigating or defending against any such loss, claims,
damage, liability or action. LKCM shall not be liable to
FDDI for any action taken or omitted by FDDI in bad faith,
with willful misfeasance or negligence or from reckless
disregard by FDDI of its obligations and duties. The
indemnities in this Section shall, upon the same terms and
conditions, extend to and inure to the benefit of each of
the directors and officers of FDDI and any
5
<PAGE>
person controlling FDDI within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act.
(d) FDDI will reimburse LKCM for reasonable legal or other
expenses reasonably incurred by LKCM in connection with
investigating or defending against any such loss, claims,
damage, liability or action. FDDI shall not be liable to
LKCM for any action taken or omitted by LKCM in bad faith,
with willful misfeasance or negligence or from reckless
disregard by LKCM of its obligations and duties. The
indemnities in this Section shall, upon the same terms and
conditions, extend to and inure to the benefit of each of
the directors and officers of LKCM and any person
controlling LKCM within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act.
(e) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, IN NO EVENT SHALL EITHER PARTY, ITS AFFILIATES
OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS OR SUBCONTRACTORS BE LIABLE FOR LOST PROFITS OR
CONSEQUENTIAL DAMAGES.
8. Record Retention and Confidentiality. FDDI shall keep and maintain
on behalf of the Funds all books and records which the Funds and FDDI are, or
may be, required to keep and maintain in connection with the services to be
provided hereunder pursuant to any applicable statutes, rules and regulations,
including without limitation Rules 31a-l and 31a-2 under the 1940 Act. FDDI
further agrees that all such books and records shall be the property of the
Funds and to make such books and records available for inspection by or upon the
request of the Funds, by LKCM, or by the SEC at reasonable times and otherwise
to keep confidential all books and records and other information relative to the
Funds and its shareholders; except when requested to divulge such information by
duly constituted authorities or court process.
9. Rights of Ownership. All computer programs and procedures developed
to perform the services to be provided by FDDI under this Agreement arc the
property of FDDI. All records and other data except such computer programs and
procedures are the exclusive property of the Funds and all such other records
and data will be furnished to LKCM and/or the Funds in appropriate form as soon
as practicable after termination of this Agreement for any reason.
10. Return of Records. FDDI may at its option at any time, and shall
promptly upon the demand of LKCM and/or the Funds, turn over to LKCM and/or the
Funds and cease to retain FDDI's files, records and documents created and
maintained by FDDI pursuant to this Agreement which are no longer needed by FDDI
in the performance of its services or for its legal protection. If not so turned
over to LKCM and/or the Funds, such documents and records will be retained by
FDDI for six years from the year of creation. At the end of such six-year
period, such records and documents will returned over to LKCM and/or the
applicable Fund unless the applicable Fund authorizes in writing the destruction
of such records and documents.
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<PAGE>
11. Representations of LKCM. LKCM represents and warrants that this
Agreement has been duly authorized by LKCM and, when executed and delivered by
LKCM, will constitute a legal, valid and binding obligation of LKCM, enforceable
against LKCM in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
12. Representations of FDDI. (a) FDDI represents and warrants that this
Agreement has been duly authorized by FDDI and, when executed and delivered by
FDDI, will constitute a legal, valid and binding obligation of FDDI, enforceable
against FDDI in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
(b) FDDI further represents and warrants that it is a member of the
NASD and agrees to abide by al1 of the rules and regulations of the NASD. FDDI
agrees to comply with all applicable federal and state laws, rules and
regulations. FDDI agrees to notify LKCM immediately in the event of its
expulsion or suspension by the NASD). Expulsion of FDDI by the NASD will
automatically terminate this Agreement immediately without notice. Suspension of
FDDI by the NASD will terminate this Agreement effective immediately upon
written notice of termination to FDDI from LKCM.
13. Notices. Any notice provided hereunder shall be sufficiently given
when sent by registered or certified mail to the following:
To LKCM:
Luther King Capital Management Corporation
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
Attention: Chief Operating Officer
To FDDI:
First Data Distributors, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to FDDI's Chief Legal Officer
14. Headings. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
15. Assignment. This Agreement and the rights and duties hereunder
shall not be assignable by either of the parties hereto except by the specific
written consent of the other party.
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16. Governing Law. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of the Common wealth of
Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
By: /s/ J. Luther King, Jr.
Name: J. Luther King, Jr.
Title: President
FIRST DATA DISTRIBUTORS, INC.
By: /s/ Scott M. Hacker
Name: Scott M. Hacker
Title: Vice President and Treasurer
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SCHEDULE A
Name of FundsLKCM FUNDS
LKCM Small Cap Equity Fund
LKCM Equity FundLKCM International Fund
LKCM Balanced Fund
LKCM Fixed Income Fund
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SCHEDULE B
Fee Schedule
For the services to be provided under this Agreement, the Company shall pay
the Distributor the following fees:
An annual fee of $24,000, plus
An additional fee based on the average net assets of the Fund as follows:
$250 million to $499 million .001
$500 million to $749 million .0005
$750 million to $1 billion .0004
The foregoing fees are based on the following assumptions:
Ad review - no more than 25 pieces annually;
Rep licensing - no more than 5 annually; and
Third party selling agreement execution - no more than 12 annually.
In the event that the foregoing assumptions are exceeded, the parties
hereto agree to renegotiate the foregoing fees in good faith.
10
April 28, 2000
LKCM Funds
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
Ladies and Gentlemen:
You have requested our opinion, as counsel to the LKCM Funds (the
"Trust"), as to certain matters regarding the issuance of Shares of the Trust.
As used in this letter, the term "Shares" means the shares of beneficial
interest of the following series of the Trust: the LKCM Small Cap Equity Fund,
the LKCM Equity Fund, the LKCM Balanced Fund, the LKCM Fixed Income Fund and the
LKCM International Fund.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Agreement and Declaration of Trust and
By-laws and such resolutions and minutes of meetings of the Trust's Board of
Trustees as we have deemed relevant to our opinion, as set forth herein. Our
opinion is limited to the laws and facts in existence on the date hereof, and it
is further limited to the laws (other than the conflict of law rules) in the
State of Delaware that in our experience are normally applicable to the issuance
of shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the
issuance of the Shares has been duly authorized by the Trust and that, when sold
in accordance with the terms contemplated by Post-Effective Amendment No. 11 to
the Trust's Registration Statement on Form N-1A ("PEA"), including receipt by
the Trust of full payment for the Shares and compliance with the 1933 Act and
the 1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is a business trust established
pursuant to the Delaware Business Trust Act ("Delaware Act"). The Delaware Act
provides that a shareholder of the Trust is entitled to the same limitation of
personal liability extended to shareholders of for-profit corporations. To the
extent that the Trust or any of its shareholders becomes subject to the
jurisdiction of courts in states that do not have statutory or other authority
limiting the liability of business trust shareholders, such courts might not
apply the Delaware Act and, thus, might subject Trust shareholders to liability.
To guard against this risk, the Agreement and Declaration of Trust: (1) requires
that every written obligation of the Trust contain a statement that such
obligation may be enforced only against the assets of the Trust and (2) provides
for indemnification out of Trust property of any shareholder held personally
liable, solely by reason of being a shareholder, for the obligations of the
Trust. Thus, the risk of a Trust shareholder
<PAGE>
incurring financial loss beyond the shareholder's investment because of
shareholder liability is limited to circumstances in which a court refuses to
apply Delaware law, no contractual limitation of liability was in effect, and
the Trust itself would be unable to meet its obligations.
<PAGE>
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
---------------------------
Robert J. Zutz
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated February 15, 2000, relating to the
financial statements and financial highlights which appear in the December 31,
1999 Annual Report to Shareholders of LKCM Funds (comprising, respectively, the
LKCM Small Cap Equity Fund, LKCM Equity Fund, LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund), which are also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the headings "Financial Highlights" and "Independent Accountants" in
such Registration Statement.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
April 27, 2000
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in Exhibit J of this Post-Effective Amendment No. 11
to Registration Statement No. 33-75116 of LKCM Funds on Form N-1A of our report
dated February 12, 1999, for the LKCM Small Cap Equity Fund, the LKCM Equity
Fund, the LKCM Balanced Fund, the LKCM Fixed Income Fund and the LKCM
International Fund.
Deloitte & Touche LLP
Milwaukee, Wisconsin
April 27, 2000
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of the LKCM Funds.:
We have audited the accompanying statements of changes in net assets of the LKCM
Small Cap Equity Fund, the LKCM Equity Fund, the LKCM Balanced Fund, the LKCM
Fixed Income Fund and the LKCM International Fund (collectively, the "Funds"),
for the year ended December 31, 1998, and the financial highlights for each of
the respective periods presented through December 31, 1998. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the changes in net assets of the
LKCM Small Cap Equity Fund, the LKCM Equity Fund, the LKCM Balanced Fund, the
LKCM Fixed Income Fund and the LKCM International Fund for the year ended
December 31, 1998, and their financial highlights for the respective periods
through December 31, 1998, in conformity with generally accepted accounting
principles.
Milwaukee, Wisconsin
February 12, 1999
LKCM FUNDS
CODE OF ETHICS
This Code of Ethics (the "Code") has been adopted by the LKCM Funds (the
"Fund") in compliance with Rule 17j-1 under the Investment Company Act of 1940,
as amended (the "1940 Act") to establish standards and procedures for the
detection and prevention of activities by which persons having knowledge of
investments and investment intentions of the Fund may abuse their fiduciary
duties to the Fund.
The Fund's administrator shall notify each person who are subject to this
Code and may be required to make reports pursuant to the Code and shall deliver
a copy of the Code to each such person. All persons subject to this Code of
Ethics are required to familiarize themselves with it and execute the attached
Acknowledgment Form. This Form should be forwarded to the Fund's administrator
or Secretary.
A. LEGAL REQUIREMENT
Rule 17j-1(b) under the 1940 Act makes it unlawful for any officer or
trustee of the Fund (as well as other persons), in connection with the purchase
or sale by such person of a Security Held or to be Acquired by the Fund:
1. To employ any device, scheme or artifice to defraud the Fund;
2. To make to the Fund any untrue statement of a material fact or omit to
state to the Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
3. To engage in any act, practice, or course of business that operates or
would operate as a fraud or deceit upon the Fund; or
4. To engage in any manipulative practice with respect to the Fund.
B. FUND POLICY
This Code of Ethics is based on the principle that the trustees, officers,
and employees of the Fund have a fiduciary duty to place the interests of the
Fund ahead of their own interests. The Code of Ethics applies to all Access
Persons and focuses principally on pre-clearance and reporting of personal
transactions in securities. Access Persons must avoid activities, interests and
relationships that might interfere with making decisions in the best interests
of the Trust.
<PAGE>
As fiduciaries, Access Persons must at all times:
1. Place the interests of the Fund first. Access Persons must scrupulously
avoid serving their own personal interests ahead of the interests of the Fund.
An Access Person may not induce or cause the Fund to take action, or not to take
action, for personal benefit, rather than for the benefit of the Fund. For
example, an Access Person would violate this Code by causing the Fund to
purchase a Security he or she owned for the purpose of increasing the price of
that Security.
2. Avoid taking inappropriate advantage of their positions. Access Persons
may not, for example, use their knowledge of portfolio transactions to profit by
the market effect of such transactions. Receipt of investment opportunities,
prerequisites, or gifts from persons seeking business with the Fund or its
investment adviser could call into question the exercise of an Access Person's
independent judgment.
3. Conduct all Personal Securities Transactions in full compliance with
this Code including both the pre-clearance and reporting requirements. Doubtful
situations should be resolved in favor of the Fund. Technical compliance with
the Code's procedures will not automatically insulate from scrutiny any trades
that indicate an abuse of fiduciary duties.
C. DEFINTIONS
1. "Access Person" means (i) each trustee or officer of the Fund; (ii) each
employee of the Fund (or of any company in a control relationship to the Fund)
who in connection with his or her regular functions or duties, makes
participates in, or obtains information regarding the purchase or sale of a
security by the Fund, (iii) each employee whose functions relate to the making
of any recommendation with respect to the purchase or sale of a security by the
Fund; and (iv) any natural person in a control relationship to the Fund who
obtains information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
2. "Beneficial Ownership" shall be interpreted in the same manner as it
would be in determining whether a person is a beneficial owner of a security for
purposes of Section 16 of the Securities Exchange Act of 1934 and Rule
16a-1(a)(2) thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all securities which an Access Person has or
acquires. Generally, you should consider yourself the beneficial owner of
securities held by your spouse, your minor children, a relative by blood or
marriage living in your household, or other persons if by reason of any
contract, understanding, relationship, agreement or other arrangement, you
obtain from such securities benefits substantially equivalent to those of
ownership. You also should consider yourself the beneficial owner of securities
if you can vest or revest title in yourself, now or in the future.
3. "Control" means the power to exercise a controlling influence over the
management or policies of a company (unless such power is solely the result of
an official position with such company). Any person who owns beneficially,
directly or through one or more controlled companies, more than 25 % of the
voting securities of a company shall be
2
<PAGE>
presumed to control such company. Natural persons shall be presumed not to be
controlled persons.
4. "Independent Trustee" means any Trustee of the Fund who is not an
"interested person" as defined in the 1940 Act.
5. "Investment Personnel" of the Fund means (i) any employee of the Fund
(or any company in a control relationship to the Fund) who, in connection with
his or her regular functions or duties, makes or participates in making
recommendations regarding the purchase or sale of securities by the Fund, or
(ii) any natural person who controls the Fund and who obtains information
concerning recommendations make to the Fund regarding the purchase or sale of
securities by the Fund.
6. "Reportable Security" means any security, but does not include direct
obligations of the Government of the United States, bankers' acceptances, bank
certificates of deposit, commercial paper and high quality short-term debt
instruments, including repurchase agreements, and shares of registered open-end
investment companies.
7. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security.
8. "Security Held or to be Acquired" by the Fund means any security which,
within the most recent 15 days, (i) is or has been held by the Fund; or (ii) is
being or has been considered by the Fund or its investment adviser for purchase
by the Fund. A purchase or sale includes the writing of an option to purchase or
sell and any security convertible into or exchangeable for a Reportable
Security.
D. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
Personal investment activities of all Investment Personnel must remain
within the parameters set forth below.
1. Prohibited Transactions. The following securities transactions are
prohibited and will not be authorized under any circumstances:
a. Inside Information. Any transaction in a security while in
possession of material nonpublic information regarding the
security or the issuer of the security.
b. Market Manipulation. Transactions intended to raise, lower, or
maintain the price of any security or to create a false
appearance of active trading.
c. Others. Any other transactions deemed by the compliance officer
of the Fund's investment adviser to involve a conflict of
interest, possible diversions of a corporate opportunity, or an
appearance of impropriety.
3
<PAGE>
2. Initial Public Offerings. Any acquisition of securities in an initial
public offering (other than a new offering of a registered open-end
investment company) within 30 days after the initial offering is
prohibited by any Investment Personnel. There may be limited
circumstances where exceptions to this restriction will be allowed.
Any such requests will be reviewed on an individual basis by the
compliance officer of the Fund's investment adviser.
3. Pre-Clearance Requirements.
a. Personal Securities Transactions. Investment Personnel will be
required to pre-clear personal securities transactions through
the investment adviser's trading department. All Investment
Personnel must submit the attached Pre-Clearance Form to a trader
before executing any personal securities transaction. The
security will be checked against current trades to determine
whether the purchase or sale would violate the Code of Ethics.
All Investment Personnel are allowed to buy or sell a security
for their own account under the condition that no trade in the
security for the Fund is currently being worked on the trading
desk. The intent of this restriction is to insure that Investment
Personnel do not benefit from knowledge of Fund transactions and
that Investment Personnel trades do not interfere with Fund
transactions.
b. Private Placements. Investment Personnel are required to
pre-clear with the compliance officer of the Fund's investment
adviser participation in any offering exempt from registration
pursuant to Rules 504, 505 or 506 or under Sections 4(2) or 4(6)
of the Securities Act of 1933 ("private placements").
c. Review of Pre-Clearance Form. After receiving the completed
Pre-Clearance Form, the compliance officer or the trader will (a)
review the information set forth in the form, (b) independently
confirm whether the securities are held by the Fund and whether
there are any unexecuted orders to purchase or sell the
securities by the Fund, and (c) as soon as reasonably
practicable, determine whether to clear the proposed securities
transaction. The authorization and date and time of the
authorization must be reflected on the form. The compliance
officer will keep one copy of the completed form and provide one
copy to the Investment Personnel seeking authorization.
NO ORDER FOR A SECURITIES TRANSACTION FOR WHICH PRE-CLEARANCE
AUTHORIZATION IS REQUIRED MAY BE PLACED PRIOR TO THE RECEIPT OF
WRITTEN AUTHORIZATION OF THE TRANSACTION. VERBAL APPROVALS ARE
NOT PERMITTED.
4
<PAGE>
d. Length of Pre-Clearance Approval. The authorization is effective
until the earlier of (1) its revocation or (2) the Investment
Personnel learns that the information in the Pre-Clearance Form
is not accurate. If the order for the securities transaction is
not placed within that period, a new authorization must be
obtained before the securities transaction is placed. If the
securities transaction is placed but has not been executed within
two trading days after the day the authorization is granted (as,
for example, in the case of a limit order), no new authorization
is necessary unless the Investment Personnel placing the original
order for the securities transaction amends it in any way or
learns that the information in the Pre-Clearance Form is not
accurate.
E. REPORTING REQUIREMENTS
In order to provide the Fund with information to enable it to determine
with reasonable assurance whether the provisions of Rule 17j-l are being
observed by its Access Persons:
1. Initial Disclosure of Personal Holdings Report (Access Persons other
than Independent Trustees). Within ten days after an Access Person becomes an
"access person" of the Fund, all Access Persons are required to submit the
Disclosure of Personal Holdings Report (attached) listing all Reportable
Securities that they hold. The form should be forwarded to the Fund's
administrator or Secretary.
2. Quarterly Personal Transactions Reports.
a. Access Persons (other than Independent Trustees). Each
Access Person other than an Independent Trustee shall submit
quarterly the Report of Security Transactions (attached) to
the Fund's administrator or Secretary, showing all
transactions in Reportable Securities in which the person
has, or by reason of such transaction acquires, any direct
or indirect Beneficial Ownership. Such Report shall be filed
with the Fund's administrator or Secretary no later than 10
days after the end of each calendar quarter.
b. Independent Trustees. Each Independent Trustee of the Fund
shall submit quarterly the Report of Security Transactions
(attached) to the Fund's administrator or Secretary, only
for a transaction in a Reportable Security where he or she
knew at the time of the transaction or, in the ordinary
course of fulfilling his or her official duties as a
Trustee, should have known that during the 15-day period
immediately preceding or after the date of the transaction,
such security is or was purchased or sold, or considered for
purchase or sale, by the Fund or its investment adviser.
Such Report shall be filed with the Fund's administrator or
Secretary no later than 10 days after the end of each
calendar quarter.
3. Annual Disclosure of Personal Holdings Report (Access Persons other
than Independent Trustees). Annually, all Access Persons must complete the
Disclosure of Personal
5
<PAGE>
Holdings Report (attached) listing all Reportable Securities in which they
have a Beneficial Ownership. The information in the Disclosure of Personal
Holdings Report must be current as of a date no more than 30 days before
the report is submitted. In addition, all Access Persons must complete the
Annual Certification Report (attached). The Reports should be forwarded to
the Fund's administrator or Secretary by the 15 days following the end of
the calendar year.
4. Exceptions to Reporting Requirements. Notwithstanding the provisions set
forth in paragraphs E.2 above (Quarterly Personal Holdings Reports), no person
shall be required to make a report where such report would duplicate information
recorded by the investment adviser to the Fund pursuant to Rule 204-2(a) of the
Investment Advisers Act of 1940.
F. FIDUCIARY DUTIES
1. Gifts.
a. Accepting Gifts. All Access Persons are prohibited from accepting
gifts of more than de minimis value from any individual doing
business with or on behalf of the Fund. Gifts of a nominal value
(i.e., gifts whose reasonable value is no more than $100 a year),
and customary business meals, entertainment (e.g., sporting
events), and promotional items (e.g., pens, mugs, T-shirts) may
be accepted. If an Access Person receives any gift that might be
prohibited under this Code of Ethics, the Access Person must
inform the Fund's Secretary.
b. Solicitation of Gifts. Access Persons may not solicit gifts or
gratuities.
c. Giving Gifts. Access Persons may not personally give any gift
with a value in excess of $100 per year to persons associated
with securities or financial organizations, including exchanges,
other member organizations, commodity firms, news media, or the
Fund.
2. Service as a director. All Access Persons are prohibited from serving on
the boards of directors of any publicly traded company absent prior written
authorization from the Fund's President. Authorization will be based upon a
determination that the board service would be consistent with the interests of
the Fund. If granted, this authorization normally will require that the Access
Person be isolated, through a "Chinese Wall" or other procedures, from those
making investment decisions related to the issuer on whose board the person
sits. This restriction does not apply to service on the board of any
not-for-profit corporation or organization.
G. COMPLIANCE WITH THIS CODE OF ETHICS
1. Investigating Violations of the Code of Ethics. The reports filed by any
Access Persons pursuant to this Code of Ethics will be reviewed on a quarterly
basis and compared to transactions entered into by the Fund. Any transactions
that are believed to be a violation of this Code of Ethics will be reported
promptly to the Fund's Board of Trustees.
2. Sanctions. The Board of Trustees shall consider reports made to it and
upon determining that a violation of this Code of Ethics has occurred, may
impose such sanctions or remedial action as it deems appropriate, including a
letter of caution or warning, suspension of personal trading rights, suspension
of employment (with or without compensation), fine, civil referral to the
Securities and Exchange Commission, criminal referral, and termination of
employment with the Fund. The Fund's Board also may require the Access Person to
reverse the trade(s) in question and forfeit any profit or absorb any loss
derived therefrom. The amount of profit shall be calculated by the Board and
shall be forwarded to a charitable organization selected by it.
6
<PAGE>
LKCM FUNDS
Code of Ethics & Insider Trading Policy
Acknowledgment
I hereby acknowledge receipt of LKCM Funds' Code of Ethics and Insider
Trading Policy and certify that I have read them and agree to abide by them. I
hereby certify that I have never been found civilly liable for or criminally
guilty of insider trading and that no legal proceedings alleging that I have
violated the law of insider trading are now pending or, to my knowledge,
threatened by any person or authority.
DATE: ___________________ _________________________
(Signature)
_________________________
(Print Name)
7
<PAGE>
LKCM FUNDS
Code of Ethics & Insider Trading Policy
ANNUAL CERTIFICATION
I hereby certify that I have complied with the requirements of the Code
of Ethics and the Insider Trading Policy and have disclosed or reported all
personal securities transactions required to be disclosed or reported pursuant
to the requirements of the Code of Ethics.
Date: _________________________ ______________________
(Signature)
______________________
(Print Name)
8
<PAGE>
LKCM FUNDS
Code of Ethics
PERSONAL TRANSACTION PRE-CLEARANCE FORM
DATE: ________________
Trustee/Officer: ___________________
Bought/Sold ________________ shares of __________________ at ______________
(number) (company) (price)
through _________________________ on __________________________.
(broker) (trade date)
TRUSTEE/OFFICER:
I certify that, to the best of my knowledge, this security is not currently
being traded on behalf of LKCM Funds.
_____________________________
(Trustee/Officer's signature)
TRADER:
I certify that, to the best of my knowledge, this security is not currently
being traded on behalf of LKCM Funds.
Trade approved by: ____________________ at __________ on ___________.
(trader) (time) (date)
9
<PAGE>
REPORT OF SECURITY TRANSACTIONS
FOR QUARTER ENDED ________________
<TABLE>
<CAPTION>
Price at Which
Name/Description of Number Shares Date of Transaction Effected Bought or Name of
Security Sold Broker
- -------------------------- -------------- -------------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
</TABLE>
The above is a record of every transaction in a security which I had, or in
which I acquired any direct or indirect beneficial ownership during the period
indicated above. I have not opened any other brokerage accounts that I have not
informed LKCM of. I continue to abide by the LKCM Code of Ethics.
Date: _______________________ Signature: _____________________
DISCLOSURE OF PERSONAL HOLDINGS
10
<PAGE>
This form is to be submitted by all "access persons" upon commencement of their
employment with LKCM Funds.
I hereby certify that the following is a complete list of the securities and
private placements in which I have a direct or indirect beneficial ownership.
<TABLE>
<CAPTION>
Price at Which
Name/Description of Number Shares Date Acquired Effected
Security Name of Broker
-------------------------- -------------- ----------------- ----------------- -------------------------
<S> <C> <C> <C> <C>
</TABLE>
Date: ______________________ Signature: _____________________
11
LUTHER KING CAPITAL MANAGEMENT
CODE OF ETHICS
FEBRUARY 29, 2000
<PAGE>
STATEMENT OF GENERAL PRINCIPLES
This statement of policy deals with codes of ethics under Rule 17j-1 of the
Investment Company Act of 1940. It applies to Luther King Capital Management as
a registered investment adviser but does not supplant other obligations or
prohibitions to which Luther King Capital Management may be subjected under the
Investment Adviser Act of 1940.
The Code of Ethics is based on the principle that the officers, directors and
employees of Luther King Capital Management owe a fiduciary duty to clients to
conduct their personal securities transactions in a manner which does not
interfere with client portfolio transactions or otherwise take unfair advantage
of their relationship with clients. In all cases, the best interest of clients
must come first. All personal security transactions must be conducted consistent
with the Code of Ethics and in such a manner as to avoid any actual or potential
conflict of interest. Persons covered by the Code of Ethics must adhere to this
general principle as well as comply with the specific provisions of the Code of
Ethics.
SECTION I - DEFINITIONS
A. Definitions
1. "Adviser" means Luther King Capital Management.
2. "Access person" means any director, officer, shareholder or
adviser person of the Adviser who makes any recommendation
regarding the purchase or sale of a security by the Adviser,
participates in the determination of which recommendation
shall be made to clients of the Adviser, or who, in connection
with his duties, obtains any information concerning securities
recommendations being made by the Adviser.
SECTION II - APPLICABILITY OF CODE OF ETHICS
This Code of Ethics shall apply to any employee of the firm who meets the
definition of "access person." This definition includes portfolio managers,
analysts and traders employed by the Adviser who provides service to any client
to which the Adviser acts as investment adviser. There may be additional
employees who fall within the definition of "access person" who, because of the
nature of their position, possess information regarding the securities that the
Adviser will purchase or sell on behalf of its clients. A comprehensive list of
all "access people" will be compiled and maintained by Luther King Capital
Management.
<PAGE>
SECTION III - TEXT OF RULE 17J-1 OF THE INVESTMENT COMPANY ACT
The actual text of Rule 17j - 1(a) pursuant to which this Code of Ethics is
adopted is attached as Exhibit A. All "access persons" are required to
familiarize themselves with this rule and execute the attached Acknowledgment
Form. This form should be forwarded to Jacqui Brownfield.
SECTION IV - RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
Personal investment activities of all "access persons" employed by the Adviser
must remain within the parameters set forth below. There may be limited
circumstances where exceptions to these restrictions will be allowed. Any such
requests will be reviewed on an individual basis by Scot Hollmann.
a) Prohibition on acquiring securities in an initial public
offering within 30 days of the initial offering.
b) Prior approval for participation in private placements.
Acquisitions of securities in a private placement will be subject to a process
of prior review. Prior approval shall be obtained from Jacqui Brownfield prior
to any participation in a private placement by an "access person".
c) Duplicate copies of broker's confirmations to employer.
All "access persons" are required to have their broker(s) supply duplicate
copies of confirmations of all personal securities transactions directly to
Jacqui Brownfield. The quarterly Report of Security Transactions (attached)
should be completed and forwarded to Jacqui Brownfield by the 10th day following
the end of a calendar quarter. The transactions reported on the confirmations
will be reviewed for compliance each quarter. If these reports are not turned in
by the 10th, paychecks will be withheld until that time when the reports are
completed in proper form.
d) Pre-clearance of personal securities transactions.
"Access Persons" will be required to pre-clear personal securities transactions
through the trading department. All "access persons" must submit the attached
Personal Transaction Pre-Clearance Form to a trader before executing any
personal securities transaction. The security will be checked against current
trades to determine whether the purchase or sale would violate the Code of
Ethics. All "access persons" are allowed to buy or sell a security for their own
account under the condition that no client trade in the security is currently
being worked on the trading desk. The intent of this restriction is to insure
that "access persons" do not benefit from knowledge of client transactions and
that access person trades do not interfere with client transactions.
<PAGE>
e) Disclosure of personal holdings.
Upon commencement of employment, all "access persons" are required to submit the
attached Disclosure of Personal Holding Form listing all securities that they
hold. The form should be forwarded to Jacqui Brownfield.
f) Gifts
All "access persons" are prohibited from accepting gifts of more than de minimus
value from any individual doing business with or on behalf of a client to which
Luther King Capital Management acts as or adviser. Business meals and
entertainment are excluded from the definition of "gift."
g) Service as a director.
All "access persons" are prohibited from serving on the boards of directors of
any publicly traded company absent prior authorization from Luther King.
Authorization will be based upon a determination that the board service would be
consistent with the interests of any client that the "access person" services.
This restriction does not apply to service on the board of any not-for-profit
corporation or organization.
SECTION V - EXEMPTED TRANSACTIONS
The following transactions are specifically exempted from coverage by this Code
of Ethics:
a) Transactions in Securities issued by the Government of the
United States.
b) Transactions in shares of open-ended investment companies.
c) Transactions involving bank certificates of deposit.
d) Transactions effected in any account over which the "access
person" has no direct influence or control (e.g., blind
trust, discretionary account or Trust managed by a third
party).
e) Transactions which are part of an automatic dividend
reinvestment plan.
<PAGE>
SECTION VI - OVERSIGHT OF CODE OF ETHICS
The reports filed by "access persons" pursuant to this Code of Ethics will be
reviewed on a quarterly basis and compared to transactions entered into by the
Adviser on behalf of the clients to which it acts as investment adviser. Any
transactions that are believed to be a violation of this Code of Ethics will be
reported promptly to Luther King.
Luther King shall consider reports made to him and upon determining that a
violation of this Code of Ethics has occurred, may impose such sanctions or
remedial action as he deems appropriate. These sanctions may include, among
other things, suspension or termination of employment with the Firm.
<PAGE>
LUTHER KING CAPITAL MANAGEMENT
CODE OF ETHICS & INSIDER TRADING POLICY
ACKNOWLEDGMENT
I hereby acknowledge receipt of Luther King Capital Management's Code
of Ethics and Insider Trading Policy and certify that I have read them and agree
to abide by them. I hereby certify that I have never been found civilly liable
for or criminally guilty of insider trading and that no legal proceedings
alleging that I have violated the law of insider trading are now pending or, to
my knowledge, threatened by any person or authority.
Date:__________________________ __________________________
(Signature)
__________________________
(Print Name)
<PAGE>
LUTHER KING CAPITAL MANAGEMENT
CODE OF ETHICS & INSIDER TRADING POLICY
ANNUAL CERTIFICATION
I hereby certify that I have complied with the requirements of the Code
of Ethics and the Insider Trading Policy and have disclosed or reported all
personal securities transactions required to be disclosed or reported pursuant
to the requirements of the Code of Ethics.
Date____________________________ ____________________________
(Signature)
____________________________
(Print Name)
<PAGE>
LUTHER KING CAPITAL MANAGEMENT
CODE OF ETHICS
PERSONAL TRANSACTION PRE-CLEARANCE FORM
Date:__________________
Employee:_____________________
Bought / Sold _______________ shares of ________________________ at _________
(number) (company) (price)
through _______________________________ on ____________________.
(broker) (trade date)
EMPLOYEE:
I certify that, to the best of my knowledge, this security is not currently
being traded on behalf of Luther King Capital Management clients.
___________________________
(Employee's signature)
TRADER:
I certify that, to the best of my knowledge, this security is not currently
being traded on behalf of Luther King Capital Management clients.
Trade approved by: ________________________ at _________ on _______________.
(trader) (time) (date)
<PAGE>
FULL TEXT OF INVESTMENT COMPANY ACT
RULE l7j-1
17 C.F.R 270.17j-1
Certain Unlawful Acts, Practices or Courses of Business and Requirements
Relating to Codes of Ethics with Respect to Registered Investment Companies
Reg. ss. 270.17j-1. (a) It shall be unlawful for any affiliated person of or
principal underwriter for a registered investment company, or any affiliated
person of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, as defined in
this section, by such registered investment company -
(1) To employ any device, scheme or artifice to defraud such registered
investment company;
(2) To make to such registered investment company any untrue statement of
a material fact or omit to state to such registered investment company
a material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any such registered
investment company; or
(4) To engage in any manipulative practice with respect to such registered
investment company.
(b)(1) Every registered investment company, and each
investment adviser of or principal underwriter for such
investment company, shall adopt a written code of ethics
containing provisions reasonably necessary to prevent its access
persons from engaging in any act, practice, or course of business
prohibited by paragraph (a) of this section and shall use
reasonable diligence, and institute procedures reasonably
necessary, to prevent violations of such code.
(2) The requirements of paragraph (b)(l) shall not apply to any
underwriter (i) which is not an affiliate person of the registered
investment company or its investment adviser and (ii) none of whose
officers, directors or general partners serves as an officer, director
or general partner of such registered investment company or investment
adviser.
(c)(1) Every access person of a registered investment company
or of an investment adviser of or principal underwriter for
such investment company shall report to such investment
company, investment adviser or principal underwriter of which
he or she is an access person the information described in
paragraph (c)(2) with respect to transactions in any security
in which such access person has, or by reason of such
transactions in any security in which such access person has,
or by reason
<PAGE>
of such transaction acquires, any direct or indirect beneficial
ownership, in the security: Provided, however that any such
report may contain a statement that the report shall not be
construed as an admission by the person making such report that
he or she has any direct or indirect beneficial ownership in the
security to which the report relates. For purposes of this
section, beneficial ownership shall be interpreted in the same
manner as it would be in determining whether a person is subject
to the provisions of section 16 of the Securities Exchange Act of
1934 [15 U.S.C. 78p] and the rules and regulations thereunder,
except that the determination of direct or indirect beneficial
ownership shall apply to all securities which the access person
has or acquires.
(2) Every report required to be made pursuant to paragraph (c)(l) shall
be made no later than 10 days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected.
(3) Notwithstanding the provision of paragraph (c)(1) no person
shall be required to make a report:
(i) With respect to transactions effected for any account
over which such person does not have any direct or indirect
influence or control;
(ii) If such person is not an "interested person" of a
registered investment company within the meaning of section
2(a)(19) of the Act [15 U.S.C. 80a2(a)(19)], and would be
required to make such a report solely by reason of being a
director of such investment company, except where such director
knew or, in the ordinary course of fulfilling his official duties
as a director of the registered investment company, should have
known that during the 15-day period immediately preceding or
after the date of the transaction in a security by the director
such security is or was purchased of sold by such investment
company or such purchase or sale by such investment company is or
was considered by the investment company or its investment
adviser;
<PAGE>
(iii) Where the principal underwriter, as to which such
person is an access person, (A) is not an affiliated person of
the registered investment company or any investment adviser of
such investment company, and (B) has no officers, directors, or
general partners who serve as officers, directors or general
partners of such investment company or any such investment
adviser, or
(iv) Where a report made to an investment adviser would
duplicate information recorded pursuant to Rules 204-2(a)(12) or
204-2(a)(13) [17 C.F.R. 275.204-2(a)(12) and 275.204-2(a)(13)]
under the Investment Advisers Act of 1940 [15 U.S.C. 80b-1, et
seq.].
(4) Each registered investment company, investment adviser and
principal underwriter to which reports are required to be made
pursuant to this section shall identify all access persons who are
under a duty to make such reports to it and shall inform such persons
of such duty.
(d) Each registered investment company, investment adviser and
principal underwriter which is required to adopt a code of ethics or
to which reports are required to be made by access persons shall, at
its principal place of business, maintain records in the manner and to
the manner and to the extent set forth below, and make such records
available to the Commission or any representative thereof at any time
and from time to time for reasonable periodic, special or other
examination.
(1) A copy of each such code of ethics which is, or at any time
within the past five years has been, in effect shall be preserved in
an easily accessible place;
(2) A record of any violation of such code of ethics, and of any
action taken as a result of such violation, shall be preserved in an
easily accessible place for a period of not less than five years
following the end of the fiscal year in which the violation occurs;
(3) A copy of each report made by an access person pursuant to
this rule shall be preserved for a period of not less than five years
from the end of the fiscal year in which it is made, the first two
years in an easily accessible place; and
(4) A list of all persons who are, or within the past five years
have been, required to make reports pursuant to this section shall be
maintained in an easily accessible place.
(e) As used in this rule
(1) "Access person" means:
(i) With respect to a registered investment company or an
investment adviser thereof, any director, officer, general
partner, or advisory person, as defined in this section, of such
investment company or investment adviser;
<PAGE>
(ii) With respect to a principal underwriter, any director,
officer, or general partner of such principal underwriter who in
the ordinary course of his business makes, participates in or
obtains information regarding the purchase or sale of securities
for the registered investment companies for which the principal
underwriter so acts or whose functions or duties as part of the
ordinary course of his business relate to the making of any
recommendation to such investment company regarding the purchase
or sale of securities.
(iii) Notwithstanding the provisions of paragraph (e)(l)(i),
where the investment adviser is primarily engaged in a business
or businesses other than advising registered investment companies
or other advisory clients; the term "access person" shall mean:
any director, officer, general partner, or advisory person of the
investment adviser who, with respect to any registered investment
company, makes any recommendation, participates in the
determination of which recommendation shall be made, or whose
principal function or duties relate to the determination of which
recommendation shall be made to any registered investment
company; or who, in connection with his duties, obtain any
information concerning securities recommendations being made by
such investment adviser to any registered investment company; or
who, in connection with his duties, obtains any information
concerning securities recommendations being made by such
investment adviser to any registered investment company.
(iv) An investment adviser is "primarily engaged in a
business or businesses other than advising registered investment
companies or other advisory clients" when, for each of its most
recent three fiscal years or for the period of time since its
organization, whichever is lesser, the investment adviser
derived, on an unconsolidated basis, more than 50 percent of (A)
its total sales and revenues, and (B), its income (or loss)
before income taxes and extraordinary items from such other
business or businesses.
(2) "Advisory person" of a registered investment company or an investment
adviser thereof means:
(i) Any employee of such company or investment adviser (or
of any company in control relationship to such investment company
or investment adviser) who, in connection with his regular
functions or duties, makes, participates in, or obtains
information, regarding the purchase or sale of a security by a
registered investment company, or whose functions relate to the
making of any recommendations with respect to such purchases or
sales; and
<PAGE>
(ii) Any natural person in a control relationship to such
company or investment adviser who obtains information concerning
recommendations made to such company with regard to the purchase
or sale of a security.
(3) "Control" shall have the same meaning as that set forth in section
2(a)(9) of the Act [l5 U.S.C. 80a-2(a)(9)].
(4) "Purchase or sale of a security" includes, inter alia, the writing of
an option to purchase or sell a security.
(5) "Security" shall have the meaning set forth in section 2(a)(36) of the
Act [15 U.S.C. 80a-2(a)(36)], except that it shall not include securities issued
by the Government of the United States, bankers' acceptances, bank certificates
of deposit, commercial paper and shares of registered open-end investment
companies.
(6) "Security held or to be acquired" by a registered investment company
means any security as defined in this rule which, within the most recent 15
days, (i) is or has been held by such company, or (ii) is being or has been
considered by such company or its investment adviser for purchase by such
company.
<PAGE>
STATEMENT OF POLICY ON INSIDER TRADING
UNDER THE INSIDER TRADING AND SECURITIES FRAUD
ENFORCEMENT ACT OF 1988
June 20, 1989
In 1988 the President signed into law the Insider Trading and Securities Fraud
Enforcement Act (The "Act"). While the Act does not provide a statutory
definition of "insider trading," it has effected major changes to the previous
law.
SECTION I. POLICY STATEMENT ON INSIDER TRADING
-----------------------------------
A. Statement of Insider Trading Policy
Luther King Capital Management forbids any officer, director or employee from
trading, either personally or on behalf of others, including private accounts
managed by Luther King Capital Management on material nonpublic information or
communicating material nonpublic information to others in violation of the law.
This conduct is frequently referred to as "insider trading," Luther King Capital
Management's policy applies to every officer, director and employee and extends
to activities within and outside their duties at Luther King Capital Management.
Every officer, director and employee must read and retain this policy statement.
Any questions regarding Luther King Capital Management's policy and procedures
should be referred to Scot Hollmann or Jacqui Brownfield.
The term "insider trading" is not defined in the federal securities laws, but
generally is used to refer to the use of material nonpublic information to trade
in securities (whether or not one is an "insider") or to communications of
material nonpublic information to others. While the law concerning insider
trading is not static, it is generally understood that the law prohibits:
* trading by an insider, while in possession of material nonpublic information,
or
* trading by a non-insider, while in possession of material nonpublic
information, where the information either was disclosed to the non-insider in
violation of an insider's duty to keep it confidential or was misappropriated,
or * communicating material nonpublic information to others, or trading a
security which is the subject of an actual or impending tender offer when in
possession of material non public information relating to the offer, or
assisting someone who is engaged in any of the above activities
The elements of insider trading and the penalties for such unlawful conduct are
discussed below. If after reviewing this policy statement, you have any
questions you should consult Scot Hollmann or Jacqui Brownfield.
<PAGE>
Who is an Insider?
The concept of "insider" is broad. It includes officers, directors and employees
of a company. In addition, a person can be a "temporary insider" if he or she
enters into a special confidential relationship in the conduct of a company's
affairs and as a result is given access to information solely for the company's
purposes. A temporary insider can include, among others, a company's attorneys,
accountants, consultants, bank lending officers, and the employees of such
organizations. In addition, Luther King Capital Management may become a
temporary insider of a company it advises or for which it performs other
services. According to the Supreme Court, the company must expect the outsider
to keep the disclosed nonpublic information confidential and the relationship
must at least imply such a duty before the outsider will be considered an
insider.
What is Material Information?
Trading on insider information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
price of a company's securities. Information that officers, directors and
employees should consider material includes, but is not limited to: dividend
changes, earnings estimates, changes in previously released earnings estimates,
significant merger or acquisition proposals or agreements, major litigation,
liquidation problems, and extraordinary management developments.
The Supreme Court has held that in close cases doubts about whether or not
information is material should be resolved in favor of a finding of materiality.
You should also be aware that your judgement regarding materiality may be
reviewed by a court or the SEC with the 20/20 vision of hindsight. Any
information that, upon disclosure, is likely to have significant impact on the
market price of securities should be considered material.
Material information dots not have to relate to a company's business. For
example, in Carpenter v. U.S.,108 U.S. 316 (1987), the Supreme Court considered
as material certain information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a security. In that case,
a Wall Street Journal reporter was found criminally liable for disclosing to
others the dates that reports on various companies would appear in the Journal
and whether those reports would be favorable or not.
What is Nonpublic Information?
Information is nonpublic until it has been effectively communicated to the
market place. One must be able to point to some fact to show that the
information is generally public. To satisfy the dissemination requirement, the
stock exchanges require exchange traded issuers to disclose information to:
(1) the national business and financial newswire services (Dow Jones and
Reuters), (2) the national services (Associates Press), and (3) The New York
Times and The Wall Street Journal. When information appears in one or more of
these publications or on the broad tape, it normally can be used immediately as
public information. Special consideration must be given to the following:
a. Local Disclosure. An article in a local newspaper would be
sufficient publication for a local company that is only locally
traded but not for a national company that is nationally traded.
b. Information in SEC Reports. In general, you may assume that
information in reports filed with the SEC is public. If, however,
it comes to your attention that particularly significant
information in a report filed with the SEC has not otherwise been
disclosed to the public, then you should not make purchases or
sales or recommendations on the basis of that information without
first discussing the matter with and obtaining authorization from
controlling parties of LKCM.
c. Information in Brokerage Reports. As a general matter, you may
assume that information in bulletins published by a brokerage
firm is public. As with SEC reports, however, if it comes to your
attention that particularly significant information in a
brokerage firm report has not otherwise been disclosed to the
public, then you should assume that it is nonpublic. In that
case, you should not purchase or sell or make recommendations on
the basis of that information without first discussing the matter
with and obtaining authorization from controlling parties of
LKCM.
Tender Offers. Many recent insider trading cases have involved trading in
securities which were the subject of actual or impending tender offers. Tender
offers are subject to particularly strict regulation under the securities laws.
Under no circumstances should you trade in securities while in possession of
material nonpublic information regarding a potential tender offer.
Basis for Liability
a. Fiduciary Duty Theory
In 1980, the Supreme Court found that there is no general duty
to disclose before trading on material nonpublic information, but that
such a duty arises only where there is a fiduciary relationship. That
is, there must be a relationship between the parties to the transaction
such that one party has a right to expect that the other party will
disclose any material nonpublic information or refrain from trading.
Chiarella v. U.S. 445 U.S. 22 (1980).
In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated
alternate theories under which non-insiders can acquire the fiduciary
duties of insiders: they can enter into a confidential relationship
with the company through which they
<PAGE>
gain information (e.g., attorneys, accountants), or they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they are
aware or should have been aware that they have been given confidential
information by an insider who has violated his fiduciary duty to the
company's shareholders. However, in the "tippee" situation, a breach
of duty occurs only if the insider personally benefits, directly or
indirectly, from the disclosure. The benefit does not have to be
pecuniary, but can be a gift of reputational benefit that will
translate into future earnings, or even evidence of a relationship
that suggests a quid pro quo.
Another basis for insider trading liability is the
"misappropriation" theory, where liability is established when trading
occurs on material nonpublic information that was stolen or
misappropriated from any other person. In U.S. v. Carpenter, supra, the
Court found, in 1989, a columnist defrauded The Wall Street Journal
when he stole information from the Journal and used it for trading in
the securities markets. It should be noted that the misappropriation
theory can be used to reach a variety of individuals not previously
thought to be encompassed under the fiduciary duty theory.
SECTION II. PENALTIES FOR INSIDER TRADING
-----------------------------
Penalties for trading on or communicating material nonpublic information are
severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she does not personally benefit from the violation. Penalties include:1)
civil injunctions; 2) treble damages; 3) disgorgement of profits; 4) maximum
jail term for criminal securities law violation increased from 5 to 10 years; 5)
fines for the person who committed the violation of up to three times the profit
gained or loss avoided, whether or not the person actually benefited, maximum
criminal fine for individuals increased from $100,000 to $1,000,000; 6) fines
for the employer or other controlling person of up to the greater of $1,000,000
or three times the amount of the profit gained or loss avoided.
The act authorizes SEC to award bounty payments to persons who provide
information leading to successful prosecution of insider trading violation,
Bounty payments are at the discretion of the SEC, but may not exceed 10% of the
penalty imposed.
In addition, any violation of this policy statement can be expected to result in
serious sanctions by Luther King Capital Management, including dismissal of the
persons involved.
SECTTON III. PROCEDURES
----------
A. Procedures to Implement Luther King Capital Management's Policy
Against Insider Trading
The following procedures have been established to aid the officers, directors
and employees of Luther King Capital Management in avoiding insider trading, and
to aid LKCM in preventing, detecting and imposing sanctions against insider
trading. Every
<PAGE>
officer, director and employee of Luther King Capital Management
must follow these procedures or risk serious sanctions, including dismissal,
substantial personal liability and criminal penalties. If you have any questions
about these procedures you should consult Scot Hollmann or Jacqui Brownfield.
1. Identifying Inside Information Before trading for yourself or
others, including investment companies or private accounts managed by
Luther King Capital Management in the securities of a company about
which you may have potential inside information, ask yourself the
following questions: Is the information material? Is this information
that an investor would consider important in making his or her
investment decision? Is this information that would substantially
effect the market price of the securities if generally disclosed? Is
the information nonpublic? To whom has this information been provided?
Has the information been effectively communicated to the marketplace
by being published in Reuters, The Wall Street Journal or other
publications of general circulation? (SEE Section I, 3)
If, after consideration of the above, you believe that the information is
material and nonpublic, or if you have questions as to whether the information
is material and nonpublic, you should take the following steps:
a. Report the matter immediately to Scot Hollmann or
Jacqui Brownfield.
b. Do not purchase or sell the securities on behalf of
yourself or others, including private accounts managed
by Luther King Capital Management.
c. Do not communicate the information inside or outside
Luther King Capital Management, other than to Scot
Hollmann or Jacqui Brownfield.
d. After Scot Hollmann or Jacqui Brownticld has reviewed
the issue, you will be instructed to continue the
prohibitions against trading and communication, or you
will be allowed to trade and communicate the
information.
2. Personal Securities Trading
Please see Luther King Capital Management Statement of Policy of Code
of Ethics under rule 17 j-l concerning personal transactions.
3. Restricting Access to Material Nonpublic Information
Information in your possession that you identify as material and
nonpublic may not be communicated to anyone, including persons within Luther
King Capital
<PAGE>
Management, except as provided in paragraph 1 .a. above. In addition, care
should be taken so that such information is secure. For example, files
containing material nonpublic information should be sealed; access to computer
files containing material nonpublic information should be restricted.
4. Resolving Issues Concerning Insider Trading
If, after consideration of the items set forth in paragraph I, doubt
remains as to whether information is material or nonpublic, or if there is any
unresolved question as to the applicability or interpretation of the foregoing
procedures, or as to the propriety of any action, it must be discussed with Scot
Hollmann or Jacqui Brownfield before trading or communicating the information to
anyone.
SECTION IV. SUPERVISORY PROCEDURES
----------------------
The role of Scot Hollmann or Jacqui Brownfield is critical to the implementation
and maintenance of Luther King Capital Management's policy and procedures
against insider trading. Supervisory Procedures can be divided into two
classifications: prevention of insider trading and detection of insider trading.
1. Prevention of' Insider Trading
To prevent insider trading, Scot Hollmann or Jacqui Brownfield should:
a. provide an educational program to familiarize officers,
directors and employees with Luther King Capital
Management's policy and procedures,
b. answer questions regarding Luther King Capital Management's
policy and procedures,
c. resolve issues of whether information received by an
officer, director or employee of Luther King Capital
Management is material and nonpublic,
d. review and update, as necessary, Luther King Capital
Management's policy and procedures,
e. when it has been determined that an officer, director, or
employee of Luther King Capital Management has material
nonpublic information,
1. implement measures to prevent dissemination of such
information, and
2. if necessary, restrict officers, directors and
employees from trading the securities.
2. Detection of Insider Trading
<PAGE>
To detect insider trading, Scot Hollmann or Jacqui Brownfield
should:
a. review the trading activity reports filed by each
officer, director and employee,
b. review the trading activity of private accounts managed
by Luther King Capital Management,
c. review trading activity of Luther King Capital
Management's own account, and
d. coordinate the review of such reports with other
appropriate officers, directors or employees or Luther
King Capital Management.
3. Special Reports to Management
Promptly, upon learning of a potential violation or a
question concerning LKCM's Policy and Procedures to Detect
and Prevent Insider Trading, Scot Hollmann or Jacqui
Brownfield should consult Luther King and prepare a
written report providing full details and recommendations
for further action.
4. Annual Reports to Management
On an annual basis, Scot Hollmann or Jacqui Brownfield
should prepare a written report to Luther King setting forth the
following:
a. full details of any investigation, either internal or
by a regulatory agency, of any suspected insider
trading and the results of such investigation,
b. an evaluation of the current procedures and any
recommendations for improvement, and
c. a description of Luther King Capital Management's
continuing educational program regarding insider
trading, including the dates of such Programs since the
last report to Luther King.
<PAGE>
<TABLE>
<CAPTION>
REPORT OF SECURITY TRANSACTIONS
FOR QUARTER ENDED ________________
Name/ Description Number Shares Date of Price at Which Bought or Sold Name of Broker
of Security Transaction Effected
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
The above is a record of every transaction in a security which I had, or in
which I acquired any direct or indirect beneficial ownership during the period
indicated above. I have not opened any other brokerage accounts that I have not
informed LKCM of. I continue to abide by the LKCM Code of Ethics.
Date:__________ Signature:_________________________________
<PAGE>
<TABLE>
<CAPTION>
DISCLOSURE OF PERSONAL HOLDINGS
This form is to be submitted by all "access persons" upon commencement of their
employment with Luther King Capital Management.
I hereby certify that the following is a complete list of the securities and
private placements in which I have a direct or indirect beneficial ownership.
Name/ Description of Number Shares Date Acquired Price at Which Name of Broker
Security Effected
- ------------------------- -------------------- ------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
</TABLE>
Date:_____________ Signature:___________________________
TT INTERNATIONAL INVESTMENT MANAGEMENT
COMPLIANCE MANUAL
Version 99.01
August, 1999
<PAGE>
TABLE OF CONTENTS
[0] INTRODUCTION TO THIS MANUAL 4
------------------------------
[1] GENERAL COMPLIANCE ARRANGEMENTS 5
- - ---------------------------------
[2] THE COMPLIANCE FUNCTION 6
-------------------------
[3] TRAINING AND COMPETENCE 7
-------------------------
[4] INDIVIDUAL REGISTRATION 8
------------------------
[5] PERMITTED BUSINESS 9
-------------------
[6] ADVERTISING, COMMUNICATIONS AND MARKETING 10
--------------------------------------------
[7] CUSTOMER STATUS AND SUITABILITY OF INVESTMENTS 16
---------------------------------------------------
[8] CUSTOMER AGREEMENTS 18
--------------------
[9] MATERIAL INTERESTS 19
-------------------
[10] INSIDER DEALING 20
----------------
[11] EMPLOYEE DEALING 21
-----------------
[12] REMUNERATION - VALUATION OF ILLIQUID SECURITIES 23
--------------------------------------------------
[13] BEST EXECUTION 24
---------------
[14] SOFT COMMISSION 25
----------------
[15] GIFTS, BENEFITS IN KIND AND PROHIBITION
OF INDUCEMENTS 26
------------------------------------------
[16] EXERCISE OF DISCRETION - RECORDKEEPING 27
------------------------------------------
[17] EXECUTION - TIMELINESS & RECORDKEEPING 28
--------------------------------------
[18] ALLOCATION OF TRANSACTIONS 29
----------------------------
[19] CHURNING AND SWITCHING 32
------------------------
[20] CONTRACT NOTES 33
---------------
2
<PAGE>
[21] PERIODIC STATEMENTS 34
--------------------
[22] SAFEKEEPING AND CONTROL OVER CUSTOMER ASSSETS 35
--------------------------------------------------
[23] CLIENT MONEY 36
-------------
[24] CUSTOMER ACCOUNTING RECORDS 37
-----------------------------
[25] RECORDS AND REPORTING 38
-----------------------
[26] CONTROLS AND SYSTEMS 39
----------------------
[27] FINANCIAL NOTIFICATION 40
-----------------------
[28] CLEARANCE BY, AND NOTIFICATION TO IMRO 41
------------------------------------------
[29] COMPLAINTS 42
----------
[30] MONEY LAUNDERING 43
-----------------
[31] NON-OBSERVANCE OF COMPLIANCE 47
------------------------------
[32] RESPONSIBILITY FOR COMPLIANCE 48
-------------------------------
[33] AUTHORITY AND DUTIES OF THE HEAD OF COMPLIANCE 49
-----------------------------------------------------
[34] ADMINISTRATIVE PROCEDURES 50
--------------------------
[35] IMRO RETURNS 51
-------------
[36] DERIVATIVES AND QUASI-DERIVATIVES 52
-----------------------------------
[37] APPENDICES 53
----------
1. STAFF UNDERTAKING AND PERSONAL ACCOUNT DEALING NOTICE
2. AUTHORISATION TO DEAL FORM
3. CROSS REFERENCE TO THE IMRO RULE BOOK
4 STATEMENT OF PERMITTED BUSINESS
5. ADVERTISING INCLUDING AUTHORISATION TO ISSUE FORM
6. CONTROLS AND SYSTEMS (AN OUTLINE)
7. DERIVATIVES
3
<PAGE>
[0] INTRODUCTION TO THIS MANUAL
0.1 This Compliance Manual (the `Manual') sets out the compliance
policies, procedural rules and restrictions, which TT International
Investment Management (`TTI') has adopted in order to comply with the
Rules of the Investment Management Regulatory Organisation Limited
(`IMRO'), and the Investment Advisers Act (1940) (US), the rules and
regulations of the US SEC and the US CFTC, the US NFA, and all
Canadian Regulators, and in order to ensure that TTI acts within the
provisions of all relevant regulatory authorities.
0.2 IMRO is the self regulating organisation (SRO) in the UK responsible
for the regulation and supervision of investment management
activities. To carry on investment business in the UK, TTI is
required under the Financial Services Act (1986) (FSA) to obtain
authorisation from IMRO. TTI's authorisation became effective on 30th
June, 1994, under Membership Registration Number (MRN) 4096. At the
time of writing the Financial Services and Markets Bill has not
received the Royal Assent but its requirements will be incorporated
into TTI's rules when this occurs.
0.3 The Rules of IMRO regulate the manner in which TTI is allowed to
carry on its permitted business of discretionary investment
management. Furthermore, these Rules require TTI to institute and
maintain `effective procedures' for ensuring compliance with IMRO
Rules. These procedures are set out in this Manual and are
supplemented by memoranda and updates issued from time to time to
partners and staff by the Head of Compliance.
0.4 This Manual will, as required by the IMRO Rules, be updated
periodically by the officer of TTI designated for the purpose of
ensuring that TTI complies with IMRO Rules (the `Head of
Compliance').
0.5 IMRO Rules, contained in the IMRO Rulebook, are available for review
by anyone at any time from the Head of Compliance. Appendix 3
contains a cross-reference of IMRO Rules to the Manual headings to
assist in any research that anyone may wish to conduct. For more
detailed research the Head of Compliance should be consulted.
0.6 THE REQUIREMENTS SET OUT IN THIS MANUAL ARE MANDATORY UNLESS
OTHERWISE STATED AND MUST BE FOLLOWED BY ALL PARTNERS AND STAFF OF
TTI AND ALL OTHER PERSONS FROM TIME TO TIME ASKED BY THE HEAD OF
COMPLIANCE TO FOLLOW THEM. (FOR EXAMPLE CONSULTANTS AND ADVISERS) IT
IS THE RESPONSIBILITY OF ALL SUCH PERSONS TO ACQUAINT THEMSELVES WITH
THE REQUIREMENTS OF THIS MANUAL. FAILURE TO COMPLY WITH THIS MANUAL
AND/OR THE IMRO RULES, OR ANY OTHER REGULATORY AUTHORITY MAY
CONSTITUTE A SERIOUS DISCIPLINARY OFFENCE AND COULD RESULT IN
DISMISSAL.
0.7 A copy of this Manual is supplied to each partner and employee of TTI
and to others as required. Unless the context demands otherwise, a
reference in this Manual to `employee' shall refer to any partner or
employee of TTI, as well as any other person designated by the Head
of Compliance as subject to the requirements of the Manual.
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[1] GENERAL COMPLIANCE ARRANGEMENTS
1.1 A suitable Compliance Officer must be appointed. Note: In August,
1996 Charles Mcauley was appointed Head of Compliance/Legal Adviser
and in July 1999 Robin Cotterill was appointed Deputy Compliance
Officer.
1.2 IMRO Rules require that employees of TTI are contractually bound to
obey the IMRO Rules. TTI insists that all employees abide by its own
Compliance procedures which are IMRO compliant.
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[2] THE COMPLIANCE FUNCTION
2.1 It is the responsibility of the Head of Compliance to monitor the
application and effectiveness of the procedural rules and
restrictions set out in this Manual in such manner as he sees fit. To
this end the Head of Compliance has the powers set out in Chapter
[33] below.
2.2 The Head of Compliance shall in addition be responsible for
monitoring and ensuring compliance with the requirements of the FSA
(1986), other applicable UK law and regulations, as well as any
overseas legal or regulatory requirements that apply to TTI's
activities.
2.3 The Head of Compliance shall report directly to the Partners in
respect of all matters which are his responsibility.
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[3] TRAINING AND COMPETENCE
3.1 The Head of Compliance will ensure that all Investment Managers
and those who otherwise fall within the Training & Competence rules
are:
(a) adequately trained and properly supervised, having regard to
the nature of that employee's responsibilities and
(b) competent to discharge those responsibilities.
3.2 TTI's policy is to hire for its discretionary investment management
activity only individuals who have exceeded Threshold Competence.
3.3 No new employee may be hired, nor may an existing employee be newly
assigned, to engage in discretionary investment management as an
Investment Manager without the approval of the Head of Compliance,
who shall be responsible together with the Partners to ensure that
the individual has attained Threshold Competence and to assess that
the individual possesses the knowledge and practical experience
required to perform the duties contemplated.
3.4 The Head of Compliance, together with the Partners and line managers,
will from time to time (and in any event at least once yearly) assess
the continuing competence of employees carrying out activities which
fall within the Training & Competence Rules.
3.5 The training of employees in the compliance aspects of their duties
is the responsibility of the Head of Compliance who will ensure their
continuing awareness of compliance issues, including material changes
to the IMRO Rules and other relevant regulations, and to give day to
day advice as needed.
3.6 In all cases suitable interviews will be conducted with prospective
members of staff, references will be taken up with at least one
reference being from the prospective employee's most recent employer
and evidence of relevant academic and education qualifications will
be verified (normally one agree level and above as well as relevant
industry qualifications such as the IMC.). Where appropriate suitable
enquiries will be made to IMRO or/and other regulators and all
contracts of employment will be subject to all these items being
satisfactory.
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[4] INDIVIDUAL REGISTRATION
4.1 IMRO has rules governing the registration of individuals within
Investment Management. All such individuals who are deemed to be
engaged in registerable activity will be bound PERSONALLY by the IMRO
rules. The following officers of TTI must be registered;
a) Partners
b) the chief executive - in the case of TTI this is the
managing partner, David Burnett.
c) investment managers
d) any individual employed by TTI who:
i. procures, or endeavours to procure other persons to
enter into investment agreements, or
ii. gives investment advice to the person whom he deals, by
entering into investment agreements or exercising
rights conferred by investments in the course of the
permitted business of the member.
e) Managers of TTI.
f) Those with a supervisory role in Administration (in the case
of TTI this the Operations Department)
In section (e) above "manager" does not necessarily mean an employee with the
job title of "manager". It has to be someone who is in a senior capacity with
responsibility either alone or jointly with one or more individuals for the
management, supervision and control of part of TTI's permitted business. This is
a fairly onerous level of control and everyone in TTI will be advised by The
Head of Compliance if they fall under this definition.
INDIVIDUALS WHO FALL INTO THE ABOVE CATEGORIES MUST BE INDIVIDUALLY REGISTERED.
IF ANYONE IS IN DOUBT HAVING READ THIS PARAGRAPH THEY SHOULD DISCUSS THE MATTER
WITH THE HEAD OF COMPLIANCE.
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[5] PERMITTED BUSINESS
5.1 IMRO's Statement of Permitted Business dated 8th October, 1997, TTI
is permitted to "manage investments for investors other than private
investors", with a "high " scale of activity. TTI is not permitted to
"hold or control Customer money or assets". When revised in October,
1997 the extension permits TTI to engage in stocklending for our
leveraged accounts.
5.2 TTI may only conduct business that falls within the scope of the
Statement referred to above. (See Statement of Permitted Business
attached as APPENDIX 4.)
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6. MARKETING
6.1 INVESTMENT ADVERTISING
DEFINITION
"IMRO's Definition "Investment Advertisement"
An "Investment Advertisement" is defined very widely in both the
Financial Services Act (1986)and the IMRO rules. It includes any
document likely to result, directly or indirectly, in any dealing in
any investment or in any exercise of rights conferred by an
investment: for example, the TT Review will count as an Investment
Advertisement. However, given the nature of i.e. generic the
statement "Regulated by IMRO" should suffice. The definition may also
include material such as letters, research material, telexes and
faxes, which may not commonly be thought of as advertisements. As a
general rule, a letter in standard form to two or more persons will
come within the definition, but a "tailor made" reply to an enquiry
will not. If in doubt you should consult the Head of Compliance.
Any Investment Advertisement published and circulated in the UK, even
if circulation is limited, is likely to come within the scope of the
FSA. However, advertisements inserted in publications published and
circulating PRINCIPALLY outside the UK will be outside the scope of
the FSA; overseas editions of journals are an example but you must
check with the publishers concerned.
The fact that an advertisement falls outside the jurisdiction of the
F.S.A. does not mean that rules do not apply; the SEC's rules in this
area are to some extent more onerous and therefore both IMRO's and
the SEC's rules have been incorporated into this document. The main
thrust of the SEC's rules are as follows:
There is a prohibition on the following types of advertisements:
1. which relate to testimonials
2. which refer to past specific recommendations by the adviser.
3. which represent the charts or graphs offered are alone
sufficient to determine which securities or other investment
instruments to purchase
4. which mislead as to fees to be charged for services or
5. which are otherwise misleading
Past specific recommendations may be stated, however, a complete list
of all recommendations over the preceding year together with
information necessary to evaluate such recommendations must be
provided if requested. Further, Customers must also be warned that
past performance is not indicative of future success (see Rule 206
(4) -1)
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6.2 IMRO RULE 1.1 (1) OF CHAPTER II
All TT International Investment Management (TTI) advertisements/
literature must state that:-
(a) TTI is regulated by IMRO and that it is the issuer of the
advertisement
It is a fundamental principle of the IMRO rules that all
advertisements are fair, clear and not misleading. In particular,
staff should bear in mind that:-
(a) any statements of fact must be true as at the date on which they
are reviewed for publication; moreover you must reasonably believe
that they will remain true throughout the currency of the
advertisement
(b) significant omissions from the information provided are just as
serious as negligent or untrue statements.
(c) advertisements must be fair and clear both in content and in
presentation. It is not fair to make all positive, up-beat statements
in bold type and large letters and negative statements in smaller,
less prominent type
FAILURE TO OBSERVE ANY OF THE APPLICABLE REQUIREMENTS RELATING TO
MARKETING AND ADVERTISING MAY INVOLVE CRIMINAL LIABILITY UNDER
SECTION 47 OF THE FSA.
6.3 APPROVAL OF ADVERTISEMENTS
IMRO RULE 1.1 (4) OF CHAPTER II
ALL ADVERTISING AND MARKETING LITERATURE MUST BE APPROVED BY THE HEAD
OF COMPLIANCE BEFORE ISSUE AND IT IS THE RESPONSIBILITY OF THE
ORIGINATOR OF THE ADVERTISEMENT TO ENSURE THAT THIS IS DONE. NO
INVESTMENT ADVERTISEMENT CAN BE PUBLISHED OR SENT OUT BEFORE THE HEAD
OF COMPLIANCE HAS SIGNED AND DATED A COPY TO INDICATE APPROVAL. It is
important that a draft of such literature is sent to him to review
well in advance of the publication date together with a note
specifying the source of written evidence for each statement of fact
in the advertisement. Any statement of fact made in an Investment
Advertisement must be supported by written evidence in TTI's
possession (including any calculations or statistics). The
requirements for Investment Advertisements on specific product or
"off the page" Investment Advertisements are especially onerous. It
has been agreed with the Partner with responsibility for Marketing
that where template presentations have been approved, they do not
require specific further approval if only factual information is
being updated. This is especially the case with TTI's "standard
presentation"
Publishers may ask for evidence of our approval, and of our
authorisation under the FSA. If you receive such a query, you should
refer it to the Head of Compliance.
6.4 REGISTER OF INVESTMENT ADVERTISEMENTS
A register of Investment Advertisements is maintained by the Head of
Compliance and a copy of each Investment Advertisement subject to 6.3
(supra) is SIGNED AND DATED BY HIM TO INDICATE APPROVAL. These must
be maintained on file together with the note specifying
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the source of written evidence for statements of fact. These must be
retained for three years after the latest publication date of the
advertisement.
6.5 PUBLISHED RECOMMENDATIONS
DEFINITION
IMRO DEFINITION "PUBLISHED RECOMMENDATIONS"
The IMRO Rules on advertising apply equally to Published
Recommendations and therefore all research notes (or any other notes
which come within the definition in 6.1 (supra) must comply with the
requirements above and should contain the following wording:-
"THIS RESEARCH HAS BEEN UNDERTAKEN AND MAY HAVE BEEN ACTED ON BY TTI
FOR ITS OWN PURPOSES. THE RESULTS ARE BEING MADE AVAILABLE TO YOU
ONLY INCIDENTALLY."
If for any reason advice or recommendations are to be issued without
this wording, you must inform the Head of Compliance immediately.
6.6 INTRODUCTION
IMRO DEFINITION "COLD CALL"
Cold Calls are PERSONAL VISITS OR ORAL COMMUNICATIONS made to a
potential Customer without express invitation.
There are, however, certain exceptions under the Common Unsolicited
Calls Regulations and, in particular, Investment Agreements may be
entered into following an Unsolicited call if:-
a) the person called upon is an existing Customer of TTI
even if the call is in respect of a product or service
which is new to them;
b) the person called upon is a Non-private Customer
However, it is not TTI's policy to make Unsolicited
calls.
YOU SHOULD ALSO NOTE THAT UNDER THE IMRO RULES A PERSONAL VISIT MADE
ON A POTENTIAL CUSTOMER OUTSIDE THE UK IS NOT, UNDER THE IMRO RULES,
AN UNSOLICITED CALL NOR IS A TELEPHONE CALL MADE FROM OUTSIDE THE UK.
6.7 MARKETING - OTHER REQUIREMENTS
Presentations and Initial Meetings
There are no specific rules about presentations or meetings with
potential Customers. However:-
a) any printed matter, audio or visual material may fall
within the definition of an Investment Advertisement
and would accordingly be subject to the advertising
rules;
b) staff should always keep in mind the sections of the
manual on MISLEADING and FRAUDULENT statements and
practices;
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c) as a general rule no investment advice should be given
to a potential Customer.
6.8 MARKETING COLLECTIVE INVESTMENT SCHEMES
THERE ARE SEVERAL RESTRICTIONS ON THE MARKETING OF THE UNREGULATED
COLLECTIVE INVESTMENT SCHEMES TO WHICH TTI IS INVESTMENT
MANAGER/ADVISER (PERMAL EUROPE AND TT EUROPEAN FUND) THESE WILL APPLY
UNLESS AND UNTIL SUCH TIME AS THEY BECOME REGULATED OR RECOGNISED
UNDER THE FSA.
Broadly, unregulated collective investment schemes can only be
marketed in the UK to existing participants, existing Customers or
other restricted categories referred to in the Financial Services
(Promotion of Unregulated Schemes Regulations). Specifically, they
generally cannot be marketed or promoted to Private Customers or to
Small Business Investors. Particular care is necessary in the
marketing of TTI (as opposed to an individual fund) to ensure (i)
that it is the service which is marketed and not any individual
scheme within it and (ii) that the marketing material is sent to the
potential Customer direct or via or at the request of that Customer's
financial consultant or other adviser.
6.9 NEW CUSTOMERS
CLEARANCE PROCEDURE FOR NEW CUSTOMERS
In the interests of TTI generally, if anyone is approached by or
becomes aware of the possibility of taking on a new Customer he
should consult Mark Williams immediately.
It is TTI's policy that before you perform any service for a new
Customer you must:-
Ensure that the Customer has a reasonable understanding of the nature
of the risks and of any further liability in relation to anything
which TTI will be authorised to perform. Further, TTI must ensure
that where a Customer Agreement does not meet all of the IMRO Rules
then a Statement of Protection is issued before the Agreement comes
into effect.
AS A GENERAL RULE, NO ACCOUNT CAN BE OPENED FOR A CUSTOMER UNTIL
THESE CONDITIONS HAVE BEEN FULFILLED AND THE PROCEDURES OUTLINED IN
6.10 AND 6.11 BELOW SHOULD ALWAYS BE FOLLOWED.
YOU SHOULD ALSO NOTE THAT AMENDMENTS TO CUSTOMER AGREEMENTS MUST BE
CONFIRMED IN WRITING BY THE CLIENT.
6.10 ACCOUNT OPENING PROCEDURE
The account opening procedure is set out below:-
a) two original Customer Agreements (both signed by a
Partner or Head of compliance) should be sent to the
Customer. The following attachments should be sent with
the letter of appointment:-
(i) A FULL Statement of Protection including the following
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a) A Soft Commission Statement
b) A Risk Warning Statement if
appropriate
c) Any other activity mentioned in
IMRO's template Statement of
Protection, if relevant.
(ii) A copy of our ADV part II (with all amendments) which
will satisfy the requirements of "The Brochure Rule"
(SEC requirement).
b) when the Customer returns one of the original Customer
Agreements it is filed with Head of Compliance.
Subsequently, the Head of Compliance together with the
Partner, Administration will also be responsible for
setting up the Customer's investment restrictions on the
TTI database.
c) IMRO RULE 2.4(7) OF CHAPTER II
the signed Customer Agreement will be retained by the Head
of Compliance. The IMRO rules require records of the terms
of our Customer's Agreements and all amendments to be kept
for at least 3 years after the termination of the
Agreement. It is therefore essential that all amendments to
the Customer Agreements are confirmed in writing, normally
by the Customer, and originals filed by the Head of
Compliance.
6.11 EXCEPTIONS
IMRO RULE 2.3(3)OF CHAPTER II
It is obviously not in TTI's interest to be running an account for a
Customer before the Customer has formally consented to the terms of
agreement. For this reason exemptions to the procedures above will
only be permitted with the prior approval of the Head of Compliance
or Administration Partner. Approval will only be possible under the
following circumstances:-
a) where the Customer is a Non-private Customer and has
confirmed acceptance orally or by fax or telex of draft
documentation, which can then be classified as a Terms of
Business Letter. If the Customer wishes to amend the
standard letter of appointment, no account can be opened
unless he has confirmed that he accepts our standard
documentation as an interim measure. In this case the
confirmation must be by fax or in writing; or
b) where the Customer is resident outside the UK and has
received but declined to sign the Standard Agreement and
you reasonably believe that the Customer does not object to
its terms.
In these cases you should ask Head of Compliance or Administration
Partner to authorise the opening of the account.
6.12 INITIAL VALUATIONS
IMRO RULE 2.4(3) OF CHAPTER II
The IMRO rules (RULE 2.4(3) of Chapter II) require that each new
discretionary Customer is sent an Initial Valuation of the first
asset(s) received (whether in the form of cash and/or
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securities). This should be prepared either as at the first day on
which any assets are received (in the case of a delivered out
Customer, being the date we receive details of the assets) or the
date on which the signed letter of appointment is received, if later.
The Initial Valuation should be despatched within 25 business days of
the valuation date and should include the following paragraph:
"We suggest you should satisfy yourself as to the accuracy of this
Initial Valuation and advise us if you consider there are any
inaccuracies. Subject thereto, this document shall be deemed to form
part of your Customer Agreement and we advise you to keep it with
your Customer Agreement".
It is the responsibility of the fund manager to ensure that
Operations Department are instructed to prepare the Initial Valuation
in good time. Operations Department will send a copy of the Initial
Valuation to Head of Compliance where it will be retained with the
Customer Agreement.
Where the assets consist solely of cash then the Initial Valuation
may take the form of a statement of amount in a letter to the
Customer along with the following:
This letter shall be deemed to form part of your Customer Agreement
and we advise you to keep it with your Customer Agreement".
The Initial Valuation forms part of the Customer Agreement and
failure to produce one promptly is a breach of the IMRO Rules.
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[7] CUSTOMER STATUS AND SUITABILITY OF INVESTMENTS
7.1 IMRO Rule 2.1 requires a Customer's status (Private versus
Non-Private) to be determined prior to dealing. A Private Customer is
defined as:
(a) a Customer who is an individual and who is not carrying on
Investment Business; or
(b) unless he is reasonably believed to be an Ordinary Business
Investor, a Customer who is a Small Business Investor; or
(c) anyone who is treated as a Private Customer pursuant to an
agreement in writing to that effect.
TTI IS NOT PERMITTED TO ENTER INTO AGREEMENTS TO PROVIDE INVESTMENT
SERVICES TO PRIVATE CUSTOMERS. NO SERVICES MAY BE PROVIDED TO A
PERSON WHO, IF A CUSTOMER, WOULD BE A PRIVATE CUSTOMER; THIS INCLUDES
THE PROVISION OF ADVICE TO PERSONS WHO ARE, OR MIGHT BE, INVESTORS IN
A COLLECTIVE INVESTMENT SCHEME WHICH HAS RETAINED TTI AS ITS
INVESTMENT MANAGER/ADVISER.
7.2 Annually the Head of Compliance will review the status of all its
Customers to ensure that their categorisation as Non-Private
continues to be appropriate. (See remedial action /Review conducted
following IMRO monitoring visit in January, 1997).
7.3 The investments of each Customer will be managed on a day to day
basis by one or more individuals at TTI authorised jointly by the
Head of Compliance and a Partner to do so ('AUTHORISED INVESTMENT
MANAGERS'). ONLY AN AUTHORISED INVESTMENT MANAGER IS PERMITTED TO
INITIATE INVESTMENT TRANSACTIONS FOR A CUSTOMER ACCOUNT. An
Authorised Investment Manager may delegate this authority to another
TTI employee subject to the joint approval of the Head of Compliance
and a partner. Any such delegation will be subject to pre-established
limits determined by the Head of Compliance and the approving partner
so that no discretion can be exercised. Note: As at August, 1999,
Messrs Tacchi, Tonner, Shenfield, and Pauline Pong are the Authorised
Investment Managers.
7.4 THE AUTHORISED INVESTMENT MANAGER IS RESPONSIBLE FOR ENSURING THAT
THE INVESTMENT DECISIONS ACCORD WITH THE INVESTMENT OBJECTIVES OF THE
CUSTOMER AS SET OUT IN THE RELEVANT DOCUMENTATION OR CORRESPONDENCE.
THE AUTHORISED INVESTMENT MANAGER IS REQUIRED TO BE FAMILIAR WITH ANY
RESTRICTIONS THAT MAY APPLY, WHETHER IMPOSED BY THE CUSTOMER ITSELF,
OR BY REGULATIONS PERTAINING TO THE NATURE OF THE ACCOUNT. IF THE
AUTHORISED INVESTMENT MANAGER IS UNSURE OF THE APPLICATION OF THESE
REQUIREMENTS IN A PARTICULAR SET OF CIRCUMSTANCES, HE SHOULD REFER
THE MATTER TO THE HEAD OF COMPLIANCE IN ADVANCE OF MAKING AN
INVESTMENT DECISION.
7.5 In effecting any transaction, the Authorised Investment Manager must
have reasonable grounds for believing that such transaction, even if
it satisfies the requirements of 7.4, is SUITABLE for the Customer.
When there is doubt as to the suitability of a particular investment,
the Head of Compliance must be consulted IN ADVANCE OF DEALING.
7.6 THE PLACING OF TRADES WILL BE EFFECTED BY INDIVIDUALS AUTHORISED BY
THE HEAD OF COMPLIANCE AND/OR A PARTNER SO TO DO ('AUTHORISED
TRADERS'). Note: As at August, 1999 .
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Messrs. Bluffield, Pattle, Campbell (FX and Derivatives) and Miss
Beecher, and the Authorised Investment Managers are Authorised
Traders.
7.7 AUTHORISED TRADERS ARE REQUIRED TO BE AWARE OF THE RESTRICTIONS THAT
APPLY TO EACH ACCOUNT FOR WHICH THEY EXECUTE A TRANSACTION. If a
transaction contravenes, or appears to contravene such a restriction,
the Authorised Trader is required to bring the matter to the
attention of the Head of Compliance PRIOR TO PLACING THE TRADE.
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[8] CUSTOMER AGREEMENTS
8.1 THE POLICY OF TTI IS TO PROVIDE SERVICES TO A CUSTOMER ONLY AFTER A
WRITTEN AGREEMENT BETWEEN TTI AND THE CUSTOMER HAS BEEN EXECUTED. THE
FORM OF SUCH AGREEMENT WILL BE APPROVED FOR UK REGULATORY PURPOSES BY
TTI'S HEAD OF COMPLIANCE AND, WHERE APPROPRIATE, EXTERNAL LAWYERS. AT
THE DISCRETION OF THE HEAD OF COMPLIANCE, A DRAFT OR "PRO TEM"
AGREEMENT MAY BE ACCEPTED PROVIDING TTI RECEIVES A DULY SIGNED
SIGNATURE PAGE PENDING EXECUTION OF THE FORMAL AGREEMENT. No
agreement may be entered into without the prior approval of the Head
of Compliance who is responsible for ensuring services are provided
only on the basis agreed with the Customer.
8.2 Only the Head of Compliance or a Partner of TTI is permitted to
execute a Customer agreement on behalf of TTI.
[For exceptions see Para 6.11 of Chapter 6 on page 14)
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[9] MATERIAL INTERESTS
9.1 Where TTI, or an employee of TTI, has a Material Interest in a
Customer transaction, or a conflict of interest in relation to such a
transaction, the existence of such an interest or conflict must be
disclosed to the Customer prior to entering into the transaction. In
any event, steps should be taken to ensure fair treatment for the
Customer. Note: a Material Interest in a transaction is defined by
IMRO to exclude services provided under IMRO compliant Soft
Commission arrangements. The following are deemed to be Material
Interests in a transaction and thus require disclosure:
(a) where a significant financial interest in the investment is held
by TTI or the person initiating the transaction (i.e. any Partner
or employee including "connected persons")
(b) where the person initiating the transaction holds a directorship
or is a partner in the company concerned
(c) where there exists any other material interest of TTI or its
employees which creates a conflict of duty in relation to the
transaction.
9.2 A list of situations, if any, in which TTI, or an employee of TTI,
may have a Material Interest, or possible conflict may be circulated
by the Head of Compliance from time to time. Note: TTI does not deal
for its own account,(with the exception of a holding in Permal Europe
Limited) and employees are discouraged from dealing in relevant
investments for their own account, so that the typical conflict
envisioned would be very unusual.
9.3 Before effecting any transaction where there exists a Material
Interest the relevant Authorised Investment Manager must check to
ensure that the necessary disclosure has been made to the Customer.
9.4 In effecting any transaction where there exists a Material Interest
extra care and diligence must be exercised to ensure fair treatment
for the Customer.
9.5 Where the standard disclosures and authorisations are not made in the
agreement, or where there may be a Material Interest not included in
the list, the Authorised Investment Manager must notify the Head of
Compliance who will then attempt to seek the Customer's express
consent to the transaction.
9.6 Employees of TTI are obliged to disclose to the Head of Compliance
any Material Interests, or other conflicts, in relation to any
Customer transaction of which they are aware.
9.7 In cases of Personal Account dealing the authorisation form must be
countersigned by the Head of Compliance and he/she must ensure that
there is no conflict of interest between the employee and TTI's
Customers. (See Section 11 for further details).
9.8 TTI's policy is not to undertake any trading activity in the name of
the firm itself except as outlined in 9.2. An exception to this
policy requires specific approval of the Head of Compliance.
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[10] INSIDER DEALING
10.1 DEALING WHEN IN RECEIPT OF PRICE SENSITIVE INFORMATION IS A CRIMINAL
OFFENCE. NO TRANSACTION SHALL BE EFFECTED ON BEHALF OF CUSTOMERS OR
OTHERWISE IN CIRCUMSTANCES WHERE ITS EXECUTION IS PROHIBITED BY THE
UK INSIDER TRADING LEGISLATION: SEE The Criminal Justice Act 1993
(Part V) a copy of which is available from the Head of Compliance on
request.
10.2 It is also an offence under the law to pass price sensitive
information on to anyone else. An employee shall take all reasonable
steps within his power to ensure that any person connected with him
by reason of a domestic or business relationship does not contravene
these rules.
10.3 At all times when dealing, employees must abide by the rules of the
appropriate exchange, and any other rules pertaining to the
transaction. If an employee is unsure of whether he is allowed to
deal in a particular investment, he must consult the Head of
Compliance.
10.4 As part of TTI's standard Employment Contract all staff are required
to sign a declaration entitled "Staff Undertaking & Personal Account
Dealing Notice (APPENDIX 1)
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[11] EMPLOYEE DEALING
11.1 NO PERSONAL DEALING WILL BE TOLERATED WHICH MAY IN ANY WAY ENDANGER
THE BUSINESS REPUTATION OF TTI. FURTHERMORE, SUCH DEALING MUST NOT
INTERFERE WITH THE PERFORMANCE OF AN EMPLOYEE'S DUTIES. ANY EMPLOYEE
WHOSE PERSONAL DEALINGS BREACH THESE RULES MAY BE PROHIBITED FROM
DEALING ON THEIR OWN ACCOUNT. COMPLIANCE WITH THESE RULES FORMS PART
OF AN EMPLOYEE'S CONTRACT OF EMPLOYMENT. FAILURE TO COMPLY WITH,
ABUSE OF, OR ATTEMPT TO CIRCUMVENT THESE RULES WILL BE CONSIDERED
GROUNDS FOR DISCIPLINARY ACTION WHICH MAY INCLUDE DISMISSAL.
COMPLIANCE WITH THESE RULES WILL BE MONITORED BY THE HEAD OF
COMPLIANCE.
11.2 EMPLOYEES ARE PROHIBITED FROM DEALING FOR THEIR OWN ACCOUNT IN
SECURITIES OF A COMPANY AT THE SAME TIME AS TTI IS ENGAGED IN DEALING
IN THE SECURITIES OF THAT COMPANY FOR ITS CUSTOMERS. Furthermore,
employees cannot deal in the securities in the "Stop Lists". The Head
of Compliance will inform you at the time you seek authorisation
whether a stock is on this list. ALL EMPLOYEES MUST INFORM THE HEAD
OF COMPLIANCE IMMEDIATELY IF THEY ARE MADE AN INSIDER. The prohibited
periods and securities shall be determined by the Head of Compliance
and shall be notified to all employees. Further, employees cannot
sell stock unless it has been held for A MINIMUM OF 30 DAYS.
The 30 day requirement is to discourage employees from "trading and
punting" stock. In the case of demutualisations of Building Societies
and Life Offices the minimum period of 30 days will not apply.
However, pre-clearance for selling is still essential - see paragraph
11.4 below.
11.3 Authority for employees to deal: this concerns all employees dealing
in securities for their own account or for the account of their
immediate families/friends. ALL SUCH PERSONAL DEALINGS REQUIRE THE
PRIOR APPROVAL OF THE HEAD OF COMPLIANCE AND APPROVAL MUST BE GIVEN
ON THE PRESCRIBED FORM. Employees must comply with the in-house rules
laid down from time to time and the clearance to deal procedures
below. It is the responsibility of the employee to ensure that the
Head of Compliance receives a Contract Note (or similar evidence of a
transaction). This should be logged with Head of compliance within 48
hours of the transaction. If the Head of compliance wishes to deal he
must follow the in house Rules and his authorisation form must be
signed by a Partner or the Deputy Compliance Officer. In cases where
the Head of Compliance is not available, authority to deal can be
given by the Deputy Compliance Officer and failing which any Partner,
and countersigned by the Head of Compliance on his return to the
office.
11.4 Clearance to deal: BEFORE DEALING, AN EMPLOYEE MUST FILL IN AN
AUTHORISATION TO DEAL FORM - PER APPENDIX 2. THIS MUST BE GIVEN TO
THE HEAD OF COMPLIANCE. If cleared by him, the Head of Compliance
will sign and date the form. It is the responsibility of the person
dealing to verify that no deal in the stock in question is being
transacted for TTI Customers. The Authorisation is valid for a
maximum of 24 hours unless otherwise stipulated by the Head of
Compliance.
11.5 The above procedures apply to the purchase or sale in securities or
derivatives, the purchase or sale in units or shares in an
Unregulated Collective Investment Scheme (which includes TT European
Fund and Permal Europe) and if at any time TTI has a relationship
with any third party (e.g. our relationship with the Singer &
Friedlander European Growth Fund) then deals in any such schemes
require authorisation and prior clearance. No authorisation/clearance
is required for trading in Regulated Collective Investment Schemes
such as Authorised Unit Trusts.
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11.6 In the case of Investment Trust Saving Schemes the employee need only
receive initial pre-clearance when the scheme is set up. No
pre-clearance is necessary on an ongoing basis providing the employee
does not decide on the time of execution. Any Amendment to the terms
of the saving scheme i.e. amount of investment, or the combination of
Trusts requires pre-clearance as do any ad hoc transactions.
11.7 As part of TTI's standard Employment Contract all staff are required
to sign a declaration entitled "Staff Undertaking & Personal Account
Dealing Notice (APPENDIX 1)
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[12] REMUNERATION, VALUATION OF ILLIQUID SECURITIES
12.1 The basis of TTI's remuneration must be fair, reasonable and in line
with TTI's policy or otherwise approved by the Head of Compliance.
TTI policy is to incorporate the agreed basis of remuneration by a
Customer in the agreement with him, such agreement to be executed
before any investment transaction for that Customer is effected.
12.2 Where a Customer pays fees based on the value of an illiquid
investment, the valuation must be at a price likely to be agreed
between third parties (e.g. a number of brokers). TTI policy is for
the amount of its remuneration (which may be based in part on the
value of illiquid investments) to be calculated by independent third
parties. Where such third parties seek guidance from TTI as to the
value of a particular investment, only the Head of Compliance may
provide such guidance; he will ascertain the arms length price, in
conjunction with investment professionals inside or outside TTI, as
he feels necessary.
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[13] BEST EXECUTION
13.1 Authorised Investment Managers and Traders, when placing orders
pursuant to an investment decision, are required to ensure that Best
Execution is achieved. Best Execution is deemed to be provided when:
(a) reasonable care is taken to ascertain the price which is the
best available for the Customer in the relevant market at the
time for a transaction of the kind and size concerned; and
(b) unless the circumstances require it to do otherwise in the
interest of the Customer, TTI deals at a price which is no
less advantageous to the Customer than the price in a) above.
13.2 TTI will ensure that Authorised Investment Managers and Traders have
available to them information sources of a quality and timeliness
sufficient to ensure they can take the reasonable care required.
13.3 TTI is not required to secure Best Execution for a Customer where the
agreement with him permits TTI to contract out of this duty or where
the Customer otherwise agrees to this in writing. However, in any
every case for present Customers TTI ensures Best Execution.
13.4 It is TTI's policy to give orders only to brokers and counterparties
who have agreed to provide Best Execution, and to place business only
with those who demonstrate this by their performance. Brokers and
counterparties executing a transaction are expected to secure for the
Customer the best terms available in the relevant market at the time
for transactions of the kind and size concerned, having regard to
price, charges and any other terms, and taking full account of any
specific requirements placed on the transaction. Under IMRO Rules
regard may be had to advantages likely to accrue to a Customer in
connection with future transactions. Such advantages may include, for
example, the quality, as perceived by TTI, of a particular broker's
research materials.
13.5 TTI's Head of Compliance monitors the provision of Best Execution. As
the majority of deals are non-UK, the Bloomberg system is used
whereby the price of deals are compared to the average and high and
low figures for that day as well as the Volume Weighted Average
(VWA). In cases where prices fall outside these ranges the matter is
investigated further.
13.6 AUTHORISED TRADERS MAY PLACE ORDERS ONLY WITH BROKERS AND
COUNTERPARTIES APPROVED BY THE HEAD OF COMPLIANCE OR THE
ADMINISTRATION PARTNER. The Head of Compliance will circulate
periodically a list, and amendments to it, of approved brokers and
counterparties.
13.7 Authorised Traders are required to alert the Head of Compliance to a
case where they believe a broker or counterparty has not fulfilled
his obligation to provide Best Execution. The Head of Compliance will
then consider what action if any should be taken including possible
deletion from the list of approved brokers and counterparties.
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[14] SOFT COMMISSION/SOFT DOLLARS
14.1 Arrangements whereby third parties provide a service or benefit to
TTI without charge, whether or not in return for an undertaking from
TTI to place business with them, are not permitted unless:-
(a) the services provided to TTI act to the benefit of its
Customers (the "permitted services" are
defined in the Definitions Schedule of the IMRO Rules)
(b) the broker involved has agreed to provide Best Execution
(c) there is no potential for comparative price disadvantage to
the Customer
(d) the existence of the arrangement, and TTI's policy in
respect of it, is disclosed in writing to the Customer before
entering into an agreement with him
(e) the value of the arrangement is disclosed at least annually
thereafter.
(f) Full disclosure is made of the SEC form ADV.
14.2 ALL NEW SOFT COMMISSION ARRANGEMENTS, AND ANY SUBSEQUENT AMENDMENTS,
MUST BE APPROVED BY THE HEAD OF COMPLIANCE PRIOR TO IMPLEMENTATION.
Any cessation of such an arrangement must be notified to the Head of
Compliance who will maintain records for three years after such
cessation.
14.3 The Head of Compliance shall keep a record of all Soft Commission
arrangements including the nature of the services provided and the
volume of business TTI places with the provider.
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[15] GIFTS, BENEFITS IN KIND AND PROHIBITION OF INDUCEMENTS
15.1 This covers gifts and benefits in kind offered to and received from
any investment business or other agent with or through which TTI does
business. These include, but are not limited to: substantial
hospitality, invitations to sporting/social events, holidays,
personal gifts such as cigars/alcohol, cars and benefits in kind such
as favourable dealing commissions for personal dealings.
15.2 The aim of the relevant IMRO Rule is to ban any inducements given
which may cause the recipient to go against his judgement of his
Customer's best interests.
15.3 The acceptance, or conferring, of gifts and benefits in kind by
employees of TTI is prohibited where they are of a value or frequency
which could influence the recipient to go against the best interest
of his Customer.
15.4 Where the receipt of a gift is in line with normal practice, and is
reasonably believed to be under (pound)10 in value, the employee may
retain it. Prior authorisation from the Head of Compliance is
necessary for the acceptance of a benefit, such as hospitality to a
sporting event believed to be worth over (pound)100. ALL GIFTS OVER
(POUND)10 IN VALUE MUST BE HANDED TO THE HEAD OF COMPLIANCE WHO WILL
EITHER AUCTION THE ITEM TO STAFF AT THE ANNUAL CHRISTMAS PARTY OR IN
THE CASE OF DRINK, RETAIN THEM FOR A SUITABLE OFFICE EVENT. THE
OFFEROR SHOULD BE INFORMED THAT THIS HAS HAPPENED.
15.5 A record of all benefits in kind accepted of a value over(pound)100
shall be maintained by the HeaD OF Compliance.
15.6 If a broker invites a TTI employee to a business presentation (of
whatever nature) TTI and not the broker must pay all expenses except
those which would normally be accepted in the course of business such
as drinks, lunch or dinner. The offeror must not pay for flights and
accommodation. If the offer of hospitality is a "package" including
flights and/or accommodation, the Head of Compliance must be
consulted.
15.7 The above does not affect the acceptance of "normal" hospitality in
the course of business.
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[16] EXERCISE OF DISCRETION - RECORDKEEPING
16.1 IMRO Rules require that a decision to deal for a discretionary
Customer must be documented. Details are to include date and time,
limit (if any). Where the investment decision and execution are
simultaneous, then one record suffices. IF THEY DIFFER THEN THEY MUST
BE RECORDED SEPARATELY.
16.2 The investment process at TTI is for a discretionary decision to be:
(a) immediately communicated to the Authorised Trader for
execution, as soon as practicable after which the details are
to be recorded and the decision executed or subject to an
order being placed in the market.
*(b) immediately executed by, or subject to an order placed by the
Authorised Investment Manager, acting as a Trader, at which
point the details are to be recorded.
* In the case of the Japanese and Far East Desks and occasionally
other Investment Managers.
OFTEN, THE DISCRETIONARY DECISION AND THE INSTRUCTION TO EXECUTE IT
(OR ACTUAL EXECUTION) ARE SIMULTANEOUS.
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[17] EXECUTION - TIMELINESS & RECORDKEEPING
17.1 Execution of an order must be timely; it must be executed as soon as
reasonably practicable in the circumstances, and a record in the
prescribed form must be maintained. In many cases a deal is executed
over days or even weeks as there is insufficient liquidity in the
market to meet the requirements of the order. TIMELINESS MUST BE SEEN
IN THIS PERSPECTIVE AND OUTSTANDING DEALS ARE MONITORED BY THE
TRADER.
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[18] ALLOCATION OF TRANSACTIONS NB: SEE SPECIAL RULES FOR IPOS/PLACINGS
(SEE UNDER AT 18.5)
18.1 IMRO Rule 3.9 of Chapter II requires Customer and own account
orders to be dealt with fairly and in due turn. Note: Since TTI's
policy is not to deal for its own account this Rule is not at present
relevant.
18.2 There are general principles which must be followed in the case of
allocation between Customers. THE ALLOCATION OF EVERY TRANSACTION
MUST BE:
a) fair between all Customers of TTI
b) be reasonable in the interests of each Customer
c) not conflict with any interested or connected party - in the
case of TTI especially any partner or employee
d) it must not conflict with any limitations the fund may have
placed within its investment parameters or our powers to
exercise discretion.
18.3 In particular these general principles must address the following:
a) The Customer's financial and other circumstances such as tax
status, requirement for liquidity or preferred level of risk
etc.
b) the other securities held in the Customer's portfolio or
related portfolios under TTI's discretion
c) the portfolio's actual and targeted weightings in the market
sector concerned
d) the marketability of the security i.e. its level of
liquidity.
It is obvious that there are various circumstances in which
discretion has to be exercised in the allocation of transactions and
the foregoing will explain the criteria which should be exercised. In
the first instance, all decisions should be taken by the Investment
Manager and trader. In exceptional circumstances that the Head of
Compliance should be asked to arbitrate on a particular scenario.
18.4 Where an immediate response to a situation is required to purchase or
sell a security and where it is not possible to ascertain which
customer should participate in the transaction, the following
procedures should be rigorously followed:
a) At the time that the order is placed, those funds where it
is obvious that they will participate should be identified
b) at the earliest opportunity TTI should indicate the intended
size of the interest and on that basis the division will be
made by the trader on a PRO-RATED BASIS according to Net
Asst Value (NAV). When the transaction is completed the
stock should be allocated to the particular portfolios in
accordance with the above stated principles.
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18.5 In the case of orders where these should be regarded as immediate
response transactions, the trader should allocate according to the
above principles to the funds for which it would be appropriate to
have an interest.
18.6 Trades must be allocated as soon as practicable after the transaction
is effected and in any event WITHIN TWENTY-FOUR HOURS OF EXECUTION OR
AS THE CASE MAY BE, CONFIRMATION OF ACCEPTANCE. The trader and Fund
Manager must sign off the approved form to the effect that he or she
has approved the allocation. In cases where the Head of Compliance
has been consulted and has opined then he too should initial the
document. Under the IMRO Rules TTI is required to maintain a record
of allocation and this will be done by the traders retaining relevant
documentation relating to the transaction.
18.7 Finally, one must consider under the IMRO Rules the correction of
errors. It is vitally important that any errors with regard to
allocation are identified as soon as possible and rectified so that
there is no loss to the Customer. In order to achieve this the
following procedures must be adopted:
a) The traders must sign the appropriate dealing sheet for the
orders which have been placed
b) When the transaction has been allocated to the fund but booked
in error to another the transactions should be cancelled and
booked to the correct fund at the original price, and finally
where an error occurs due to an employee's error (e.g. short
selling) the bargain must again be cancelled at the original
price. In all cases an "Error and Re-allocation form" must be
completed and this must record the reason for the reallocation
together with a confirmation as to whether or not the original
deal involved a breach of the IMRO Rules. In all cases
cancellations must be notified to the Head of Compliance and
must be counter-signed by him. Any remedial action must be
executed expeditiously and approved by the Head of Compliance.
c) For the avoidance of doubt, any matter which is particularly
complex or if there is difficulty in the application of the
above, must always be referred to Head of Compliance who will
arbitrate on the best way to proceed.
18.8 INSTITUTIONAL ACCOUNTS:
1. Until further notice, no IPOs, Placings or similar investments will
be made for JET's accounts (subject to the investment manager in his
absolute discretion, exceptionally accepting these for clients if it
is considered to be in the client's best interest).
The rationale for this adopted procedure is that JET is generally not
interested in IPOs. This is not a decision which is wholly dependent
upon the size of the allocation but rather on the nature of IPOs
themselves. This is effectively a blanket investment management
decision which JET has taken on the basis that IPOs rarely fit the
investment objectives of the institutional accounts. Some of the
areas of concern are that IPOs are too high risk and that there is
often poor liquidity in the market place. Further, there may be
onerous obligations to buy in the aftermarket and this is considered
unacceptable to JET. There is often extreme difficulty in achieving a
meaningful position without dramatically affecting the share price of
the newly offered stock. As stated above, on an exceptional basis,
JET may decide to override this policy position in cases where he
feels that an IPO may match the risk profile and investment
objectives of institutional accounts e.g. major privatisations.
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There is one exception to the above: Martin Shenfield may wish to
participate in Asia/Oceania IPOs but he will only participate if it
can be effectively pro-rated across all Institutional accounts.
IN THE EVENT OF JET EXCEPTIONALLY OVER-RIDING THE POLICY OR MS NOT
PRO-RATING, THE CLEAR AND UNAMBIGUOUS RATIONALE FOR OVERRIDING THIS
POLICY STATEMENT MUST BE DETAILED ON THE IPO FORM.
2. LEVERAGED ACCOUNTS: TAT (or in the case of The TT Asia Pacific Fund,
Martin Shenfield) will decide whether or not he wishes his accounts
to commit to an IPO and these will generally be pro-rated according
to the NAV of the accounts. In cases where it is appropriate, both
Collins and Alfanar would also be included.
Both TAT and JET have stated as a matter of policy that they do not
participate in any underwriting or sub-underwriting.
CJPGM
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[19] CHURNING AND SWITCHING
19.1 Churning is defined as excessive dealing on behalf of a Customer in
order to generate commissions, fees or other benefits.
19.2 TTI policy is not to enter into agreements with Customers where
remuneration is based on the volume of business conducted.
Nevertheless, the level of commission payable by a Customer is an
important consideration in proper management of a Customer's account.
19.3 With this in mind, transactions for a particular Customer should not
be effected at a frequency and size that is unreasonably
disproportionate to that Customer's requirements. In determining
'unreasonableness', regard should be had to the Customer's investment
objectives and normal practice for the type of account. In order to
monitor compliance with this Rule, the Head of Compliance, or an
employee designated by him and independent of the investment decision
and trading process, should review all trades conducted by TTI on a
regular basis as part of this exercise of scrutinising the daily deal
sheets. In addition, the Partner, Administration prepares a quarterly
report detailing the overall level of activity across all Customer
accounts and reports these findings to the Partners.
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[20] CONTRACT NOTES
20.1 For every transaction the Customer must be provided with a contract
note that is timely and contains essential details. The Rules exempt
the case where the Customer has requested contract notes not be sent
or there are reasonable grounds to believe he does not wish to
receive them. Note: TTI operates under this exemption for all its
Customers: each Customer, having its own established custody and
control arrangements, has requested TTI to implement a transaction
confirmation procedure specific to that Customer, generally involving
the despatch to the Customer, or his appointed agent, of transaction
advices by TTI and contract notes by TTI's broker or counterparty.
TTI's policy is to send to the Customer or his appointed agent a
transaction advice for every transaction within 24 hours of the
execution of that transaction; where the procedure requires TTI's
broker or counterparty to send a contract note to the Customer, or
his appointed agent, TTI will take reasonable steps to ensure this is
done.
20.2 TTI's policy is to ensure that it receives a contract note or
confirmation of every transaction within 24 hours of execution, and
to reconcile that confirmation in all material details to its own
record of the transaction within the same time frame. Cases of
delayed confirmation are to be followed up with rigour.
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[21] PERIODIC STATEMENTS
21.1 This Rule covers the timing and content of periodic valuations.
21.2 The Rules exempt the case where a Non-Private Customer has requested
a different procedure. Note: TTI operates under this exemption for
each of its Customers: each Customer, having its own established
custody and control arrangements, has instructed TTI to employ a
unique procedure where statements are prepared by the Customer's
appointed custodians and/or accountants independent of TTI although
TTI issues its own statement at least quarterly.
21.3 TTI's policy is to receive a copy of each valuation or statement of
holdings prepared by a Customer's appointed agent and to reconcile it
to TTI's own valuation records in all material respects no later than
10 days after receipt. Exceptions are to be communicated to the
Customer's appointed agent and followed up with rigour.
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[22] SAFEKEEPING AND CONTROL OVER CUSTOMER ASSETS
22.1 TTI is not permitted to maintain custody of a Customer's assets.
22.2 TTI DOES NOT APPOINT CUSTODIANS; APPOINTMENTS ARE MADE BY THE
CUSTOMER ITSELF. TTI does not therefore fall within the purview of
IMRO's Rule 5.1 relating to the Safekeeping of Customer Assets.
Notwithstanding the above TTI may have certain contractual
obligations between itself and a Customer.
As a matter of record the Custodians responsibilities include:
(a) arranging, at least every six months, for a custody statement
to be sent to the Customer
(b) ensuring written records in the prescribed form are maintained
As a matter of good practice TTI reconciles custodian safekeeping
records to its own records at least every month and ensure the
differences are resolved.
22.3 TTI policy is to enter into an investment management relationship
only with a Customer that has well-established custody arrangements
in place. Before entering into an Agreement with a Customer, the Head
of Compliance will ensure that arrangements complying with
requirements of 22.2 (a) and (b) will govern custody of the assets
that TTI will manage.
22.4 TTI policy is to reconcile custodian records to its own records,
whether of money or assets, upon receipt of a custodian statement.
22.5 UNDER NO CIRCUMSTANCES MAY AN EMPLOYEE OF TTI ARRANGE FOR DELIVERY OF
A CUSTOMER'S ASSETS, OR DOCUMENTS OF TITLE PERTAINING THERETO, TO THE
OFFICES OF TTI. IN THE EXCEPTIONAL CASE WHERE SUCH ASSETS OR
DOCUMENTS ARE MISTAKENLY DELIVERED TO THE OFFICES OF TTI, THE HEAD OF
COMPLIANCE MUST BE INFORMED IMMEDIATELY. THE HEAD OF COMPLIANCE WILL
ARRANGE FOR THE ASSETS TO FORWARDED TO THE CUSTODIAN
22.6 Certain Customers occasionally enter into Stock Lending Agreements
but in all cases TTI insists on the Customer executing the
documentation itself.
22.7 For derivatives TTI ensures entitlements are separately held and
identifiable. TTI's policy is to reconcile custodian records of such
balances to its own records upon receipt of a custodian statement.
22.8 GIVEN THE SERIOUS NATURE OF THE RULES REGARDING CUSTODY OVER CUSTOMER
ASSETS, ANY TRANSACTION OR NEW COUNTERPARTY/BROKER RELATIONSHIP WHERE
PHYSICAL SECURITIES ARE PROPOSED TO BE HELD OUTSIDE ESTABLISHED
CUSTODY ARRANGEMENTS REQUIRES PRIOR HEAD OF COMPLIANCE APPROVAL. THIS
INCLUDES THE CASE OF ASSETS BEING USED AS COLLATERAL TO SUPPORT
TRANSACTIONS IN DERIVATIVES.
22.9 ALL NEW COUNTERPARTY/BROKER RELATIONSHIPS IN RESPECT OF
NON-PHYSICAL ASSETS REQUIRE PRIOR APPROVAL OF THE HEAD OF COMPLIANCE
AND THE PARTNER, ADMINISTRATION
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[23] CLIENT MONEY
23.1 TTI is not permitted to handle Client Money. Therefore the
Financial Services (Client Money) Regulations 1991 do not apply.
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[24] CUSTOMER ACCOUNTING RECORDS
24.1 Records must show all purchases and sales, receipts and payments
arising from transactions effected by TTI, the assets and liabilities
of Customers, both individually and collectively to the extent
managed by TTI.
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[25] RECORDS AND REPORTING
25.1 TTI's financial records must be timely, accurate and must enable it
to demonstrate continuing compliance with IMRO's Financial Resources
Requirement. The Partner, Administration is responsible for this
recordkeeping function. He will ensure that financial results of the
business are calculated monthly and made available to the partners
within 15 business days after the end of month.
25.2 IMRO Rule 3.4 of Chapter V requires these records to be maintained
for six years, for the last two years at 24 hour availability. Note:
The records prior to May 16th, 1992 are maintained by Touche Ross.
Subsequent records are maintained by the Partner, Administration.
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[26] CONTROLS AND SYSTEMS
26.1 Controls and systems must be "adequate" for the size, nature and
complexity of TTI's business and such that TTI can comply with the
IMRO Rules - Chapter V. There must be an adequate statement in
writing of the system of control. (APPENDIX 6)
26.2 Controls are based primarily on the provisions of this Compliance
Manual and are enforced by the Head of Compliance in accordance with
his duties under the IMRO Rules. Furthermore, it is the Head of
Compliance's responsibility to ensure that procedural requirements,
as from time to time documented, are followed.
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[27] NOTIFICATIONS
27.1 IMRO must be advised of any breach of the Core Rules in Chapter V,
and, among other events, any expected delay in submitting Financial
Returns, an anticipated audit qualification, guarantees or
indemnities issued and legal actions. The Rules specify the manner of
notice.
27.2 The Head of Compliance is responsible for such notifications.
Employees are required to notify the Head of Compliance of any events
they become aware of that are of a nature likely to be subject to
IMRO notification requirements.
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[28] CLEARANCE BY, AND NOTIFICATION TO IMRO
28.1 A change of Controller or Chief Executive and a cessation of
business, inter alia, require prior clearance from IMRO. Note: At
July 1999 the Controllers of TTI are Messrs. Tacchi and Tonner.
28.2 Other events are notifiable (but do not require prior clearance:)
changes in senior personnel (including Compliance and Finance
Officers), changes in voting powers, any decision to seek a change of
auditors and any legal/bankruptcy actions against the business or its
controllers.
28.3 THE DEFINITIONS UNDER THESE RULES ARE COMPLEX. ANY DEVELOPMENT THAT
IS, OR COULD BECOME, A CLEARANCE OR NOTIFICATION EVENT SHOULD BE
ADVISED, AS SOON AS IT BECOMES KNOWN, TO THE HEAD OF COMPLIANCE WHO
WILL DETERMINE WHETHER CLEARANCE/NOTIFICATION IS REQUIRED AND IN WHAT
MANNER.
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[29] COMPLAINTS
29.1 This procedure applies to any complaint from a Customer relating to
the conduct of investment business by TTI or any TTI employee. While
IMRO Rules apply to complaints of 'significance', TTI policy in this
Manual, given the nature of its Customer base, applies to all
complaints. All employees of TTI who are responsible for dealing with
Customers should be aware of this procedure. Note: an investor in a
collective investment scheme, the assets of which are managed by TTI,
is not a Customer for the purposes of these requirements, nor is a
broker/counterparty in the execution of Customer transactions.
However, TTI has decided to apply its complaints procedures to all.
29.2 A register of complaints is maintained by the Head of Compliance and
all complaints, however minor, must be referred to him.
29.3 If the Head of Compliance determines that a complaint is a "Complaint
of significance", then, in order to comply with Rule 3.1 of Chapter
IV he must enter the Complaint in the Register and ensure a prompt
and substantial reply is sent in line with Rule 3.1 (4)a. Rule 3,1
(4)f requires the record be maintained for three years after the date
of the last response.
29.4 Rule 3.1 (4)d and e state that, if the first substantive response to
a complaint is not expected to satisfy the complainant, then it must
advise him of his right to complain directly to The Investment
Ombudsman and must send him a copy of the Informal Guide explaining
the service provided by the Ombudsman, and that if the response
proved unsatisfactory then the subsequent response must enclose the
Informal Guide and advise the complainant of his right to complain to
the Investment Ombudsman.
29.5 Rule 3.1 (4) b states that, if after one month the complainant has
not indicated that he is still not satisfied, the complaint can be
treated as settled.
29.6 Rule 3.1(4) c requires notice to be given to IMRO of the details of
the complaint and the action taken if, after two months, the
complaint has not been settled. The complainant must be advised that
IMRO have been so notified and of the date of notification.
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[30] MONEY LAUNDERING
30.1 The purpose of these notes is to outline the requirement of UK
legislation and the Regulations, how they apply to the business of
TTI and the implementation of procedures to ensure that the
requirements of the Regulations are complied with.
30.2 IT IS A CRIMINAL OFFENCE, PUNISHABLE BY UP TO FOURTEEN YEARS
IMPRISONMENT OR A FINE OR BOTH, TO PROVIDE ASSISTANCE TO A MONEY
LAUNDERER. IT IS A DEFENCE TO HAVE REPORTED KNOWLEDGE OR SUSPICIONS
OF MONEY LAUNDERING TO THE AUTHORITIES. IT IS AN OFFENCE, CARRYING A
MAXIMUM SENTENCE OF FIVE YEARS OR A FINE OR BOTH, TO INFORM OR "TIP
OFF" A POTENTIAL MONEY LAUNDERER THAT THE AUTHORITIES HAVE BEEN
INFORMED OF SUSPICIONS REGARDING HIS ACTIVITIES. IT IS ALSO AN
OFFENCE, CARRYING A MAXIMUM SENTENCE OF FIVE YEARS OR A FINE OR BOTH,
NOT TO REPORT SUSPICIONS OF MONEY LAUNDERING TO THE AUTHORITIES.
30.3 IN ADDITION TO THE PROVISIONS OF UK LAW OUTLINED ABOVE, ALL
INVESTMENT BUSINESSES, BANKS AND OTHER FINANCIAL BUSINESSES MUST HAVE
IN PLACE PROCEDURES TO COMPLY WITH THE REGULATIONS WHICH ARE DESIGNED
TO FACILITATE THE IDENTIFICATION AND MONITORING OF MONEY LAUNDERING.
30.4 The investment business of TTI comprises discretionary fund
management and this activity falls within the regulations.
It is a criminal offence, punishable by two years imprisonment and/or
fines, for investment business to be conducted unless the Regulations
are being complied with. The Rules apply to both TTI in its capacity
as a partnership as well as individuals.
30.5 The Regulations require that procedures are in place to:
a) identify clients in specified circumstances;
b) record specific details of Customer identification and
transactions with them;
c) report suspicions of money laundering to the National
Criminal Intelligence Service (NCIS);
d) inform relevant employees of the legal position and the
procedures in (a) to c above; and
e) provide training to relevant employees to recognise
potential cases of money laundering.
30.6 Guidance Notes ("the Notes") on how the requirements of the
Regulations can be met by providers of wholesale investment products
has been provided by the Joint Money Laundering Steering Group.
(These notes are available from the Head of Group compliance.
IMRO has indicated that any breaches of the Regulations by a
regulated firm will be relevant in determining its "fitness and
properness" for authorisation. From 1 July, 1994 breaches of the
Regulations by individuals may also affect their position as
registered individuals.
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30.7 RELEVANT REQUIREMENTS AND GUIDANCE
Identification is required whenever a business relationship is formed
(regardless of the value of transactions), or a one-off transaction
or a series of linked transactions with a value of more than ECU
15,000 (at present say (pound)10,000) is undertaken. Transactions
more than three months apart arE NOT treated as linked in the absence
of evidence to the contrary but otherwise the definition of "linked"
is not expanded in the Notes. In paragraph 43 of the Notes, it is
stated that firms do not have to introduce additional computer
systems to identify linkages but that if existing systems identify
links the information must be acted upon. The transaction size test
applies equally to receipts and payments.
30.8 The Notes (paragraph 58) indicate that the signing of a Customer
agreement does not in itself create a business relationship Such a
relationship would occur, however, upon the entering of an
arrangement to collect regular subscriptions. In this case, unless an
exemption is available, identification procedures must be followed.
If a business relationship as described above is not formed, it is
necessary to consider whether the payment represents, either alone or
combined with other linked one-off transactions that requires
identification.
30.9 When dealing with people whom it is believed are acting as agents for
a principal, it will usually be necessary to identify both principal
and agent. However, when TTI is dealing with people who are either
introducing or acting as agent for a third party investor rather than
directly with the investor, TTI may be able to take advantage of
exemptions from the need to verify identity. The exemption applies if
an authorised person introduces an investor and gives written
assurance to the effect that he has verified the identity of the
investor.
30.10 The Notes (paragraphs 48 and 49) state that if it is reasonable for
the business to be carried out by post or by phone, and for payments
to be made by post or electronically, then the requirement for
identification, if applicable, is satisfied by checking that the
payment is made from an account in the name of the Customer (joint
accounts are acceptable) with an authorised Bank.
30.11 Payments to Customers in respect of realisation etc., but only where
the original investment was made after 1 April, 1994, trigger an
identification requirement if the amount exceeds ECU 15,000 (at
present, say (pound)10,000). This identification requirement will be
satisfied by a cheque payable tO THE Customer and crossed "account
payee" or by a transfer to a bank account in the name of the
Customer.
APPLICATION TO TTI
30.12 In the absence of evidence or suspicion of money laundering,
identification procedures do not have to be applied to Customers
existing as at 1 April 1994 either retrospectively or for future
transactions.
Termination payments will invariably exceed the transactions limits
and trigger an identification requirement which can be met by
ensuring that payments are made only to the Customer as described in
the following paragraphs.
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RECORD KEEPING
30.13 Relevant Requirement and Guidance
Where evidence of identity has been obtained these must be kept for
at least five years.
Transaction records must also be retained for at least five years
from the end of the relationship or settlement of the one-off
transaction and must include, in addition to normal details the
origin of funds paid by the Customer including in the case of
cheques, the sort code, account number and drawer's name. In
addition, although not specifically required it is considered good
practice to retain a copy of the signature on Customer cheques.
For payment to Customers, the form and destination (i.e. cheque
details or bank and account number for transfers). This applies to
all transactions with all Customers after 1 April 1994 and not just
to those cases where identification procedures are required.
Evidence of the verification of identity (mainly cheque or electronic
transfer details) have to be kept.
Otherwise the transaction details set out in the Regulations do not
impose any recording requirements in addition to the details captured
by the accounting system.
30.14 Reporting Procedures
The Regulations require an investment business to establish a central
point of contact - The "Money Laundering Reporting Officer" ("MLRO")
whose responsibility it is to receive notification by employees of
suspicions of money laundering, to evaluate those suspicions and, if
appropriate, to report them to the National Criminal Intelligence
Service ("NCIS") using the standard format provided. The MLRO for TTI
is Charles Mcauley and if he is not available, Robin Cotterill.
There must also be clear procedures for employees to follow to bring
suspicions to the attention of the MRLO without the Customers
becoming aware of the situation thus triggering potential criminal
sanctions for "tipping off".
FAILURE TO REPORT IS A CRIMINAL OFFENCE BUT THE DUTY OF EMPLOYEES IN
THIS RESPECT IS DISCHARGED BY INFORMING THE MLRO OF THEIR SUSPICIONS.
It is essential that the Customer is not informed that a report has
been made to NCIS as this may trigger criminal penalties. It is also
important to note that it may be necessary to report even if the
potential Customer has been turned away. In addition the consent of
NCIS is required to continue dealing with a Customer once a report
has been made.
30.15 TRAINING
RELEVANT REQUIREMENTS AND GUIDANCE
The Regulations require that relevant employees are made aware of the
requirements of the legislation, are trained in the procedures
established by management to prevent money laundering and to report
suspicious transactions, and are able to recognise potential money
laundering situations. All training will be organised by Compliance.
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30.16 APPLICATION TO TTI
Training consists of reading literature supplied by the Head of Group
Compliance, together with a viewing of a specialist video on the
subject. In July, 1999, all Partners and Staff have received
appropriate training.
30.17 RECORD KEEPING
In the unlikely event that any Customers forward moneys to TTI direct
cheques will be copied and forwarded to the appropriate custodian.
30.18 REPORTING
Charles Mcauley has been appointed MLRO and in his absence, Robin
Cotterill will deputise for him. In view of the small size of the
organisation all staff should report directly to him.
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[31] NON - OBSERVANCE OF COMPLIANCE
31.1 The Head of Compliance shall monitor the conduct of employees to
ensure compliance with the IMRO Rules. If it should come to his
attention that a breach has occurred he will first review that breach
with the individual concerned and, if the breach is material, report
the case to a meeting of the partners who will determine what action
should be taken, which may include dismissal and/or referral to IMRO.
The breach and remedial action will be recorded in the Breaches
Register.
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[32] RESPONSIBILITY FOR COMPLIANCE
32.1 COMPLIANCE WITH IMRO'S RULES AND THIS MANUAL IS THE RESPONSIBILITY OF
EACH EMPLOYEE OF TTI IN THE PERFORMANCE OF HIS DUTIES. THE PARTNERS
ARE RESPONSIBLE COLLECTIVELY FOR THE FIRM'S COMPLIANCE WITH THE
RULES. The Head of Compliance is responsible to monitor the
application and effectiveness of these procedures, having regard to
the objectives laid down in the IMRO Rules, and to make changes in
response to changes in the IMRO Rules and other legislation
/regulations.
32.2 The Head of Compliance will investigate what he feels necessary in
the application and effectiveness of these procedures and any other
issues which he feels may raise compliance issues. All employees will
co-operate fully with the Head of Compliance in pursuance of his
duties, and with IMRO in any investigation.
32.3 On all operational matters involving compliance an employee is
subject to the decision of the Head of Compliance.
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[33] AUTHORITY AND DUTIES OF THE HEAD OF COMPLIANCE
33.1 The Head of Compliance has the authority to :
- attend any meetings, whether or not they concern compliance
directly
- examine all documents and records
- interview any partner or employee
- conduct any investigations he sees fit
- submit compliance matters for consideration to a partners
meeting
33.2 The Head of Compliance may, if he sees fit, without prior
consultation with the managing partner, or any other partner or
employee, report on any compliance matter directly to any competent
regulatory authority.
33.3 The Head of Compliance may appoint a deputy to perform any of his
duties. In Charles Mcauley's absence, Robin Cotterill will assume his
responsibilities.
33.4 The Head of Compliance will ensure at all times appropriate
authorisation by IMRO of TTI business. He will also be responsible
for monitoring the requirements of all relevant regulatory
requirements.
33.5 Compliance with the financial requirements of Chapter V of the IMRO
Rules is the responsibility of the Partner, Administration.
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[34] ADMINISTRATIVE PROCEDURES
34.1 This Manual can be amended only with the approval of the Head of
Compliance. Employees have the right to be consulted prior to any
change, and will given reasonable notice to implement any changes
made.
34.2 WHILE THE HEAD OF COMPLIANCE SHALL TO THE EXTENT POSSIBLE ENSURE THIS
MANUAL ACCURATELY REFLECTS THE NATURE AND CONDUCT OF TTI BUSINESS,
THE AUTHORISED INVESTMENT MANAGERS AND TRADERS ARE RESPONSIBLE TO
RECOMMEND CHANGES TO THIS MANUAL IN RESPONSE TO THE SERVICES TTI
PROVIDES AND ADVANCES IN MARKET PRACTICE.
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[35] IMRO RETURNS
35.1 The Head of Compliance is responsible for timely and accurate
preparation and submission of all IMRO Returns, with the exception of
Financial Returns which are the province of the Partner,
Administration.
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[36] DERIVATIVES
IMRO published a Consultation document entitled "Derivatives" in
November, 1996. TTI has developed a detailed procedure consistent
with this document and it appears as APPENDIX 7 to this manual.
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APPENDIX 1
TT INTERNATIONAL INVESTMENT MANAGEMENT
STAFF UNDERTAKING & PERSONAL ACCOUNT DEALING NOTICE
This Staff Undertaking ("THE UNDERTAKING") applies to all Partners and Employees
of TT International Investment Management ("TTI"). TTI must at all times act in
accordance with the letter and the spirit of the applicable rules and laws that
govern us and the business undertaken by us. As a partner or employee of TTI it
is important that you act at all times within the applicable rules and laws
which govern you individually. THIS UNDERTAKING is part of those rules and laws
and represents part of your contract of employment with TTI.
A] PERSONAL ACCOUNT DEALING NOTICE [EXTRACT FROM SECTION 11 OF COMPLIANCE
MANUAL]
PERSONAL ACCOUNT TRADING
Statement of General Principles: No personal dealing will be tolerated
which may endanger in any way the business reputation of TTI.
Furthermore, such dealing must not interfere with the performance of an
employee's duties. Any employee whose personal dealings breach these
rules may be prohibited from dealing on their own account. Compliance
with these rules forms part of an employee's contract of employment.
Failure to comply with, abuse of, or attempt to circumvent these rules
will be considered grounds for disciplinary action, which may include
dismissal. The Head of Compliance will monitor compliance with these
rules.
Pre-Approval of Personal Trading: Every partner and employee shall
obtain the prior written approval of the Head of Compliance before
directly or indirectly acquiring or selling beneficial ownership in any
securities according to the following procedures:
(a) Authorization to Deal Form. To obtain approval, a partner or
employee must submit a completed Authorization to Deal Form
(Appendix 2 of Compliance Manual Section 11) to the Head of
Compliance.
(b) Approval. If cleared by him, the Head of Compliance will sign and
date the form. The authorization to deal is valid for a maximum
of 24 hours unless otherwise stipulated by the Head of
Compliance.
(c) Evidence of Transaction. Each partner and employee that directly
or indirectly acquires or sells beneficial ownership in any
securities must ensure that the Head of Compliance receives a
contract note (or similar evidence of a transaction) within 48
hours of the transaction.
(d) Special Procedures for Head of Compliance. The Head of Compliance
must submit a completed Authorization to Deal Form to a partner
for approval before directly or indirectly acquiring or selling
beneficial ownership in any securities.
(e) Alternates for Head of Compliance. In cases where the Head of
Compliance is not available, authority to deal can be given by
the Deputy Compliance Officer, or, in the absence of the Deputy
Compliance Officer, any partner. The Authorization to Deal Form
will be reviewed and countersigned by the Head of Compliance on
his return to the office.
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Standards for Approval: Partners and employees shall confirm that a
transaction for which they are requesting approval meets the following
standards, and the Head of Compliance shall consider these standards, as
well as any other relevant circumstances, in determining whether to approve
the transaction.
(a) No Customer Dealing. PARTNERS AND EMPLOYEES ARE PROHIBITED FROM
DEALING FOR THEIR OWN ACCOUNT IN SECURITIES OF AN ISSUER AT THE
SAME TIME AS TTI IS ENGAGED IN DEALING IN THE SECURITIES OF THAT
ISSUER FOR ITS CUSTOMERS. In particular, if a partner or employee
knows that TTI has accepted a Customer's order or has made a
decision to deal for a Customer, such person must not deal in a
security of that issuer until 24 hours after completion of the
Customer's transaction. It is the responsibility of the person
proposing to deal for their own account to verify that the
proposed transaction does not conflict with transactions for TTI
Customers. MOREOVER, PARTNERS AND EMPLOYEES MAY NOT SELL TO OR
BUY FROM ANY CUSTOMER OF THE FIRM FOR THEIR OWN ACCOUNT.
(b) No Dealing Contrary to a Customer's Interest. Partners and
employees must not deal in an investment at a time or in a manner
likely to have a direct adverse effect on the particular
interests of one of TTI's Customers.
(c) Stop List. Partners and employees cannot deal in the securities
in a "Stop List." The Head of Compliance will inform partners
and employees at the time they seek authorization whether a
security is on the list. ALL PARTNERS AND EMPLOYEES MUST INFORM
THE HEAD OF COMPLIANCE IMMEDIATELY IF THEY RECEIVE MATERIAL
NON-PUBLIC INFORMATION (IE INSIDE INFORMATION) WITH RESPECT TO
ANY ISSUER. The Head of Compliance shall consider whether any
such issuer is placed upon the Stop List.
(d) Minimum Holding Period. Partners and employees cannot sell a
security unless it has been held for A MINIMUM OF THIRTY DAYS.
This requirement is to discourage partners and employees from
short term trading. The Head of Compliance may waive this
requirement in certain circumstances, for example in the case of
the sale of securities acquired from the demutualisation of a
Building Society or Life Office.
(e) Watch Period. If TTI makes a decision to deal for a Customer in a
security dealt in by a partner or employee in the thirty days
prior to the Customer decision, the Head of Compliance may
request the partner or employee to provide additional information
about the personal account transaction.
(f) Investments in Initial Public Offerings and Private Placements.
In determining whether to approve the acquisition by partners or
employees of any securities in an initial public offering,
private offering or other `high demand' issue, the Head of
Compliance shall consider whether the proposed acquisition raises
specific issues under US securities laws in relation to any
investment fund managed by TTI that is registered with the US
Securities and Exchange Commission.
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Reporting Requirements:
(a) Initial Holdings Reports. Every partner and employee must file
an initial holdings report with the Head of Compliance, no later
than 10 days after the person becomes a partner or employee, as
applicable, containing the following information:
(i) The title, number of shares and principal amount of
each security in which the person had any direct or
indirect beneficial ownership when the person became a
partner or employee;
(ii) The name of the account holder that had the direct
beneficial ownership of each security in (i), or such
other information to identify the nature of the account
that held the security and the relationship between the
owner of the security and the person submitting the
report;
(iii) The name of any broker, dealer or bank where an account
holder in (ii) maintained an account in which any
securities were held for the direct or indirect benefit
of the person as of the date the person became a
partner or employee; and
(iv) The date that the report is submitted by the person.
In addition, as part of TTI's standard Employment Contract all
employees are required to sign a declaration entitled "Staff
Undertaking & Personal Account Dealing Notice" (Appendix 1 of
Compliance Manual Section 11) which must be submitted along with
the initial holdings report.
(b) Account Opening Statements. A partner or employee must file with
the Head of Compliance an account opening statement, no later
than 10 days after an account is opened with a broker, dealer or
bank in which securities are held for the direct or indirect
benefit of such person. The account opening statement must
contain the following information:
(i) The name of the broker, dealer or bank where the
account was established;
(ii) The name of the account holder that has the direct
beneficial ownership of each security in (i); or such
other information to identify the nature of the account
that held the security and the relationship between the
owner of the security and the person submitting the
report;
(iii) The date the account was established; and
(iv) The date the report is submitted by the person.
(c) Annual Holdings Reports. Every partner and employee must file
with the Head of Compliance an annual holdings report not later
than 15th January of each calendar year containing the following
information (which information must be current as of 31st
December of the preceding year):
(i) The title, number of shares and principal amount of
each security in which the person had any direct or
indirect beneficial ownership;
(ii) The name of the account holder having the direct
beneficial ownership of each security in (i);
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(iii) The name of any broker, dealer or bank where an account
holder in (ii) maintained an account in which any
securities were held for the direct or indirect benefit
of the person; and
(iv) The date that the report is submitted by the person.
Securities and Accounts Covered by Sections 11.2 to 11.4 of the Compliance
Manual
(a) General Policy. The procedures in Sections 11.2 to 11.4 of the Compliance
Manual apply to the purchase or sale of all securities, derivatives, and
units or shares in collective investment schemes, except as specifically
excluded in (c) below.
The procedures apply to the above transactions conducted by:
o all partners and employees of the UK firm and its direct or
indirect subsidiaries;
o other persons who are informed by the Head of Compliance that
they are covered by the procedures;
o persons connected to the above; and
o entities connected to the above by way of influence or benefit
derived, including but not limited to pension funds, trusts,
companies, incorporated or unincorporated investment vehicles.
(b) Investment Trust Savings Schemes. In the case of Investment Trust Saving
Schemes, the partner or employee need receive only initial pre-approval
when the scheme is set up. No pre-approval is necessary on an ongoing basis
provided the partner or employee does not determine the time of execution.
Any amendment to the terms of the saving scheme, ie amount of periodic
investment or the identity of the Investment Trust involved, requires
pre-approval as does any irregular transaction.
(c) Exceptions for Certain Investments. Sections 11.2 to 11.4 of the Compliance
Manual do not apply to transactions in, or holdings of:
o bankers' acceptances and bank certificates of deposit;
o high quality (rated at least AA minus by S&P, or equivalent
rating) short-term fixed rate corporate debt instruments
including commercial paper;
o direct obligations of the US or UK government;
o US registered open-end investment funds (except those advised or
sub-advised by TTI);
o spot and forward foreign exchange contracts; and
o life assurance policies (other than a life assurance policy or
pension plan that is linked to the performance of investments
selected by the partner or employee).
Where a partner or employee is a UK resident, Sections 11.2 to
11.4 of the Compliance Manual do not apply to transactions in,
or holdings of:
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o UK Regulated Collective Investment Schemes such as Authorized
Unit Trusts (except those advised or sub-advised by TTI);
(d) Exceptions for Certain Accounts. A partner or an employee need not
follow the procedures in Sections 11.2 to 11.4 of the Compliance
Manual with respect to transactions effected for, and securities held
in, any account over which the person cannot have direct or indirect
influence or control. If a partner or employee has such an account,
THE PERSON IS REQUIRED TO PROVIDE THE HEAD OF COMPLIANCE WITH COPIES
OF ALL THE ACCOUNT DOCUMENTATION ALONG WITH THE "STAFF UNDERTAKING &
PERSONAL ACCOUNT DEALING NOTICE" (SEE APPENDIX 1) AND IS REQUIRED TO
INFORM THE HEAD OF COMPLIANCE OF ANY SUBSEQUENT CHANGES TO SUCH
DOCUMENTATION.
Definition of Beneficial Ownership. For purposes of the procedures in Sections
11.2 to 11.4 of the Compliance Manual, "beneficial ownership" of a security is
determined by reference to, among other things, the provisions of Section 16 of
the US Securities Exchange Act of 1934. This means that a person should
generally consider himself or herself the beneficial owner of any securities in
which he or she, or any person connected to him or her, has a direct or indirect
pecuniary interest. For illustrative purposes, the following is a list of
situations (not necessarily exhaustive) in which a partner or employee should
consider himself or herself the beneficial owner of securities held:
(a) by his or her spouse,
(b) by his or her minor children,
(c) by a relative who shares his or her home,
(d) by other persons by reason of any contract, arrangement,
understanding or relationship that provides him or her with sole
or shared voting or investment power,
(e) in his or her capacity as a trustee or settlor of a trust, or as
a personal representative of an estate in which he or she or an
associate (any person, including members of his or her family,
companies or partnerships, whose business or domestic
relationship would give rise to a community of interest) has a
significant beneficial interest,
(f) in his or her capacity as a trustee or settlor of any other
trust, or a personal representative of any other estate unless
he or she is relying entirely on the advice of another person
(such as another broker or a solicitor), or
(g) for the account of another person as recommended by the TTI
partner or employee other than in his or her capacity as a TTI
partner or employee.
Review and Enforcement:
(a) The Head of Compliance shall review all of the reports and any
other information provided under this Section 11 to determine
whether a violation of Section 11 of the Compliance Manual may
have occurred. Before making any determination that any person
has committed a violation, the Head of Compliance shall give
such person an opportunity to supply additional explanatory
material.
(b) If the Head of Compliance determines that a violation of Section
11 of The Compliance Manual has occurred, he or she shall impose
upon the individual such sanctions as he or she deems
appropriate and shall report the violation and the sanction
imposed to TTI
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partners and to the board of directors of any investment fund
managed by TTI that is registered with the US Securities and
Exchange Commission. Sanctions may include, but not be limited
to, a ban on personal account trading and surrender of any
profits.
(b) No person shall participate in a determination of whether he
or she has committed a violation of Section 11 of the
Compliance Manual or of the imposition of any sanction against
himself or herself.
B] PROVISIONS OF US SECURITIES LAWS
In addition, you are subject to certain restrictions under U.S.
securities laws by virtue of the fact that TTI is registered as an
investment adviser with the U.S. Securities and Exchange Commission.
Among other things, in connection with the purchase or sale, directly
or indirectly by you of a security held or to be acquired by a U.S.
registered investment fund, you are prohibited from:
(a) employing any device, scheme or artifice to defraud the fund;
(b) making to the fund any untrue statement of a material fact or
omitting to state to the fund a material fact necessary in order to
make the statements made, in the light of the circumstances under
which they are made, not misleading;
(c) engaging in any act, practice of course of business which would
operate as a fraud or deceit upon the fund; or
(d) engaging in any manipulative practice with respect to the fund.
C] PERSONAL BENEFITS
You must not accept from any person any benefit or inducement, which is
likely to conflict with your duties to TTI or any of TTI' customers.
If you are in any doubt you should consult THE COMPLIANCE OFFICER.
D] COUNSELLING AND PROCURING
If the above provisions preclude you from entering into any transaction
yourself, you cannot: -
(a) advise or cause any other person to enter into such a transaction;
OR
(b) communicate any information or opinion to any other person,
if you know, or have reason to believe, that the other person will as a
result enter into such a transaction or cause or advise someone else to
do so.
This does not apply to actions that you take in the course of your
employment with TTI. For example, the fact that you are yourself
prohibited from dealing in a certain stock as a result of one of the
provisions above does not mean that you are precluded from dealing for a
customer.
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E] SUMMARY OF INSIDER DEALING LEGISLATION
The Rules of IMRO require us to provide you with a brief summary of the
insider dealing legislation.
The insider dealing provisions contained in PART V OF THE CRIMINAL
JUSTICE ACT 1993 ("THE ACT") are complex, and if you would like more
details or are in any doubt whether a particular transaction would be
prohibited, you should consult THE COMPLIANCE OFFICER.
THE ACT applies to all securities traded on a regulated market (which
currently includes all EU stock exchanges, LIFFE, OMLX and NASDAQ), and
to warrants and derivatives (including index options and futures)
relating to these securities even if these warrants and derivatives are
only "over the counter" or otherwise not publicly traded.
In broad terms, and subject to the exemptions provided by THE ACT, THE
ACT makes it a criminal offence, with a maximum penalty of seven years
imprisonment and an unlimited fine, for an
individual who has non-public information to deal in price-affected
securities (including warrants or derivatives relating to them) on a
regulated market; or to deal with or through a professional intermediary;
or by acting himself as a professional intermediary. Securities are
"price-affected" if the inside information, if made public, would be
likely to have a significant effect on the price of the securities. This
applies to all companies' securities affected by the information, whether
directly or indirectly (for example, competitors of a company about to
bring out a new product).
THE ACT applies whether you deal as part of your employment or on your
own account. It also covers any information that you obtain directly or
indirectly from an insider whether or not in the course of your
employment, (for example by social contacts).
If you are precluded from dealing, normally you are also prohibited from:
-
(a) dealing on behalf of TTI or a customer (except perhaps on an
unsolicited basis);
(b) procuring or encouraging another person to deal in price affected
securities (whether or not the other person knows they are price
affected); and
(c) passing the inside information to another person other than in
the proper performance of your employment.
It is possible for a transaction which involves insider dealing to
constitute an offence otherwise than under the insider dealing provisions
of the CRIMINAL JUSTICE ACT. In particular, under section 47 (1) of the
FINANCIAL SERVICES ACT 1986 a person who "dishonestly conceals any
material facts" is guilty of an offence if he does so for the purpose of
inducing, or is reckless as to whether it may induce, another person
(whether or not the person from whom the facts are concealed) to buy or
sell an investment, or to refrain from buying or selling an investment.
This offence could well be committed by a person who conceals price
sensitive information from a counterparty to induce him to deal, if the
concealment is dishonest.
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UNDERTAKING
I ......................................................(full name) confirm that
I have read and understood this STAFF UNDERTaking (dated July 1998) and accept
its contents.
I agree to undertake to observe PART V OF THE CRIMINAL JUSTICE ACT 1993, in its
present form and as it may be amended or replaced in future, and the
requirements regarding personal account transactions that are set out in the
foregoing notice.
I agree to comply with Section 11 of TTI's Compliance Manual and the provisions
of U.S. securities laws referred to in this Staff Undertaking.
I agree to undertake to act at all time in conformity with the rules of IMRO and
the procedures of TTI, as they will be notified to me from time to time.
I agree that THIS UNDERTAKING extends to any amended or replacement requirements
that TTI set out in any written notice that TTI subsequently gives to me.
I further agree that THIS UNDERTAKING shall form part of my contract of
employment (or contract for services) with TTI and that any breach of THIS
UNDERTAKING will entitle TTI, inter alia, to terminate that contract without
notice.
Signed:.................................
Name:...................................
Date:...................................
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APPENDIX 2
PERSONAL DEALING
NAME: SIGNATURE:
(name of "connected party*" if relevant)
NAME OF STOCK: BUY OR SELL:
AMOUNT:
TIME AND DATE OF REQUEST:
TIME PLACED:
NAME OF BROKER:
CONFLICT WITH ANY CUSTOMER:
.................................. DATE: ...............................
AUTHORISED BY THE HEAD OF COMPLIANCE
(or his alternate)
NOTES:
Before any deal is authorised the following as an absolute minimum must be
considered
(I) Is there a potential conflict with any TT Customer or related party
(ii) Has the stock been held for 30 days or more
(iii) Does the party dealing have price sensitive information?
* DEFINED BY THE IMRO RULES.
61
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THIS AUTHORISATION IS VALID FOR A MAXIMUM OF 24 HOURS UNLESS OTHERWISE
STIPULATED BY TTI'S HEAD OF COMPLIANCE
62
<PAGE>
<TABLE>
<CAPTION>
APPENDIX 3
IMRO RULEBOOK / COMPLIANCE MANUAL CROSS REFERENCE
IMRO RULE HEADING COMPLIANCE MANUAL REFERENCE
- --------- ------- ---------------------------
<S> <C> <C>
(PC = Private Customer)
CHAPTER I STANDARDS OF CONDUCT not specifically referred to
CHAPTER II CONDUCT OF BUSINESS RULES
1.1 to 1.4 Advertising 6
1.5 Cold Calling not applicable (PCs)
1.6 Inducements 15
1.7 Soft Commission 14
1.8, 1.9 Overseas Business not applicable (PCs)
2.1 Customer Status 7
2.2 Agreements with PCs not applicable
2.3 Agreements with non-PCs 8
2.4 Contents of Customer Documents 8
2.5 Exclusion of Liability 8
3.1 Suitability 7
3.2 Understanding Risk not applicable (PCs)
3.3 Material Interests 9
3.4 Reasonable Charges 12
3.5 Information about Remuneration not applicable (PCs)
3.6 Customer Order Priority 18
3.7 Timely Execution 17
3.8 Best Execution 13
3.9 Timely Allocation 18
3.10 Fair Allocation 18
3.11 Churning and Switching 19
3.12 Dealing Ahead of Published Research not applicable
3.13 Contingent Liability Transactions not applicable (PCs)
3.14 Insider Dealing 10
3.15 Stabilisation not applicable
3.16 Market Making not applicable
3.17 Deleted
4.1 Fair and Clear Communications 6
4.2 Information about the Firm not applicable (PCs)
4.4 Contract Notes 20 }
4.5 Periodic Information 21 } For the most part
5.1 Safekeeping of Customer Assets 22 } not applicable
5.2 Client Money Regulations 23 }
6.1 to 6.6 Packaged Products not applicable
7.1 to 7.8 Collective Investment Schemes not applicable
8.1 to 8.4 BES Schemes not applicable
9.1 Corporate Finance not applicable
10.1 to 10.5 OPS Members not applicable
11.1 to 11.7 Trustee Activities not applicable
12.1 European Institutions not applicable
63
<PAGE>
64
<PAGE>
<CAPTION>
<S> <C> <C>
CHAPTER III FRIENDLY SOCIETIES not specifically referred to
CHAPTER IV COMPLIANCE, REPORTING, RECORDS AND COMPLAINTS
1.1 Compliance Arrangements: General 1 to 3, 30 to 34
1.2 Access and Inspections not specifically referred to
1.3 Statements of Representation not specifically referred to
1.4 Insider Dealing 10
1.5 Personal Dealings 11
1.6 Records 16, 17
1.7 Appointed Representatives not applicable
1.8 Disqualified Employees not specifically referred to
2.1 to 2.3 Notifications 28
3.1 Complaints 29
CHAPTER V FINANCIAL RULES 24 to 27, 35
CHAPTER VI GENERAL REQUIREMENTS not specifically referred to
CHAPTER VII MEMBERSHIP AND REGISTRATION 4, 5
</TABLE>
65
<PAGE>
APPENDIX 4
IMRO
STATEMENT OF PERMITTED BUSINESS
FOR
TT INTERNATIONAL INVESTMENT MANAGEMENT
AS AT 08/10/97
66
<PAGE>
IMRO STATEMENT OF PERMITTED BUSINESS AS AT 8/10/97
TT INTERNATIONAL INVESTMENT MANAGEMENT (4096)
PART I
PERMITTTED BUSINESS CATEGORIES
START DATE CATEGORIES
- --------------------------------------------------------------------------------
A MANAGING AND ADVISING
* 1 Managing investments for Private Customers 01/01/96
* 2 Managing investments for Non-private Customers
01/01/96
* 3 Managing investments for non-UK Customers
* 4 PEP manager
5 Managing investments DELEGATED
6 Investment advice to Non-private Customers
7 Treating Private Customers as non-private Customers
8 Own accounting dealing
* 9 Trustee Activities
- --------------------------------------------------------------------------------
B COLLECTIVE INVESTMENT SCHEMES
1 Manager of authorised unit trusts
2 Trustee of authorised unit trusts
3 Authorised futures and options funds
4 Authorised geared futures and options funds
5 Authorised property funds
6 Authorised corporate director of open-ended
investment companies
7 Depositary of open-ended investment companies
8 Operator of unregulated collective investment schemes
9 Trustee of unregulated collective investment schemes
* 10 Broker Fund adviser
11 Operator of Enterprise Investment Schemes
* 12 Administrationof collective investment schemes
13 Collective investment schemes administration
DELEGATED
- --------------------------------------------------------------------------------
C OCCUPATIONAL PENSION SCHEMES
1 OPS Firm
- --------------------------------------------------------------------------------
D VENTURE CAPITAL
* 1 Venture Capital Business
- --------------------------------------------------------------------------------
E OTHER ACTIVITIES
01/01/96 * 1 Derivatives on exchange
01/01/96 * 2 Derivatives OTC
08/10/97 * 3 Stocklending
01/01/96 * 4 Repurchasing agreements
* 5 Underwriting on own account and/or participation
in placings
01/01/96 * 6 Sub-underwriting on behalf of a Customer
7 Providing Credit to carry out a transaction
8 CREST Sponsor
- --------------------------------------------------------------------------------
*Denotes the categories which may bring a Frim within the scope of the
Investment Services Directive
67
<PAGE>
IMRO STATEMENT OF PERMITTED BUSINESS AS AT 08/10/97
II INTERNATIONAL INVESTMENT MANAGEMENT
PART I (CONTINUED)
PERMITTED BUSINESS CATEGORIES
START DATE CATEGORIES
- --------------------------------------------------------------------------------
F CUSTOMERS' MONIES AND ASSETS
1 Holding clients' monies
2 Holding customers' assets
3 Controlling customers' monies and assets
- ---------------------- ------ -------------------------------------------------
G ANCILLARY ACTIVITIES
1 Investment advice to Private Customers
*2 Dealing in investments
18/10/96 *3 Arranging deals in activities
*4 Money Market activities
*5 Independent intermediary activities
6 Pension Transfer activities
7 Corporate Finance Business
8 Marketing authorised unit trusts
9 Marketing open-ended investment companies
10 Marketing investment trust savings schemes
11 Marketing recognised schemes
18/10/96 12 Marketing unregulated collective investment
schemes
13 Marketing Enterprise Investment Schemes
14 Life Assurance Contracts as a Marketing Group
Associate
15 Regulated CIS as a Marketing Group Associate
- --------------------------------------------------------------------------------
H ADDITIONAL TERMS
H1 E3 Limited to Permal Europe Limited and TT
European Fund Limited
- --------------------------------------------------------------------------------
o DENOTES THE CATEFORIES WHICH MAY BRING A FRIM WITHIN THE SCOPE OF THE
INVESTMENT SERVICES DIRECTIVE.
68
<PAGE>
IMRO STATEMENT OF PERMITTED BUSINESS AS AT 08/10/97
II INTERNATIONAL INVESTMENT MANAGEMENT (4096)
PART III
OWN FUNDS REQUIREMENT
START DATE CATEGORIES
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
L ECU
01/01/96 1 50K
2 125K
3 730K
- --------------------------------------------------------------------------------
CONFIRMATION
I UNDERSTAND THE PERMITTED BUSINESS ACTIVITIES FOR WHICH THIS FIRM IS AUTHORISED
AND AGREE NOT TO CONDUCT SUCH BUSINESS OTHER THAN WITHIN THOSE CATEGORIES.
I CONFIRM THE ISD CORE SERVICES, NON-CORE SERVICES AND THE OWN FUNDS REQUIREMENT
ARE CORRECT*
SIGNATURE NAME: CJPG MCAULEY
/s/ CJPG MCAULEY
TITLE: HEAD OF COMPLIANCE/LEGAL ADVISER * DELETE IF NO APPLICABLE
DATE: 9 OCT. 97
69
<PAGE>
APPENDIX 5
5.1 INTRODUCTION
This section of the manual relates to all advertisements issued or
caused to be issued in any form whatsoever by TTI which refer,
whether directly or indirectly, to TTI's investment business or to
any operated by it and governed by the terms of Section 57 of the
Financial Services Act 1986 (FSA).
IN PRACTICE THE FOREGOING APPLIES ONLY TO COLLECTIVE INVESTMENT
SCHEMES (CISS). TTI HAS 3 CISS VIZ PERMAL EUROPE, TT EUROPEAN, AND
TT INTERNATIONAL INVESTMENT TRUST.
5.2 DEFINITION
Under Section 57(2) of the FSA 1986, an advertisement includes any
kind of "investment advertisement". An "investment advertisement"
is any advertisement inviting anyone to enter or offer to enter
into an Investment Agreement or to exercise any rights conferred
by an investment to acquire, dispose of, underwrite or convert an
investment or containing information calculated to lead directly
or indirectly to anyone doing so.
5.3 An "investment advertisement" includes every form of advertising
including, in particular, publications, notices, signs, labels,
show cards, circulars, catalogues, price lists or other documents,
pictures, films, radio or television broadcasting or any other
kind of recording. In certain instances it may also include
prepared oral statements, e.g. statements at press conferences or
presentations. If in any doubt as to whether or not an
advertisement constitutes an "investment advertisement" employees
must consult the Head of Compliance.
OBTAINING AUTHORISATION TO ISSUE ADVERTISEMENTS
5.4 Advertisements MUST NOT be published, distributed, sent,
transmitted or otherwise issued, or be sanctioned to be issued,
WITHOUT first being authorised by the Head of Compliance. If any
advertisement is issued or allowed to be issued without
authorisation TTI will be in breach of the IMRO rules and the
employee responsible for allowing an advertisement to be issued in
such circumstances MAY BE COMMITTING A CRIMINAL OFFENCE.
5.5 A Customer who enters into a contract with TTI as a result of an
"unauthorised" advertisement could refuse to be bound by the
contract and could recoup from TTI any resulting loss he suffers.
In order for authorisation to be given to an advertisement a draft
copy of the proposed advertisement MUST be given to the Head of
Compliance.
5.6 In the first instance the employee who drafted the Advertisement
must ensure that it complies with all relevant rules. Upon receipt
of the draft copy of the advertisement the Head of Compliance must
check to ensure that it complies with all relevant IMRO - or other
rules. The rules setting out what is required to be contained in
an advertisement are given below.
REGISTER OF INVESTMENT ADVERTISEMENTS
5.7 A register of investment advertisements must be retained for three
years after the latest
70
<PAGE>
publication date. This register is maintained by the Head of
Compliance and a copy of each advertisement, signed and dated by
both the employee who drafted the Advertisement and the Head of
Compliance to indicate approval must be maintained in his office.
5.8 RULES APPLICABLE TO ALL ADVERTISEMENTS ("CATEGORY `A'
ADVERTISEMENTS")
ALL advertisements MUST comply with the following requirements:
i. the advertisement should state clearly that it contains
promotional material and has a promotional purpose and it
should be distinct from any other matter contained in the
medium which carries it; and
ii. the nature of the investment or the services being promoted
in the advertisement should be stated clearly; and
iii. any statement, promise or forecast is not untrue or
misleading; and
iv. any statement of fact must NOT be used UNLESS TTI has
reasonable grounds for believing it to be true and for
believing that it will continue to be true during the
currency of the advertisement; and
v. any statement of opinion included in the advertisement
(whether held by TTI or any other person) may only be made
if, at the time the advertisement is issued or approved, TTI
has reasonable grounds for believing that it is the opinion
held by that person at the time; and
vi. any statement relating to the scale of activities of TTI or
a Connected Company, or any activity or resources of or
available to them, must not be misleading; and
vii. must be clearly identifiable as an advertisement and not
presented in such a manner as to appear to be part of a news
item, report, bulletin or article; and
viii. where the advertisement contains an invitation to the
reader to apply for further information it must clearly
state the fact that such an application may lead to follow
up telephone calls or personal visits being made on the
reader by TTI.
Documentary evidence MUST be kept for easy access in case of inspection in
respect of any statements made in iv. and v. above
In addition to the above requirements there are general
prohibitions on the issue of an advertisement which must be taken
into account before approval is given and before the advertisement
is issued or caused to be issued by TTI. Under these prohibitions
TTI MUST NOT:
i. design the content and format of the advertisement in such a manner as
to render it likely to be misunderstood;
ii. disguise the significance of any statement, warning or other
matter required to be included in the advertisement by the
design, content or format;
iii. issue an advertisement with the intention of persuading anyone
who responds to it to transact investment business of a kind not
described in the advertisement;
71
<PAGE>
iv. state or imply in the advertisement that the investment or
services being advertised has been approved or otherwise endorsed
by IMRO, PIA, SIB or any governmental body UNLESS approval has
been given in writing. EXCEPTIONS to this are:
a. where an investment has been recognised by the Inland
Revenue for any tax relief purposes this may be stated in
the advertisement, e.g. PEPs; and
b. the statement that TTI is regulated by IMRO.
v. include any statement indicating the scale of the activities, or
the extent of the resources, of TTI which would imply that these
activities, or resources, available to support performance of its
obligations are in fact greater than they are;
vi. quote anything said or written by any person, or include any
statement purporting to represent a person's views, UNLESS:
a. if in the event that such person is an associate or
controller or an employee of TTI, or a close relative of an
employee of TTI or of such an associate or controller, a
statement of that fact is included in the advertisement; and
b. the person's consent to its inclusion in the advertisement
has been obtained and provided that such consent has not
subsequently been withdrawn; and
c. the quotation or statement included is relevant to the
subject matter; and
d. the quotation or statement fairly represents the views of
the person to whom it is attributed; and
e. the quotation or statement, or its use in the advertisement,
has not become inaccurate or misleading since it was first
made or given.
vii. make any statement about past performance or taxation UNLESS it
complies with the requirements given above.
Any advertisement to which ONLY the above requirements/prohibitions
apply is referred to as a Category A advertisement.
5.9 ADVERTISEMENTS WHICH IDENTIFY AND PROMOTE SPECIFIC FUNDS ("CATEGORY
`B' ADVERTISEMENTS")
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<PAGE>
INTRODUCTION
The requirements given in this section apply ONLY to
advertisements which identify and promote one or more particular
authorised or unauthorised Collective Investment Scheme Such an
advertisement is referred to as a Category B advertisements. The
requirements given here are IN ADDITION to those given above.
REQUIREMENTS
Any Category B advertisement issued, or caused to be issue, by TTI
is bound under the Regulations to adhere to the following
requirements:
a. MUST identify TTI and state that TTI is regulated by IMRO,
b. MUST state clearly the nature of the fund(s) advertised;
c. MUST NOT be issued with the intention of creating interest
in any funds other than the fund(s) identified in the
advertisement. This does not prevent the inclusion of any
invitation to apply for information about other funds
offered by TTI (provided the "Customer" is "non private".
d. MUST state enough of the relevant features to give a fair
view of the fund(s), including the financial commitments and
risks involved and state how full details may be obtained;
e. MUST NOT specify some in preference to all of the terms and
conditions attaching to the unit trust fund(s) UNLESS:
i. it provides details of how a written statement of all
the terms and conditions may be obtained, and
ii. Those which are specified give a fair indication of the
nature of the unit trust fund(s), the financial
commitment required AND the risks involved.
f. MUST NOT compare one unit trust fund with another, or
another form of investment or saving, UNLESS:
i. the comparison is fair; and
ii. it includes all information relevant to the comparison;
and a comparison MUST NOT be made with any index UNLESS
the comparison is fair.
g. MUST NOT contain information about the past performance of
trust fund UNLESS:
i. It is directly relevant to the performance of the
fund(s) advertised; and
ii. it is complete, or is a fair and NOT misleading,
representation of the past performance of the fund(s)
advertised, i.e. it has not been selected/presented so
as to exaggerate (or disguise) the success (or lack of
success) of past performance over the period to which
the information relates; and
iii. the source of the information (other than that obtained
from TTI's own records) is stated and the relevant
permission to reproduce the information is sought, if
applicable; and
73
<PAGE>
iv. it contains a warning that past performance is not
necessarily a guide to future performance;
v. it contains information relating to the past
performance during the period of five years preceding
the date on which the advertisement is issued (or from
the launch date to the date on which the advertisement
is issued if less); and
1. if reference is made to an actual return to a client,
or a comparison is made with other forms of investment,
the reference, or comparison, MUST be made on an
"offer-to-bid" basis and the basis MUST be stated or
apparent; and
2. if a comparison is made of performance with an index or
with movements in the price of units or shares, the
basis on which the comparison is made MUST be stated or
other apparent, e.g. "offer-to-offer", "offer-to-bid",
"bid-to-bid";
and any such comparison is fair.
NOTE: The information provided will not breach
the Regulations if it does not cover the
whole of the period and may be for a
lesser period than stated here ONLY
PROVIDED that the information is complete
up to the date before the day on which
the advertisement is issued and for which
the relevant information was available
for inclusion in the advertisement.
h. MUST NOT make any reference to taxation UNLESS:
i. it includes a warning that the levels and bases of, and
relief from, taxation can change; and
ii. it states the rate where a matter is based upon an
assumed rate of taxation; and
iii. it states that any tax reliefs referred to are those
currently available and that their value depends upon
the individual circumstances of the investor; and
iv. it makes it clear whether any tax reliefs (or freedom
from taxation) referred to apply directly to the
investor, or to TTI, or to the unit trust fund(s) for
which the investor applies, or to more than one of them
if applicable; and
v. it states whether the matters referred to are only
relevant to a particular class or classes of investor
with particular tax liabilities and identify the class
or classes and liabilities concerned; and
vi. it does not describe the unit trust fund(s) as being
free from any liability to capital gains tax if any
realised capital gains of the assets of the unit trust
funds(s) to which the value of the fund(s) is linked
are subject to tax; and
vii. it does not describe the income from the fund(s) as
being free from any liability to income tax if the
income payable out of the fund is liable to income tax;
and
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<PAGE>
viii. it must state that the value of the unit trust fund(s)
may fluctuate and is not guaranteed.
ix. MUST NOT contain projections.
5.10 ADVERTISEMENTS MAKING OR INVITING OFFERS (DIRECT OFFER
ADVERTISEMENTS - "CATEGORY `C' ADVERTISEMENTS") (THIS CATEGORY
DOES NOT APPLY TO "TTI" BUT IS FOR REFERENCE)
INTRODUCTION
The requirements given in this section apply to an advertisement
which constitutes an offer to members of the public to enter into
a contract with TTI, and which requires any person wishing to
accept the offer, to send or give his acceptance to TTI, or an
agent of TTI. It also applies to any written invitation to an
individual to enter into an agreement which is made directly
following the individual's response to a Category `A' or Category
`B' advertisement issued by TTI. The requirements given here are
IN ADDITION to those above. Any advertisement to which these
requirements apply is referred to as a Category `C' advertisement.
TTI has never issued a Category `C' advertisement. However, should
it do so the requirements given below MUST be adhered to.
REQUIREMENTS
TTI MUST only issue, or approve to be issued, a Category `C'
advertisement to a private Customer PROVIDED THAT the
advertisement:
i. gives information about the investments or investment
services;
ii. gives details of the terms of the offer;
iii. states clearly, in a separate paragraph and at least in the
type-size as that of the main text, the risks involved in
investing (acquiring and hold units in the relevant unit
trust fund) pursuant to such an offer which is adequate and
fair having regard to the regulatory protections (UK or
overseas) which apply and the market to which the
advertisement is directed; AND
iv. state clearly that the capital value of, and the income
from, the unit trust fund may fluctuate and is not
guaranteed;
v. MUST include written contractual terms as required setting
out in adequate detail the basis on which the investment
services will be provided.
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<PAGE>
In addition to the requirements given above the advertisement:
a. MUST describe the property or index to which the units or
shares are linked and state how the amount of any benefit
under the contract will be calculated and it must be made
clear that the price of units or shares can go down as well
as up; AND
b. MUST specify the amounts which any person (other than TTI or
other issuer) will pay under, or for the purposes of, the
contract; AND
c. MUST outline a Customer's liability (if any) to UK income
tax and CGT at the time the advertisement is issued (or, if
a proposed change in the relevant law has been announced
which it is reasonably practicable for TTI to take into
account, under the law as so changed) in respect of any
amounts which may be paid under the contract; AND
d. MUST describe the consequences for the client if at any time
he or any person on his behalf were to stop making payments
under the contract; AND
e. MUST state the minimum amount which the client may invest
(if any), and if regular amounts are to be invested, what
those amounts may be; AND
f. MUST state if an application for units will NOT be
acknowledged; AND
g. MUST give details of any arrangements under which a client
may make regular withdrawals from the amount of his
investment in the unit trust fund; AND
h. MUST be accompanied by a copy of the Scheme Particulars or
similar prospectus of the relevant fund(s).
i. the advertisement MUST also include all other information as
may be necessary to enable a client to understand the nature
of the unit trust fund(s) concerned and what it is that will
determine the ultimate value of his investment.
STATEMENTS AND FORECASTS OF FUTURE INCOME
TTI shall NOT publish or cause to be published to any person any
statement, forecast or estimate of the future income likely to be
derived from investment in any unit trust fund (s).
CONTRIBUTION TO PUBLICATIONS BY EMPLOYEES
NO employee is allowed to publish publications or articles written
by him about TTI's funds, (or those in any way related to the
firm) or any other investments whatsoever, and which, whether or
not he is paid or unpaid, refer to his employment with TTI OR any
Connected entity (including Customers) or are written under his
own name, a pseudonym or unsigned WITHOUT first obtaining the
approval of the Head of Compliance to publish the article or
defined series of articles in question.
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<PAGE>
APPENDIX 5
ADVERTISEMENT
REGISTER NUMBER:
TT INTERNATIONAL INVESTMENT MANAGEMENT
ADVERTISEMENT APPROVAL SUBMISSION FORM
DETAILS OF INVESTMENT ADVERTISEMENT:
TARGET AUDIENCE:
- --------------------------------------------------------------------------------
DOES THE ADVERTISEMENT COMPLY IN EVERY WAY WITH THE IMRO RULES AND THE FINANCIAL
SERVICES (PROMOTION OF UNREGULATED SCHEMES REGULATION, 1991) ERISA, AND THE
INVESTMENT ADVISERS ACT (1940)
- --------------------------------------------------------------------------------
MATTERS BROUGHT TO THE ORIGINATOR'S ATTENTION BY THE COMPLIANCE OFFICER:
SIGNATURE OF ORIGINATOR:
COUNTER SIGNATURE OF COMPLIANCE OFFICER:
(TO VERIFY THAT, IN HIS ASSESSMENT, THE ADVERTISEMENT COMPLIES WITH THE IMRO
RULES, THE FINANCIAL SERVICES (PROMOTION OF UNREGULATED SCHEMES REGULATIONS,
1991 AND THE ERISA RULES - AS APPLICABLE)
DATE THAT ADVERTISEMENT WAS SUBMITTED:
DATE AUTHORISATION GRANTED BY THE COMPLIANCE OFFICER:
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<PAGE>
APPENDIX 6
STATEMENT OF INTERNAL CONTROL FOR THE PURPOSE OF COMPLIANCE WITH RULES ON
FINANCIAL SUPERVISION (RULE 4.1 (1) OF CH V)
- -------------------------------------------------------------------------------
The main objective of our financial process in so far as compliance with this
Rule is concerned is to ensure ongoing adherence to the Financial Resources
Requirement (`FRR'). The objective is met by adoption of the following policy
and procedure:
[A] POLICY
A1 That IMRO defined Own Funds shall exceed the Own Funds Requirement and
that IMRO defined Liquid Capital shall exceed the Liquid Capital
Requirement at all times.
A2 That monthly running expenses of the business shall aim to be more
than covered by monthly running income
A3 Only a partner may commit the firm to expenditure. Significant
expenditure shall be approved by all the Partners.
A4 Partners are able to make regular drawings which may be amended from
time to time. Drawings outside of regular drawings require the approval
of all Partners.
[B] PROCEDURE
B1 The Finance Partner is required to maintain the financial records of
the business in such a way that ensures the above policies are adhered
to. The financial records are maintained in hardcopy form, as well as
appropriate software, subject to offsite back-up routines.
B2 All bank accounts are reconciled regularly but at least monthly by
the Financial Controller, who is responsible also for the collection
of all fee income.
B3 The Financial Controller is required to report to the partners as at
each month end, usually by the 15th of the following month, on the
financial condition of the firm.
B4 The partners meet periodically to review this report and determine any
action that may be appropriate to ensure the policies are adhered to.
B5 Only the Finance Partner and/or the Financial Controller, as a matter
of established procedure, may disburse funds, including partners'
drawings.
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<PAGE>
APPENDIX 7
DERIVATIVES
THE FOREGOING ASSUMES A WIDE DEFINITION OF DERIVATIVES, INCLUDING,
FOR EXAMPLE, FORWARD FOREIGN EXCHANGE CONTRACTS AND WARRANTS. THIS
WIDER DEFINITION RECOGNISES THAT CERTAIN TRANSACTIONS, NOT COMMONLY
DEFINED AS DERIVATIVES, INVOLVE UNIQUE ECONOMIC, CREDIT, PERFORMANCE
AND OPERATIONAL RISKS SIMILAR TO THOSE INHERENT IN DERIVATIVE
TRANSACTIONS.
Analysis of TTI's involvement in derivatives must distinguish clearly
between activity in relation to `leveraged' accounts and activity in
relation to `institutional' accounts. Each account falls clearly
within only one of these categories:
36.1 (1) LEVERAGED:
Permal Europe
The TT European Fund Ltd
Caxton International
The TT Asia Pacific Fund Limited
(2) INSTITUTIONAL:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Alfanar Europe Bimcor Canadian Utilities
Collins Associates The Common Fund Denver Public Schools
Detroit General Retirement .Detroit Police and Fire Gannett Co. Inc
The Walt Disney Company Houston Municipal The Kresge Foundation
Luther King Capital Ludwig Institute for Cancer Northern Trust Co
Management Research
Teachers' Retirement System of University of Notre Dame Oregon Investment Council
Louisiana
Public Employees Retirement RCB TT International Investment
System of Ohio Trust
Workplace Safety The Wellcome Trust West Virginia
</TABLE>
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<PAGE>
OBJECTIVES
(1) Leveraged:
The investment objective of these accounts is to produce annual
double digit absolute returns from exposure to equity markets,
including the use of leveraging and/or hedging (both as to currency
and equity market risk) techniques. Leveraging and hedging often
involve the use of derivatives; their use in this context is,
therefore, central to the management of these accounts. In addition,
TTI seeks further to enhance returns through selective, and
occasional, use of derivatives in the foreign exchange and interest
rate markets. Derivatives are also used to take positions in specific
equities (either long or short) when, for a variety of reasons,
investment managers consider it expedient to do so.
The use of derivatives in these accounts falls, therefore, into three
broad areas:
o to provide leverage or hedging (both currency and equity
risk) of the portfolio as a whole
o to provide exposure to non - equity markets (foreign
exchange and interest rates)
o as a substitute for `cash-market' positions in specific
equities.
The leveraged accounts, broadly speaking, and with slightly varying
limitations, permit us to undertake a wide variety of derivative
transactions.
36.2 INSTITUTIONAL:
Here TTI's investment objective is to produce positive
benchmark-relative returns from `long-only' investment in equities.
On an ongoing basis, TTI seeks to enhance local currency equity
market returns through judicious hedging of currency exposures.
Occasionally, TTI uses derivatives as a substitute for, or as a hedge
of, `cash-market' positions in particular equity markets.
It should be noted that, to date, aside from:
o hedging of currency exposures, across all accounts, by means
of Forward Foreign Exchange Contracts
o the purchase of Warrants across all accounts
o the use of Exchange Traded Stock Index Futures as a
`cash-market' substitute in the case of Gannett and one
other account (since terminated)
no other derivative transactions have been undertaken for
institutional accounts; TTI is in the process of establishing
facilities to undertake Exchange Traded Stock Index Futures
transactions for those accounts which permit such transactions.
While this articulates, broadly, TTI's objective in the use of
derivatives for institutional accounts, the extent to which TTI is
permitted by investment guidelines to undertake such transactions
varies considerably from case to case.
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36.3 TYPES OF TRANSACTIONS
THIS DISCUSSION FOCUSES ON CURRENT PRACTICE. CERTAIN TYPES OF
TRANSACTIONS DESCRIBED BELOW AS APPLICABLE TO INSTITUTIONAL ACCOUNTS
IN GENERAL MAY NOT BE APPLICABLE TO CERTAIN ACCOUNTS, AS A MATTER OF
PRACTICE OR DUE TO VARIOUSLY RESTRICTIVE GUIDELINES; CONVERSELY,
CERTAIN TYPES OF TRANSACTIONS DESCRIBED BELOW AS NOT BEING ENTERED
INTO, AS A MATTER OF PRACTICE, FOR INSTITUTIONAL ACCOUNTS IN GENERAL
MAY IN FACT BE PERMITTED BY THE GUIDELINES COVERING ONE OR MORE SUCH
ACCOUNTS.
36.4 Warrants
Warrants are purchased for both leveraged and institutional accounts.
When purchased for institutional accounts, they are considered to be
a substitute for cash market positions in the underlying equity. Some
institutional accounts limit the extent to which warrants may be
purchased.
Short positions in warrants are never taken, although, this is
permitted for leveraged accounts.
36.5 Exchange Traded Stock Index Futures and related Options
Short positions in Exchange Traded Stock Index Futures are taken for
both leveraged and institutional accounts. In the case of leveraged
accounts, this can be to hedge existing exposures (quite frequently),
or to create a net short position (very rarely). For institutional
accounts, this is done rarely and only to hedge existing exposures in
a particular market.
Long positions in Exchange Traded Stock Index Futures are taken for
both leveraged and institutional accounts. In the case of leveraged
accounts, this will be to increase existing exposures (quite
frequently), perhaps, but not necessarily, in anticipation of a
buying programme in a particular market. For institutional accounts,
this is done rarely and only in anticipation of a buying programme in
a particular market.
Exchange Traded Options on Stock Index Futures are bought (both puts
and calls) for leveraged accounts. While TTI has, in the past,
considered such a transaction for an institutional account, no
transaction has been entered into. Although permitted for leveraged
accounts, such options are never sold short (written).
36.6 Exchange Traded Interest Rate Futures and related Options
Positions in Exchange Traded Interest Rate Futures (both long and
short) are taken, and related Options are bought (both puts and
calls) only for leveraged accounts, as a means of expressing a
desired exposure to a particular interest rate market.
Although permitted for leveraged accounts, Exchange Traded Interest
Rate Options are never sold short (written).
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36.7 Foreign Exchange Options
These are purchased for leveraged accounts only, as a means of
expressing a desired exposure to a particular currency, beyond the
exposure arising from equity market investments. Foreign Exchange
Options have, on rare occasions, been sold short (written), for
leveraged accounts only.
Foreign Exchange Options are not entered into for institutional
accounts, although, in some cases, such transactions are permitted.
36.8 Forward Foreign Exchange Contracts
TTI may hedge underlying currency exposures in each account, whether
leveraged or institutional, into the base currency of the account.
Typically, this involves the forward sale of underlying currency
exposures against the forward purchase of the base currency. By their
nature, these hedges may be outstanding (on a roll-over basis) for
twelve months or more. For institutional accounts it is generally not
permitted to maintain a net short currency position; for leveraged
accounts, this is permitted and may occur.
Occasionally, for both leveraged and institutional accounts, the
hedge may be into a currency other than the base currency; this will
arise when the investment manager anticipates that the base currency
will devalue against the currencies in which the underlying
investments are denominated.
For leveraged accounts only, additional foreign exchange contracts
are entered into as a means of expressing a desired exposure to a
particular currency, beyond the exposure arising from equity market
investments. Such contracts are clearly distinguished in TTI's
internal reports from contracts entered into for currency hedging
purposes.
36.9 OTC Stock Index Options
These are entered into only for leveraged accounts. Typically, long
term put options are purchased to hedge against a general market
decline; the exercise value of such options purchased for a
particular account will be related to the net assets of that account.
The value of the options may be referenced to a particular market
index, or to a predetermined basket of such indices.
36.10 OTC Equity Options
These are entered into only for leveraged accounts, as a substitute
for `cash market' exposure to a particular equity, either long, or,
more usually, short. Typically, a structured transaction takes place,
that is: the simultaneous purchase and sale of offsetting puts and
calls (or vice versa) to create a position economically equivalent to
a long or short `cash market' position. On the long side, this
represents a form of leverage; on the short side such structured
option transactions are entered into as the most effective way of
creating the short exposure, in preference to other derivative
mechanisms.
36.11 Equity Swaps
These are entered into only for leveraged accounts, as a substitute
for cash market exposure to a particular equity. To date, such a
transaction has been undertaken only as a replacement for an existing
long cash market position; the transaction enables the long position
to be taken independent of bank financing constraints, thereby
providing a mechanism for creating leverage at a cost somewhat below
that of regular financing alternatives.
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36.12 Securities Lending
While, strictly speaking, not a derivative transaction, Securities
Lending is included in this discussion as it involves, for leveraged
accounts only, a mechanism, alternative to the Equity Swap, which
enhances leveraging capacity at a cost lower than that of regular
financing alternatives.
36.13 Government Bond Repurchase Agreements
While, strictly speaking, not a derivative transaction, Repurchase
Agreements are included in this discussion as they involve, for
leveraged accounts only, a mechanism which enhances leveraging
capacity at a cost lower than that of regular financing alternatives.
Such transactions arise under two different investment scenarios:
o as means of self-financing the purchase of government bonds
or, conversely, the investment of proceeds from the short
sale of government bonds; this practice was common until
1994 but has not been employed since then;
o to employ collateral received under Securities Lending
transactions, thereby substituting at a lower cost for
regular financing alternatives.
RISK MANAGEMENT
THIS DISCUSSION DOES NOT ATTEMPT TO IDENTIFY THE APPLICABILITY OF
EACH RISK CLASSIFICATION TO A PARTICULAR TRANSACTION TYPE DEFINED
ABOVE; THE RISK CLASSIFICATIONS DESCRIBED BELOW APPLY TO TRANSACTION
TYPES TO VARYING DEGREES, AND, IN SOME CASES, NOT AT ALL. FOR
EXAMPLE, WARRANTS, TRADED ON RECOGNISED EXCHANGES ON A PHYSICAL
DELIVERY VERSUS PAYMENT BASIS, DIFFER FROM CASH MARKET EQUITY
TRANSACTIONS ONLY IN TERMS OF VOLATILITY, AND THUS CONTAIN ECONOMIC
RISK ONLY.
36.14 Economic Risk
All positions in derivative transactions described above, for all
accounts, are revalued, based on external data sources, at close of
business each day; these updated values are communicated to
investment managers. In addition, for leveraged accounts, most, but
not all, positions are revalued intra-day in real time; exceptions
arise in certain OTC transactions where intra-day values cannot be
derived easily from external data sources. Where valuation is
supplied by the counterparty to a transaction, this is verified by
the trader by reference to an internal model, with an additional
reasonableness check performed by TTI's operations department.
Market risk is monitored on a continuing basis by investment managers
as well as, in the case of leveraged account exposures to interest
rate and foreign exchange markets, by a designated trader.
For leveraged accounts a risk management model (using generally
accepted statistical techniques similar to those employed in the JP
Morgan VAR model) has been developed; this decomposes economic risk
across all asset classes (equities, foreign exchange and interest
rates), regardless of transaction type, into a common denominator of
risk: `daily risk of loss'. The results are available in real time to
the investment manager and the traders..
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36.15 Credit Risk
Many of these transactions involve credit risk. For example:
o whenever margin deposits are required to be placed with a
counterparty in support of a transaction, most frequently in
the case of Forward Foreign Exchange Contracts and Exchange
Traded Futures;
o additionally, to the extent of up to 100% of the nominal
value of the transaction, in the settlement (either, or
both, at commencement and maturity) of a derivative
transaction. Commonly this occurs in the case of Forward
Foreign Exchange Contracts which involve `free' payment of
cash without the security of knowing that the countervalue
has been received;
While no formal credit limit structure has been implemented, the
value of such exposures is monitored on a continuing basis by the
traders. In addition, traders are responsible to ensure that such
exposures are not unduly concentrated in any one counterparty.
36.16 Performance Risk
In certain derivative transactions unrealised profits that are not
immediately settled by the counterparty may arise; in some cases, for
example OTC Stock Index Options, the receivable may be outstanding
for as much as twelve months. Where the size or tenor of the
transaction warrant it, we require the counterparty contractually to
agree to periodic settlement of unrealised profits during the life of
the transaction.
36.17 Counterparty Approval
Counterparties where credit or performance risk may arise require the
prior approval of the Administrative Partner; a list of such approved
counterparties is made available to investment managers and traders.
36.18 Operational Control / Reconcilement
TTI requires that each transaction is confirmed in writing by the
counterparty, no later than 24 hours after dealing. Transaction
details are verified; non-routine exceptions are brought to the
attention of the Administrative Partner.
Periodic statements, of transaction positions and/or cash balances,
as appropriate to the transaction, may be received daily or monthly
from the counterparty; they are reconciled to TTI's records of
outstandings upon receipt. Exceptions are resolved as a matter of
priority.
All transactions are advised to a customer's master custodian (for
institutional accounts) or accountants (for leveraged accounts) with
24 hours of dealing. These entities regularly provide TTI with
transaction and/or balance reports, or valuations, and these are
reconciled to TTI's records upon receipt. Exceptions are resolved as
a matter of priority.
These reconcilement and verification functions are performed by TTI's
operations area, independent of the trading and investment management
function.
36.19 Documentation / Client Money
All derivative transactions require the support of a written
agreement between the counterparty and TTI's Customer. TTI is not a
direct party to such an agreement, although
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the agreement may grant to TTI formal trading authority in
respect of the transactions subject to the agreement. After
assessing all risks inherent in any new transaction type, and
having negotiated on behalf of the Customer the major economic
terms, TTI reviews all agreements for reasonableness and
consistency, and acts as a conduit between the Customer and the
counterparty, arranging for the agreement to be executed. For
reference purposes, TTI has on file copies of all such agreements
entered into.
Only TTI's Legal Adviser and Administrative Partner are permitted to
communicate directly with customers in relation to agreements
supporting derivative transactions.
No derivative transaction involves the holding of client money by
TTI. All transactions represent contractual obligations of TTI's
Customer, and are entered into by TTI in its capacity as trading
agent for the Customer. Account balances, whether cash or securities,
are held by the counterparty in separate accounts in the name of
TTI's Customer.
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