Registration Nos. 33-88792
811-8960
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 8 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 10 [X]
(Check appropriate box or boxes.)
LPT VARIABLE INSURANCE SERIES TRUST
__________________________________________________
(Exact name of registrant as specified in charter)
1755 Creekside Oaks Drive
Sacramento, CA 95833
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (916) 641-4200
George Nicholson
London Pacific Life and Annuity Company
3109 Poplarwood Court
Raleigh, North Carolina 27604
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective (Check appropriate
space):
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on May 1, 2000 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) 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
Title of Securities Being Registered:
Investment Company Shares
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LPT VARIABLE INSURANCE SERIES TRUST
CROSS REFERENCE SHEET
(as required by rule 404(c))
<TABLE>
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<S> <C> <C>
PART A
N-1A
- --------
Item No. Location
- -------- ---------
1. Front and Back Cover Pages......... Front and Back Cover Pages
2. Risk/Return Summary: Investments,
Risks and Performance.............. Summary of Principal Risks
for all Portfolios; Performance
3. Risk/Return Summary: Fee Table.... Management of the Portfolios
4. Investment Objectives, Principal
Investment Strategies, and Related
Risks.............................. Description of the Portfolios
5. Management's Discussion of
Fund Performance................... Performance of the Portfolios
6. Management, Organization, and
Capital Structure.................. Management of the Portfolios
7. Shareholder Information............ Portfolio Shares
8. Distribution Arrangements.......... Distribution of Shares
9. Financial Highlights Information... Financial Highlights
PART B
10. Cover Page and Table of Contents... Cover Page and Table of Contents
11. Fund History....................... The Trust
12. Description of the Fund and
Its Investments and Risks.......... Investment Strategies and Risks
13. Management of the Fund............. Management of the Trust
14. Control Persons and Principal
Holders of Securities.............. Control Persons and Principal
Holders of Securities
15. Investment Advisory and Other
Services........................... Investment Advisory and Other
Services
16. Brokerage Allocation and Other
Practices.......................... Brokerage Allocation and Other
Practices
17. Capital Stock and Other
Securities......................... Capital Stock and Other Securities
</TABLE>
CROSS REFERENCE SHEET (cont'd)
(as required by rule 404(c))
<TABLE>
<CAPTION>
<S> <C> <C>
N-1A
- --------
Item No. Location
- -------- ---------
18. Purchase, Redemption and
Pricing of Shares.................. Purchase, Redemption and
Pricing of Shares
19. Taxation of the Fund............... Taxation of the Trust
20. Underwriters....................... Not Applicable
21. Calculation of Performance Data.... Performance Information
22. Financial Statements............... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
PART A
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
RS DIVERSIFIED GROWTH PORTFOLIO
(formerly Robertson Stephens Diversified Growth Portfolio)
HARRIS ASSOCIATES VALUE PORTFOLIO
LEXINGTON CORPORATE LEADERS PORTFOLIO
STRONG GROWTH PORTFOLIO
MFS TOTAL RETURN PORTFOLIO
SAI GLOBAL LEADERS PORTFOLIO
The Securities and Exchange Commission
has not approved or disapproved these
securities nor has it determined that
this prospectus is accurate or complete.
It is a criminal
offense to state otherwise.
The date of this Prospectus is May 1, 2000
TABLE OF CONTENTS
Page
SUMMARY....................................................
The Trust and the Portfolios.............................
Performance..............................................
DESCRIPTION OF THE PORTFOLIOS..............................
MANAGEMENT OF THE PORTFOLIOS...............................
PERFORMANCE OF THE PORTFOLIOS..............................
COMPARABLE PERFORMANCE.....................................
PORTFOLIO SHARES...........................................
DISTRIBUTION OF SHARES.....................................
FINANCIAL HIGHLIGHTS.......................................
SUMMARY
THE TRUST AND THE PORTFOLIOS
All of the Portfolios described in this document are series of LPT Variable
Insurance Series Trust ("Trust"), an open-end management investment company.
Investment companies (or "mutual funds") pool the money of a number of different
investors and buy many different securities. Pooling allows the investors to
spread the risk of loss of their investments over more securities than they
could if they invested their money alone.
Although the Portfolios are structured the same as mutual funds, they are not
offered or sold directly to the public. Unless you are an insurance company, you
may only invest in the Portfolios through a variable annuity contract
("Contract"), which you purchase from an insurance company. The insurance
company becomes the legal shareholder in the Portfolio. You (the holder of the
Contract) are not a shareholder in the Trust, but have a beneficial interest in
it. Although you do not have the same rights as if you were a direct
shareholder, you are given many similar rights, such as voting rights under
rules of the Securities and Exchange Commission that apply to registered
investment companies.
Within limitations described in the Contract, owners may allocate the amounts
under the Contracts for ultimate investment in the various Portfolios of the
Trust. See the prospectus which is attached at the front of this Prospectus for
a description of:
o the Contract,
o the Portfolios of the Trust that are available under that Contract, and
o the relationship between increases or decreases in the net asset value of
Trust shares (and any dividends and distributions on such shares) and the
benefits provided under that Contract.
Some of the Portfolios have names and investment objectives that are very
similar to certain publicly available mutual funds that are managed by the same
money managers. These Portfolios are not those publicly available mutual funds
and will not have the same performance. Different performance will result from
such factors as different implementation of investment policies, different cash
flows into and out of the Portfolios, different fees, and different sizes.
A Portfolio's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a Portfolio with a small asset base.
A Portfolio may not experience similar performance as its assets grow.
The Contracts may be sold by banks. An investment in a Portfolio of the Trust
through a Contract is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
RS Diversified Growth Portfolio
Investment Goal
RS Diversified Growth Portfolio seeks long-term capital growth.
Principal Investment Strategies and Risks
RS Diversified Growth Portfolio
The Portfolio will invest at least 65% of its total assets in stocks and
warrants of companies that have a market capitalization of $3 billion or less.
The Subadviser looks for companies that it believes have a potential for growth
that other investors have not recognized. The Subadviser may invest a larger
percentage of the assets of the Portfolio in a single company than do other
investment advisers.
The principal risks of investing in the Portfolio are:
o Investments in small to medium sized companies may produce higher returns
than investments in companies with larger capitalizations; however, companies
with smaller capitalizations may have a higher risk of failure than larger
companies.
o There is no assurance that the Subadviser will find securities that meet
the goals of the Portfolio or that the companies the Subadviser selects will
reach their potential value. The value of the securities purchased by the
Portfolio may decline as a result of economic, political or market conditions or
an issuer's financial circumstances.
o The portfolio manager's judgment that a particular security is
undervalued in relation to the company's fundamental economic values may prove
incorrect. Stocks of undervalued companies may never achieve their potential
value.
o Investing larger amounts in a single company can increase the potential
risk to the Portfolio if one of those companies is not successful.
o Engaging in short sales of stock can increase the losses of the
Portfolio.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you (the
owner of the Contract) originally invested in the Portfolio. If you liquidate
your investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
Harris Associates Value Portfolio
Investment Goal
Harris Associates Value Portfolio seeks long-term capital appreciation.
Principal Investment Strategies and Risks
Harris Associates Value Portfolio
The Portfolio will invest at least 65% of its total assets in stocks or
securities that can be converted into stocks. The Subadviser may invest up to
25% of the assets in securities of non-U.S. companies and may invest up to 25%
of the assets in lower quality, higher-yielding, bonds (junk bonds).
The principal risks of investing in the Portfolio are:
o The value of the securities purchased by the Portfolio may decline as a
result of economic, political or market conditions or an issuer's financial
circumstances.
o Investments in small to medium sized companies may produce higher returns
than investments in companies with larger capitalizations; however, companies
with small capitalizations may have a higher risk of failure than larger
companies.
o The portfolio manager's judgment that a particular security is
under-valued in relation to the company's fundamental economic values may prove
incorrect. Stocks of undervalued companies may never achieve their potential
value.
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes in
currency exchange rates, additional transaction costs and more difficulty in
selling the securities.
o Lower quality, higher-yielding, bonds (junk bonds) may have a greater
potential return than higher quality bonds but also have a higher risk of
default.
o Engaging in short sales of stock can increase the losses of the Portfolio.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payment you (the owner
of the Contract) originally invested in the Portfolio. If you liquidate your
investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
Lexington Corporate Leaders Portfolio
Investment Goal
Lexington Corporate Leaders Portfolio seeks long-term capital growth and income.
Principal Investment Strategies and Risks
Lexington Corporate Leaders Portfolio
The Portfolio will invest in the stocks of large, well-established companies
that have a market capitalization greater than $1 billion. The stocks that the
Portfolio will own will be substantially selected from among the stocks of
companies represented in the Dow Jones Industrial Average (DJIA), but the
Portfolio is not limited in its investment to companies in the DJIA and will
purchase shares of other companies that meet its investment criteria.
The principal risks of investing in the Portfolio are:
o The value of the securities purchased by the Portfolio may decline as a
result of economic, political or market conditions or an issuer's financial
circumstances.
o Larger more established companies may be unable to respond quickly to new
competitive challenges such as changes in technology and consumer tastes. Many
larger companies also may not be able to attain the high growth rate of
successful smaller companies, especially during extended periods of economic
expansion.
o Although the Subadviser expects to invest in the stocks of companies
listed in the DJIA, the Subadviser does not expect the Portfolio to have the
same return as the Dow Jones Industrial Average.
o The Portfolio is not required to be diversified and therefore the
Subadviser may invest in a small number of companies. Investing in a small
number of companies can increase the potential risk to the Portfolio if one of
those companies is not successful.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you (the
owner of the Contract) originally invested in the Portfolio. If you liquidate
your investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
Strong Growth Portfolio
Investment Goal
Strong Growth Portfolio seeks capital growth.
Principal Investment Strategies and Risks
Strong Growth Portfolio
The Portfolio will invest at least 65% of its assets in stocks and securities
that can be converted into stocks, which may include a substantial amount of
stocks of companies that have a market capitalization of $3 billion or less. The
Subadviser may also invest up to 25% of the assets in foreign securities,
including up to 15% of the assets directly in securities of non-U.S. Companies
and the rest in depository receipts.
The principal risks of investing in the Portfolio are:
o Investments in small- to medium-sized companies may produce higher returns
than investments in companies with larger capitalizations; however, companies
with smaller capitalizations may have a higher risk of failure than larger
companies.
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes in
currency exchange rates, higher transaction costs and more difficulty in selling
the securities.
o General stock risks: The major risk of the Portfolio is that of investing
in the stock market. That means the Portfolio may experience sudden,
unpredictable declines in value, as well as periods of poor performance. Because
stock values go up and down, the value of your Portfolio's shares may go up and
down. Therefore, when you sell your investment, you may receive more or less
money than you originally invested.
o Growth-style investing: Different types of stocks tend to shift into and
out of favor with stock market investors depending on market and economic
conditions. Because the Portfolio focuses on growth-style stocks, the
Portfolio's performance may at times be better or worse than the performance of
stock funds that focus on other types of stocks, or that have a broader
investment style.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you (the
owner of the Contract) originally invested in the Portfolio. If you liquidate
your investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
MFS Total Return Portfolio
Investment Goal
MFS Total Return Portfolio seeks total return.
Principal Investment Strategies and Risks
MFS Total Return Portfolio
The Portfolio seeks to meet its goal by investing between 40% and 75% of its
assets in stocks and securities that can be converted into stocks and at least
25% of its assets in debt obligations, including up to 20% in lower-quality,
higher-yielding bonds (junk bonds).
The principal risks of investing in the Portfolio are:
o The value of the securities purchased by the Portfolio may decline as a
result of economic, political or market conditions or on issuer's financial
circumstances.
o The issuer of a fixed income security owned by the Portfolio may be unable
to make interest or principal payments.
o Fluctuations in interest rates may affect the value of the Portfolio's
interest-paying fixed income securities.
o Lower quality, higher-yielding, bonds (junk bonds) may have a greater
potential return than higher quality bonds but also have a higher risk of
default.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you (the
owner of the Contract) originally invested in the Portfolio. If you liquidate
your investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
SAI Global Leaders Portfolio
Investment Goal
SAI Global Leaders Portfolio seeks long-term capital growth.
Principal Investment Strategies and Risks
SAI Global Leaders Portfolio
The Portfolio seeks to meet its goals by investing primarily in equity
securities of foreign and domestic companies with large market capitalizations
($3 billion or more).
The Portfolio may invest up to 80% of its assets in foreign equity securities,
including depository receipts or shares. The Portfolio usually invests in
companies from at least three different countries.
The Portfolio may invest up to 35% of its assets in intermediate- to long-term
debt securities. The Portfolio may invest up to 20% of its assets in
non-investment grade debt securities.
The principal risks of investing in the Portfolio are:
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes in
currency exchange rates, additional transaction costs and more difficulty in
selling the securities.
o Lower quality, higher-yielding, bonds (junk bonds) may have a greater
potential return than higher quality bonds but also have a higher risk of
default.
o The value of the securities purchased by the Portfolio may decline as a
result of economic, political or market conditions or an issuer's financial
circumstances.
o Larger more established companies may be unable to respond quickly to new
competitive challenges such as changes in technology and consumer tastes. Many
larger companies also may not be able to obtain the high growth rates of
successful smaller companies, especially during extended periods of economic
expansion.
o The issuer of a fixed income security owned by the Portfolio may be unable
to make interest or principal payments.
o Fluctuations in interest rates may affect the value of the Portfolio's
interest-paying fixed income securities.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you (the
owner of the Contract) originally invested in the Portfolio. If you liquidate
your investment in a Portfolio when the value is low, you have a greater risk of
receiving less than the amount you originally invested.
PERFORMANCE
The following charts provide information about the performance of each of the
Portfolios. The SAI Global Leaders Portfolio commenced investment operations on
May 11, 1999. Therefore a bar chart and annual return table have not been
included for this Portfolio. For the other Portfolios, unless noted otherwise,
information is shown from February 9, 1996 (the date the Portfolios were first
offered for investment) through December 31, 1999. The bar charts show you how
much the performance of each Portfolio has varied for each calendar year since
it began operations. The amount of variation between years can show you how much
risk there is in investing in a particular Portfolio. The tables compare the
performance of each Portfolio to the performance of one or more broad market
indexes. This comparison can show you how well the Portfolio performed against
the market.
You should note, however, that since the Portfolios only started their
operations in 1996, there is only a limited performance history described below.
A longer history might give a clearer indication of the risks involved in
investing in the Portfolios.
The performance described below will give you an indication of how the
Portfolios have performed in the past. Of course, past performance is not
necessarily an indication of how the Portfolios will perform in the future. In
addition, the fees and expenses related to your Contract have not been included
in the calculations of performance shown below. Therefore, the actual
performance you would have received through your Contract would have been less
than the results shown below.
RS Diversified Growth Portfolio
(The following table will be depicted as a bar chart in the printed material.)
1997 19.12%
1998 17.42%
1999 137.04%
Best Quarter: Q.4 '99, up 64.88% Worst Quarter: Q.1 '97 down 20.40%
Average Annual Total Return
One Year Since Inception
Ended 12/31/99 (February 9, 1996)*
-------------- -------------------
RS Diversified Growth Portfolio 137.04% 36.89%
Standard & Poor's
Stock Index 21.04% 25.08%
Russell 2000 Small
Company Index 21.26% 12.81%
* The date the Portfolio was first available for sale. The current subadviser
has been managing the Portfolio since May 1, 1997.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") is an
unmanaged index of 500 leading stocks.
The Russell 2000 Small Company Index is an unmanaged index of 2000 small company
stocks.
Harris Associates Value Portfolio
(The following table will be depicted as a bar chart in the printed material.)
1997 25.56%
1998 4.31%
1999 4.65%
Best Quarter: Q.4 '98 up 14.91% Worst Quarter: Q.3 '98, down 15.09%
Average Annual Total Return
One Year Since Inception
Ended 12/31/99 (February 9, 1996)*
-------------- -------------------
Harris Associates Value
Portfolio 4.65% 13.82%
Standard & Poor's 500
Stock Index 21.04% 25.08%
Lipper Multi-Cap
Value Index 5.94% 13.70%
* The date the Portfolio was first available for sale. The current Subadviser
has been managing the Portfolio since May 1, 1997.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") is an
unmanaged index of 500 leading stocks.
The Lipper Multi-Cap Value Index is a nonweighted index investing in stocks and
corporate and government bonds.
Lexington Corporate Leaders Portfolio
(The following table will be depicted as a bar chart in the printed material.)
1997 24.71%
1998 12.04%
1999 20.05%
Best Quarter: Q.2 '97, up 14.71% Worst Quarter: Q.3 '98, down 10.75%.
Average Annual Total Return
One Year Since Inception
Ended 12/31/99 (February 9, 1996)*
-------------- -------------------
Lexington Corporate
Leaders Portfolio 20.05% 17.83%
Standard & Poor's 500
Stock Index 21.04% 25.08%
Lipper Large-Cap
Value Index 10.78% 18.39%
* The date the Portfolio was first available for sale.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") is an
unmanaged index of 500 leading stocks.
The Lipper Large-Cap Value Index is a nonweighted index investing in stocks and
corporate and government bonds.
Strong Growth Portfolio
(The following table will be depicted as a bar chart in the printed material.)
1997 25.56%
1998 30.43%
1999 81.45%
Best Quarter: Q.4 '99, up 58.05% Worst Quarter: Q.3 '98, down 11.16%
Average Annual Total Return
One Year Since Inception
Ended 12/31/99 (February 9, 1996)*
-------------- -------------------
Strong Growth Portfolio 81.45% 38.75%
Standard & Poor's 500
Stock Index 21.04% 25.08%
Russell 2000 Small
Company Index 21.26% 12.81%
* The date the Portfolio was first available for sale.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") is an
unmanaged index of 500 leading stocks.
The Russell 2000 Small Company Index is an unmanaged index of 2000 small company
stocks.
MFS Total Return Portfolio
(The following table will be depicted as a bar chart in the printed material.)
1997 21.18%
1998 11.98%
1999 2.92%
Best Quarter: Q.2 '97, up 10.46% Worst Quarter: Q.3 '99, down 4.45%
Average Annual Total Return
One Year Since Inception
Ended 12/31/99 (February 9, 1996)*
-------------- -------------------
MFS Total Return
Portfolio 2.92% 11.60%
Lehman Brothers
Aggregate Bond Index (0.82)% 5.32%
Lipper Balanced Fund
Index 8.98% 13.78%
* The date the Portfolio was first available for sale.
The Lehman Brothers Aggregate Bond Index is an unmanaged index of average yield
U.S. investment grade bonds.
The Lipper Balanced Fund Index is a nonweighted index investing in stocks and
corporate and government bonds.
DESCRIPTION OF THE PORTFOLIOS
Fundamental Policies. This Prospectus and the Statement of Additional
Information for the Trust describe certain investment policies of the Portfolios
as fundamental. The consent of the shareholders of a Portfolio (determined under
the rules of the Securities and Exchange Commission) is required to change a
fundamental policy. The Board of Trustees may change all other policies,
percentage limits and investment goals of the Portfolios without the consent of
shareholders or the holders of the Contracts who have assets invested in the
Portfolios.
RS Diversified Growth Portfolio (formerly known as Robertson Stephens
Diversified Growth Portfolio)
Before May 1, 1997, the Portfolio was called the Berkeley Smaller Companies
Portfolio and it had a different investment goal and a different subadviser.
Investment Goal
RS Diversified Growth Portfolio seeks long-term capital growth.
Implementation of Goal
The Subadviser of the RS Diversified Growth Portfolio seeks to
meet the goal of the Portfolio by investing the total assets of the Portfolio:
o at least 65% in common and preferred stocks and warrants (collectively
called stocks or equity securities) of small- to medium-sized companies, that is
companies which have market capitalizations of $3 billion or less (warrants are
securities that give the purchaser the right to buy common or preferred stock in
the future at a price that is fixed when the purchaser buys the warrant);
o in stocks and warrants of companies with market capitalizations greater
than $3 billion;
o in stocks and warrants of non-U.S. companies or stocks that trade in
non-U.S. markets; and
o in debt securities such as bonds, including lower-quality,
higher-yielding bonds (junk bonds).
Principal Strategies
The Subadviser seeks aggressively to find investment opportunities that other
investors and investment advisers may not find. The Subadviser will buy stocks
based on the Subadviser's evaluation of the company issuing the stock, the
economic climate, the sector of the market in which the company's operations are
involved and other investment factors that the Subadviser believes will mean the
stock will increase in value. The Subadviser may buy and sell securities at
different times than other investors or investment advisers. The Subadviser may
invest a larger percentage of the assets of the Portfolio in a single stock than
would many other investment advisers.
The Subadviser may engage in short sales of stock when the Subadviser expects
that the purchase price of the stock is going to go down. A short sale means
that the Subadviser agrees to sell the stock at a fixed price, but does not
deliver the stock until the sale date. A short sale protects the Portfolio from
a loss if the price goes down, or allows the Portfolio to realize a profit on
the stock. The Portfolio will not sell securities short if, immediately after
and as a result of the sale, the value of the securities sold short by the
Portfolio exceeds 25% of its total assets. The Portfolio will limit short sales
of any one issuer's securities to 2% of the Portfolio's total assets and to 2%
of any one class of the issuer's securities.
Portfolio Turnover Rate
The Subadviser may actively trade the securities held by the Portfolio if the
Subadviser decides that the trades will help the Portfolio meet its investment
goal. Active trading can increase the portfolio turnover rate for the Portfolio.
The portfolio turnover rate for the Portfolio was 480.03% in 1999. The rate may
vary from year to year depending on markets and redemption requests.
Specific Risks of the Portfolio
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Smaller companies may have a greater risk of failing than more established
companies.
Stocks of undervalued companies may never achieve their potential value.
Investing large amounts in one security can increase losses.
Lower quality bonds have a greater risk of default than higher quality bonds.
Engaging in short sales of stock can increase the losses of the Portfolio.
Frequent trades of securities can increase costs of the Portfolio.
Investments in non-U.S. securities are subject to risks in addition to the
normal risks of investments.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of Portfolios. That section
discusses the above risks and some additional strategies and risks that could
affect the return you receive from an investment in the Portfolio.
Subadviser: RS Investment Management Company, L.P.
Portfolio Manager: John L. Wallace of RS Investment Management Company, L.P.
Harris Associates Value Portfolio
Before May 1, 1997, the Portfolio had different investment goals, policies and
restrictions and a different Subadviser.
Investment Goal
Harris Associates Value Portfolio seeks long-term capital appreciation.
Implementation of Goals
The Subadviser of the Harris Associates Value Portfolio seeks to meet the goal
of the Portfolio by investing the total assets of the Portfolio:
o at least 65% in common and preferred stocks and securities that can be
converted into stocks such as convertible bonds and warrants (collectively
called stocks or equity securities), including in stocks of smaller
companies, that is companies with market capitalizations of less than $1
billion;
o up to 25% in stocks or warrants of non-U.S. companies or stocks traded in
non- U.S. markets;
o in debt securities such as bonds issued by governments or corporations,
including up to 25% of its total assets in lower-quality, higher-yielding
bonds (junk bonds); and
o up to 10% in other investment companies, such as mutual funds.
Principal Strategies
The Subadviser tries to find stocks for the Portfolio that the Portfolio can buy
at a price that is significantly less than what the Subadviser believes the
stock is worth. The Subadviser believes that the Portfolio will benefit if the
Portfolio holds these undervalued stocks until they reach their potential value.
The Subadviser uses several methods to evaluate the companies whose stock the
Subadviser is considering for the Portfolio. The Subadviser relies primarily,
however on how well the Subadviser believes the company can produce cash for its
shareholders.
The Subadviser may engage in short sales of stock when the Subadviser expects
that the purchase price of the stock is going to go down. A short sale means
that the Subadviser agrees to sell the stock at a fixed price, but does not
deliver the stock until the sale date. The Portfolio may already own the stock,
but a short sale protects the Portfolio from a loss if the price goes down, or
allows the Portfolio to realize a profit on the stock. The Subadviser may use up
to 20% of the total assets of the Portfolio for short sales of securities. The
Subadviser will only sell stock short that it owns or that it has the right to
purchase and for which it has already paid.
Portfolio Turnover Rate
The portfolio turnover rate for the Portfolio for 1999 was 22.47%. The rate may
vary from year to year depending on markets and redemption requests.
Specific Risks of the Portfolio
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Stocks of undervalued companies may never achieve their potential value.
Smaller companies may have a greater risk of failing than more established
companies.
Investments in non-U.S. securities are subject to risks in addition to the
normal risks of investments.
Lower quality bonds have a greater risk of default than higher quality bonds.
Engaging in short sales of stock can increase the losses of the Portfolio.
Purchasing shares of other investment companies may result in the Portfolio
paying for some administrative costs both through the investment company it
purchases and directly.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of the Portfolios. That
section discusses the above risks and some additional strategies and risks that
could affect the return you receive from an investment in the Portfolio.
Subadviser: Harris Associates L.P.
Portfolio Managers: Kevin Grant and Floyd Bellman of Harris Associates L.P.
Lexington Corporate Leaders Portfolio
Investment Goal
Lexington Corporate Leaders Portfolio seeks long-term capital growth and income.
Implementation of Goal
The Subadviser of the Lexington Corporate Leaders Portfolio seeks to meet the
goal of the Portfolio by investing the assets of the Portfolio in the common
stocks of large, well-established companies. These are companies that have a
market capitalization greater than $1 billion, an established history of
earnings and dividend payments and a large number of publicly held shares with
high trading volume and a high degree of liquidity.
Principal Strategies
The stocks that the Subadviser will select for the Portfolio will be
substantially selected from among the stocks of companies represented in the Dow
Jones Industrial Average. The stocks will be selected from a list of the stocks
of approximately 100 companies that the Subadviser considers "corporate
leaders." These are companies that meet the standards listed above, which the
Subadviser has set for the investments of the Portfolio. Under normal
circumstances, the Subadviser will invest the assets of the Portfolio equally
among all of those stocks. The Subadviser does not have to invest in the stocks
of all of the companies listed on the Dow Jones Industrial Average and may
invest in stocks of companies not listed on the Dow Industrial Average if the
Subadviser believes that those companies meet the high standards it applies in
selecting stocks for the Portfolio.
The Subadviser is not required to diversify the assets of the Portfolio. The
Subadviser can invest one-half of the assets of the Portfolio in as few as two
companies by investing up to 25% of the total assets in the stocks of each
company. The Subadviser can invest the other half of the assets in as few as ten
companies by investing up to 5% of the total assets in the stocks of each
company.
The Dow Jones Industrial Average is a list put together by Dow Jones & Company
of companies that meet certain high standards and that represent dominant firms
in their respective industries. The return of the stocks on the Dow Jones
Industrial Average is used to measure the daily performance of the stock
markets. The Portfolio is not sponsored by Dow Jones & Company nor is it an
affiliate of Dow Jones & Company. The term "Dow Jones Industrial Average" and
the abbreviation "DJIA" are trademarks of Dow Jones & Company.
Portfolio Turnover Rate
The portfolio turnover rate for the Portfolio for 1999 was 10.06%. The rate may
vary from year to year depending on markets and redemption requests.
Specific Risks of the Portfolio
Although the Subadviser expects to invest in the stocks of companies listed in
the Dow Jones Industrial Average, the Subadviser does not expect the Portfolio
to have the same return as the Dow Jones Industrial Average.
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Since the Portfolio is not diversified, it can invest a large percentage of the
assets in a small number of different companies, which means there is a larger
risk to the Portfolio if one of those companies is not successful.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of the Portfolios. That
section discusses the above risks and some additional strategies and risks that
could affect the return you receive from an investment in the Portfolio.
Subadviser: Lexington Management Corporation.
Portfolio Manager: An investment management team from the Subadviser is
responsible for the day to day management of the Portfolio. Richard M. Hisey,
a Managing Director and Chief Financial Officer of Lexington Management
Corporation, is the lead manager.
Strong Growth Portfolio
Investment Goal
Strong Growth Portfolio seeks capital growth.
Implementation of Goals
The Subadviser of the Strong Growth Portfolio seeks to meet the goal of the
Portfolio by investing the total assets of the Portfolio:
o at least 65% in common and preferred stocks and securities that can be
converted into stocks, such as warrants and convertible bonds (collectively
called stocks or equity securities); the stocks may include a substantial
amount of stocks of small to medium sized companies, that is companies with
market capitalizations of $3 billion or less;
o up to 35% in debt obligations, such as bonds, issued by governments or
corporations, including up to 5% in debt which is considered below
investment grade, which may be lower-quality, higher-yielding bonds (junk
bonds);
o up to 15% in securities of non-U.S. companies or traded in non-U.S.
markets; and
o an unlimited amount of depository receipts which are securities traded in
U.S. dollars in U.S. markets, but which represent an indirect interest in
non-U.S. companies. The Subadviser has agreed, however, to limit the total
amount of its foreign investments, both direct and indirect through
depository receipts, to no more than 25% of the total assets of the
Portfolio.
Principal Strategies
The Strong Growth Portfolio focuses on stocks of companies that its manager
believes are reasonably priced and has above-average growth potential. The
Portfolio can include stocks of any size. The manager may decide to sell a stock
when the company's growth prospects become less attractive. The Portfolio's
active trading approach may increase the Portfolio's costs.
The manager may invest without limitation in cash or cash-type securities
(high-quality, short-term debt securities issued by corporations, financial
institutions, or the U.S. government) as a temporary defensive position to avoid
losses during adverse market conditions. Taking a temporary defensive position
could reduce the benefit to the Portfolio if the market goes up. In this case,
the Portfolio may not achieve its investment goals.
Portfolio Turnover Rate
The Subadviser may actively trade the securities held by the Portfolio if the
Subadviser decides that the trades will help the Portfolio meet its investment
goal. Active trading can increase the portfolio turnover rate for the Portfolio.
The portfolio turnover rate for the Portfolio was 342.87% in 1999. The rate may
vary from year to year depending on markets and redemption requests.
Specific Risks of the Portfolio
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Smaller companies may have a greater risk of failing than more established
companies.
Stocks of undervalued companies may never achieve their potential value.
Investments in non-U.S. securities are subject to risks in addition to the
normal risks of investments.
There is a risk in using derivative transactions that the security may not go up
or down as the Subadviser anticipates, resulting in a loss to the Portfolio.
Frequent trades of securities can increase costs of the Portfolio.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of the Portfolios. That
section discusses the above risks and some additional strategies and risks that
could affect the return you receive from an investment in the Portfolio.
Subadviser: Strong Capital Management, Inc.
Portfolio Manager: Mr. Ronald C. Ognar of Strong Capital Management, Inc.
MFS Total Return Portfolio
Investment Goal
MFS Total Return Portfolio seeks total return.
Implementation of Goal
The Subadviser of the MFS Total Return Portfolio seeks to meet the goal of the
Portfolio by investing the total assets of the Portfolio:
o at least 40% and no more than 75% in common and preferred stocks and
securities that can be converted into stocks, such as warrants and
convertible bonds (collectively called stock or equity securities);
o at least 25% in debt obligations, such as bonds, that produce income (fixed
income securities), including short-term obligations and including up to
20% of the assets in lower-quality, higher-yielding bonds (junk bonds).
Principal Strategies
The Subadviser selects investments for the Portfolio that it believes will
provide the Portfolio with a return that includes both above average income from
its investments (that is more income than you would receive from investing only
in stocks) and growth of capital from its investments.
The Subadviser will select investments for the Portfolio from a broad list of
securities that may be diversified among different types of companies and
different industries. The Subadviser will divide the assets between equity and
fixed income securities based on the Subadviser's evaluation of the then current
economic and market conditions and which securities will best help the Portfolio
meet its investment goal under those conditions.
Portfolio Turnover Rate
The Subadviser may actively trade the securities held by the Portfolio if the
Subadviser decides that the trades will help the Portfolio meet its investment
goal. Active trading can increase the portfolio turnover rate for the Portfolio.
The portfolio turnover rate for the Portfolio was 109.20% in 1999. The rate may
vary from year to year depending on markets and redemption requests.
Specific Risks of the Portfolio
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Lower quality bonds have a greater risk of default than higher quality bonds.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of the Portfolios. That
section discusses the above risks and some additional strategies and risks that
could affect the return you receive from an investment in the Portfolio.
Subadviser: Massachusetts Financial Services Company.
Portfolio Manager: David M. Calabro of Massachusetts Financial Services Company
is the head of a team of Portfolio managers responsible for the Portfolio.
Geoffrey L. Kurinsky, also of Massachusetts Financial Services Company, is
responsible for the management of the fixed income portion of the assets.
SAI Global Leaders Portfolio
Investment Goal
SAI Global Leaders Portfolio seeks long-term capital growth.
Implementation of Goal
The Portfolio may invest up to 80% of its net assets in foreign equity
securities, either directly or through depository shares.
The Portfolio will invest primarily in the equity securities of foreign and
domestic companies with large capitalizations (in excess of $3.0 billion). These
companies will also generally have a high degree of liquidity and will have
exhibited dominance in their respective industries on a global basis.
The Portfolio usually invests in issuers from at least three different
countries, although it may at times invest in fewer than three countries.
Outside the U.S., the Portfolio will invest primarily in Europe, Japan and
Australia.
The Portfolio may also invest up to 35% of its assets in intermediate- to
long-term debt securities including U.S. Government, U.S. Government Agency,
corporate and foreign debt obligations such as Brady Bonds.
The Portfolio may invest up to 20% of its assets in debt which is considered
below investment grade.
Principal Strategies
The Portfolio will primarily invest in common stocks, but may also invest in
other securities including preferred stocks, warrants, convertible bonds and
debt securities when the Subadviser perceives these other securities offer
attractive growth potential or to receive a return on idle cash.
The Portfolio will generally invest in companies that have the following
characteristics in the opinion of the Subadviser:
o Large capitalization with strong overall financial strength and sound
financing policies.
o High profitability as measured by an adjusted return on capital
calculation.
o A worldwide market for the company's products or services.
o High quality management with a history of providing attractive returns to
shareholders.
o A relatively narrow industry focus with exhibited dominance in that
industry.
o Strong earnings growth prospects and attractive valuation measures.
The Subadviser may use derivatives, including derivatives related to foreign
securities or currencies, for hedging or managing risk, and to a limited extent,
to seek an enhanced return. Derivatives are securities or agreements whose value
is derived from or comes from the value of some underlying asset, such as
futures and options.
Portfolio Turnover Rate
The Portfolio commenced investment operations on May 11, 1999. The portfolio
turnover rate for the Portfolio for the period from commencement of investment
operations through December 31, 1999 was 12.36%. The portfolio turnover rate for
the Portfolio may vary from year to year depending on market and redemption
requests.
Specific Risks of the Portfolio
Stocks tend to go up and down in value more than bonds or other debt (fixed
income) securities.
Investments in non-U.S. securities are subject to risks in addition to the
normal risks of investments.
There is a risk in using derivative transactions that the security may not go up
or down as the Subadviser anticipates, resulting in a loss to the Portfolio.
Lower quality bonds have a greater risk of default than higher quality bonds.
All of the above factors can reduce the return you may receive from an
investment in the Portfolio. You should review carefully the discussion below in
the Section called Investment Strategies and Risks of the Portfolios. That
section discusses the above risks and some additional strategies and risks that
could affect the return you receive from an investment in the Portfolio.
Subadviser: Select Advisors, Inc.
Portfolio Manager: David L. Ruff, CFA and Jack Waymire of Select Advisors, Inc.
Investment Strategies and Risks of the Portfolios
The following strategies will be used by some or all of the Portfolios. Unless
otherwise noted, the strategies and risks apply to all Portfolios. These
strategies can affect the return you receive from your investment in a
Portfolio.
Investment Goals. The above discussion lists investment goals for each of the
Portfolios described in this document. There is no assurance that the
Subadvisers will achieve the investment goals described above or any other
investment goals for the Portfolios. Furthermore, the Board of Trustees of the
Trust may change the investment goals of any of the Portfolios at any time,
without the consent of the shareholders or the holders of the Contracts who have
assets invested in the Portfolios.
Market Risks. All securities have market risk. The Subadvisers invest in
different types of securities and investment techniques all of which involve
varying amounts of risk. The value of bonds and other fixed income securities
will go up and down in response to changes in interest rates charged by the
Federal Reserve Bank and the lending banks. Stocks may be affected by the
overall domestic and international economies and by changes in demand for
certain products or in certain parts of the market.
Investments in Stocks. The investment strategies of all Portfolios involve
investing in stocks. Stocks tend to go up and down in value more than do
bonds or other debt obligations (fixed income securities), making them more
volatile. Volatile securities have a greater potential return than do fixed
income securities, but have more risk of loss. Although, in the past, stocks
that have been held for a long period of time have provided higher returns than
less volatile securities, there is no assurance that they will do so in the
future.
Investment in Bonds. The value of bonds and other debt obligations (fixed income
securities) will change when interest rates change. If interest rates go down,
the market value of bonds held by the Portfolio that pay higher interest rates
increases; however if interest rates go up, the market value of bonds held by
the Portfolio that pay lower interest rates goes down.
Smaller Companies. The Strong Growth Portfolio and the RS Diversified
Growth Portfolio will invest in the stocks of smaller companies. The Harris
Associates Value Portfolio may also invest in such stocks. Investment in
the stocks of smaller companies has risks in addition to the risk of investing
in any stocks. Smaller companies have less capitalization than larger companies
and a greater risk of failing. Smaller companies may be less diversified than
larger companies and therefore may be more at risk from economic changes that
affect only specific industries or markets.
Investing in Larger Companies. Larger more established companies may be unable
to respond quickly to new competitive challenges such as changes in technology
and consumer tastes. Many larger companies also may not be able to attain the
high growth rates of successful smaller companies, especially during an extended
period of economic expansion.
Purchasing for Value. When a Subadviser purchases stocks of companies that other
investors have not recognized as having value, there is a risk that those stocks
will never be recognized by other investors and therefore may not achieve their
potential value. This is an investment risk of the Harris Associates Value
Portfolio and the RS Diversified Growth Portfolio.
Limited Diversification. Each of the Portfolios, except the Lexington Corporate
Leaders Portfolio, is diversified as described in the Investment Company Act of
1940. Although the Lexington Corporate Leaders Portfolio is not diversified as
defined by the Investment Company Act of 1940, it will invest its assets so that
it meets the diversification requirements necessary to qualify it as a regulated
investment company under Subchapter M of the Internal Revenue Code. Investing
larger amounts in the securities of only a few companies can increase the
potential losses of the Portfolio, since a loss on that stock would have a
larger effect on the Portfolio than a loss on a stock in which the Portfolio has
a smaller interest. There is potentially a larger risk to the Portfolio if one
of its investments is not successful, or if there is a downturn in the industry
in which one of its investments is involved.
Derivatives. Derivatives can be volatile investments and involve certain risks.
A Portfolio may be unable to limit its losses by closing a position due to lack
of a liquid market or similar factors. Losses may also occur if there is not a
perfect correlation between the value of futures or forward contracts and the
related securities. The use of futures may involve a high degree of leverage
because of low margin requirements. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited gains or
losses to a Portfolio. Leverage may exaggerate losses of principal. The amount
of gains or losses on investments in futures contracts depends on the investment
adviser's ability to predict correctly the direction of stock prices, interest
rates and other economic factors. This risk applies to all Portfolios.
Foreign Securities. Investments in non-U.S. securities are subject to risks in
addition to the normal risks of investments. The value of non-U.S. securities
will change as the exchange rates for the currency in the countries where the
companies are located change. Some countries do not have the same kinds of laws
that protect the purchasers of securities, as do countries with more established
markets such as the United States.
Therefore, there is more risk in purchasing securities issued by companies
located in those countries. In addition, there may be less information available
about non-U.S. issuers, delays in settling sales of foreign securities and
governmental restrictions or controls that can adversely affect the value of
securities of foreign companies. Securities of foreign companies may not be as
easy to sell as securities of U.S. companies. The Portfolio may incur additional
costs in handling foreign securities, such as increased sales costs and custody
costs.
Repurchase Agreements. Under a repurchase agreement the purchaser acquires a
debt instrument for a relatively short time. The seller of the debt instrument
agrees to repurchase the instrument and the purchaser agrees to resell the
instrument at a fixed price and time. Repurchase agreements give the Portfolio
the potential for increased returns, but also have similar market risks to those
of investing in mortgage dollar roll transactions described below. If the value
of the security that will be repurchased increases above the repurchase price,
the Portfolio will benefit. However, if the value goes down, the Portfolio will
be purchasing a security at a price higher than its value. In addition in a
repurchase agreement, there is a risk that the other party will refuse to resell
the security at the end of the transaction period. The purchaser receives
collateral from the seller to back up the seller's agreement to repurchase;
however, there is a risk that the collateral may not be worth the amount paid by
the purchaser for the instrument. The purchaser may also have difficulty selling
the collateral.
Mortgage Dollar Roll Transactions. The Strong Growth Portfolio may engage in
mortgage dollar roll transactions. Mortgage dollar roll transactions have risks
that are similar to those of reverse repurchase agreements. These transactions
can increase the return of a Portfolio if the market value of the security sold
by the Portfolio goes up to a price higher than the price at which the Portfolio
can repurchase the security. However, if the market value goes down, the
Portfolio will be purchasing a security at a price that is higher than its
market value.
Borrowing. All of the Portfolios may borrow money for temporary or emergency
purposes. Most of the Portfolios can engage in borrowing by investing in dollar
roll transactions, repurchase agreements or similar securities. Some Portfolios
can borrow money or securities to increase the return on a Portfolio. Borrowing
money or securities increases the assets that a Portfolio has available to
invest. If the investments are profitable, the return for the Portfolio is
enhanced. However, if the investments lose value, the losses are exaggerated.
Lending Securities. Lending securities means that the Portfolio lends securities
that the Portfolio owns to a third party for a fee. The Portfolio holds other
assets of the borrower as collateral to insure the repayment of the securities
loaned. Lending Portfolio securities may result in losses to the Portfolio if
the borrower does not repay the securities loaned and the Portfolio is unable to
sell the collateral for an amount equal to the value of the loaned securities.
Below Investment Grade Bonds or Junk Bonds. The investment strategies of the MFS
Total Return Portfolio, Harris Associates Value Portfolio and the SAI Global
Leaders Portfolio involve investing in lower quality bonds. Investing in below
investment grade bonds, such as the lower quality, higher yielding bonds called
junk bonds, can increase the risks of loss for a Portfolio. Junk bonds are bonds
that are issued by small companies or companies with limited assets or short
operating histories. These companies are more likely than more established or
larger companies to default on the bonds and not pay interest or pay back the
full principal amount. Third parties may not be willing to purchase the bonds
from the Portfolios, which means they may be difficult to sell and some may be
considered illiquid. Because of these risks, the companies issuing the junk
bonds pay higher interest rates than companies issuing higher-grade bonds. The
higher interest rates can give investors a higher return on their investment.
Short Sales. The RS Diversified Growth Portfolio and the Harris Associates
Value Portfolio may engage in short sales. Engaging in short sales of
stock can increase the losses of the Portfolio if the value of the stock
increases before the Portfolio buys the stock to cover the short sale.
Illiquid and Restricted Securities. Each Portfolio may invest up to 15% of its
assets in securities which it cannot easily sell or which it cannot sell quickly
(within seven days) without taking a reduced price for them (illiquid
securities). Any Portfolio may invest in securities that the Portfolio cannot
sell unless it meets certain restrictions (restricted securities). The
restrictions usually relate to the initial sale of the security, such as
securities purchased in a private transaction or securities sold only to
qualified purchasers. It may take the Subadvisers more time to sell illiquid or
restricted securities than it would take them to sell other securities. The
Portfolio might be forced to sell the securities at a discount or be unable to
sell securities at all that are losing value.
Cash Investments. In addition to the investments described above for each
Portfolio, each Subadviser may keep a portion of a Portfolio's assets in cash or
in investments that are as liquid as cash such as money market mutual funds. The
Subadvisers keep the cash available to meet unexpected expenditures such as
redemptions. Investments in cash or similar liquid securities (cash equivalents)
generally do not provide as high a return as would assets invested in other
types of securities.
Defensive Positions. The Subadvisers have described their strategies for
investing the assets of each Portfolio under normal market conditions. Under
extraordinary market, economic, political or other conditions, the Subadvisers
may not follow their normal strategies, but instead may take certain temporary,
defensive actions. These actions may include moving all assets to cash or cash
equivalent investments or taking extraordinary steps to limit losses in response
to adverse conditions. Defensive actions may prevent a Portfolio from achieving
its investment goal.
Portfolio Turnover. Some of the Subadvisers may buy and sell securities for the
Portfolios frequently, which increases a Portfolio's portfolio turnover rate.
That rate is the percentage of all the net assets of a Portfolio that are bought
and sold during a year. The higher the portfolio turnover rate, the higher will
be the related transaction costs, such as brokerage costs, charged to the
Portfolio. The Subadvisers that actively trade Portfolio assets expect that the
potentially improved performance from frequent transactions will offset the
higher costs; however, higher transaction costs can reduce the return of the
Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
Background. LPIMC Insurance Marketing Services has been the investment adviser
for each Portfolio since its inception. The day-to-day decisions about the
investment of assets are made by one or more Portfolio Managers who work for a
Subadviser appointed by the investment adviser for each Portfolio. The
investment adviser maintains its principal office at 1755 Creekside Oaks Drive,
Sacramento, California 95833. The investment adviser is a wholly-owned
subsidiary of London Pacific Life and Annuity Company, which is a wholly-owned
subsidiary of London Pacific Group Limited, a corporation listed on the New York
and London Stock Exchanges. As of December 31, 1999, London Pacific Group
Limited had a market capitalization of over $580 million and, either directly or
through its subsidiaries, managed or administered funds having total assets in
excess of $4.5 billion. London Pacific Life and Annuity Company issues the
Contracts through which you may invest in the Portfolios. The investment adviser
has been registered as an investment adviser with the Securities and Exchange
Commission since 1995.
Investment Advisory Agreement. The Board of Trustees oversees the investment of
the assets of each Portfolio. The Board, on behalf of the Trust and its
Portfolios, has entered into an Investment Advisory Agreement with the
investment adviser. The agreement authorizes the investment adviser to manage
the investment of the assets of each Portfolio, based on the investment goals
and policies of each Portfolio. The investment adviser must develop a program
for investing the assets of each Portfolio that is consistent with the
investment goal of each Portfolio and that follows the policies and restrictions
that the Board of Trustees has set for the Portfolios. This Prospectus and the
Statement of Additional Information describe these policies. (See the back cover
of this prospectus to find out how to get a free copy of the Statement of
Additional Information.) The investment adviser is responsible for determining
the securities to be bought, sold, held or lent by each Portfolio and for
carrying out those transactions.
Compensation. The investment adviser receives a fee, monthly, from each
Portfolio for management of the net assets of the Portfolio. The investment
adviser calculates the fee based on the average daily net assets of each
Portfolio. During 1999, the last fiscal year of the Portfolio, each of the
Portfolios paid the investment adviser the following percentage of its average
daily net assets as compensation for its services as investment adviser to the
Portfolios:
RS Diversified Growth .......................... .95%
Harris Associates Value ........................................ 1.00%
Lexington Corporate Leaders ................................... .65%
Strong Growth .................................................. .75%
MFS Total Return ............................................... .75%
SAI Global Leaders ............................................. .75%
The percentage of net assets paid to the investment adviser as an investment
advisory fee for each Portfolio changes with the amount of net assets in the
Portfolio. Generally the larger the net assets, the lower the fees as a
percentage of net assets.
Under the Investment Advisory Agreement, the Trust is obligated to pay the
Adviser a monthly fee at the following annual rates based on the average daily
net assets of a Portfolio:
ADVISORY FEE
PORTFOLIO (as a % of average daily net assets)
--------- ------------------------------------
RS Diversified Growth .95% of first $10 million
.90% of the next $25 million
.85% of the next $165 million
.80% over and above $200 million
Harris Associates Value 1.00% of first $25 million
.85% of next $75 million
.75% over and above $100 million
Lexington Corporate
Leaders .65% of first $10 million
.60% of next $90 million
.55% over and above $100 million
Strong Growth .75% of first $150 million
.70% of next $350 million
.65% over and above $500 million
MFS Total Return .75% of first $200 million
.70% of the next $1.1 billion
.65% over and above $1.3 billion
SAI Global Leaders .75% of first $25 million
.70% of next $75 million
.65% over and above $100 million
Other Services and Expenses. The investment adviser is also responsible for the
operation of each Portfolio and the supervision of others who provide services
to the Portfolios such as custodians, accountants and transfer agents. The
investment adviser must provide office space and the services of personnel to
carry out the operations of the Portfolios. The investment adviser pays all
ordinary office expenses for the Trust and the Portfolios. The investment
adviser also pays the salaries and costs of persons employed by the investment
adviser who serve as officers or Trustees of the Trust. The Portfolios are
responsible for all their own direct expenses such as fees of custodians,
accountants, transfer agents and unaffiliated trustees. London Pacific Life and
Annuity Company has voluntarily agreed to reimburse each of the Portfolios,
through December 31, 2000 for their expenses (other than brokerage commissions)
that exceed the following annual percentages of average daily net assets:
RS Diversified Growth .......................................... 1.39%
Harris Associates Value........... ............................ 1.29%
Strong Growth .................................................. 1.29%
Lexington Corporate Leaders..................................... 1.29%
MFS Total Return................................................ 1.29%
SAI Global Leaders.............................................. 1.29%
London Pacific Life and Annuity Company may withdraw or modify this policy of
expense reimbursement in the future.
Subadvisers and Portfolio Management
Subadvisory Agreements. The investment advisory agreement allows the investment
adviser to contract with third parties to provide some or all of its duties to
the Portfolios under the Investment Advisory Agreement. The investment adviser
has contracted with the Subadvisers listed below to provide day to day
management of the assets of each of the Portfolios. Under the terms of the
agreements between each Subadviser and the investment adviser, the Subadviser
will develop a plan for investing the assets of each Portfolio, select the
assets to be purchased and sold by each Portfolio, select the broker-dealer or
broker-dealers through which the Portfolio will buy and sell its assets, and
negotiate the payment of commissions, if any, to those broker-dealers. Each
Subadviser follows the policies set by the investment adviser and the Board of
Trustees for each of the Portfolios.
Compensation. Under the Subadvisory Agreements, the investment adviser has
agreed to pay each Subadviser a fee for its services out of the fees the
investment adviser receives from the Portfolios. During 1999, the last fiscal
year of the Portfolios, the investment adviser paid each of the Subadvisers fees
based on the following percentage of each Portfolio's average daily net assets:
RS Diversified Growth Portfolio................................ .70%
Harris Associates Value Portfolio.............................. .75%
Lexington Corporate Leaders Portfolio ......................... .40%
Strong Growth Portfolio........................................ .50%
MFS Total Return Portfolio..................................... .50%
SAI Global Leaders Portfolio................................... .50%
The percentage of net assets paid to the Subadvisers as fees for their services
to each Portfolio changes with the amount of net assets in the Portfolio.
Generally the larger the net assets, the lower the fees as a percentage of net
assets.
Under the terms of each Sub-Advisory Agreement, the Adviser shall pay to each
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to each Portfolio, monthly fees at the following annual
rates based on the average daily net assets of each Portfolio:
SUB-ADVISORY FEE
PORTFOLIO (as a % of average daily net assets)
--------- ------------------------------------
RS Diversified Growth .70% of first $10 million
.65% of the next $25 million
.60% of the next $165 million
.55% over and above $200 million
Harris Associates Value .75% of first $25 million
.60% of next $75 million
.50% over and above $100 million
Lexington Corporate .40% of first $10 million
Leaders .35% of the next $90 million
.30% over and above $100 million
Strong Growth .50% of first $150 million
.45% of the next $350 million
.40% over and above $500 million
MFS Total Return .50% of first $200 million
.45% of the next $1.1 billion
.40% over and above $1.3 billion
SAI Global Leaders .50% of first $25 million
.45% of next $75 million
.40% over and above $100 million
RS Diversified Growth Portfolio
Subadviser. RS Investment Management Company, L.P. (formerly Robertson, Stephens
& Company Investment Management, L.P.) has been the Subadviser of the Robertson
Stephens Diversified Growth Portfolio since May 1, 1997. The Subadviser was
formed in 1993 and has been registered as an investment adviser with the
Securities and Exchange Commission since 1993. It maintains its principal office
at 555 California Street, San Francisco, California 94104. The Subadviser is
principally owned by senior managers and portfolio managers of RS Investment
Management Company, LLC. As of December 31, 1999, the Subadviser and its
investment advisory affiliates were managing in excess of $8 billion for
public and private investment funds.
Portfolio Manager. John L. Wallace is responsible for the day to day management
of the assets of the Portfolio. Mr. Wallace has been a portfolio manager with
the Subadviser since July 1995. From 1990 until joining Robertson, Stephens &
Company, Mr. Wallace was a Vice President of Oppenheimer Funds, Inc. From 1991
through June 1995, he was the portfolio manager of the Oppenheimer Main Street
Income and Growth Fund and from 1990 through June 1995, he was the manager of
the Oppenheimer Total Return Fund. Mr. Wallace received his B.A. from the
University of Idaho and his M.B.A. from Pace University.
Harris Associates Value Portfolio
Subadviser. Harris Associates L.P. has been the Subadviser of the Harris
Associates Value Portfolio since May 1, 1997. The Subadviser has been in
business as an investment adviser since 1976. It maintains its principal office
at 2 North LaSalle Street, Chicago, Illinois 60602. The Subadviser is a wholly
owned subsidiary of Nvest, which is a publicly traded limited partnership that
owns investment management firms. A majority of the limited partnership
interests in Nvest are owned by Metropolitan Life Insurance Company. As of
December 31, 1999, the Subadviser was managing in excess of $12.6 billion for
its clients.
Portfolio Manager. Kevin Grant and Floyd Bellman are primarily responsible for
the day-to-day management of the Portfolio. Mr. Grant has been employed by
Harris Associates L.P. since 1988 and is a portfolio manager of The Oakmark
Fund. Mr. Grant is a Chartered Financial Analyst and holds a BS degree from the
University of Wisconsin and an MBA degree from Loyola University. Mr. Bellman
joined Harris Associates L.P. in 1995. From 1989 to 1995, Mr. Bellman was a Vice
President and Senior Portfolio Manager at Harris Trust and Savings Bank. Mr.
Bellman is a Chartered Financial Analyst and received his BBA degree from the
University of Wisconsin.
Lexington Corporate Leaders Portfolio
Subadviser. Lexington Management Corporation has been the Subadviser of the
Lexington Corporate Leaders Portfolio since February 9, 1996, the date the
Portfolio was first available for sale. The Subadviser and its predecessor
companies, registered investment advisers under the Investment Advisers Act of
1940, as amended, were established in 1938. It maintains its principal office at
Park 80 West Plaza Two, Post Office Box 1515, Saddle Brook, and New Jersey
07663. The Subadviser is a wholly owned subsidiary of Lexington Global Asset
Managers, Inc., which is privately owned. As of December 31, 1999, the
Subadviser was managing in excess of $3.6 billion in assets for its clients. The
service marks "Lexington" and "Corporate Leaders" are owned by Lexington
Management Corporation. The Portfolio has a sublicense to use the service marks
as long as Lexington Management Corporation or its affiliates manage the assets
of the Portfolio.
Portfolio Manager. The Lexington Corporate Leaders Portfolio is managed by
an investment management team. Richard M. Hisey is the lead manager. Mr.
Hisey is a Managing Director and Chief Financial Officer of Lexington
Management Corporation. He is also a Director of the Lexington Funds and
an Executive Vice President of Lexington Global Asset Managers, Inc. Mr.
Hisey joined the Subadviser in 1989. Mr. Hisey is a Chartered Financial
Analyst and holds an M.B.A. from the University of Connecticut.
Strong Growth Portfolio
Subadviser. Strong Capital Management, Inc. ("Strong") is the subadviser for the
Strong Growth Portfolio. Strong began conducting business in 1974. Since then,
its principal business has been providing investment advice for individuals and
institutional accounts, such as pension and profit-sharing plans, as well as
mutual funds, several of which are available through variable insurance
products. Strong provides investment management services for mutual funds and
other investment portfolios representing assets of over $38.8 billion as of
December 31, 1999. Strong's address is P.O. Box 2936, Milwaukee, Wisconsin
53201.
Portfolio Manager. Ronald C. Ognar, a Chartered Financial Analyst with more than
30 years of investment experience, is primarily responsible for the Strong
Growth Portfolio. He joined Strong in April 1993, after two years as a principal
and portfolio manager with RCM Capital Management. For approximately three years
prior to that, he was a portfolio manager at Kemper Financial Services in
Chicago. In addition to his duties as portfolio manager of the Strong Growth
Portfolio, Mr. Ognar has managed the Strong Growth Fund, the Strong Growth Fund
II and the Strong Growth 20 Fund since their inception on December 1993, June
1995 and June 1997, respectively. In addition, he has co-managed the Strong
Total Return Fund since December 1994 and the Strong Mid Cap Growth Fund since
January 1999.
MFS Total Return Portfolio
Subadviser. Massachusetts Financial Services Company has been the Subadviser of
the MFS Total Return Portfolio since February 9, 1996, the date the Portfolio
was first made available to the public. The Subadviser is the oldest mutual fund
organization in the United States. The Subadviser and its predecessor
organizations have a history of money management dating from 1924. It maintains
its principal office at 500 Boylston Street, Boston, Massachusetts 02116. The
Subadviser is an indirect subsidiary of Sun Life Assurance Company of Canada,
which is one of the largest international life insurance companies. As of
December 31, 1999, the Subadviser was managing approximately $136 billion in
assets.
Portfolio Manager. A team of investment professionals is responsible for the
day-to-day management of the MFS Total Return Portfolio. David M. Calabro, a
Senior Vice President of the Subadviser, is the head of the management team and
a manager of the common stock portion of the assets of the Portfolio. Mr.
Calabro, a Senior Vice President of MFS, has been employed by the Subadviser as
a portfolio manager since 1992. Mr. Calabro is the head of this portfolio
management team and a manager of the common stock portion of the Portfolio.
Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been employed by the
Subadviser as a portfolio manager since 1987. Mr. Kurinsky is the manager of the
Portfolio's fixed income securities. Constantinos G. Mokas, a Vice President of
MFS, has been a portfolio manager of the Portfolio since April 1, 1998, and has
been employed by the Sub-Adviser as a portfolio manager since 1990. Mr. Mokas is
the manager of the Portfolio's convertible securities. Lisa B. Nurme, a Senior
Vice President of MFS, has been employed by the Subadviser as a portfolio
manager since 1987. Ms. Nurme is a manager of the common stock portion of the
Portfolio. Each individual became a portfolio manager of the Portfolio on July
19, 1995. Kenneth J. Enright, a Senior Vice President of MFS, has been employed
by the Subadviser as a portfolio manager since 1986. Mr. Enright became a
manager of the common stock portion of the Portfolio on January 15, 1999.
SAI Global Leaders Portfolio
Subadviser. Select Advisors, Inc. (SAI) is an affiliate of London Pacific Life
and Annuity Company and of the investment adviser. SAI began operations in 1983
through its predecessor company, and is a registered investment adviser located
at 1755 Creekside Oaks Drive, Suite 290, Sacramento, CA 95833. SAI and
affiliated companies provide financial services for clients with assets in
excess of $2 billion. SAI is a wholly-owned subsidiary of the London Pacific
Group Limited, a corporation listed on the New York and London Stock Exchanges
with a market valuation of approximately $580 million. The London Pacific
Group Limited, which manages or administers funds valued at
approximately $9.5 billion (including the assets managed by the Sub-Adviser) as
of December 31, 1999, maintains offices in Jersey (Channel Islands), Sacramento,
Raleigh and San Francisco.
Portfolio Manager. The investment professionals primarily responsible for the
daily management of the Portfolio are David L. Ruff, CFA and Jack Waymire. Jack
Waymire founded the SAI predecessor company in 1983 and has 26 years of
investment experience. David Ruff has 12 years of investment experience, and
began with the SAI predecessor company in 1987.
PERFORMANCE OF THE PORTFOLIOS
Performance information for the Portfolios of the Trust, including a bar chart
and average annual total return information since the inception of the
Portfolios, is contained in this Prospectus under the heading "Performance."
COMPARABLE PERFORMANCE
Public Fund Performance
Each of the RS Diversified Growth Portfolio, the Harris Associates
Value Portfolio, the Strong Growth Portfolio and the MFS Total Return
Portfolio has a substantially similar investment objective and follows
substantially the same investment strategies as certain mutual funds whose
shares are sold to the public. Each of these public mutual funds is managed by
the same Subadviser which manages each of the corresponding Portfolios.
The historical performance of each of these public mutual funds is shown below.
This performance data should not be considered as an indication of future
performance of the Portfolios. The public mutual fund performance figures shown
below:
o reflect the deduction of the historical fees and expenses paid by the
public mutual funds and not those to be paid by the Portfolios;
o do not reflect Contract fees or charges imposed by London Pacific Life and
Annuity Company. Investors should refer to the separate account prospectus
for information describing the Contract fees and charges. These fees and
charges will have a detrimental effect on Portfolio performance.
The Portfolios and their corresponding public mutual fund series are expected to
hold similar securities. However, their investment results are expected to
differ for the following reasons:
o differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security
selections;
o differences in the relative weightings of securities;
o differences in the price paid for particular portfolio holdings;
o differences relating to certain tax matters.
The following table shows average annualized total returns for each comparable
public mutual fund for their fiscal 1999 years (ended December 31, 1999, except
September 30, 1999 for the MFS Total Return Fund). Also shown are performance
comparisons between these public mutual funds and comparable indices.
Since Inception
Fund 1 Year Inception Date
- - ----- ------ --------- ----
RS Diversified
Growth Fund 150.21% 57.08% 8/1/96
Standard & Poor's 500
Stock Index 21.04% 28.99% 8/1/96
Russell 2000 Small Company
Index 21.26% 15.87% 8/1/96
Since Inception
Fund 1 Year 5 Year Inception Date
----- ------ ------ --------- ----
Oakmark Fund of
the Harris Associates
Investment Trust (10.47)% 13.97% 21.17% 8/5/91
Standard & Poor's 500
Stock Index 21.04% 28.56% 27.37% 7/31/91
Lipper Multi-Cap
Value Index 5.94% 22.56% 14.18% 7/31/91
Since Inception
Fund 1 Year 5 Year Inception Date
- - ----- ------ ------- --------- ----
Strong Growth Fund 75.06% 34.86% 31.75% 12-31-93
Standard & Poor's
500 Stock Index 21.04% 28.56% 23.55% 1-1-94
Russell 2000 Small
Company Index 21.26% 16.69% 13.38% 1-1-94
Since Inception
Fund 1 Year 5 Year 10 Year Inception Date
- - ------ ------ ------ ------- --------- ----
MFS Total
Return Fund 2.31% 14.98% 11.41% 11.87% 10-6-70
Lehman Brothers
Aggregate Bond
Index (0.82)% 7.73% 7.70% 9.32% 1-1-70
Lipper Balanced
Fund Index 8.98% 16.63% 12.26% 11.38% 9-30-70
Description of Indices Used
Russell 2000 Small Company Index
An unmanaged index of 2000 small company stocks.
Lipper Multi-Cap Value Index
A nonweighted index investing in stocks and corporate and
government bonds.
Lehman Brothers Aggregate Bond Index
An unmanaged index of average yield U.S. investment grade bonds.
Lipper Balanced Fund Index
A nonweighted index investing in stocks and corporate and
government bonds.
Private Account Performance
The SAI Global Leaders Portfolio, which is subadvised by Select Advisors, Inc.
(SAI), commenced investment operations on May 11, 1999. This Portfolio has an
investment objective, policies and strategies which are substantially
similar to those employed by SAI with respect to certain Private Accounts.
Thus the performance information derived from these Private Accounts may be
deemed relevant to the investor. The performance of the Portfolio will
vary from the Private Account composite information because
o the Portfolio will be actively managed and its investments will from time
to time and will not be identical to the past portfolio investments of the
Private Accounts
o the Private Accounts are not subject to certain investment limitations,
diversification requirements and other restrictions imposed under federal
tax and securities laws which, if applicable, may have adversely affected
the performance results of the Private Account composites.
The chart below shows performance information derived from historical composite
performance of the Private Accounts. The performance figures shown below
represent the performance results of the composites of comparable Private
Accounts, adjusted to reflect the deduction of the fees and expenses paid or
anticipated to be paid by the Portfolio. The Private Account composites are not
substitutes for the performance history of the Portfolio. The Private Account
composite performance figures are time-weighted rates of return which include
all income and accrued income and realized and unrealized gains or losses, but
do not reflect the deduction of investment advisory fees actually charged to the
Private Accounts.
Investors should not consider the performance data of these Private Accounts as
an indication of the future performance of the Portfolio. The figures also do
not reflect the deduction of any insurance fees or charges which are imposed by
London Pacific Life and Annuity Company in connection with the Contracts.
Investors should refer to the separate account prospectus describing the
Contracts for information pertaining to these insurance fees and charges. Any
fees and charges will have a detrimental effect on the performance of the
Portfolio.
Since
Inception
Portfolio's Performance (May 11, 1999)
SAI Global Leaders Portfolio 17.00%
Standard & Poor's 500 Stock Index 9.26%
Private Account Composite Performance
Reduced by Portfolio Fees and Expenses
For the periods ended 12/31/99
Average Annual Total Return
Since
Inception Date
Private Account 1 Year (January 1, 1998)
- - --------------- - ---- -----------------
SAI Global Leaders Equity 27.26% 33.13%
Standard & Poor's 500 Stock Index 21.04% 24.73%
65% Standard & Poor's 500 Stock
Index/35% Morgan Stanley Capital
International Europe, Asia, and Far
East (EAFE) Index* 23.46% 24.62%
* The Morgan Stanley Capital International Europe, Asia and Far East (EAFE)
Index is an unmanaged index of leading international stocks.
Legal Proceedings
Neither the Trust nor any Portfolio is involved in any material legal
proceedings. Neither the investment adviser nor any Subadviser is involved in
any legal proceedings that if decided against any such party would materially
affect the ability of the party to carry out its duties to the Portfolios. None
of such persons is aware of any litigation that has been threatened.
PORTFOLIO SHARES
Price of Shares
The Portfolios are available as investment options under the Contracts. The
insurance companies offering the Contracts will purchase and sell shares for you
when you direct them to do so under the terms of your Contract. The Portfolios
will buy or sell shares at the price determined at the end of each day during
which the New York Stock Exchange is open for trading (see Net Asset Value,
below). The Portfolio must receive your order by 4:00 p.m. eastern time for you
to receive the price for that day. The Portfolio will buy or sell shares for
orders it receives after 4:00 p.m. at the price calculated for the next day on
which the New York Stock Exchange is open.
Placing Orders for Shares
The prospectus for your Contract describes the procedures for investing your
purchase payments in shares of the Portfolios. You may obtain a copy of that
prospectus, free of charge, from your insurance company or from the person who
sold you the Contract. The investment adviser and the life insurance company
will not consider an order to buy or sell shares in the Portfolios as received
until the order meets the requirements for documentation or signatures described
in the prospectus for your Contract. The Portfolios do not charge any fees for
selling (redeeming) shares. You should review the prospectus for your Contract
to see if the insurance company charges any fees for redeeming your interest in
the Contract or for moving your assets from one Portfolio to another.
Payment for Redemptions
Payment for orders to sell (redeem) shares will be made within seven days after
the investment adviser receives the order.
Suspension or Rejection of Purchases and Redemptions
The Portfolios may suspend the offer of shares, or reject any specific request
to purchase shares from a Portfolio at any time. The Portfolios may suspend
their obligation to redeem shares or postpone payment for redemptions when the
New York Stock Exchange is closed or when trading is restricted on the Exchange
for any reason, including emergency circumstances established by the Securities
and Exchange Commission.
Net Asset Value
The investment adviser calculates the value or price of each share of each
Portfolio (net asset value per share) at the close of business, usually 4:00
p.m., of the New York Stock Exchange, every day that the New York Stock Exchange
is open for business. The investment adviser determines the value of all assets
held by each Portfolio at the end of the day, subtracts all liabilities and
divides the total by the total number of shares outstanding. The investment
adviser provides this value to the insurance company, which uses it to calculate
the value of your interest in your Contract. It is also the price at which the
investment adviser will buy or sell shares in the Portfolios for orders it
receives that day. The investment adviser determines the value of the net assets
of the Portfolio by obtaining market quotations, where available, Short-term
debt instruments maturing in less than 60 days are valued at amortized cost.
Securities for which market quotations are not available are valued at their
fair value as determined, in good faith, by the investment adviser based on
policies adopted by the Board of Trustees.
Some of the Portfolios trade securities on foreign markets or in foreign
currencies. Those markets are open at different times and occasionally on
different days than securities traded on the New York Stock Exchange. Exchange
rates for foreign currencies are usually determined at 1:00 p.m. rather than
4:00 p.m. These factors may mean that the value of the securities held by these
Portfolios may change after the close of business of the New York Stock
Exchange.
Dividends and Distributions
Each Portfolio will declare and distribute dividends from net ordinary income
and will distribute its net realized capital gains, if any, at least annually.
The insurance companies generally direct that all dividends and distributions of
the Portfolios be reinvested in the Portfolios under the terms of the Contracts.
Tax Matters
The Trust intends to qualify as a regulated investment company under the tax law
and, as such distributes substantially all of each Portfolio's ordinary net
income and capital gains each calendar year as a dividend to the separate
accounts funding the Contracts to avoid an excise tax on certain undistributed
amounts. The Trust expects to pay no income tax. Dividends are reinvested in
additional full and partial shares of the Portfolio as of the dividend payment
date.
The Trust and its Portfolios intend to comply with special diversification and
other tax law requirements that apply to investments under the Contracts. Under
these rules, shares of the Trust will generally only be available through the
purchase of a variable life insurance or annuity contract. Income tax
consequences to Contract owners who allocate premiums to Trust shares are
discussed in the prospectus for the Contracts that is attached at the front of
this Prospectus.
DISTRIBUTION OF SHARES
Sales Charges
You will not have to pay any fees or sales charges for investing in a Portfolio
or for withdrawing money from a Portfolio. You may have to pay sales charges on
payments you make to your Contract or on amounts you withdraw from the Contract.
The prospectus for the Contract you have purchased describes those charges.
Classes of Shares
The Trust has the authority to issue two classes of shares - Class A and Class
B. the shares offered by this prospectus are Class A Shares. As of the date of
this prospectus, the Trust has not offered or sold any Class B shares.
Additional Information
This Prospectus sets forth concisely the information about the Trust and each
Portfolio that you should know before you invest money in a Portfolio. Please
read this prospectus carefully and keep it for future reference. The Trust has
prepared and filed with the Securities and Exchange Commission (Commission) a
Statement of Additional Information that contains more information about the
Trust and the Portfolios. You may obtain a free copy of the Statement of
Additional Information from your registered representative who offers you the
Contract. You may also obtain copies by calling the Trust at 1-800-852-3152 or
by writing to the Trust at the following address: 1755 Creekside Oaks Drive,
Sacramento, CA 95833.
FINANCIAL HIGHLIGHTS
Financial Information
The following information is intended to help you understand the financial
performance of the Portfolios since the time they were first offered to the
public. The total returns in the table represent the rate that an investor would
have earned or lost on an investment in the Portfolios, assuming reinvestment of
all dividends and distributions. The information applies to a single share
throughout each year indicated. This information has been audited by
PricewaterhouseCoopers LLP, Independent Accountants, whose unqualified report
thereon is included in the annual report for the Trust. The annual report is
incorporated by reference into the Statement of Additional Information for the
Trust. You will find information about how to get a free copy of the annual
report and Statement of Additional Information on the back cover of this
prospectus.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LPT Variable Insurance Series Trust
Financial Highlights
For a Share Outstanding Throughout the Period
Harris
Associates Value Portfolio (1)
---------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Period Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.03 $13.45 $11.86 $10.00
Income from Investment Operations:
Net investment income (a) 0.05 0.10 0.08 0.10
Net realized and unrealized gain on investments 0.61 0.48 2.94 2.13
---- ---- ---- ----
Total from investment operations 0.66 0.58 3.02 2.23
---- ---- ---- ----
Less Distributions:
Dividends from net investment income (0.09) 0.00 (0.05) (0.10)
Distributions from net realized capital gains (0.65) 0.00 (1.38) (0.27)
----- ---- ----- -----
Total distributions (0.74) 0.00 (1.43) (0.37)
----- ---- ----- -----
Net Asset value, End of Period $13.95 $14.03 $13.45 $11.86
====== ====== ====== ======
Total Return ++ 4.65% 4.31% 25.56% 20.39%
==== ==== ===== =====
Ratios to Average Net Assets/Supplemental
Data
Net assets, end of period (in 000's) $6,535 $7,223 $3,523 $1,421
Ratio of operating expenses to average net assets 1.29% 1.29% 1.29% 1.26%+
Ratio of net investment income to average net assets 0.35% 0.75% 0.56% 1.01%+
Portfolio turnover rate 22.47% 49.83% 84.94% 41.08%
Ratio of operating expenses to average net
assets before expense reimbursements 1.85% 1.85% 4.22% 7.55%+
Net investment income (loss) per share before
expense reimbursements (a) $(0.03) $0.03 $(0.32) $(0.52)
+ Annualized
++ Total returns represent aggregate total return for the years ended December 31, 1999, 1998 and 1997 and for the period February
9, 1996 (effective date) to December 31, 1996, respectively. The total returns would have been lower if certain expenses had
not been reimbursed by London Pacific.
(a) Based on the average of the daily shares outstanding throughout the year.
(1) Formerly MAS Value Portfolio (Note 1)
* For the period January 31, 1996 (Commencement of Operations) to December 31, 1996
</TABLE>
<TABLE>
<CAPTION>
LPT Variable Insurance Series Trust
Financial Highlights
For a Share Outstanding Throughout the Period
MFS Total Return Portfolio
--------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Period Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.28 $12.80 $10.90 $10.00
Income from Investment Operations:
Net investment income (a) 0.38 0.37 0.35 0.25
Net realized and unrealized gain on investments 0.02 1.16 1.95 0.85
---- ---- ---- ----
Total from investment operations 0.40 1.53 2.30 1.10
---- ---- ---- ----
Less Distributions:
Dividends from net investment income (0.28) 0.00 (0.19) (0.20)
Distributions from net realized capital gains (0.57) (0.05) (0.21) (0.00)
----- ----- ----- -----
Total distributions (0.85) (0.05) (0.40) (0.20)
----- ----- ----- -----
Net Asset Value, End of Period $13.83 $14.28 $12.80 $10.90
====== ====== ====== ======
Total Return ++ 2.92% 11.98% 21.18% 9.81%
==== ===== ===== ====
Ratios to Average Net Assets/Supplemental
Data
Net assets, end of period (in 000's) $13,129 $11,766 $5,973 $1,529
Ratio of operating expenses to average net assets 1.29% 1.29% 1.29% 1.26%+
Ratio of net investment income to average net assets 2.67% 2.72% 2.80% 2.59%+
Portfolio turnover rate 109.20% 126.29% 103.75% 53.91%
Ratio of operating expenses to average net
assets before expense reimbursements 1.60% 1.87% 3.88% 7.84%+
Net investment income (loss) per share
before expense reimbursements (a) $0.34 $0.29 $0.03 $(0.38)
+ Annualized
++ Total returns represent aggregate total return for the years ended December 31,1999, 1998 and 1997 and for the period February
9,1996 (effective date) to December 31, 1996, respectively. The total returns would have been lower if certain expenses had
not been reimbursed by London Pacific.
(a) Based on the average of the daily shares outstanding throughout the year.
* For the period January 31, 1996 (Commencement of Operations) to December 31, 1996
</TABLE>
<TABLE>
<CAPTION>
LPT Variable Insurance Series Trust
Financial Highlights
For a Share Outstanding throughout the Period
Strong Growth Portfolio
-----------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Period Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.06 $13.47 $11.92 $10.00
Income from investment operations:
Net investment income (loss) (a) (0.18) (0.08) (0.04) 0.25
Net realized and unrealized gain on
investments 13.79 4.17 3.07 2.49
----- ---- ---- ----
Total from investment operations 13.61 4.09 3.03 2.74
----- ---- ---- ----
Less distributions:
Dividends from net investment income 0.00 0.00 0.00 (0.22)
Distributions from net realized capital gains (3.31) (0.50) (1.48) (0.60)
----- ----- ----- -----
Total distributions (3.31) (0.50) (1.48) (0.82)
----- ----- ----- -----
Net Asset Value, End of Period $27.36 $17.06 $13.47 $11.92
====== ====== ====== ======
Total return ++ 81.45% 30.43% 25.56% 20.27%
===== ===== ===== =====
Ratios to Average Net Assets/Supplemental
Data
Net assets, end of period (in 000's) $14,363 $6,860 $2,912 $1,513
Ratio of operating expenses to average net assets 1.29% 1.29% 1.29% 1.26%+
Ratio of net investment income (loss) to average
net assets (0.88%) (0.53%) (0.26%) 2.25%+
Portfolio turnover rate 342.87% 275.16% 270.11% 422.67%
Ratio of operating expenses to average net
assets before expense reimbursements 1.80% 2.39% 4.44% 7.09%+
Net investment income (loss) per share before
expense reimbursements (a) $(0.28) $(0.24) $(0.46) $(0.39)
+ Annualized
++ Total returns represent aggregate total return for the years ended December 31, 1999, 1998 and 1997 and for the period February
9, 1996 (effective date) to December 31, 1996, respectively. The total returns would have been lower if certain expenses had
not been reimbursed by London Pacific.
(a) Based on the average of the daily shares outstanding throughout the year.
* For the period January 31, 1996 (Commencement of Operations) to December 31, 1996
</TABLE>
<TABLE>
<CAPTION>
LPT Variable Insurance Series Trust
Financial Highlights
For a Share Outstanding throughout the Period
RS Diversified Growth Portfolio (1)
-----------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Period Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.00 $10.22 $8.58 $10.00
Income from investment operations:
Net investment income (loss) (a) (0.14) (0.08) (0.07) 2.10
Net realized and unrealized gain (loss) on investments 15.96 1.86 1.71 (1.69)
----- ---- ---- -----
Total from investment operations 15.82 1.78 1.64 0.41
----- ---- ---- ----
Less distributions:
Dividends from net investment income 0.00 0.00 0.00 (1.83)
Distributions from net realized capital gains (4.77) 0.00 0.00 (0.00)
----- ---- ---- -----
Total distributions (4.77) 0.00 0.00 (1.83)
----- ---- ---- -----
Net Asset Value, End of Period $23.05 $12.00 $10.22 $8.58
====== ====== ====== =====
Total return ++ 137.04% 17.42% 19.12% 2.42%
====== ===== ===== ====
Ratios to Average Net Assets/Supplemental
Data
Net assets, end of period (in 000's) $15,042 $6,257 $3,452 $1,441
Ratio of operating expenses to average net assets 1.39% 1.39% 1.39% 1.36%+
Ratio of net investment income (loss) to average
net assets (0.87%) (0.73%) (0.72%) 20.30%+
Portfolio turnover rate 480.03% 381.64% 234.54% 2,242.85%
Ratio of operating expenses to average net
assets before expense reimbursements 1.97% 2.37% 4.53% 7.02%+
Net investment income (loss) per share before
expense reimbursements (a) $(0.24) $(0.18) $(0.35) $1.51
+ Annualized
++ Total returns represent aggregate total return for the years ended December 31, 1999, 1998 and 1997 and for the period February
9, 1996 (effective date) to December 31, 1996, respectively. The total returns would have been lower if certain expenses had not
been reimbursed by London Pacific.
(a) Based on the average of the daily shares outstanding throughout the year.
(1) Formerly Berkeley Smaller Companies Portfolio (Note 1).
* For the period January 31, 1996 (Commencement of Operations) to December 31, 1996
</TABLE>
<TABLE>
<CAPTION>
LPT Variable Insurance Series Trust
Financial Highlights
For a Share Outstanding Throughout the Period
SAI Global Leaders
Lexington Corporate Leaders Portfolio Portfolio
--------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996* December 31, 1999**
----------------- ------------------- ----------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.97 $13.39 $11.44 $10.00 $10.00
Income from Investment Operations:
Net investment income (loss) (a) 0.09 0.12 0.13 0.14 (0.03)
Net realized and unrealized gain on
investments 2.91 1.49 2.70 1.42 1.73
---- ---- ---- ---- ----
Total from investment operations 3.00 1.61 2.83 1.56 1.70
---- ---- ---- ---- ----
Less distributions:
Dividends from net investment income (0.10) 0.00 (0.08) (0.12) 0.00
Distributions from net realized capital
gains (0.17) (0.03) (0.80) (0.00) 0.00
----- ----- ----- ----- ----
Total distributions (0.27) (0.03) (0.88) (0.12) 0.00
----- ----- ----- ----- ----
Net Asset Value, End of Period $17.70 $14.97 $13.39 $11.44 $11.70
====== ====== ====== ====== ======
Total Return ++ 20.05% 12.04% 24.71% 12.84% 17.00%
===== ===== ===== ===== =====
Ratios to Average Net Assets/Supplemental
Data
Net assets, end of period (in 000's) $9,238 $8,169 $3,453 $1,323 $1,527
Ratio of operating expenses to average net
assets 1.29% 1.29% 1.29% 1.26%+ 1.29%+
Ratio of net investment income (loss) to
average net assets 0.53% 0.87% 0.99% 1.40%+ (0.50%)+
Portfolio turnover rate 10.06% 7.08% 35.69% 0.00% 12.36%
Ratio of operating expenses to average net
assets before expense reimbursements and
fee waivers 1.34% 1.60% 4.08% 6.86%+ 9.86%+
Net investment income (loss) per share before
expense reimbursements (a) $0.08 $0.08 $(0.24) $(0.41) $(0.61)
+ Annualized
++ Total returns represent aggregate total return for the years ended December 31, 1999, 1998 and 1997 and for the period
February 9, 1996 (effective date) to December 31, 1996, respectively, for the Lexington Corporate Leaders Portfolio. Total
return for SAI Global Leaders Portfolio is not annualized. The total returns would have been lower if certain expenses had not
been reimbursed and waived by London Pacific.
(a) Based on the average of the daily shares outstanding throughout the year.
* For the period January 31, 1996 (Commencement of Operations) to December 31, 1996
** For the period May 11, 1999 (Commencement of Operations) to December 31, 1999
</TABLE>
LPT VARIABLE INSURANCE SERIES TRUST
1755 Creekside Oaks Drive
Sacramento, California 95833
Additional information about the Trust and its Portfolios can be found in the
Statement of Additional Information. Additional information about the
Portfolios' investments is available in the Trust's annual and semi-annual
reports to shareholders. In the annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
performance of the Portfolios during their last fiscal year. The Statement of
Additional Information and the annual and semi-annual reports are available on
request without charge for any person having an interest in the Trust. Please
call 1-800-852-3152 or write to the Trust at the address listed above to request
copies of the Statement of Additional Information, the annual report, the
semi-annual report, or any additional information you would like about the
Portfolios or to ask questions about the Portfolios.
Information about the purchase and sale of the Trust shares and the related
costs is included in the prospectus for the Contracts that offer the Portfolios
as investments.
You may also view or obtain the Statement of Additional Information and annual
and semi-annual reports to shareholders from the Securities and Exchange
Commission:
* Call the Commission at 1-202-942-8090 for information on the operation
of the Public Reference Room
* Reports and other information about the Trust are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov
* Copies of the information may be obtained, after paying a duplicating
fee, by electronic request at [email protected], or by writing the
Commission's Public Reference Section, Wash. D.C. 20549-0102
On the Internet: www.sec.gov
The Trust's Investment Company Act filing number is 811-8960.
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
LPT VARIABLE INSURANCE SERIES TRUST
RS Diversified Growth Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Strong Growth Portfolio
MFS Total Return Portfolio
SAI Global Leaders Portfolio
The date of this Statement of Additional Information is May 1, 2000
This Statement of Additional Information is not a prospectus. It contains
information that supplements the information in the prospectus dated May 1,
2000, for the Trust and its Portfolios. It also contains additional information
that may be of interest to you. The prospectus incorporates this Statement of
Additional Information by reference. You may obtain a free copy of the
prospectus from your registered representative who offered or sold you your
Contract that uses the Portfolios for investment. You may also obtain copies by
calling London Pacific Life and Annuity Company at 1-800-852-3152 or by writing
to:
LPT VARIABLE INSURANCE SERIES TRUST
1755 Creekside Oaks Drive
Sacramento, California 95833
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<S> <C>
THE TRUST.........................................................................................................
INVESTMENT STRATEGIES AND RISKS...................................................................................
MANAGEMENT OF THE TRUST..........................................................................................
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..............................................................
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................
BROKERAGE ALLOCATION AND OTHER PRACTICES.........................................................................
CAPITAL STOCK AND OTHER SECURITIES...............................................................................
PURCHASE, REDEMPTION AND PRICING OF SHARES.......................................................................
TAXATION OF THE TRUST............................................................................................
PERFORMANCE INFORMATION..........................................................................................
FINANCIAL STATEMENTS.............................................................................................
</TABLE>
THE TRUST
History
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended (the
"Declaration of Trust").
Classification
The Trust is an open-end, management investment company. It is divided into
different series, each of which has its own assets, investment objectives and
policies. Each is managed separately, using distinct strategies appropriate to
its objectives and policies. The Trust currently has six Portfolios. The Trust
may authorize additional Portfolios in the future. Each Portfolio is authorized
to offer two different classes of shares. This document describes Class A
shares. The Trust has not issued any Class B shares. All the Portfolios, except
the Lexington Corporate Leaders Portfolio, are diversified, which means that for
75% of the assets of each Portfolio, no more than 5% is invested in any one
issuer and no Portfolio will own more than 10% of any single issuer. For
purposes of this restriction, the Rules of the Securities and Exchange
Commission do not consider the U.S. Government, its agencies and
instrumentalities to be a single issuer. The Trust cannot change its
classification as an open-end, management investment company without the consent
of a majority of its shareholders. A Portfolio that is currently diversified
cannot change to nondiversified without the approval of a majority of the
shareholders of that Portfolio.
Shareholder Liability
Under Massachusetts law, shareholders of a trust may be held personally liable
as partners for the obligations of the trust under certain circumstances. The
Declaration of Trust contains an express disclaimer of shareholder liability in
connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally liable
for the claims and liabilities to which a shareholder may become subject by
reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio itself would be unable to meet its
obligations. A copy of the Declaration of Trust is on file with the Secretary of
State of The Commonwealth of Massachusetts.
INVESTMENT STRATEGIES AND RISKS
Summary
The prospectus for the Trust describes the principal strategies of each of the
Portfolios and the risks of those strategies. This Section describes the
strategies that are not principal strategies for the Portfolios, but which the
Subadvisers may use in managing a Portfolio and the risks of those strategies.
Some of these strategies could affect the return of the Portfolio. Additional
information on certain Portfolios is also provided.
REPURCHASE AGREEMENTS
The Portfolios may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, the Portfolio buys a security at
one price, and at the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price (usually within seven days).
The repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. Repurchase agreements permit a Portfolio to
keep all its assets at work while retaining "overnight" flexibility in pursuit
of investments of a longer-term nature. The Sub-Adviser for each Portfolio will
monitor, on an ongoing basis, the value of the underlying securities to ensure
that the value always equals or exceeds the repurchase price plus accrued
interest. Repurchase agreements could involve certain risks in the event of a
default or insolvency of the other party to the agreement, including possible
delays or restrictions upon a Portfolio's ability to dispose of the underlying
securities. Each Portfolio will enter into repurchase agreements only with banks
or dealers, which in the opinion of each Portfolio's Sub-Adviser based on
guidelines established by the Trust's Board of Trustees, are deemed
creditworthy. A Portfolio may, under certain circumstances, deem repurchase
agreements collateralized by U.S. Government securities to be investments in
U.S. Government securities. Repurchase agreements with maturities of more than
seven days will be treated as illiquid securities by the Portfolios.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry; to earn additional
income on portfolio securities, such as Treasury bills and notes; or, with
respect to the Strong Growth Portfolio, for arbitrage transactions discussed
below. In a reverse repurchase agreement, a Portfolio temporarily transfers
possession of a security to another party, such as a bank, in return for cash,
and agrees to buy the security back at a future date and price. In a reverse
repurchase agreement, the Portfolio generally retains the right to interest and
principal payments on the security. Since a Portfolio receives cash upon
entering into a reverse repurchase agreement, it may be considered a borrowing
and therefore is subject to the overall percentage limitations on borrowings and
the restrictions on the purposes of borrowing described therein. (See
"Borrowing" and "Investment Restrictions.") When required by guidelines of the
Securities and Exchange Commission ("SEC"), a Portfolio will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
A Portfolio may also enter into mortgage dollar rolls, in which the Portfolio
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Portfolio would forego principal and interest
paid on the mortgage-backed securities during the roll period, the Portfolio
would be compensated by the difference between the current sales price and the
lower price for the future purchase as well as by any interest earned on the
proceeds of the initial sale. The Portfolio also could be compensated through
the receipt of fee income equivalent to a lower forward price. At the time the
Portfolio would enter into a mortgage dollar roll, it would set aside
permissible liquid assets in a segregated account to secure its obligation for
the forward commitment to buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Portfolio. (See "Borrowing.")
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Strong Growth Portfolio may be used as arbitrage transactions in which the
Portfolio will maintain an offsetting position in investment grade debt
obligations or repurchase agreements that mature on or before the settlement
date on the related mortgage dollar roll or reverse repurchase agreement. Since
the Portfolio will receive interest on the securities or repurchase agreements
in which it invests the transaction proceeds, such transactions may involve
leverage. However, since such securities or repurchase agreements will be high
quality and will mature on or before the settlement date of the mortgage dollar
roll or reverse repurchase agreement, the Sub-Adviser believes that such
arbitrage transactions do not present the risks to the Portfolio that are
associated with other types of leverage.
ILLIQUID OR RESTRICTED SECURITIES
A Portfolio may invest in securities that are considered illiquid because of the
absence of a readily available market or due to legal or contractual
restrictions. Each Portfolio may invest up to 15% of its net assets in such
securities or, with respect to the Strong Growth Portfolio, such other amounts
as may be permitted under the Investment Company Act of 1940 ("1940 Act"). The
Board of Trustees of the Trust has the ultimate authority to determine, to the
extent permissible under the federal securities laws, which securities are
illiquid for purposes of these limitations. Certain securities exempt from
registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended (the "1933 Act"), including securities that
may be resold pursuant to Rule 144A under the 1933 Act, may be considered
liquid. The Board of Trustees has adopted guidelines and delegated to the
Sub-Advisers the daily function of determining and monitoring the liquidity of
Rule 144A securities, although it has retained oversight and ultimate
responsibility for such determinations. Although no definitive liquidity
criteria are used, the Board of Trustees has directed the Sub-Advisers to look
to such factors as (i) the nature of the market for a security (including the
institutional private resale market), (ii) the terms of certain securities or
other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii) the
availability of market quotations (e.g. for securities quoted in the PORTAL s
system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the 1933 Act. Where registration is required, a Portfolio may be obligated
to pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Portfolio may
be permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a Portfolio
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Board of Trustees of the Trust. If through the appreciation of restricted
securities or the depreciation of unrestricted securities, a Portfolio should be
in a position where it has exceeded its maximum percentage limitation with
respect to its net assets which are invested in illiquid assets, including
restricted securities which are not readily marketable, the Portfolio will take
such steps as is deemed advisable, if any, to protect liquidity.
A Portfolio may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC options
written by the Portfolio. The assets used as cover for OTC options written by
the Portfolio will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Portfolio may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. Notwithstanding the
above, the Sub-Adviser for the Strong Growth Portfolio intends, as a matter of
internal policy, to limit each of such Portfolio's investments in illiquid
securities to 10% of its net assets.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
Government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. Government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt securities. Among the principal differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities, 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 Portfolio purchases these securities 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 the yield to maturity. Conversely, if a Portfolio
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Amounts available for reinvestment
by the Portfolio are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on securities
purchased by a Portfolio at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full. The market for privately issued mortgage- and asset-backed
securities is smaller and less liquid than the market for government-sponsored
mortgage-backed securities.
A Portfolio may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest only and principal only classes, a rate of prepayment that is
faster or slower than anticipated may result in a Portfolio failing to recover
all or a portion of its investment, even though the securities are rated
investment grade.
STRIPPED MORTGAGE SECURITIES. A Portfolio may purchase stripped mortgage
securities which are derivative multiclass mortgage securities. Stripped
mortgage securities 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 subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities. Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid and
to such extent, together with any other illiquid investments, will be subject to
the Portfolio's applicable restriction on investments in illiquid securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization
("NRSRO").
In addition to the stripped mortgage securities described above, a Portfolio may
invest in similar securities such as Super POs and Levered IOs which are more
volatile than POs, IOs and IOettes. Risks associated with instruments such as
Super POs are similar in nature to those risks related to investments in POs.
Risks connected with Levered IOs and IOettes are similar in nature to those
associated with IOs. The Portfolio may also invest in other similar instruments
developed in the future that are deemed consistent with its investment
objective, policies and restrictions. POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs are bonds that are collateralized by whole loan mortgages or mortgage
pass-through securities. The bonds issued in a CMO transaction are divided into
groups, and each group of bonds is referred to as a "tranche." Under the
traditional CMO structure, the cash flows generated by the mortgages or mortgage
pass-through securities in the collateral pool are used to first pay interest
and then pay principal to the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro rata return of
principal found in traditional pass-through obligations. Subject to the various
provisions of individual CMO issues the cash flow generated by the underlying
collateral to the extent it exceeds the amount required to pay the stated
interest) is used to retire the bonds. Under the CMO structure, the repayment of
principal among the different tranches is prioritized in accordance with the
terms of the particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issue, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or tranches,
in the sequence, as specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of bonds groups
continues until the last tranche, or group of bonds, is retired. Accordingly,
the CMO structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate and long
final maturities and expected average lives.
In recent years, new types of CMO structures have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds, and CMO
residuals. These newer structures affect the amount and timing of principal and
interest received by each tranche from the underlying collateral. Under certain
of these new structures, given classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments on
the underlying mortgages serving as collateral. An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life, and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can be
volatile. Some CMOs may also not be as liquid as other securities.
FOREIGN SECURITIES
Investment by a Portfolio in securities issued by companies or other issuers
whose principal activities are outside the United States involves significant
risks not present in U.S. investments. The value of securities denominated in
foreign currencies and of dividends and interest paid with respect to such
securities will fluctuate based on the relative strength of the U.S. dollar. In
addition, less publicly available information is generally available about
foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign companies are not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to U.S. companies.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the repatriation of monies or other assets
of a Portfolio, political or financial instability or diplomatic and other
developments which could affect such investments. Further, the economies of
particular countries or areas of the world may perform less favorably than the
economy of the U.S. and the U.S. dollar value of securities denominated in
currencies other than the U.S. dollar may be affected unfavorably by exchange
rate movements. Each of these factors could influence the value of a Portfolio's
shares, as well as the value of dividends and interest earned by a Portfolio and
the gains and losses which it realizes. It is anticipated that in most cases the
best available market for foreign securities will be on exchanges or in
over-the-counter markets located outside of the U.S. However, foreign securities
markets, while growing in volume and sophistication, are generally not as
developed as those in the U.S., and securities of some foreign companies
(particularly those located in developing countries) are generally less liquid
and more volatile than securities of comparable U.S. companies. Foreign security
trading practices, including those involving securities settlement where
Portfolio assets may be released prior to receipt of payment, may expose a
Portfolio to increased risk in the event of a failed trade or the insolvency of
a foreign broker-dealer. In addition, foreign brokerage commissions and other
fees are generally higher than on securities traded in the U.S. and may be
non-negotiable. These is less overall governmental supervision and regulation of
securities exchanges, securities dealers, and listed companies than in the U.S.
The Portfolios may invest in foreign securities that are restricted against
transfer within the U.S. or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
DEPOSITARY RECEIPTS
A Portfolio may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"), or other securities convertible into securities or issuers based in
foreign countries. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the U.S. securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for use in European securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement. For purposes of a Portfolio's investment
policies, ADRs and EDRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock. ADR facilities may be
established as either "unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects similar, there are
distinctions between them relating to the rights and obligations of ADR holders
and the practices of market participants. A depositary may establish an
unsponsored facility without participation by (or even necessarily the
acquiescence of) the issuer of the deposited securities, although typically the
depositary requests a letter of non-objection from such issuer prior to the
establishment of the facility. Holders of unsponsored ADRs generally bear all
the costs of such facilities. The depositary usually charges fees upon the
deposit and withdrawal of the deposited securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distributions, and the
performance of other services. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depositary. The deposit agreement sets out the rights and
responsibilities of the issuer, the depositary and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depositary), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities.
LENDING OF PORTFOLIO SECURITIES
Except with respect to the Harris Associates Value Portfolio, each Portfolio is
authorized to lend its portfolio securities to broker-dealers or institutional
investors that the Sub-Adviser deems qualified, but only when the borrower
maintains with the Portfolio's custodian bank collateral either in cash or money
market instruments in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. However, the Portfolios do not presently intend
to engage in such lending. In determining whether to lend securities to a
particular broker-dealer or institutional investor, the Sub-Adviser will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. A Portfolio will
retain authority to terminate any loans at any time. The Portfolios may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Portfolios
will receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Portfolios will retain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription rights
and rights to dividends, interest or other distributions, when retaining such
rights is considered to be in a Portfolio's interest.
Other than the Harris Associates Value Portfolio, each of the Portfolios may
lend up to 33 1/3% of the total value of its securities (except 30% with
respect to the MFS Total Return Portfolio).
BORROWING
The Portfolios may borrow money from banks, limited by each Portfolio's
investment restriction as to the percentage of its total assets that it may
borrow, and may engage in mortgage dollar roll transactions and reverse
repurchase agreements which may be considered a form of borrowing. (See
"Mortgage Dollar Rolls and Reverse Repurchase Agreements," above.) In addition,
the Strong Growth Portfolio may borrow up to an additional 5% of its respective
total assets from banks for temporary or emergency purposes. A Portfolio will
not purchase securities when bank borrowings exceed 5% of the Portfolio's total
assets.
HIGH-YIELD (HIGH RISK) SECURITIES
IN GENERAL. Certain Portfolios have the authority to invest in non-investment
grade debt securities (up to 5% of its net assets with respect to the Strong
Growth Portfolio). Non-investment grade debt securities (hereinafter referred to
as "lower-quality securities") include (i)bonds rated as low as C by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group "(S&P"), or
Fitch IBCA, Inc. ("Fitch"), or CCC by Duff & Phelps, Inc. ("D&P"); (ii)
commercial paper rated as low as C by S&P, Not Prime by Moody's or Fitch 4 by
Fitch; and (iii) unrated debt obligations of comparable quality. Lower-quality
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed below. Refer to "Description of NRSRO Ratings"
for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and comparable
unrated securities market is relatively new and its growth has paralleled a long
economic expansion. As a result, it is not clear how this market may withstand a
prolonged recession or economic downturn. Such an economic downturn could
severely disrupt the market for and adversely affect the value of such
securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality and comparable unrated
securities may experience financial stress and may not have sufficient revenues
to meet their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by an
issuer of these securities is significantly greater than issuers of higher-rated
securities because such securities are generally unsecured and are often
subordinated to other creditors. Further, if the issuer of a lower-quality or
comparable unrated security defaulted, a Portfolio might incur additional
expenses to seek recovery. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of these
securities and thus in the Portfolio's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market, and accordingly so will
a Portfolio's net asset value. If a Portfolio experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Portfolio may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Portfolio's asset base over
which expenses could be allocated and could result in a reduced rate of return
for the Portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities typically
contain redemption, call or prepayment provisions which permit the issuer of
such securities containing such provisions to, at its discretion, redeem the
securities. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them with
debt securities with a lower interest rate. To the extent an issuer is able to
refinance the securities, or otherwise redeem them, a Portfolio may have to
replace the securities with a lower yielding security, which would result in a
lower return for the Portfolio.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated securities will be more dependent on the Sub-Adviser's credit
analysis than would be the case with investments in investment-grade debt
securities. The Sub-Advisers employ their own credit research and analysis,
which includes a study of existing debt, capital structure, ability to service
debt and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Sub-Advisers
continually monitor the investments in each Portfolio's portfolio and carefully
evaluate whether to dispose of or to retain lower-quality and comparable unrated
securities whose credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. A Portfolio may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Portfolios anticipate
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, the Portfolio's asset value and ability to
dispose of particular securities, when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for a Portfolio to obtain accurate market quotations for purposes
of valuing the Portfolio's investments. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
LEGISLATION. Legislation has been adopted, and from time to time proposals have
been discussed, regarding new legislation designed to limit the use of certain
lower-quality and comparable unrated securities by certain issuers. An example
of legislation is a law which requires federally insured savings and loan
associations to divest their investments in these securities over time. It is
not currently possible to determine the impact of any proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could have
a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
U.S. GOVERNMENT OBLIGATIONS
U.S. Government Obligations include 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 the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES
Securities issued or guaranteed by Federal agencies and U.S. Government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. 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.
Agencies which are backed by the full faith and credit of the United States
include the Export Import Bank, Farmers Home Administration, Federal Financing
Bank, and others. Certain debt issued by Resolution Funding Corporation has both
its principal and interest backed by the full faith and credit of the U.S.
Treasury in that its principal is defeased by U.S. Treasury zero coupon issues,
while the U.S. Treasury is explicitly required to advance funds sufficient to
pay interest on it, if needed. Certain agencies and instrumentalities, such as
the Government National Mortgage Association, are, in effect, backed by the full
faith and credit of the United States through provisions in their charters that
they may make "indefinite and unlimited" drawings on the Treasury, if needed to
service its debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Federal National Mortgage Association,
are not guaranteed by the United States, but those institutions are protected by
the discretionary authority of the U.S. Treasury to purchase certain amounts of
their securities to assist the institution in meeting its debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the credit worthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized under
Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
BANK OBLIGATIONS
Bank obligations include, but are not limited to, negotiable certificates of
deposit, bankers' acceptances and fixed time deposits.
Fixed time deposits are obligations of U.S. banks, of foreign branches of U.S.
banks, or of foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Generally, fixed time deposits may be withdrawn on
demand by the investor, but they may be subject to early withdrawal penalties
which vary depending upon market conditions and the remaining maturity of the
obligation. Although fixed time deposits do not have a market, there are no
contractual restrictions on a Portfolio's right to transfer a beneficial
interest in the deposit to a third party.
Obligations of foreign banks and foreign branches of United States banks involve
somewhat different investment risks from those affecting obligations of United
States banks, including the possibilities that liquidity could be impaired
because of future political and economic developments, that the obligations may
be less marketable than comparable obligations of United States banks, that a
foreign jurisdiction might impose withholding taxes on interest income payable
on those obligations, that foreign deposits may be seized or nationalized, that
foreign governmental restrictions (such as foreign exchange controls) may be
adopted which might adversely affect the payment of principal and interest on
those obligations and that the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks, or the accounting, auditing and financial reporting standards,
practices and requirements applicable to foreign banks differ from those
applicable to United States banks. In that connection, foreign banks are not
subject to examination by any United States Government agency or
instrumentality.
SAVINGS AND LOAN OBLIGATIONS
The Portfolios may invest in savings and loan obligations which are negotiable
certificates of deposit and other short-term debt obligations of savings and
loan associations.
DEBT OBLIGATIONS
A Portfolio may invest a portion of its assets in debt obligations. Issuers of
debt obligations have a contractual obligation to pay interest at a specified
rate on specified dates and to repay principal on a specified maturity date.
Certain debt obligations (usually intermediate- and long-term bonds) have
provisions that allow the issuer to redeem or "call" a bond before its maturity.
Issuers are most likely to call such securities during periods of falling
interest rates.
PRICE VOLATILITY. The market value of debt obligations is affected by changes in
prevailing interest rates. The market value of a debt obligation generally
reacts inversely to interest-rate changes, meaning, when prevailing interest
rates decline, an obligation's price usually rises, and when prevailing interest
rates rise, an obligation's price usually declines. A fund portfolio consisting
primarily of debt obligations will react similarly to changes in interest rates.
MATURITY. In general, the longer the maturity of a debt obligation, the higher
its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form of
debt obligation. The term "bond" generally refers to securities with maturities
longer than two years. Bonds with maturities of three years or less are
considered short-term, bonds with maturities between three and seven years are
considered intermediate-term, and bonds with maturities greater than seven years
are considered long-term.
CREDIT QUALITY. The values of debt obligations may also be affected by changes
in the credit rating or financial condition of their issuers. Generally, the
lower the quality rating of a security, the higher the degree of risk as to the
payment of interest and return of principal. To compensate investors for taking
on such increased risk, those issuers deemed to be less creditworthy generally
must offer their investors higher interest rates than do issuers with better
credit ratings.
In conducting their credit research and analysis, the Sub-Advisers consider both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Sub-Advisers also rely, in part, on credit ratings
compiled by a number of NRSROs. See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. When a Sub-Adviser determines that market
conditions warrant a temporary defensive position, the Portfolios may invest
without limitation in cash and short-term fixed income securities, including
U.S. Government securities, commercial paper, banker's acceptances, certificates
of deposit, and time deposits.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
A Portfolio may invest in commercial paper, which refers to short-term,
unsecured promissory notes issued by U.S. and foreign corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months.
A Portfolio may also invest in non-convertible corporate debt securities (e.g.,
bonds and debentures) with no more than one year remaining to maturity at the
date of settlement. Corporate debt securities with a remaining maturity of less
than one year tend to become extremely liquid and are traded as money market
securities.
MUNICIPAL OBLIGATIONS
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included with the term Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax.
Other types of industrial development bonds, the proceeds of which are used for
the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Obligations,
although the current federal tax laws place substantial limitations on the size
of such issues.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are secured by revenues derived from the lease of
property to state and local government units. The underlying leases typically
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to a Portfolio. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks. Eurodollar and
Yankee obligations are subject to the same risks that pertain to domestic
issues, notably credit risk, market risk and liquidity risk. Additionally,
Eurodollar (and to a limited extent, Yankee) obligations are subject to certain
sovereign risks. One such risk is the possibility that a sovereign country might
prevent capital, in the form of dollars, from flowing across their borders.
Other risks include: adverse political and economic developments; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes, and the expropriation or
nationalization of foreign issuers.
BRADY BONDS
A portion of a Portfolio's fixed -income investments may be invested in certain
debt obligations customarily referred to as "Brady Bonds", which are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are
dollar-denominated) and they are actively traded in the over-the-counter
secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (I) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to Collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings have been implemented to date in various
countries including Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic,
Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines, Poland, Uruguay and
Venezuela. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS
A Portfolio may from time to time purchase securities on a "when-issued" basis.
The price of debt obligations purchased on a when-issued basis, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase. During
the period between the purchase and settlement, no payment is made by a
Portfolio to the issuer and no interest on the debt obligations accrues to the
Portfolio. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of a Portfolio's other assets. While
when-issued securities may be sold prior to the settlement date, the Portfolios
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time a Portfolio
makes the commitment to purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. The Portfolios do not believe that their respective net asset
values will be adversely affected by purchases of securities on a when-issued
basis.
The Portfolios will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. When the time
comes to pay for when-issued securities, a Portfolio will meet its obligations
from then-available cash flow, sale of the securities held in the separate
account, described above, sale of other securities or, although it would not
normally expect to do so, from the sale of the when-issued securities themselves
(which may have a market value greater or less than the Portfolio's payment
obligation).
WARRANTS
A Portfolio may acquire warrants. Warrants are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance) during a
specified period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
A Portfolio may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount to
their face value. Pay-in-kind securities pay interest through the issuance of
additional securities. 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, step-coupon, and pay-in-kind 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.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the floating or variable rate obligations that may be purchased by a
Portfolio may carry a demand feature that would permit the holder to tender them
back to the issuer of the instrument or to a third party at par value prior to
maturity. Some of the demand instruments purchased by a Portfolio are not traded
in a secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, a Portfolio
will nonetheless treat the instrument as "readily marketable" for the purposes
of its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days; if the notice
period is greater than seven days, the demand instrument will be characterized
as "not readily marketable" for such purpose.
A Portfolio's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Portfolio elects to demand
payment and the date payment is due that may affect the ability of the issuer of
the instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than the Trust's custodian subject to a sub-custodian agreement
approved by the Trust between that bank and the Trust's custodian.
SHORT SALES
A Portfolio may sell securities short to hedge unrealized gains on portfolio
securities. Selling securities short involves selling a security that a
Portfolio owns or has the right to acquire, for delivery at a specified date in
the future. If a Portfolio sells securities short, it may protect unrealized
gains, but will lose the opportunity to profit on such securities if the price
rises. All short sales must be fully collateralized and marked to market daily.
The net proceeds of the short sale will be retained by the broker (or by the
Trust's custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. A Portfolio also
will incur transaction costs in effecting short sales. Proposed legislation
would require recognition of unrealized gains from short sales and other
constructive sales.
INVERSE FLOATING RATE OBLIGATIONS
Certain Portfolios may invest in inverse floating rate obligations, or "inverse
floaters." Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the "reference rate"). Inverse floaters may constitute a class of CMOs
with a coupon rate that moves inversely to a designated index, such as LIBOR
(London Inter-Bank Offered Rate) or COFI (Cost of Funds Index). Any rise in the
reference rate of an inverse floater (as a consequence of an increase in
interest rates) causes a drop in the coupon rate while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate. In addition,
like most other fixed income securities, the value of inverse floaters will
generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying mortgage
assets.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
A Portfolio may purchase loan participations and other direct claims against a
borrower. In purchasing a loan participation, a Portfolio acquires some or all
of the interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans that are fully secured
offer the Portfolio more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which a
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. A Portfolio may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations acquired by a Portfolio may involve revolving
credit facilities or other standby financing commitments which obligate a
Portfolio to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring a Portfolio to increase its
investment in a company at a time when a Portfolio might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that a Portfolio is
committed to advance additional funds, it will at all times hold and maintain in
a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
A Portfolio's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which a Portfolio will purchase, the Sub-Adviser will
rely upon its (and not that of the original lending institutions) own credit
analysis of the borrower. As a Portfolio may be required to rely upon another
lending institution to collect and pass on to the Portfolio amounts payable with
respect to the loan and to enforce a Portfolio's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay or
prevent a Portfolio from receiving such amounts. In such cases, a Portfolio will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to the
diversification of a Portfolio's investments. The highly leveraged nature of
many such loans may make such loans especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans may involve additional
risks to a Portfolio. For example, if a loan is foreclosed, a Portfolio could
become part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, a Portfolio
could be held liable as a co-lender. It is unclear whether loans and other forms
of direct indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, a Portfolio
relies on the Sub-Adviser's research in an attempt to avoid situations where
fraud or misrepresentation could adversely affect the Portfolio. In addition,
loan participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, a Portfolio may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. To the extent that the Sub-Adviser
determines that any such investments are illiquid, a Portfolio will include them
in the investment limitations described below.
INDEXED SECURITIES
A Portfolio may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Index securities may include
securities that have embedded swaps (see "Swaps and Related Transactions") and
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Restrictions", a Portfolio may from time to time
invest in securities of other investment companies. The return on such
investments will be reduced by the operating expenses, including investment
advisory and administration fees, of such investment funds, and will be further
reduced by the Portfolio expenses, including management fees; that is, there
will be a layering of certain fees and expenses.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which a Portfolio may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, a Portfolio may
invest up to 10% of its assets in shares of investment companies and up to 5% of
its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
SWAPS AND RELATED TRANSACTIONS
A Portfolio may enter into interest rate swaps, currency swaps and other types
of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a
Portfolio's exposure to long or short-term interest rates (in the U.S. or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as securities prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names. A
Portfolio is not limited to any particular form or variety of swap agreement if
the Sub-Adviser determines it is consistent with the Portfolio's investment
objective and policies.
A Portfolio will maintain cash or appropriate liquid assets with its custodian
to cover its current obligations under swap transactions. If a Portfolio enters
into a swap agreement on a net basis (i.e., the two payment streams are netted
out, with the Portfolio receiving or paying as the case may be, only the net
amount of the two payments), the Portfolio will maintain cash or liquid assets
with its Custodian with a daily value at least equal to the excess, if any, of
the Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If the
Portfolio enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Portfolio's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If a
Sub-Adviser is incorrect in its forecasts of such factors, the investment
performance of the Portfolio would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Portfolio, the Portfolio must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Portfolio's risk of loss consists of the net
amount of payments that the Portfolio is contractually entitled to receive. The
Portfolio anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Sub-Advisers for
certain Portfolios may use a variety of derivative instruments, including
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, and forward currency contracts for any lawful purpose, such
as to hedge a Portfolio's investments, risk management, or to attempt to enhance
returns.
The use of these instruments is subject to applicable regulations of the SEC,
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Portfolio's ability to use these instruments will be
limited by tax considerations.
In addition to the products, strategies and risks described below and in the
Prospectus, the Sub-Advisers expect to discover additional derivative
instruments and other hedging techniques. These new opportunities may become
available as the Sub-Advisers develop new techniques or as regulatory
authorities broaden the range of permitted transactions. The Sub-Advisers may
utilize these opportunities to the extent that they are consistent with a
Portfolio's investment objective and permitted by a Portfolio's investment
limitations and applicable regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments involves
special considerations and risks as described below. Risks pertaining to
particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon a
Sub-Adviser's ability to predict movements of the overall securities and
currency markets, which requires different skills than predicting changes in the
prices of individual securities. While the Sub-Advisers are experienced in the
use of these instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of investments being
hedged. For example, if the value of an instrument used in a short hedge (such
as writing a call option, buying a put option, or selling a futures contract)
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Portfolio entered into a
short hedge because the Sub-Adviser projected a decline in the price of a
security in the Portfolio's investments, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the instrument. Moreover, if the price of
the instrument declined by more than the increase in the price of the security,
a Portfolio could suffer a loss.
(4) As described below, a Portfolio might be required to maintain assets as
"cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If a Portfolio were unable to close
out its positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. The requirements might impair a Portfolio's ability to sell
a portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Portfolio sell a portfolio security at a
disadvantageous time. A Portfolio's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to a Portfolio.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The Trust has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the CFTC and the National Futures Association, which
regulate trading in the futures markets. Pursuant to Rule 4.5 of the regulations
under the Commodity Exchange Act (the "CEA"), the notice of eligibility will
include representations that the Trust will use futures contracts and related
options solely for bona fide hedging purposes within the meaning of CFTC
regulations, provided that the Trust may hold other positions in futures
contracts and related options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and premiums required to
establish these positions, less the amount by which any such options positions
are "in the money," do not exceed 5% of the Trust's net assets. Adoption of
these guidelines does not limit the percentage of the Trust's assets at risk to
5%.
In addition, (i) the aggregate value of securities underlying call options on
securities written by a Portfolio or obligations underlying put options on
securities written by a Portfolio determined as of the date the options are
written will not exceed 50% of the Portfolio's net assets; (ii) the aggregate
premiums paid on all options purchased by a Portfolio and which are being held
will not exceed 20% of the Portfolio's net assets; (iii) a Portfolio will not
purchase put or call options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures
transactions being held will not exceed 5% of a Portfolio's total assets.
The foregoing limitations are not fundamental policies of the Portfolios and may
be changed by the Trust's Board of Trustees without shareholder approval as
regulatory agencies permit.
Transactions using options (other than purchased options) expose a Portfolio to
counter-party risk. To the extent required by SEC guidelines, a Portfolio will
not enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, other options, or futures or (2) cash and
liquid high grade debt securities with a value sufficient at all times to cover
its potential obligations to the extent not covered as provided in (1) above. A
Portfolio will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option or futures contract is open,
unless they are replaced with similar assets. As a result, the commitment of a
large portion of a Portfolio's assets to segregated accounts as a cover could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
OPTIONS. A Portfolio may purchase and write put and call options on securities,
on indices of securities, and foreign currency, and enter into closing
transactions with respect to such options to terminate an existing position. The
purchase of call options serves as a long hedge, and the purchase of put options
serves as a short hedge. Writing put or call options can enable a Portfolio to
enhance income by reason of the premiums paid by the purchaser of such options.
Writing call options serves as a limited short hedge because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Portfolio will be obligated to sell the
security at less than its market value or will be obligated to purchase the
security at a price greater than that at which the security must be sold under
the option. All or a portion of any assets used as cover for OTC options written
by a Portfolio would be considered illiquid to the extent described under
"Illiquid or Restricted Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the
Portfolio will be obligated to purchase the security at more than its market
value.
The value of an option position will reflect, among other things, the historical
price volatility of the underlying investment, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, and general
market conditions. Options that expire unexercised have no value. Options used
by a Portfolio may include European-style options. This means that the option is
only exercisable at its expiration. This is in contrast to American-style
options which are exercisable at any time prior to the expiration date of the
option.
A Portfolio may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Portfolio may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Portfolio to realize the profit
or limit the loss on an option position prior to its exercise or expiration.
A Portfolio may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between a Portfolio and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Portfolio purchases or writes an OTC option, it relies
on the counter party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party to do so would result in
the loss of any premium paid by a Portfolio as well as the loss of any expected
benefit of the transaction.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Portfolios intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Portfolio,
there is no assurance that the Portfolio will in fact be able to close out an
OTC option at a favorable price prior to expiration. In the event of insolvency
of the counter party, a Portfolio might be unable to close out an OTC option
position at any time prior to its expiration.
If a Portfolio were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A Portfolio may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities markets in
general.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of attempted
hedging.
YIELD CURVE OPTIONS: A Portfolio may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, a Portfolio may purchase or write such options for
hedging purposes. For example, a Portfolio may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two securities. A Portfolio may also
purchase or write yield curve options for other than hedging purposes (i.e., in
an effort to increase its current income) if, in the judgment of the
Sub-Adviser, a Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield curve
options written by a Portfolio will be "covered". A call (or put) option is
covered if the Portfolio holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or cash equivalents sufficient to cover the Portfolio's net
liability under the two options. Therefore, a Portfolio's liability for such a
covered option is generally limited to the difference between the amount of the
Portfolio's liability under the option written by the Portfolio less the value
of the option held by the Portfolio. Yield curve options may also be covered in
such other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Portfolio's assets (the "SEC illiquidity ceiling"). The
Sub-Advisers intend to limit a Portfolio's writing of over-the-counter options
in accordance with the following procedure. Except as provided below, the
Portfolios intend to write over-the-counter options only with primary U.S.
government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts which a Portfolio will have in place with such primary
dealers will provide that the Portfolio has the absolute right to repurchase an
option it writes at any time at a price which represents the fair market value,
as determined in good faith through negotiation between the parties, but which
in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Portfolio for writing the option, plus the amount,
if any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-money. A Portfolio will treat all or a part of
the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
Portfolio may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these options
as illiquid for purposes of such SEC illiquidity ceiling.
SPREAD TRANSACTIONS. A Portfolio may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Portfolio the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that a
Portfolio does not own, but which is used as a benchmark. The risk to the
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
FUTURES CONTRACTS. A Portfolio may enter into futures contracts, including
interest rate, index, and foreign currency futures. A Portfolio may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options in securities.
A Portfolio's hedging may include purchases of futures as an offset against the
effect of expected increases in securities prices and currency exchange rates
and sales of futures as an offset against the effect of expected declines in
securities prices and currency exchange rates. A Portfolio's futures
transactions may be entered into for any lawful purpose such as hedging
purposes, risk management, or to enhance returns. A Portfolio may also write put
options on futures contracts while at the same time purchasing call options on
the same futures contracts in order to create synthetically a long futures
contract position. Such options would have the same strike prices and expiration
dates. A Portfolio will engage in this strategy only when a Sub-Adviser believes
it is more advantageous to the Portfolio than is purchasing the futures
contract.
To the extent required by regulatory authorities, the Portfolios only enter into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce a Portfolio's exposure to market, currency, or interest rate
fluctuations, the Portfolio may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.
debt security) or currency for a specified price at a designated date, time, and
place. An index futures contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index futures contract was originally
written. Transaction costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures contract may be satisfied
by delivery or purchase, as the case may be, of the instrument, the currency, or
by payment of the change in the cash value of the index. More commonly, futures
contracts are closed out prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although the value of an index might
be a function of the value of certain specified securities, no physical delivery
of those securities is made. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain; if it is less, the
Portfolio realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that a Portfolio will be able
to enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the Portfolio is not able to enter into an
offsetting transaction, the Portfolio will continue to be required to maintain
the margin deposits on the futures contract.
No price is paid by a Portfolio upon entering into a futures contract. Instead,
at the inception of a futures contract, the Portfolio is required to deposit in
a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Portfolio at the termination of the transaction if all contractual
obligations have been satisfied. Under certain circumstances, such as periods of
high volatility, the Portfolio may be required by an exchange to increase the
level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of the Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Portfolio
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by selling
or purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade that provides a secondary market. The Portfolios
intend to enter into futures transactions only on exchanges or boards of trade
where there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio would continue
to be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES-SPECIAL CONSIDERATIONS. A
Portfolio may also use options and futures on foreign currencies and forward
currency contracts to hedge against movements in the values of the foreign
currencies in which the Portfolio's securities are denominated. The Portfolio
may utilize foreign currency-related derivative instruments for any lawful
purposes such as for bona fide hedging or to seek to enhance returns through
exposure to a particular foreign currency. Such currency hedges can protect
against price movements in a security the Portfolio owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in the
securities that are attributable to other causes.
A Portfolio might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Portfolio may hedge against price movements in that currency
by entering into transactions using hedging instruments on another foreign
currency or a basket of currencies, the values of which the Sub-Adviser believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the hedging instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such hedging instruments, the
Portfolio could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Portfolio will normally purchase OTC options on foreign
currency only when the Sub-Adviser believes a liquid secondary market will exist
for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an obligation
to purchase or sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the parties, at a
price set at the time the contract is entered into.
A Portfolio may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. Such transactions may serve as long hedges
- --for example, a Portfolio may purchase a forward currency contract to lock in
the U.S. dollar price of a security denominated in a foreign currency that a
Portfolio intends to acquire. Forward currency contracts may also serve as short
hedges -- for example, the Portfolio may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
A Portfolio may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which the Sub-Adviser believes will have a positive
correlation to the values of the currency being hedged. In addition, the
Portfolio may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a Portfolio
owns securities denominated in a foreign currency and the Sub-Adviser believes
that currency will decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency. Transactions that use
two foreign currencies are sometimes referred to as "cross hedges." Use of
different foreign currency magnifies the risk that movements in the price of the
instrument will not correlate or will correlate unfavorably with the foreign
currency being hedged.
The cost to the Portfolio of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Portfolio enters into a forward currency contract, it relies on the
counter party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counter party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by selling or purchasing, respectively, an instrument
identical to the instrument held or written. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counter party. Thus, there can be no assurance that the
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counter party, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
FOREIGN CURRENCY TRANSACTIONS
Although the SAI Global Leaders Portfolio values its assets daily in U.S.
dollars, it is not required to convert its holdings of foreign currencies to
U.S. dollars on a daily basis. The Portfolio's foreign currencies generally will
be held as "foreign currency call accounts" at foreign branches of foreign or
domestic banks. These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became insolvent, the Portfolio
could suffer a loss of some or all of the amounts deposited. The Portfolio may
convert foreign currency to U.S. dollars from time to time. Although foreign
exchange dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a "spread," which is the
difference between the prices at which the dealers are buying and selling
foreign currencies.
HYBRID INSTRUMENTS
Hybrid Instruments combine the elements of futures contracts or options with
those of debt, preferred equity or a depository instrument. Often these Hybrid
Instruments are indexed to the price of a commodity, a particular currency, or a
domestic or foreign debt or equity securities index. Hybrid Instruments may take
a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to a
particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of the risks
of investing in securities, options, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of
futures, options, and forward contracts herein for a discussion of these risks.
Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). In addition, because the purchase and sale of Hybrid Instruments could
take place in an over-the-counter market or in a private transaction between a
Portfolio and the seller of the Hybrid Instrument, the creditworthiness of the
counterparty to the transaction would be a risk factor which a Portfolio would
have to consider. Hybrid Instruments also may not be subject to regulation by
the CFTC, which generally regulates the trading of commodity futures by U.S.
persons, the SEC (which regulates the offer and sale of securities by and to
U.S. persons), or any other governmental regulatory authority.
COMBINED TRANSACTIONS
The Portfolios may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and 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
a Sub-Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the 1940 Act and the
rules thereunder, "majority of the outstanding voting securities" of a Portfolio
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding shares of that Portfolio are
present in person or by proxy, and (2) more than 50% of the outstanding shares
of that Portfolio. Any investment restrictions which involve a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after, and is caused by, an
acquisition or encumbrance of securities or assets of, or borrowings by or on
behalf of, a Portfolio, as the case may be.
STRONG GROWTH PORTFOLIO
The Strong Growth Portfolio:
1. May not with respect to 75% of its total assets, purchase the securities
of any issuer (except securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities) if, as a result, (i) more than 5% of the
Portfolio's total assets would be invested in the securities of that issuer, or
(ii) the Portfolio would hold more than 10% of the outstanding voting securities
of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the 1940 Act which may involve a
borrowing such as reverse repurchase agreement and mortgage "dollar roll"
transactions, provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Portfolio's total assets (including the amount
borrowed), less the Portfolio's liabilities (other than borrowings), except that
the Portfolio may borrow up to an additional 5% of its total assets (not
including the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Portfolio may also
borrow money from the other Strong Funds for which it serves as investment
adviser or other persons to the extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Portfolio may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Portfolio from purchasing or selling options, futures contracts, or
other derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Portfolio's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more than
25% of the Portfolio's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Portfolio from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objective, policies, and restrictions as the Portfolio.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio may not:
1. In regard to 75% of its assets, invest more than 5% of its assets
(valued at the time of investment) in securities of any one issuer, except in
U.S. government obligations;
2. Acquire securities of any one issuer which at the time of investment (a)
represent more than 10% of the voting securities of the issuer, or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at the time of investment) in
securities of companies in any one industry, except that this restriction does
not apply to investments in U.S. government obligations;
4. Borrow money except from banks for temporary or emergency purposes in
amounts not exceeding 10% of the value of the Portfolio's assets at the time of
borrowing;
5. Issue any senior security except in connection with permitted
borrowings; or
6. Underwrite the distribution of securities of other issuers; however the
Portfolio may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Portfolio could be regarded as an underwriter as defined by that
Act with respect to such resale;
7. Make loans, but this restriction shall not prevent the Portfolio from
(a) investing in debt obligations, (b) investing in repurchase agreements (A
repurchase agreement involves a sale of securities to the Portfolio with the
concurrent agreement of the seller (bank or securities dealer) to repurchase the
securities at the same price plus an amount equal to an agreed-upon interest
rate within a specified time. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Portfolio could experience both delays in
liquidating the underlying securities and losses);
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real estate
or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it may
enter into forward foreign currency contracts;
10. Acquire securities of other investment companies except (a) by purchase
in the open market, where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission or (b) where the
acquisition results from a dividend or a merger, consolidation or other
reorganization. (In addition to this investment restriction, the Investment
Company Act of 1940 provides that the Portfolio may neither purchase more than
3% of the voting securities of any one investment company nor invest more than
10% of the Portfolio's assets (valued at the time of investment) in all
investment company securities purchased by the Portfolio. Investment in the
shares of another investment company would require the Portfolio to bear a
portion of the management and advisory fees paid by that investment company,
which might duplicate the fees paid by the Portfolio.)
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
a. issue any senior security (as defined in the 1940 Act), except that (a)
the Portfolio may enter into commitments to purchase securities in accordance
with the Portfolio's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Portfolio may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Portfolio may engage in short sales
of securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Portfolio may borrow money as
authorized by the 1940 Act.
b. act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Portfolio, the
Portfolio may be deemed to be an underwriter under the provisions of the 1933
Act.
c. purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
d. invest in commodity contracts, except that the Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into transactions in financial
and index futures contracts and related options, may engage in transactions on a
when-issued or forward commitment basis, and may enter into forward currency
contracts.
e. make loans, except that, to the extent appropriate under its investment
program, the Portfolio may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of such
loaned securities does not exceed one-third of the Portfolio's total assets;
f. hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting securities of any
one issuer. This restriction applies only to 50% of the value of the Portfolio's
total assets. Securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities are excluded from this restriction;
g. concentrate its investments in any one industry except that the
Portfolio may invest up to 25% of its total assets in securities issuers
principally engaged in any one industry. This limitation, however, will not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, securities invested in, or repurchase agreements for, U.S.
Government securities, and certificates of deposit, or bankers' acceptances, or
securities of U.S. banks and bank holding companies;
h. borrow money, except that (a) the Portfolio may enter into certain
futures contracts and options related thereto; (b) the Portfolio may enter into
commitments to purchase securities in accordance with the Portfolio's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Portfolio may
borrow money in amounts not exceeding 5% of the value of its total assets at the
time when the loan is made; (d) the Portfolio may pledge its portfolio
securities or receivable or transfer or assign or otherwise encumber them in an
amount not exceeding one-third of the value of its total assets; and (e) for
purposes of leveraging, the Portfolio may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of the
Portfolio's assets, including the amount borrowed, less its liabilities, is
equal to at least 300% of the amount borrowed, plus all outstanding borrowings.
If at any time, the value of the Portfolio's assets fails to meet the 300% asset
coverage requirement relative only to leveraging, the Portfolio will, within
three days (not including Sundays and holidays), reduce its borrowings to the
extent necessary to meet the 300% test.
RS DIVERSIFIED GROWTH PORTFOLIO
The RS Diversified Growth Portfolio may not:
1. issue any class of securities which is senior to the Portfolio's shares
of beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. purchase securities on margin (but may obtain such short-term credits as
may be necessary for the clearance of transactions). (Margin payments or other
arrangements in connection with transactions in short sales, futures contracts,
options, and other financial instruments are not considered to constitute the
purchase of securities on margin for this purpose.);
3. borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities laws;
5. (i) as to 75% of the Portfolio's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result more than 5% of the Portfolio's total assets
(taken at current value) would then be invested in securities of a single
issuer, or (ii) purchase any security if as a result 25% or more of the
Portfolio's total assets (taken at current value) would be invested in a single
industry;
6. make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities;
7. purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions or other
financial transactions, and except as required in connection with otherwise
permissible options, futures, and commodity activities as described elsewhere in
the prospectus or this SAI at the time;
8. purchase or sell real estate or interests in real estate, including real
estate mortgage loans, although it may purchase and sell securities which are
secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.)
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio shall not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding currencies and any type of option,
futures contracts and forward contracts) in the ordinary course of its business.
The Portfolio reserves the freedom of action to hold and to sell real
estate, mineral leases, commodities or commodity contracts (including currencies
and any type of option, futures contracts and forward contracts) acquired as a
result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of swap, option, forward contracts and futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be
the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Portfolio's assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
there is no limitation with respect to obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities and repurchase agreements
collateralized by such obligations).
SAI GLOBAL LEADERS PORTFOLIO
The SAI Global Leaders Portfolio will not:
a. issue any senior security (as defined in the 1940 Act), except that (a)
the Portfolio may enter into commitments to purchase securities in accordance
with the Portfolio's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Portfolio may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Portfolio may engage in short sales
of securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Portfolio may borrow money as
authorized by the 1940 Act.
b. act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Portfolio, the
Portfolio may be deemed to be an underwriter under the provisions of the 1933
Act.
c. purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
d. invest in commodity contracts, except that the Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into transactions in financial
and index futures contracts and related options, may engage in transactions on a
when-issued or forward commitment basis, and may enter into forward currency
contracts.
e. make loans, except that, to the extent appropriate under its investment
program, the Portfolio may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of such
loaned securities does not exceed one-third of the Portfolio's total assets;
f. hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting securities of any
one issuer. This restriction applies only to 75% of the value of the Portfolio's
total assets. Securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities are excluded from this restriction;
g. concentrate its investments in any one industry except that the
Portfolio may invest up to 25% of its total assets in securities issuers
principally engaged in any one industry. This limitation, however, will not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, securities invested in, or repurchase agreements for, U.S.
Government securities, and certificates of deposit, or bankers' acceptances, or
securities of U.S. banks and bank holding companies;
h. borrow money, except that (a) the Portfolio may enter into certain
futures contracts and options related thereto; (b) the Portfolio may enter into
commitments to purchase securities in accordance with the Portfolio's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Portfolio may
borrow money in amounts not exceeding 5% of the value of its total assets at the
time when the loan is made; (d) the Portfolio may pledge its portfolio
securities or receivable or transfer or assign or otherwise encumber them in an
amount not exceeding one-third of the value of its total assets; and (e) for
purposes of leveraging, the Portfolio may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of the
Portfolio's assets, including the amount borrowed, less its liabilities, is
equal to at least 300% of the amount borrowed, plus all outstanding borrowings.
If at any time, the value of the Portfolio's assets fails to meet the 300% asset
coverage requirement relative only to leveraging, the Portfolio will, within
three days (not including Sundays and holidays), reduce its borrowings to the
extent necessary to meet the 300% test.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be
changed by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
STRONG GROWTH PORTFOLIO
The Strong Growth Portfolio may not:
1. Sell securities short, unless the Portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and positions
of the SEC or its staff, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments are not
deemed to constitute selling securities short.
2. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities, or such
other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental investment
objective, restrictions and policies as the Portfolio.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions thereof)
if, as a result, more than 5% of its total assets would be invested in the
securities of issuers that, including predecessor or unconditional guarantors,
have a record of less than three years of continuous operation. This policy does
not apply to securities of pooled investment vehicles or mortgage or
asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Portfolio may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the CEA and, in accordance with Rule
4.5, will use futures or options on futures transactions solely for bona fide
hedging transactions (within the meaning of the CEA), provided, however, that
the Portfolio may, in addition to bona fide hedging transactions, use futures
and options on futures transactions if the aggregate initial margin and premiums
required to establish such positions, less the amount by which any such options
positions are in the money (within the meaning of the CEA), do not exceed 5% of
the Portfolio's net assets.
In addition, (i) the aggregate value of securities underlying call options
on securities written by the Portfolio or obligations underlying put options on
securities written by the Portfolio determined as of the date the options are
written will not exceed 50% of the Portfolio's net assets; (ii) the aggregate
premiums paid on all options purchased by the Portfolio and which are being held
will not exceed 20% of the Portfolio's net assets; (iii) the Portfolio will not
purchase put or call options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures
transactions being held will not exceed 5% of the Portfolio's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Portfolio except
as may be necessary in connection with permissible borrowings or investments and
then such pledging, mortgaging, or hypothecating may not exceed 33 1/3% of the
Portfolio's total assets at the time of the borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or
trustee of the Trust or its investment advisor beneficially owns more than 1/2
of 1% of the securities of such issuer and such officers and trustees together
own beneficially more than 5% of the securities of such issuer.
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Portfolio's net assets. Included in that amount, but not to
exceed 2% of the Portfolio's net assets, may be warrants that are not listed on
any stock exchange. Warrants acquired by the Portfolio in units or attached to
securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when Bank
borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except through
(I) purchases of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio will not:
1. Invest more than (a) 5% of its total assets (valued at the time of
investment) in securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors or unconditional
guarantors, have been in continuous operation for less than three years
("unseasoned issuers") or (b) more than 15% of its total assets (valued at time
of investment) in restricted securities and securities of unseasoned issuers;
2. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 15% of its assets at
cost;
3. Make margin purchases or participate in a joint or on a joint or several
basis in any trading account in securities;
4. Invest in companies for the purpose of management or the exercise of
control;
5. Invest more than 15% of its net assets (valued at time of investment) in
illiquid securities, including repurchase agreements maturing in more than seven
days;
6. Invest in oil, gas or other mineral leases or exploration or development
programs, although it may invest in marketable securities of enterprises engaged
in oil, gas or mineral exploration;
7. Invest more than 25% of its total assets (valued at time of investment)
in securities of non-U.S. issuers (other than securities represented by American
Depository Receipts);
8. Make short sales of securities unless the Portfolio owns at least an
equal amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an equal
amount of such securities;
9. Purchase a call option or a put option if the aggregate premium paid for
all call and put options then held exceeds 20% of its net assets (less the
amount by which any such positions are in-the-money);
10. Invest in futures or options on futures, except that it may invest in
forward foreign currency contracts.
11. Purchase additional securities when its borrowings, less receivables
from portfolio securities sold, exceed 5% of the Portfolio's total assets.
Notwithstanding the foregoing investment restrictions, the Portfolio may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Portfolio's ceasing to be a
diversified investment company. Japanese and European corporations frequently
issue additional capital stock by means of subscription rights offerings to
existing shareholders at a price substantially below the market price of the
shares. The failure to exercise such rights would result in a Portfolio's
interest in the issuing company being diluted. The market for such rights is no
well developed in all cases and, accordingly, the Portfolio may not always
realize full value on the sale of rights. The exception applies in cases where
the limits set forth in the investment restrictions would otherwise be exceeded
by exercising rights or would have already been exceeded as a result of
fluctuations in the market value of a Portfolio's portfolio securities with the
result that the Portfolio would be forced either to sell securities at a time
when it might not otherwise have done so, or to forego exercising the rights.
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
i. purchase the securities of any other investment company, except as
permitted under the 1940 Act.
ii. purchase any securities on margin or make short sales of securities,
other than short sales "against the box", or purchase securities on margin
except for short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of options,
futures contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment programs of the Portfolio.
iii. buy securities from or sell securities (other than securities issued
by the Portfolio) to any of its officers, trustees or its investment adviser or
sub-adviser or distributor as principal.
iv. contract to sell any security or evidence of interest therein, except
to the extent that the same shall be owned by the Portfolio.
v. purchase securities of an issuer if to the Portfolio's knowledge, one or
more of the Trustees or officers of the Trust, the adviser or the sub-adviser
individually owns beneficially more than 0.5% and together own beneficially more
than 5% of the securities of such issuer nor will the Portfolio hold the
securities of such issuer.
vi. except for investments which, in the aggregate, do not exceed 5% of the
Portfolio's total assets taken at market value, purchase securities unless the
issuer thereof or any company on whose credit the purchase was based has a
record of at least three years continuous operations prior to the purchase.
vii. invest for the purpose of exercising control over or management of any
company.
viii. write, purchase or sell puts, calls or combinations thereof. However,
the Portfolio may invest up to 15% of the value of its assets in warrants. This
restriction on the purchase of warrants does not apply to warrants attached to,
or otherwise included in, a unit with other securities.
ix. The Portfolio will not invest more than 15% of its total assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule 144A
or securities offered pursuant to Section 4(2) of the 1933 Act, shall not be
deemed illiquid solely by reason of being unregistered. The Sub-Adviser shall
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
x. The Portfolio will not purchase interests in oil, gas, mineral leases or
other exploration programs; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or transmission
of oil, gas or other materials.
RS DIVERSIFIED GROWTH PORTFOLIO
The RS Diversified Growth Portfolio does not currently intend
to:
1. purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Portfolio's total assets would be invested in such securities,
or (ii) more than 5% of the Portfolio's total assets (excluding any securities
eligible for resale under Rule 144A under the Securities Act of 1933) would be
invested in such securities;
2. invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Portfolio's net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c) above;
3. invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (taken at current
value) would be invested in such securities, or except as part of a merger,
consolidation, or other acquisition;
4. invest in real estate limited partnerships;
5. purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old;
6. make investments for the purpose of exercising control or management;
7. invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs;
8. acquire more than 10% of the voting securities of any issuer;
9. invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933);
10. purchase or sell puts, calls, straddles, spreads, or any combination
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would exceed
5% of its total assets.
In addition, the Portfolio will only sell short securities that are traded
on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of unlisted
securities, where no market exists) if more than 15% of the Portfolio's assets
(taken at market value) would be invested in such securities. Repurchase
agreements maturing in more than seven days will be deemed to be illiquid for
purposes of the Portfolio's limitation on investment in illiquid securities.
Securities that are not registered under the 1933 Act and sold in reliance on
Rule 144A thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% limitation;
(2) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(3) purchase any securities or evidences of interest therein on margin,
except that the Portfolio may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that the Portfolio may make
margin deposits in connection with any type of swap, option, futures contracts
and forward contracts;
(4) sell any security which the Portfolio does not own unless by virtue of
its ownership of other securities the Portfolio has at the time of sale a right
to obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(5) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of swap, option, futures contracts and forward contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale of
(1) warrants where the grantor of the warrants is the issuer of the underlying
securities or (ii) put or call options or combinations thereof with respect to
securities, indices of securities, swaps, foreign currencies and futures
contracts;
(7) invest for the purpose of exercising control of management. These
investment restrictions are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result in
a violation of policy.
SAI GLOBAL LEADERS PORTFOLIO
The SAI Global Leaders Portfolio will not:
i. purchase the securities of any other investment company, except as
permitted under the 1940 Act.
ii. purchase any securities on margin or make short sales of securities
except for short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of options,
futures contracts and related options, in the manner permitted by the investment
restrictions, policies and investment programs of the Portfolio.
iii. buy securities from or sell securities (other than securities issued
by the Portfolio) to any of its officers, trustees or its investment adviser or
sub-adviser or distributor as principal.
iv. contract to sell any security or evidence of interest therein, except
to the extent that the same shall be owned by the Portfolio.
v. purchase securities of an issuer if to the Portfolio's knowledge, one or
more of the Trustees or officers of the Trust, the adviser or the sub-adviser
individually owns beneficially more that 0.5% and together own beneficially more
than 5% of the securities of such issuer nor will the Portfolio hold the
securities of such issuer.
vi. except for investments which, in the aggregate, do not exceed 5% of the
Portfolio's total assets taken at market value, purchase securities unless the
issuer thereof or any company on whose credit the purchase was based has a
record of at least three years continuous operations prior to the purchase.
vii. invest for the purpose of exercising control over or management of any
company.
viii. purchase or sell puts, calls, straddles, spreads or combinations
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would exceed
10% of total assets.
ix. The Portfolio will not invest more than 15% of its total assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule 144A
or securities offered pursuant to Section 4(2) of the 1933 Act, shall not be
deemed illiquid solely by reason of being unregistered. The Sub-Adviser shall
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
x. The Portfolio will not purchase interests in oil, gas, mineral leases or
other exploration programs; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or transmission
of oil, gas or other materials.
MANAGEMENT OF THE TRUST
Responsibilities of Trustees
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust and the Portfolios. In carrying out their duties, the Trustees
follow the provisions of the Investment Company Act of 1940, the General Laws of
the Commonwealth of Massachusetts governing business trusts, the Declaration of
Trust of the Trust and its Bylaws. The Trustees approve contracts with the
investment adviser, custodians and other service providers on behalf of the
Portfolios. The Trustees also set broad policies for the management of the
assets of each Portfolio, including the pricing of securities owned by the
Portfolios and the policies governing investments by the Portfolios.
Management Information
<TABLE>
<CAPTION>
The Trustees and officers of the Trust and their respective backgrounds are as
follows:
Name, Address** Positions Held with Trust Principal Occupation During Past 5 Years
and Age
<S> <C> <C>
William F. Duff President and Principal Vice-President & Chief Marketing Officer -
Age: 56 Executive Officer London Pacific Life & Annuity Company (since
4/99); formerly Vice-President - Marketing,
Federal Home Life Insurance Company,
Richmond, VA (1980 to 3/99).
Raymond L. Pfeister Trustee Principal, Chief Marketing Officer of Fred
One World Trade Center Alger Management, Inc. for more than 5 years.
New York, NY 10048
Age: 53
Robert H. Singletary Trustee Chairman, National Securities Commission -
1800 N. Kent Street Republic of Georgia (since 2/00); Formerly
Arlington, VA 22209 Senior Capital Markets Advisor, U.S. Agency
Age: 43 for International Development (1996 to 2/00);
Chief of Enforcement, San Francisco Office,
U.S. Securities and Exchange Commission
(1990 to 1996).
James A. Winther Trustee President of WMI Corporation (since 1983).
11000 Placidia Road
Placidia, FL 33946
Age: 62
George C. Nicholson* Vice President, Treasurer, President, CEO & Director, London Pacific Life
3109 Poplarwood Court Principal Financial Officer & Annuity Company (since 11/99); Chief
Raleigh, NC 27604 and Principal Accounting Financial Officer, Secretary and Director
Age: 41 Officer. - London Pacific Life & Annuity Company
and LPIMC Insurance Marketing Services
(since 9/94); Treasurer and Director - London
Pacific Financial & Insurance Services (since
11/94).
Jerry T. Tamura* Vice President and Secretary Vice President and Chief Operating Officer -
Age: 53 London Pacific Life & Annuity Company (since
11/99); Vice President-Administrative Services -
London Pacific Life & Annuity Company (from 1989
to 11/99); President and Director - London
Pacific Financial & Insurance Services (since
11/94).
</TABLE>
* Designates persons who are interested persons as defined by the Rules of
the Securities and Exchange Commission.
** The address for William F. Duff and Jerry T. Tamura is LPIMC
Insurance Marketing Services, 1755 Creekside Oaks Drive,
Sacramento, California 95833.
Committees
The Board has established two committees. The committees, their members and the
responsibilities of the committees are as follows:
Pricing Committee. The Pricing Committee has the responsibility of overseeing
the determination of the net asset value of the Portfolios and the calculation
of the value of any debt instrument, share of stock, or other Portfolio security
or asset. The members are as follows:
George C. Nicholson
Jerry T. Tamura
Audit Committee. The Audit Committee makes recommendations to the Board
concerning the selection of the Trust's independent accountants and reviews with
such accountants the scope and results of the Trust's annual audit. The members
are as follows:
Raymond L. Pfeister
Robert H. Singletary
James A. Winther
Compensation of Management
The table below describes the compensation paid by the Trust during the past
fiscal year to each of the Trustees who is a not an interested person of the
Trust. None of the officers and no Trustee who is an interested person of the
Trust received compensation from the Trust during the past fiscal year.
<TABLE>
<CAPTION>
Pension or Estimated Total
Aggregate Retirement Annual Benefits Compensation
Name, Compensation Benefits upon From Trust and
Position from Trust Accrued Retirement Trust Complex
-------- ---------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Raymond L. Pfeister $13,000 0 0 $13,000
Robert H. Singletary $13,000 0 0 $13,000
James A. Winther $13,000 0 0 $13,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Only the life insurance companies that issue the variable annuity contracts or
variable life insurance policies that use the Portfolios for investment can own
shares in the Portfolios. The shares are usually held in a Separate Account of
the life insurance company on behalf of the holders of the variable annuity
contracts or variable life insurance policies who invest assets in the
Portfolios. As of March 31, 2000, Separate Account One of London Pacific Life
and Annuity Company, a North Carolina corporation, held all of the outstanding
shares of all the Portfolios.
London Pacific Group Limited, a corporation organized under the laws of the
United Kingdom owns all of the outstanding shares of London Pacific Life and
Annuity Company, which in turn owns Separate Account One. London Pacific Group
Limited is a corporation whose shares are publicly traded on the New York and
London Stock Exchanges.
The persons who own a Contract that uses the Portfolios as investments have an
indirect interest in the Trust. Rules of the Securities and Exchange Commission
require the insurance company shareholders to pass to these Contract owners any
vote that is given to shareholders of the Trust. To the knowledge of management
of the Trust, no person has an indirect ownership interest in the Trust of more
than 25% of the voting securities of the Trust.
Management Ownership
As of March 31, 2000, no officer or Trustee of the Trust owned any interest in
any of the Portfolios.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Services
Investment Adviser. The Trust and LPIMC Insurance Marketing Services, a
California corporation, have entered into an Investment Advisory Agreement
appointing LPIMC Insurance Marketing Services as the investment adviser for each
Portfolio. The investment adviser is responsible for the management of the
assets of each Portfolio based on the investment objectives and policies of each
Portfolio.
London Pacific Life and Annuity Company, a North Carolina insurance corporation
owns all the outstanding stock of the investment adviser and London Pacific
Group Limited owns all of the outstanding stock of London Pacific Life and
Annuity Company. See the discussion under Control Persons and Principal Holders
of Securities for additional information on the ownership and control of London
Pacific Group Limited. See also the table under Management of the Trust for
information about the officers and Trustees of the Trust who hold positions as
officers or Trustees with the investment adviser, London Pacific Life and
Annuity Company and its parent, London Pacific Group Limited.
Compensation. The investment adviser receives a fee from the Trust for its
services as investment adviser as described in the Prospectus.
The investment adviser calculates the fee each day that the New York Stock
Exchange is open for business based on the net asset value determined for that
day. The fee accrues daily and is paid monthly. The investment adviser received
the following fees from each Portfolio during the past three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year or Fiscal Year Fiscal Year
Name of Period Ended Ended Ended
Portfolio 1999 1998 1997
--------- ------- ---- ----
<S> <C> <C>
RS Diversified Growth Portfolio $68,439 $34,326 $18,662
Harris Associates Value Portfolio $71,583 $42,425 $18,552
Lexington Corporate Leaders
Portfolio $56,399 $28,265 $11,968
Strong Growth Portfolio $58,113 $25,889 $16,134
MFS Total Return Portfolio $91,493 $51,531 $19,980
SAI Global Leaders Portfolio $ 0*
*For the period from May 11, 1999 (Commencement of Investment Operations) to
December 31, 1999. Fees waived by investment adviser.
</TABLE>
Operating Expenses. The investment adviser is obligated to provide overhead and
office space for the Trust under the terms of the Investment Advisory Agreement.
Each Portfolio is responsible for its other operating costs, including the cost
of services described below. Expenses that the Trust incurs on behalf of all the
Portfolios are charged to the individual Portfolios based on the ratio of their
respective average daily net assets during the period for which the expenses
were incurred.
Operating Expense Reimbursement Contract. The investment adviser has entered
into a contract with the Trust to reimburse certain Portfolios for their
operating expenses (other than brokerage commissions) that exceed certain
specified limits. The specific limits for each Portfolio are described in the
prospectus for the Portfolios. The Operating Expense Reimbursement Contract will
remain in effect through December 31, 2000, at which time it may be discontinued
or renewed.
Code of Ethics
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute. Employees subject to the
Codes of Ethics may invest in securities for their own investment accounts,
including securities that may be purchased or held by the Trust.
Subadvisory Services
Appointment. The investment adviser has entered into agreements with registered
investment advisers to carry out the management of the assets of the Portfolio
based on the investment objectives and policies of the Portfolios. The
Subadvisers are responsible for deciding which securities to purchase and sell
for the Portfolios and for placing trades for those securities. The prospectus
provides more information about the Subadvisers.
Compensation. The investment adviser pays the Subadvisers fees for their
services, as described in the Prospectus, out of the compensation the investment
adviser receives from each Portfolio:
The Subadviser calculates the fee each day that the New York Stock Exchange is
open for business based on the net asset value determined for that day. The fee
accrues daily and is paid monthly. The Subadvisers received the following fees
from each Portfolio during the past three fiscal years:
<TABLE>
<CAPTION>
Name of Fiscal Year Fiscal Year Period
Portfolio or Period Ended Ended Ended
1999 1998 1997
---- ---- ----
<S> <C> <C>
RS Diversified Growth Portfolio $50,429 $25,275 $13,840
Harris Associates Value Portfolio $53,687 $31,711 $13,834
Lexington Corporate Leaders
Portfolio $34,651 $17,382 $ 7,376
Strong Growth Portfolio $38,742 $17,246 $10,770
MFS Total Return Portfolio $60,995 $34,326 $13,348
SAI Global Leaders Portfolio $ 0*
*For the period from May 11, 1999 (Commencement of Investment Operations) to
December 31, 1999. Fees waived by sub-adviser.
</TABLE>
Other Service Providers
Custody. State Street Bank and Trust Company has entered into a Custody
Agreement with the Trust appointing it the custodian of the assets of each of
the Portfolios. The Custodian's address is 801 Pennsylvania Avenue, Kansas City,
Missouri. The responsibilities of the Custodian include safeguarding and
controlling the cash and securities of the Portfolios, handling the receipt and
delivery of securities, and collecting interest and dividends on their
investments. The Trust may employ foreign subcustodians that are approved by the
Board of Trustees to hold foreign assets.
Transfer Agent and Dividend Paying Agent. The investment adviser serves as the
transfer agent and dividend paying agent for the shares of each of the
Portfolios and keeps the records of share ownership and is responsible for
paying dividends to the shareholders. The investment adviser receives no
compensation for providing this service.
Legal Matters. Legal matters in connection with the offering are being passed
upon by Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
Independent Accountants. The Trust has appointed PricewaterhouseCoopers LLP as
the independent accountants who will audit the annual financial statements of
the Trust and provide related advice to the Trust and the Trustees.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokerage Transactions
General. The Subadvisers purchase securities for each Portfolio in different
ways depending on the type of security and the market for it. The following
describes the way in which different kinds of securities would be purchased by
the Portfolios.
Equities. The Subadvisers will purchase equity securities such as stock from
broker-dealers on either a principal or an agency basis. A principal basis means
the broker-dealer holds the security in inventory and sells it at a mark-up over
the price it pays for the security. Although the broker-dealer does not usually
charge a commission on the principal transaction, the price of the security will
reflect an increase over the broker-dealer's cost that represents compensation
to it. Mark-ups generally cannot exceed 5% of the price of the security, but
different rules apply when the broker has held the security in inventory for a
long time.
In an agency transaction, the broker-dealer does not own the security itself,
but will find the security for the Portfolio from someone who is willing to sell
it. The Subadvisers will generally purchase and sell securities listed on the
stock exchanges from broker-dealers who have seats on the exchange. The
Subadvisers will generally purchase and sell securities traded in the
over-the-counter-market from broker-dealers who make a market in those
securities (market makers). The broker-dealer will generally add a commission to
the price of the security to compensate it for its efforts in finding the
security for the Portfolio. Commissions for these transactions generally average
approximately six cents per share, but may increase to a much higher amount if
the security is difficult to find or the transaction is very small.
The Subadvisers may also use matching services to purchase and sell equity
securities. These services generally attempt to match buy and sell orders for
securities that they receive. Matching services do not attempt to find the
security for the Portfolio, but will simply match buy orders with sell orders
for the same security. Matching services generally charge a low commission on
the transaction, equal to a few cents per share, but they cannot guarantee the
availability or the price of the securities sought to be purchased or sold.
Under limited circumstances, a Portfolio may acquire equity securities from the
issuer of the security through an underwriter or selling dealer in an initial
public offering or secondary offering by the issuer. The price of these
securities is generally fixed in the offering in the same manner as for fixed
income securities, described below. Alternatively, commissions may be charged
uniformly for the purchase of these securities and paid to the underwriter, who
pays a portion to the selling dealers.
On rare occasions, one Portfolio wants to purchase a security that another
Portfolio is selling. The Portfolios have adopted a policy that allows the
Portfolios to purchase or sell securities to and from each other. These
transactions must comply with Rules of the Securities and Exchange Commission
that try to ensure that both Portfolios to the transaction are treated
equitably.
Fixed Income Securities. Fixed income securities are often purchased directly
from the issuer through an underwriter or selling dealer in an initial offering
of the security. The price for the security is set for the offering. There is no
additional compensation added for the underwriter or broker-dealer selling the
security. The issuer generally pays a commission to the underwriter out of the
proceeds of the offering and the underwriter pays (re-allows) a portion of that
commission to the other selling dealers.
Fixed income securities may also be purchased in the market from broker-dealers
acting as principal or through broker-dealers acting on an agency basis in the
same manner as equity securities.
Options and Futures. Commodities, futures and options on futures are purchased
through commodity brokers and generally include a commission based on the size
of the transaction. Options on equities are purchased through the broker-dealers
who buy and sell the equities. These brokers also receive commissions on the
transactions.
Commissions Paid by the Portfolios. The following are the aggregate amounts of
commissions paid by each of the Portfolios for brokerage during the past three
fiscal years:
<TABLE>
<CAPTION>
Name of Fiscal Year Ended
Portfolio
1999 1998 1997
---- ---- ----
<S> <C> <C>
RS Diversified Growth Portfolio $76,503 $41,774 $ 9,419
Harris Associates Value $ 8,732 $14,623 $ 7,177
Portfolio
Lexington Corporate Leaders $ 2,222 $ 5,228 $ 3,005
Portfolio
Strong Growth Portfolio $48,398 $24,173 $12,021
MFS Total Return Portfolio $12,136 $11,496 $ 3,215
SAI Global Leaders Portfolio $ 233*
*For the period from May 11, 1999 (Commencement of Investment Operations) to
December 31, 1999.
</TABLE>
Transactions with Affiliates
The Portfolios may enter into brokerage transactions with affiliates subject to
the applicable rules of the Securities and Exchange Commission.
Brokerage Selection
The Subadvisers are responsible for selecting the broker-dealers through which
Portfolio securities are purchased. The Subadvisers use their judgment to decide
which broker-dealer firm, commodity broker or other firm will provide the best
service to the Portfolio for each security a Portfolio wants to buy or sell. In
deciding which firms provide the best service or 'best execution'; the
Subadvisers consider a number of factors, including the cost of the service, the
price of the security through that firm, the overall financial quality of the
firm, the firm's capacity for handling the transaction, the speed with which the
transaction will be completed, research provided by the firm on behalf of the
Portfolios, the quality of the reporting for the transaction and any other
services the firm may provide. Best execution does not mean the lowest price
available or lowest commission, but means the combination of the factors
discussed above, which is appropriate for the specific transaction. The Board of
Trustees has overall responsibility for assuring that the Subadvisers obtain
best execution for Portfolio transactions and for monitoring commissions paid to
broker-dealers by the Portfolios.
Research Services
The Subadvisers may select broker-dealers to execute trades for the Portfolios
which broker-dealers provide research and other services to the Subadvisers.
These services may include research information, analyses and reports about
securities, statistical data, advice on the value of securities, as well as
equipment or services that provide access directly to such data through third
parties. Agreements with these broker-dealers may provide that the broker-dealer
may use a portion of the commissions paid by the Portfolios to offset the costs
of these services. The Subadvisers will use research services in managing the
assets of the Portfolios. The Subadvisers may also use the research services in
managing accounts of clients other than the Portfolios. The Subadvisers must at
all times assure that the brokerage services of these broker-dealers meet the
standards for best execution discussed above. The Board of Trustees of the Trust
must also oversee these arrangements to assure that they meet the standards
imposed by the Securities and Exchange Commission for best execution and that
the research services conform to the guidelines established by the Securities
and Exchange Commission for such services.
Bunching and Allocation of Trades
Although the Subadvisers will make investment decisions independently for each
Portfolio, there may be occasions when more than one client of the Subadvisers,
including other Portfolios managed by a Subadviser, will be purchasing or
selling the same security. There are occasions when the price for purchasing the
security, or the commissions the Portfolios would pay on the transaction, would
be lower if all the trades were combined (bunched or aggregated) in one order. A
Subadviser may bunch trades of different Portfolios it subadvises when placing
an order with a broker-dealer where the Subadviser believes the aggregation is
in the best interests of each Portfolio or client.
There may be other occasions where a Subadviser is unable to purchase all the
securities required to fill all the orders of the Portfolios and other clients.
The Subadviser must allocate the securities among the Portfolios and clients in
a manner that is fair to all parties. Certain Subadvisers have adopted
procedures for bunching and allocating securities of their clients. These
procedures are intended to treat each client equitably and to assure that the
best interests of the Portfolios are protected. There may be situations where
one Portfolio may be disadvantaged in an isolated case; however, the investment
adviser believes that all Portfolios will benefit from the procedures over time.
CAPITAL STOCK AND OTHER SECURITIES
Capital Stock
Series and Classes of Shares. The Trust issues shares in series, called
Portfolios, each of which has its own distinct assets, investment objectives,
policies, costs, expenses and shareholders. The Trust is authorized to subdivide
each Portfolio into two or more classes. Currently, the shares of each Portfolio
are divided into Class A and Class B shares. Each class of shares of a Portfolio
is entitled to the same rights and privileges as all other classes of the
Portfolio, except for expenses from selling arrangements or other matters not
related to the investment of the assets of the Portfolio. The Trust may
authorize additional Portfolios and additional classes of shares in the future.
Restrictions on Purchase and Sale. You may only purchase shares as investments
under the Contracts. Only insurance companies offering variable annuity
contracts or variable life insurance policies that use the Portfolios as
investments may purchase shares of the Portfolios. The insurance companies
purchase shares at the direction of the owners of the variable annuity contract
or variable life insurance policy. The insurance companies sell shares back to
the Trust at the direction of the owners of the variable annuity contracts or
variable life insurance policies. The shareholders cannot transfer the shares to
third parties. The Trust does not issue certificates for shares of the
Portfolios.
Dividend Rights. The Board of Trustees may, from time to time, declare and pay
dividends of the net investment income, if any, and will distribute net realized
capital gains, if any, on the shares of each Portfolio, in such form and in such
amount, as the Board of Trustees, in its sole discretion determines. The Board
of Trustees may declare dividends monthly, or at other times as it determines,
but will do so at least annually. The Board of Trustees attempts to declare
dividends so that the Portfolios comply with the requirements of the Internal
Revenue Code for qualifying as regulated investment companies, but they are not
required to do so and will not be held liable if they do not meet those
requirements. The Portfolios will generally pay all dividends and distributions
in additional shares, though if requested by an insurance company shareholder,
they may pay in dividends and distributions in cash. The Portfolios will value
dividends or distributions that it pays in securities at the current net asset
value of the securities determined on the day of payment.
A Portfolio pays dividends and distributions only to shareholders of that
Portfolio. The Board of Trustees establishes a date and a time for determining
the shareholders to whom payment of the dividend or distribution are made
(record date). Dividends and distributions are allocated among the shareholders
of a Portfolio in proportion to the number of shares of the Portfolio held by
each shareholder on the record date; provided, however, that if there are
separate classes of shares that bear different expenses, the dividend or
distribution is adjusted for those charges and allocated among shareholders of
each specific class of shares of the Portfolio. The Portfolios will not pay
dividends or distributions on shares for which the Portfolio has not received
payment or a completed purchase order as of the record date.
Voting Rights. Each shareholder is entitled to one vote for each full share and
a fractional vote for each fractional share held in the name of the shareholder
on the books of the Trust. The shareholders of the Portfolios are the insurance
companies issuing the respective variable annuity contracts or variable life
insurance policies that offer the Portfolios as investments. Under Rules of the
Securities and Exchange Commission, the insurance companies, under most
circumstances, must pass the voting rights through to the owners of the variable
annuity contracts or variable life insurance policies. The prospectus for the
variable annuity contracts or variable life insurance policies describes if and
how voting rights are passed to you.
On matters affecting the Trust, all shareholders of all Portfolios vote and
matters generally require approval of a majority of the shareholders of all of
the Portfolios to pass. Certain matters such as fee issues that are different
for each Portfolio or approval of the investment advisory agreement require a
separate vote by each Portfolio or class of a Portfolio. In addition, the Board
of Trustees may decide, on any matter put to a vote of shareholders, that the
issue affects only a single Portfolio or class of a Portfolio. Under those
circumstances, the Board of Trustees may require that the shareholders of the
Portfolio or class vote separately on the matter.
The remaining Trustees may fill vacancies on the Board of Trustees as long as at
least two thirds of the Trustees after the vacancies are filled, were elected by
shareholders. If at any time less than a majority of the Trustees were elected
by shareholders, the Trust must call a meeting of shareholders within 60 days to
elect Trustees.
Rules of the Securities and Exchange Commission state that the Trust or a
Portfolio may do the following only if approved by a 'majority of shareholders'
as defined by Rules of the Securities and Exchange Commission:
* execute an investment advisory or subadvisory contract or any amendment to
it;
* adopt or amend a service or distribution plan under Rule 12b-1 of the
Securities and Exchange Commission;
* amend any policy that the Portfolio has stated is fundamental;
* change a Portfolio from diversified to nondiversified; or
* increase the advisory fees charged by the Portfolio.
The Investment Company Act of 1940, which is the law governing mutual funds,
defines a majority vote of shareholders for the purpose of voting on these
matters to mean the vote in person or by proxy of shareholders holding 67% or
more of the shares of the Portfolio present in person or by proxy at a meeting
of shareholders, if the holders of more than 50% of the outstanding shares are
represented in person or by proxy at the meeting. In the alternative, the vote
of a majority of shareholders means the vote in person or by proxy of
shareholders holding more than 50% of all the outstanding shares. The Portfolio
can use whichever method is less, to determine if the matter has passed.
Liquidation Rights. Each share of a Portfolio represents an equal proportionate
interest in the assets of the Portfolio, subject to the liabilities of the
particular Portfolio. If the Board of Trustees establishes classes of shares in
a Portfolio, each class would be charged with its respective expenses. Shares of
one Portfolio do not have any rights with respect to the assets of any other
Portfolio. In the event any Portfolio is liquidated, the shareholders of the
Portfolio will receive a proportionate share of the assets of the Portfolio
reduced by the liabilities of the Portfolio. If the Portfolio has been divided
into classes, the amount available for liquidation is determined by class.
Shareholders of any class of a Portfolio will receive their proportionate share
of the net assets of the class. If the Trust is liquidated, all Portfolios and
classes of Portfolios will be liquidated in the same manner. In no event will
the fact that a shareholder owns shares in one Portfolio entitle that
shareholder to participate in a distribution of the assets of any other
Portfolio.
Preemptive and Conversion Rights. Shares have no preemptive or conversion
rights.
Redemption. The Trust does not have the right to redeem shares from shareholders
except at the request of shareholders.
Liabilities and Assessments. The Trust will not issue shares unless it has
received full payment for those shares. The shares are not subject to
assessments for any additional costs of the Trust or the Portfolios.
Authority of Board of Trustees. Under the Declaration of Trust, the Board of
Trustees has full power and authority to establish and amend the preferences,
rights, voting powers, restrictions, limitations on dividends, qualifications,
terms and conditions of redemption, of the shares of the Portfolios, as the
Board of Trustees, in its sole discretion, determines from time to time. Certain
provisions of the laws and rules governing mutual funds limit this authority.
Therefore, under most circumstances, changes that would materially, adversely
affect shareholders require the approval of shareholders or would only apply to
shares issued after the change has been adopted by the Trustees and the
shareholders have been notified.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Purchase of Shares
As discussed above, shares may only be purchased as investments under variable
annuity contracts or variable life insurance policies. Only insurance companies
offering the variable annuity contracts or variable life insurance policies that
use the Portfolios for investments may purchase shares of the Portfolios. The
insurance companies purchase shares at the direction of the owners of the
variable annuity contract or variable life insurance policy as described in the
prospectus for the applicable contract or policy. There are no sales charges for
the purchase of shares and there are no special plans for the purchase of
shares. Purchase orders from the insurance companies generally must be received
by 4:00 p.m. Eastern time or the close of business of the New York Stock
Exchange, if earlier, to be purchased at the net asset value determined for the
Portfolio for that day. Under certain circumstances, the Portfolio may accept
purchase orders at the net asset value determined for that day if the order is
received from the insurance company after the deadline, but before the opening
of the New York Stock Exchange on the next business day. The insurance company
must have received the order directing the investment in the Portfolio from the
annuity contract or life insurance policy owner before the close of the New York
Stock Exchange.
Offering Price
As described in the prospectus, the investment adviser calculates the value of
each share of each Portfolio (net asset value per share) at 4:00 p.m. every day
that the New York Stock Exchange is open for business. If the New York Stock
Exchange closes before 4:00 p.m., the net asset value is calculated at the time
the Exchange closes. The investment adviser determines the value of all assets
held by the Portfolio at the end of the day, subtracts all liabilities and
divides the total by the total number of shares outstanding.
The investment adviser determines the value of the assets of the Portfolio by
assigning to each security its current market price for that day. Debt
securities, including zero-coupon securities and certain foreign securities will
be valued by a pricing service. Other foreign securities will be valued by the
Custodian for the Trust. Securities traded on a national securities exchange or
quoted on the NASDAQ National Market System are valued at their last-reported
sale price on the principal exchange or reported by NASDAQ or, if there is no
reported sale, and in the case of over-the-counter securities not included in
the NASDAQ National Market System, at the closing bid price. Portfolio
securities for which market quotations are readily available are valued at
market. Short-term debt instruments maturing in less than 60 days are valued at
amortized cost, which the Board of Trustees has determined approximates market
value. Restricted and illiquid securities or other securities for which market
quotations are not available are valued at their fair value determined in good
faith based on policies of the Board of Trustees.
The value of the assets of the Portfolio so determined is then increased by any
accrued but uncollected dividends or interest earned on the securities it holds.
The total value is then reduced by all liabilities including accrued, but unpaid
liabilities such as the investment advisory fee.
Certain portfolios invest in securities that trade on days other than the days
on which the New York Stock Exchange is open. Those securities include
securities of non-U.S. companies, securities listed on foreign stock exchanges
and debt securities of the United States and foreign governments. The value of
securities quoted in foreign currencies are generally converted into U.S.
Dollars at 1:00 p.m. Eastern Time unless a Subadviser believes that another time
may be more appropriate. Changes in the value of the currencies will change the
value of the assets of a Portfolio even where there has been no change in the
market value of the security.
Foreign exchanges and securities markets close at times other than the closing
of the New York Stock Exchange. Values of the securities traded on those markets
will generally be determined prior to the close of the New York Stock Exchange.
If an event materially affecting the value of foreign securities occurs during
the period between the close of the foreign exchange and the time for
determining the net asset value of the Portfolio holding the security, the
securities will be valued at fair value as determined in good faith by the
Subadviser.
TAXATION OF THE TRUST
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986. If a Portfolio fails to
qualify as a regulated investment company under Subchapter M, the Portfolio
would be taxed on its net investment income and net capital gains without being
able to deduct dividends and distributions paid to shareholders. The tax
liability would reduce amounts available for distribution under your Contract
and would reduce the total return of the Portfolio. The Portfolios make every
effort to meet the requirements of Subchapter M which include earning 90% of
their income from dividends, interest, and gains from the sale of securities;
distributing at least 90% of their net income during each year and meeting
diversification tests.
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that is
distributed. If a Portfolio does not distribute substantially all taxable income
and realized gains each year, it is subject to an excise tax. Each Portfolio
intends to avoid this tax except when the cost of processing the distribution is
greater than the tax.
The Contract you have purchased must also meet certain requirements to allow the
deferral of income tax on earnings of the Portfolio through the Contract. One of
those requirements is that the assets of the annuity contract or life insurance
policy be adequately diversified as defined by the Internal Revenue Code and
interpretations and regulations under the Code. This diversification requirement
is different from the diversification requirement under Subchapter M.
PERFORMANCE INFORMATION
The Portfolios may advertise performance in terms of yield or total
return. A Portfolio's yield is presented for a specified 30-day period (the
"base period"). Yield is based on the amount determined by (I) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
net asset value per share of the Portfolio on the last day of the base period.
The result is annualized on a compounding basis to determine the Portfolio's
yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first expected
call date) of such obligations based on their market values (or, in the case of
receivables-backed securities such as Ginnie Maes, based on cost). Dividends on
equity securities are accrued daily at their stated dividend rates.
The performance of the Portfolios depends on a number of factors, including the
success of the investment adviser in selecting securities that meet the
objectives of the Portfolios. The performance of the Portfolios varies daily as
net earnings and the value of the assets in the Portfolio vary. The performance
of a mutual fund is commonly measured as total return. Total return of a
Portfolio for periods longer than one year is determined by calculating the
actual dollar amount of investment return on a $1,000 investment in the
Portfolio made at the beginning of each period, then calculating the average
annual compounded rate of return which would produce the same investment return
on the $1,000 investment over the same period. Total return for a period of one
year or less is equal to the actual investment return on a $1,000 investment in
the Portfolio during that period. Total return calculations assume that all
Portfolio distributions are reinvested at net asset value on their respective
reinvestment dates.
From time to time, the investment adviser may reduce its compensation or assume
expenses in respect of the operations of a Portfolio in order to reduce the
Portfolio's expenses. Any such waiver or assumption would increase a Portfolio's
yield and total return during the period of the waiver or assumption.
The Portfolios will use the following formula to calculate performance when
applicable: The average annual compounded rate of return (denoted by T below) is
the rate that would equate the initial amount invested to the ending redeemable
value according to the formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1-, 5- or 10-year periods at the end of the 1-, 5-, or
10-year periods (or fractional portion).
You may compare the performance of the Portfolios to that of other funds that
are comparable to the Portfolios or to indices which represent the asset classes
in which the assets of the Portfolios are invested. You may also use financial
publications and other sources to obtain a complete view of the performance of
the Portfolios. When comparing performance, you should consider all factors that
are relevant to performance, such as the securities that make up the index used
or that are held by funds to which the Portfolios are compared, the actual type
of assets held by other funds to which the Portfolios are compared, and the
methods used to value the assets of other funds. You should also remember that
indices do not incur any costs and therefore the performance reported for an
index may be higher than that of a Portfolio which has management, service and
other costs and expenses.
Financial services and other financial publications may publish the past
performance of the Portfolios from time to time. Such performance may be measure
by independent sources such as, but not limited to:
* Lipper Analytical Services, Inc.
* Weisenberger Investment Companies Service
* Bank Rate Monitor
* Barron's
* Business Week
* Changing Times
* Financial World
* Forbes
* Fortune
* Money
* Personal Investor
* The Wall Street Journal
* Standard & Poor's Indices
* Morningstar, Inc.
Advertisements and other sales literature for the Portfolios may quote total
returns which are calculated for periods other than the 1-, 5- and 10-year
periods required by the Rules of the Securities and Exchange Commission or may
quote returns that do not reflect the deduction of all expenses incurred by a
Portfolio. The investment adviser may use these returns in advertising if the
investment adviser believes the nonstandard returns are useful. Nonstandard
returns are always accompanied by total returns calculated as required by Rules
of the Securities and Exchange Commission, which require performance to be
calculated for 1-, 5- and 10-year periods with the deduction of all expenses and
the assumption that all dividends and distributions are reinvested.
In addition, Portfolio performance may be advertised relative to certain indices
and benchmark investments, including: (a) the Lipper Analytical Services, Inc.
Mutual Fund Performance Analysis, Fixed-Income Analysis and Mutual Fund indices
(which measure total return and average current yield for the mutual fund
industry and rank mutual fund performance); (b) the CDA Mutual Fund Report
published by CDA Investment Technologies, Inc. (which analyzes price, risk and
various measures of return for the mutual fund industry); (c) the Consumer Price
Index published by the U.S. Bureau of Labor Statistics which measures changes in
the price of goods and services); (d) Stocks, Bonds, Bills and Inflation
published by Ibbotson Associates (which provides historical performance figures
for stocks, government securities and inflation); (e) the Hambrecht & Quist
Growth Stock Index; (f) the NASDAQ OTC Composite Prime Return; (g) the Russell
Midcap Index; (h) the Russell 2000 Index - Total Return; (i) the ValueLine
Composite-Price Return; (j) the Wilshire 5000 Index; (k) the Salomon Brothers'
World Bond Index (which measures the total return in U.S. dollar terms of
government bonds, Eurobonds and non-U.S. bonds of ten countries, with all such
bonds having a minimum maturity of five years); (l) the Shearson Lehman Brothers
Aggregate Bond Index or its component indices (the Aggregate Bond Index measures
the performance of Treasury, U.S. Government agencies, mortgage and Yankee
bonds); (m) the S&P Bond indices (which measure yield and price of corporate,
municipal and U.S. Government bonds); (n) the J.P. Morgan Global Government Bond
Index; (o) other taxable investments including certificates of deposit, money
market deposit accounts, checking accounts, savings accounts, money market
mutual funds and repurchase agreements; (p) historical investment data supplied
by the research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley (including EAFE), Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data;(q) the
FT-Actuaries Europe and Pacific Index; (r) mutual fund performance indices
published by Variable Annuity Research & Data Service; and (s) mutual fund
performance indices published by Morningstar, Inc. The composition of the
investment in such indices and the characteristics of such benchmark investments
are not identical to, and in some cases are very different from, those of a
Portfolio. These indices and averages are generally unmanaged and the items
included in the calculations of such indices and averages may be different from
those of the equations used by the Trust to calculate a Portfolio's performance
figures.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its operating
expenses. The effective yield and total return for a Portfolio should be
distinguished from the rate of return of a corresponding division of the Life
Company's separate account, which rate will reflect the deduction of additional
charges, including mortality and expense risk charges, and will therefore be
lower. Accordingly, performance figures for a Portfolio will only be advertised
if comparable performance figures for the corresponding division of the separate
account are included in the advertisements. Variable annuity contract holders
should consult the variable annuity contract prospectus for further information.
Each Portfolio's results also should be considered relative to the risks
associated with its investment objectives and policies.
FINANCIAL STATEMENTS
The Trust's Financial Statements and notes thereto for the year ended December
31, 1999 and the report of PricewaterhouseCoopers LLP, Independent Auditors,
with respect thereto, appear in the Trust's Annual Report for the year ended
December 31, 1999, which is incorporated by reference into this Statement of
Additional Information. The Trust delivers a copy of the Annual Report to
investors along with the Statement of Additional Information. In addition, the
Trust will furnish, without charge, additional copies of such Annual Report to
investors which may be obtained without charge by calling the Life Company at
(800) 852-3152.
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended and Restated Declaration of Trust**
(b) By-laws of Trust++
(c) Not Applicable
(d) (1) Investment Advisory Agreement**
(2) Form of Amendment to Investment Advisory Agreement*****
(3) (i) Sub-Advisory Agreement dated as of July 24, 1995, among
Strong Capital Management, Inc., the Adviser and the Trust++
(ii) Sub-Advisory Agreement dated as of July 7, 1995, among Lexington
Management Corporation, the Adviser and the Trust++
(iii)Sub-Advisory Agreement dated as of July 17, 1995, among
Massachusetts Financial Services Company, the Adviser and the
Trust++
(iv) Form of Sub-Advisory Agreement among Harris Associates L.P., the
Adviser and the Trust*****
(v) Form of Sub-Advisory Agreement among Robertson, Stephens &
Company (RSC) Investment Management, L.P., the Adviser and the
Trust +
(vi)Form of Sub-Advisory Agreement among Select Advisors, Inc., the
Adviser and the Trust+++
(e) Not Applicable
(f) Not Applicable
(g)(1) Form of Custodian Agreement and Fund Accounting Agreement
between the Registrant and the Custodian++
(g)(2) Amendment to Custodian Agreement++
(h) Form of Subadministration Agreement for Reporting and Accounting Services
between the Registrant and the Subadministrator***
(i) Consent and Opinion of Counsel
(j) Consent of Independent Accountants
(k) Financial Statements - incorporated herein by reference to the Trust's
Annual Report dated December 31, 1999, as filed electronically with
the Securities and Exchange Commission on March 7, 2000.
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedules*
(o) Not Applicable
(p)(1) Registrant's and Adviser's Code of Ethics
(p)(2) Sub-Adviser's Code of Ethics - RS Investment Management Company, L.P.
(p)(3) Sub-Adviser's Code of Ethics - Harris Associates L.P.
(p)(4) Sub-Adviser's Code of Ethics - Lexington Management Corporation
(p)(5) Sub-Adviser's Code of Ethics - Strong Capital Management, Inc.
(p)(6) Sub-Adviser's Code of Ethics - Massachusetts Financial Services Company
(p)(7) Sub-Adviser's Code of Ethics - Select Advisors, Inc.
* previously filed.
** incorporated by reference to Registrant's Pre-Effective Amendment No.
2 to Form N-1A (File No. 33-88792), as filed electronically on January
26, 1996.
*** incorporated by reference to Registrant's Post-Effective Amendment No.
1 to Form N-1A (File No. 33-88792), as filed electronically on September
13, 1996.
**** incorporated by reference to Registrant's Post-Effective Amendment No.
2 to Form N-1A (File No. 33-88792), as filed electronically on March 7,
1997.
***** incorporated by reference to Registrant's Post-Effective Amendment
No. 3 to Form N-1A (File No. 33-88792), as filed electronically on April
25, 1997.
+ incorporated by reference to Registrant's Post-Effective Amendment No. 4
to Form N-1A (File No. 33-88792), as filed electronically on September 5,
1997.
++ incorporated by reference to Registrant's Post-Effective Amendment No.
5 to Form N-1A (File No. 33-88792), as filed electronically on April
28, 1998.
+++ incorporated by reference to Registrant's Post-Effective Amendment No.
7 to Form N-1A (File No. 33-88792), as filed electronically on April
30, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
The shares of the Trust are currently sold to LPLA Separate Account One.
ITEM 25. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the Trust to
the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding was
brought, that the person to be indemnified was not liable by reason of disabling
conduct or, (ii) in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the person to be indemnified was not
liable by reason of disabling conduct, by (a) the vote of a majority of a quorum
of Trustees who are neither "interested persons" of the company as defined in
section 2(a)(19) of the 1940 Act, nor parties to the proceedings or (b) an
independent legal counsel in a written opinion. The Trust may, by vote of a
majority of a quorum of Trustees who are not interested persons, advance
attorneys' fees or other expenses incurred by officers, Trustees, investment
advisers or principal underwriters, in defending a proceeding upon the
undertaking by or on behalf of the person to be indemnified to repay the advance
unless it is ultimately determined that he is entitled to indemnification. Such
advance shall be subject to at least one of the following: (1) the person to be
indemnified shall provide a security for his undertaking, (2) the Trust shall be
insured against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of the disinterested, non-party Trustees of the Trust, or
an independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts, that there is reason to believe that the
person to be indemnified ultimately will be found entitled to indemnification.
The law of Massachusetts is superseded by the 1940 Act insofar as it conflicts
with the 1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, 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 THE INVESTMENT ADVISER AND SUB-
ADVISERS
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or officer
of the Registrant's Investment Adviser is, or at any time during the past two
years has been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee.
<TABLE>
<CAPTION>
<S> <C>
NAME AND PRINCIPAL
BUSINESS ADDRESS BUSINESS AND OTHER CONNECTIONS
- ----------------------- ------------------------------------------------
Ian K. Whitehead President, Chief Executive Officer and Director
1755 Creekside Oaks Dr. of the Adviser; Chief Executive Officer
Sacramento, CA 95833 and Director - Life Company; Chairman and
Director - London Pacific Financial & Insurance
Services; Chief Financial Officer - Govett & Company
Limited
Arthur I. Trueger Chairman of the Board and Director of the
650 California St. Adviser; Chairman of the Board and Director -
San Francisco, CA 94108 Life Company; Executive Chairman - Govett &
Company Limited
George C. Nicholson Chief Financial Officer, Secretary and Director
3109 Poplarwood Court of the Adviser; President, Chief Executive Officer
Raleigh, NC 27604 and Director - Life Company; Treasurer and
Director - London Pacific Financial & Insurance
Services
Susan Y. Gressel Vice President and Treasurer of the Adviser;
3109 Poplarwood Court Vice President and Treasurer - Life Company
Raleigh, NC 27604
Charles M. King Vice President and Controller of the Adviser;
3109 Poplarwood Court Vice President and Controller - Life Company
Raleigh, NC 27604
William J. McCarthy Vice President and Chief Actuary of the Adviser;
3109 Poplarwood Court Vice President and Chief Actuary - Life Company
Raleigh, NC 27604
Charlotte M. Stott Vice President, Marketing of the Adviser; Vice
1755 Creekside Oaks Dr. President, Marketing - Life Company
Sacramento, CA 95833
Jerry T. Tamura Vice President - Administrative Services of the
1755 Creekside Oaks Dr. Adviser; Vice President - Administrative
Sacramento, CA 95833 Services - Life Company; President and Director -
London Pacific Financial & Insurance Services
Jerry S. Waters Vice President, Technology Services of the
1755 Creekside Oaks Dr. Adviser; Vice President, Technology Services -
Sacramento, CA 95833 Life Company
</TABLE>
The principal address of Registrant's Investment Adviser is 1755 Creekside Oaks
Drive, Sacramento, California 95833.
With respect to information regarding the Sub-Advisers, reference is hereby made
to "Management of the Trust" in the Prospectus. For information as to the
business, profession, vocation or employment of a substantial nature of each of
the officers and directors of the Sub-Advisers, reference is made to the current
Form ADVs of the Sub-Advisers filed under the Investment Advisers Act of 1940,
incorporated herein by reference, the file numbers of which are as follows:
Robertson, Stephens & Company Investment Management, L.P.
File No. 801-144125
Harris Associates L.P.
File No. 801-50333
Lexington Management Corporation
File No. 801-8281
Strong Capital Management, Inc.
File No. 801-10724
Massachusetts Financial Services Company
File No. 801-17352
Select Advisors, Inc.
File No. 801-29775
ITEM 27. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules promulgated thereunder include the Registrant's Secretary; the
Registrant's investment adviser, LPIMC Insurance Marketing Services; and the
Registrant's custodian, State Street Bank and Trust Company. The address of the
Secretary and LPIMC Insurance Marketing Services is 31 Poplarwood Court,
Raleigh, NC 27604.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth in Parts A and B of this Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) and has duly caused this Post-Effective Amendment No.
8 to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Raleigh, and State of North Carolina
on the 27th day of April, 2000.
LPT VARIABLE INSURANCE SERIES TRUST
By: /s/GEORGE NICHOLSON
__________________________________________
George C. Nicholson
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 8 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/WILLIAM F. DUFF President and Principal 4-27-00
- ------------------------------- ----------------
William F. Duff Executive Officer
/s/GEORGE NICHOLSON Vice President, Treasurer, 4-27-00
- ------------------------------- ----------------
George C. Nicholson Principal Financial
Officer and Principal
Accounting Officer
/S/ RAYMOND L. PFEISTER* Trustee 4-27-00
- ------------------------------- -----------------
Raymond L. Pfeister
/S/ ROBERT H. SINGLETARY* 4-27-00
- ------------------------------- Trustee -----------------
Robert H. Singletary
/S/ JAMES WINTHER* Trustee 4-27-00
- ------------------------------- ----------------
James Winther
</TABLE>
*By: /s/GEORGE NICHOLSON
------------------------
George C. Nicholson
Attorney-in-Fact
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that LPT VARIABLE INSURANCE SERIES TRUST, a
Massachusetts Business Trust (the "Trust"), and each of its undersigned officers
and Trustees hereby nominate, constitute and appoint William F. Duff and George
C. Nicholson (with full power to each of them to act alone) its/his true and
lawful attorney-in-fact and agent, for it/him and in its/his name, place and
stead in any and all capacities, to make, execute and sign all amendments to the
Trust's Registration Statement on Form N-1A under the Securities Act of 1933 and
the Investment Company Act of 1940, and to file with the Securities and Exchange
Commission and any other regulatory authority having jurisdiction over the offer
and sale of shares of the Trust, such amendments, and any and all amendments and
supplements thereto, and any and all exhibits and other documents requisite in
connection therewith granting unto said attorneys and each of them, full power
and authority to do and perform each and every act necessary and/or appropriate
as fully to all intents and purposes as the Trust and the undersigned officers
and Trustees itself/themselves might or could do.
IN WITNESS WHEREOF, LPT VARIABLE INSURANCE SERIES TRUST has caused this
power of attorney to be executed in its name by its President and attested by
its Secretary, and the undersigned officers and Trustees have hereunto set their
hands this 25th day of April, 2000.
LPT VARIABLE INSURANCE SERIES TRUST
By:/s/WILLIAM F. DUFF
----------------------------
William F. Duff, President
ATTEST:
/s/JERRY T. TAMURA
- ---------------------------
Jerry T. Tamura, Secretary
(signatures continue)
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/WILLIAM F. DUFF
- -------------------- President and Principal
William F. Duff Executive Officer
/s/GEORGE NICHOLSON
- ---------------------- Vice President, Treasurer,
George C. Nicholson Principal Financial Officer
and Principal Accounting
Officer
/s/RAYMOND L. PFEISTER
- ---------------------- Trustee
Raymond L. Pfeister
/s/ROBERT H. SINGLETARY
- ----------------------- Trustee
Robert H. Singletary
/s/JAMES WINTHER
- --------------------- Trustee
James Winther
</TABLE>
PART II
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 8
TO
FORM N-1A
FOR
LPT VARIABLE INSURANCE SERIES TRUST
INDEX TO EXHIBITS
PAGE
EX-23(i) Consent and Opinion of Counsel
EX-23(j) Consent of Independent Accountants
EX-23(p)(1) Registrant's and Adviser's Code of Ethics
EX-23(p)(2) Sub-Adviser's Code of Ethics - RS Investment Management
Company, L.P.
EX-23(p)(3) Sub-Adviser's Code of Ethics - Harris Associates L.P.
EX-23(p)(4) Sub-Adviser's Code of Ethics - Lexington Management Corporation
EX-23(p)(5) Sub-Adviser's Code of Ethics - Strong Capital Management, Inc.
EX-23(p)(6) Sub-Adviser's Code of Ethics - Massachusetts Financial
Services Company
EX-23(p)(7) Sub-Adviser's Code of Ethics - Select Advisors, Inc.
April 27, 2000
Board of Trustees
LPT Variable Insurance Series Trust
1755 Creekside Oaks Drive
Sacramento, CA 95833
Re: Opinion of Counsel - LPT Variable Insurance Series Trust
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-1A with respect to LPT Variable Insurance
Series Trust.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. LPT Variable Insurance Series Trust ("Trust") is a valid and
existing unincorporated voluntary association, commonly known as a business
trust.
2. The Trust is a business Trust created and validly existing pursuant
to the Massachusetts Laws.
3. All of the prescribed Trust procedures for the issuance of the shares
have been followed, and, when such shares are issued in accordance with the
Prospectus contained in the Registration Statement for such shares, all state
requirements relating to such Trust shares will have been complied with.
4. Upon the acceptance of purchase payments made by shareholders in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable law, such shareholders will have
legally-issued, fully paid, non-assessable shares of the Trust.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration.
We consent to the reference to our Firm under the caption "Legal Counsel"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ RAYMOND A. O'HARA III
- -----------------------------
Raymond A. O'Hara III
[Letterhead of PricewaterhouseCoopers LLP]
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 11, 2000, relating to
the financial statements and financial highlights which appears in the
December 31, 1999 Annual Report to Shareholders of the LPT Variable
Insurance Series Trust (consisting of Harris Associates Value Portfolio,
MFS Total Return Portfolio, Strong Growth Portfolio, Robertson Stephens
Diversified Growth Portfolio, Lexington Corporate Leaders Portfolio and
SAI Global Leaders Portfolio), which are also incorporated by reference
into the Registration Statement. We also consent to the references to
us under the headings "Financial Highlights", "Experts", "Independent
Accountants" and "Financial Statements" in such Registration Statement.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
April 26, 2000
LPT VARIABLE INSURANCE SERIES TRUST
CODE OF ETHICS
This Code of Ethics ("Code") is adopted by:
LPT Variable Insurance Series Trust, a registered investment company
("Trust") on behalf of its series (each series of which is referred to as a
"Portfolio") and LPIMC Insurance Marketing Services ("Adviser"), the
investment adviser of all pursuant to Rule 17j-1 promulgated by the
Securities and Exchange Commission (the "Rule") under the Investment
Company Act of 1940.
Statement of General Principles
This Code is adopted in recognition of the general fiduciary principles
that govern personal investment activities of all individuals associated with
the Trust, Portfolio and the Adviser.
It is the duty at all times to place the interests of Portfolio
shareholders first. Priority must be given to Portfolio trades over
personal securities trades.
Individuals are prohibited from trading on the basis of material non-public
information as defined by federal courts and the SEC in interpreting Rule
10b_5 under the Securities Exchange Act of 1934. Individuals are prohibited
from trading in their personal accounts before trades in the Portfolio for
the same security ("front-running").
All personal securities transactions must be conducted consistent with this
Code and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and
responsibility.
Individuals should not take advantage of their positions with the Trust.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
1. General Prohibitions..........................................................................................1
2. Definitions...................................................................................................1
Access Person............................................................................................1
Advisory Person..........................................................................................1
Beneficial Interest......................................................................................1
Blind Trust..............................................................................................2
Compliance Department....................................................................................2
Day......................................................................................................3
Designated Access Person.................................................................................3
For his or her own account...............................................................................3
Immediate Family.........................................................................................3
Investment Company.......................................................................................3
Investment Personnel.....................................................................................3
Portfolio Manager........................................................................................3
Related Issuer...........................................................................................3
Security.................................................................................................3
3. Required Compliance Procedures................................................................................4
3.1 Preclearance of Securities Transactions..............................................................4
3.2 Post-Trade Monitoring of Precleared Transactions.....................................................5
3.3 Disclosure of Personal Holdings......................................................................5
3.4 Certification of Compliance With Code of Ethics......................................................5
4. Restrictions and Disclosure Requirements......................................................................6
4.1 Initial Public Offerings.............................................................................6
4.2 Private Placements...................................................................................6
4.3 Related Issuers......................................................................................6
4.4 Blackout Periods.....................................................................................7
4.5 Same Day Price Switch................................................................................8
4.6 Short-term Trading Profits..........................................................................10
4.7 Gifts...............................................................................................11
4.8 Service as Director of Publicly Traded Companies....................................................11
5. Procedures with Regard to Dissemination of Information.......................................................11
6. Reporting by Access Persons..................................................................................12
6.1 General Requirement.................................................................................12
6.2 Disinterested Trustees..............................................................................12
6.3 Contents............................................................................................12
7. Code of Ethics Board.........................................................................................13
8. Annual Report to Board of Trustees...........................................................................14
9. Implementation...............................................................................................14
9.1 Forms..............................................................................................14
9.2 Exceptions.........................................................................................14
9.3 Compliance by Sub-Advisers..........................................................................14
</TABLE>
1. General Prohibitions
No individual associated with the Trust, Portfolio, or the Adviser in connection
with the purchase or sale, directly or indirectly, by such person of a security
held or to be acquired by such Trust or Portfolio, shall:
Employ any device, scheme or artifice to defraud such Trust or Portfolio;
Make to such Trust or Portfolio any untrue statement of a material fact or
omit to state to such Trust or Portfolio a material fact necessary in order
to make the statements made, in light of the circumstances under which they
are made, not misleading;
Engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any such Trust or Portfolio;
Engage in any manipulative practice with respect to such Trust or
Portfolio;
Engage in any transaction in a security while in possession of material
nonpublic information regarding the security or the issuer of the security;
or
Engage in any transaction intended to raise, lower, or maintain the price
of any security or to create a false appearance of active trading.
2. Definitions
The following words have the following meanings, regardless of whether such
terms are capitalized or not in this Code:
Access Person - all Trustees, directors, officers, or Advisory Persons of
the Portfolio or Adviser.
Advisory Person - any employee of the Portfolio or Adviser, (or of any
company in a control relationship to the Portfolio, or the Adviser) 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 Portfolio, or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
Beneficial Interest - a person has a beneficial interest in an account in
which he or she may profit or share in the profit from transactions.
Without limiting the foregoing, a person has a beneficial interest when the
securities in the account are held:
(i) in his or her name;
(ii) in the name of any of his or her Immediate Family;
(iii)in his or her name as trustee for himself or herself or for his or
her Immediate Family;
(iv) in a trust in which he or she has a beneficial interest or is the
settlor with a power to revoke;
(v) by another person and he or she has a contract or an understanding
with such person that the securities held in that person's name are
for his or her benefit;
(vi) in the form of a right to acquisition of such security through the
exercise of warrants, options, rights, or conversion rights;
(vii) by a partnership of which he or she is a member;
(viii) by a corporation which he or she uses as a personal trading medium;
(ix) by a holding company which he or she controls; or
(x) any other relationship in which a person would have beneficial
ownership under Section 16 of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, except that the determination of
direct or indirect beneficial interest shall apply to all securities
which an Access Person has or acquires.
Any person who wishes to disclaim a beneficial interest in any securities must
submit a written request to the Compliance Department explaining the reasons
therefor. Any disclaimers granted by the Compliance Department must be made in
writing. Without limiting the foregoing, if a disclaimer is granted to any
person with respect to shares held by a member or members of his or her
Immediate Family, the provisions of this Code of Ethics applicable to such
person shall not apply to any member or members of his or her Immediate Family
for which such disclaimer was granted.
Blind Trust - a trust in which an Access Person or employee has beneficial
interest or is the settlor with a power to revoke, with respect to which the
Compliance Department has determined that such Access Person or employee has no
direct or indirect influence or control and no knowledge of transactions
therein, provided, however, that direct or indirect influence or control of such
trust is held by a person or entity not associated with Adviser or any affiliate
of Adviser and not a relative of such Access Person or employee.
Compliance Department - Adviser's Compliance Department.
Day - a calendar day.
Designated Access Person - Any Access Person who in the course of his/her
regular duties knows of or has access to information regarding transactions that
will be made or have been effected on behalf of any Portfolio. The Compliance
Department will maintain a list of the names of the Designated Access Persons.
For his or her own account - transactions in securities held in an
individual's own name or for any account in which he or she has beneficial
interest.
Immediate Family - any of the following relatives sharing the same
household with an individual: child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, sister-in-law, including adoptive
relationships.
Investment Company - each registered investment company and series thereof
for which the Adviser is the investment adviser.
Investment Personnel - each Portfolio Manager, and any Access Person who,
in connection with his or her regular functions or duties, provides information
and advice to a Portfolio Manager or who helps execute a Portfolio Manager's
decisions.
Portfolio Manager - an Access Person who has or shares principal day-to-day
responsibility for managing the portfolio of any Portfolio.
Related Issuer - an issuer with respect to which an Investment Personnel or
his or her Immediate Family: (i) has a business relationship with such issuer or
any promoter, underwriter, officer, director, or employee of such issuer; or
(ii) is related to any officer, director or employee of such issuer.
Security - any option, stock or option thereon, instrument, bond,
debenture, pre-organization certificate, investment contract, any other interest
commonly known as a security, and any security or instrument related to, but not
necessarily the same as, those held or to be acquired by a Portfolio; provided,
however, that the following shall not be considered a "security": securities
issued by the United States Government or any state or municipality or any other
governmental subdivision thereof, bankers' acceptances, bank certificates of
deposit, commercial paper, shares of registered open-end investment companies,
commodities, futures, and options on futures.
3. Required Compliance Procedures
3.1 Preclearance of Securities Transactions .
(a) Every Designated Access Person and member of his or her Immediate
Family must obtain prior written approval from the Compliance Department
regarding a transaction in a Security for his or her own account or for his
or her Immediate Family.
(b) Every Access Person and member of his or her Immediate Family must
obtain prior written approval from the Compliance Department regarding a
transaction in a Security for his or her own account or for his or her
Immediate Family if such Access Person, at the time of that transaction,
knew or, in the ordinary course of fulfilling his or her official duties as
an Access Person should have known about any security that, during the
15-day period immediately preceding the date of the transaction by the
Access Person, was purchased or sold by a Portfolio or was being considered
by the Adviser for purchase or sale by a Portfolio.
(c) Before approving any transaction requiring Preclearance, the
Compliance Department shall determine that:
(i) No Portfolio for which the Adviser has direct day-to-day
portfolio management and transaction responsibility, has a
pending "buy" or "sell" order in that security;
(ii) The security does not appear on any "restricted" list of the
Adviser; and
(iii)Such transaction is not short selling or option trading that is
economically opposite any pending transaction for any Portfolio
for which the Adviser has direct day-to-day portfolio management
and transaction responsibility.
(d) The following securities are exempt from preclearance
requirements:
(i) Securities transactions where neither the Designated Access
Person nor his or her Immediate Family knows of the transaction
before it is completed or securities transactions for Access
Persons under Section 3.1(b) where such Access Person does not
know of the transaction before it is completed;
(ii) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities;
(iii)The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired;
(iv) Repurchase agreements;
(v) Options on the Standard & Poor's "500" Composite Stock Price
Index; and
(vi) Other securities that may from time to time be so designated in
writing by the Code of Ethics Board.
(e) Obtaining preclearance approval does not constitute a waiver of
any prohibitions, restrictions, or disclosure requirements in this Code of
Ethics.
3.2 Post-Trade Monitoring of Precleared Transactions . After the
Compliance Department has granted preclearance to a Designated Access
Person or member of his or her Immediate Family or to any Access
Person under Section 3.1(b) with respect to any personal securities
transaction, the investment activity of such Designated Access Person
and member of his or her Immediate Family or such Access Person under
Section 3.1(b) shall be monitored by the Compliance Department to
ascertain that such activity conforms to the preclearance so granted
and the provisions of this Code.
3.3 Disclosure of Personal Holdings .
All Designated Access Persons are required to disclose all their
personal securities holdings and those of their Immediate Family to the
Compliance Department upon commencement of employment and thereafter on an
annual basis.
3.4 Certification of Compliance With Code of Ethics .
All Access Persons are required to certify annually in writing that
they have:
(a) read and understand the Code of Ethics and recognize that they are
subject thereto;
(b) complied with the requirements of the Code of Ethics;
(c) disclosed or reported all personal securities transactions
required to be disclosed or reported pursuant to the requirements of the
Code; and
(d) with respect to any blind trusts in which such person has a
beneficial interest, that such person has no direct or indirect influence
or control and no knowledge of any transactions therein.
4. Restrictions and Disclosure Requirements
4.1 Initial Public Offerings .
All Designated Access Persons and members of their Immediate Family
are prohibited from acquiring any securities in an initial public offering,
in order to preclude any possibility of their profiting improperly from
their positions on behalf of a Portfolio.
4.2 Private Placements .
(a) No Designated Access Person or member of his or her Immediate
Family may acquire any securities in private placements without prior
written approval by the Compliance Department.
(b) Prior approval shall take into account, among other factors,
whether the investment opportunity should be reserved for a Trust or
Portfolio and its shareholders and whether the opportunity is being offered
to an individual by virtue of his or her position or relationship to the
Trust or Portfolio.
(c) A Designated Access Person who has (or a member of whose Immediate
Family has) acquired securities in a private placement is required to
disclose that investment to the Portfolio Manager when such Designated
Access Person plays a part in any subsequent consideration of an investment
in the issuer for any Trust or Portfolio; provided, however, that if such
Designated Access Person is the Portfolio Manager, such Designated Access
Person shall make such disclosure to the Compliance Department. In any such
circumstances, the decision to purchase securities of the issuer for a
Trust or Portfolio is subject to an independent review by individuals with
no personal interest in the issuer. Such independent review shall be made
in writing and furnished to the Compliance Department.
APPENDIX II
February 1, 2000
RS INVESTMENT MANAGEMENT CO. LLC
RS INVESTMENT MANAGEMENT, L.P.
RS INVESTMENT MANAGEMENT, INC.
RS GROWTH GROUP LLC
RS VALUE GROUP LLC
RS INVESTMENT TRUST
---------------------------
CODE OF ETHICS
including
RSIM POLICY ON PERSONAL TRADING
---------------------------
I. SCOPE AND SUMMARY
(a) Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940
Act"), requires every investment company, as well as every investment adviser to
and principal underwriter of an investment company, to have a written Code of
Ethics which specifically deals with trading practices by "Access Persons."
Access Persons are defined to include (1) officers, directors and general
partners of the two mutual fund advisers (RS Investment Management, Inc. and RS
Investment Management, L.P. -- collectively "RSIM"), as well as (2) employees of
RSIM and officers, directors, partners who have substantial responsibility for
or knowledge of the investments of the mutual funds constituting series of the
RS (each, a "Fund"), and (3) each member of the Funds' Board of Trustees. The
Rule also requires that reasonable diligence is used and procedures instituted
to prevent violations of this Code of Ethics.
(b) Sections 21A and 15(f) of the Securities Exchange Act and Section 204A of
the Investment Advisers Act further require all broker-dealers and investment
advisers to establish, maintain and enforce written policies and procedures to
prevent the misuse of material nonpublic information.
(c) Common law fiduciary principles require that an investment adviser (like
RSIM) avoid placing itself in a position of conflict of interest with its
clients. Likewise, RSIM as a general partner to various partnerships, stands in
a fiduciary relationship to the limited partners investing in those
partnerships.
(d) The "Blue Ribbon" Advisory Group on Personal Investing in its report to the
Investment Company Institute also articulated the following three general
fiduciary principles which the Group believes should govern the personal
investment activities of mutual fund advisory and distributor personnel:
(i) the duty at all times to place the interests of Fund shareholders
first;
(ii) the requirement that all personal securities transactions be conducted
consistent with the Code of Ethics and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility; and
(iii)the fundamental standard that mutual fund advisory and distributor
personnel should not take inappropriate advantage of their positions.
(e) This Code of Ethics is designed to satisfy the above-referenced legal
requirements and ethical principles as applicable to RSIM in their roles as
adviser to and distributor for the RSIM Funds. It is important that all
partners, officers, directors and employees of RSIM to whom this Code of Ethics
applies observe the ethical standards set forth in the Code.
(f) This Code of Ethics is not intended to cover all possible areas of potential
liability under the 1940 Act or under the federal securities laws in general.
For example, other provisions of Section 17 of the 1940 Act prohibit various
transactions between a registered investment company and affiliated persons,
including the knowing sale or purchase of property to or from a registered
investment company on a principal basis, and joint transactions (e.g., combining
to achieve a substantial position in a security, concerted market activity, or
commingling of funds) between an investment company and an affiliated person.
(g) It is expected that Access Persons will be sensitive to all areas of
potential conflict, even if this Code of Ethics does not address specifically an
area of fiduciary responsibility.
(h) Exceptions to specific provisions of this Code of Ethics may be granted by
the compliance officer or an alternate if warranted by circumstances and if the
exception is requested in a timely manner.
(i) SUMMARY. Under the Code of Ethics, all Access Persons, except independent
Trustees of the Funds, are required to:
(i) Pre-clear all trades in individual securities. [Note: certain
securities are excepted: mutual funds, stock index options, SPDR's and
money market instruments are "excepted securities."]
(ii) Reverse trades that involve securities subsequently purchased or sold
by a Fund within the applicable blackout period.
(iii)Observe a minimum 60 day holding period for all securities (except
"excepted securities"). This policy only applies to profitable trades.
(iv) Avoid IPO's.
(v) Receive special clearance for private placements.
(vi) Avoid directorships of companies in which Fund assets may be invested.
(Unless permission is obtained from the CEO.)
(vii)Promptly disclose all security transactions and file quarterly
transaction reports and annual ownership reports.
(viii) Avoid security transactions in which they possess material
non-public information with regard to the particular security.
II. DEFINITIONS
(a) "ACCESS PERSON" means: (i) officers, directors and general partners of the
four mutual fund advisers (RS Investment Management, Inc. and RS Investment
Management, L.P., RS Growth Group LLC and RS Value Group LLC --collectively
"RSIM"), as well as (ii) employees of RSIM and officers, directors, partners who
have substantial responsibility for or knowledge of the investments of the
mutual funds constituting series of the RS Trust (each, a "Fund"), hedge funds
managed by RSIM, institutional accounts where RSIM acts as a sub-adviser,
separate accounts managed by RSIM and (iii) each member of the Funds' Board of
Trustees. Members of the immediate family of an Access Person living in the same
household are covered by this Code of Ethics to the same extent as the Access
Person.
(b) "ADVISORY PERSON" means with respect to (i) the Funds, (ii) an investment
adviser to a Fund or (iii) any company in a control relationship to the Funds or
the investment adviser (i.e., RSIM), (A) any employee 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 Fund, or whose functions
relate to the making of any recommendations with respect to such purchases or
sales; and (B) any natural person in a control relationship to the Funds or an
investment adviser who obtains information concerning recommendations made to a
Fund with regard to the purchase or sale of a security.
(c) A security is "BEING CONSIDERED FOR PURCHASE OR SALE" when a recommendation
to purchase or sell a security has been made and communicated, and, with respect
to a person making a recommendation, when such person seriously considers making
such a recommendation.
(d) "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, as amended, and the rules and regulations
thereunder, with the exception that the determination of direct or indirect
beneficial ownership shall apply to all securities which an Access Person has or
acquires.
(e) "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, as further defined in Section 2(a)(9) of the 1940 Act.
(f) "PURCHASE OR SALE OF A SECURITY" includes the writing of an option to
purchase or sell a security.
(g) "SECURITY" shall have the meaning set forth in Section 2(a)(36) of the 1940
Act, and shall include options and warrants, except that it shall not include
excepted securities (as defined below).
(h) "EXCEPTED SECURITIES" include shares of registered open-end investment
companies (except the RSIM Funds), securities issued by the Government of the
United States (including Government agencies), short term debt securities which
are "government securities" within the meaning of Section 2(a)(16) of the 1940
Act, bankers' acceptances, bank certificates of deposit, commercial paper and
other money market instruments. Stock Index Options and SPDR's are also
considered "excepted securities" for all purposes except the quarterly and
annual reporting obligations.
(i) "MATERIAL NON-PUBLIC INFORMATION" is information relating to dividend
increases or decreases, earnings estimates, changes in previously released
earnings estimates, significant expansion or curtailment of operations, a
significant increase or decline of orders, significant merger or acquisition
proposals or agreements, significant new products or discoveries, extraordinary
borrowing, major litigation, liquidity problems, extraordinary management
developments, purchase or sale of substantial assets or any information a
reasonable investor might consider to be of importance in making an investment
decision to buy, sell or hold. Information should be deemed non-public if it has
not been widely disseminated by wire service, in one or more newspapers of
general circulation, or by communication from the company involved to its
shareholders or in a press release.
III. PROHIBITED TRADING PRACTICES
(a) GENERAL ANTI-FRAUD PROHIBITION. If a security:
(i) is being considered for purchase or sale by a Fund;
(ii) is in the process of being purchased or sold by a Fund; or
(iii) is or has been held by a Fund within the most recent 15 day period;
no Access Person shall knowingly purchase, sell or otherwise directly or
indirectly acquire or dispose of any direct or indirect beneficial ownership
interest in that security if such action by such Access Person would defraud a
Fund, operate as a fraud or deceit upon a Fund, or constitute a manipulative
practice with respect to a Fund.
(b) PRE-CLEARANCE. No Access Person shall purchase or sell any individual
security (i.e., any security except an "excepted security") without
pre-clearance. Once pre-clearance has been obtained, the trade must be executed
by the end of the business day or new clearance must be obtained. (See attached
Pre-clearance Form).
(c) BLACKOUT PERIOD. An Access Person may not execute a securities transaction
(other than an "excepted security") on any day during which any Fund in the RSIM
Funds complex has a pending "buy" or "sell" order in that same security or a
related security of the same issuer (e.g., common stock is a related security to
an option on common stock). However, it is not always possible to determine
which orders were executed until the following day. The fact of pre-clearance
does not mean that a trade will not end up being unwound if it is later
ascertained that one of the Funds traded in that security on the same day.
Blackout periods may be extended for certain securities. This policy applies to
all Access people.
Additionally, portfolio managers and others who make investment
decisions with respect to a Fund are prohibited for seven (7) calendar days
preceding and following any Fund purchase or sale of that security and will
include the entire business day on which the last Fund purchase or sale activity
occurs. Any profits realized on a trade effected during the blackout period by a
portfolio manager or other individual with investment decision-making authority
will be disgorged to the appropriate Fund. The blackout period only applies to
securities traded by a Fund or Funds over which the individual exercises
investment decision-making authority. It does not apply to all Funds in the
complex. The fact of pre-clearance and execution within the same day of
pre-clearance is not relevant. Blackout periods may be extended for certain
securities
(d) TRADES IN SHARES OF RSIM FUNDS. Please note that purchases and sales of
shares of an RS Fund do not need pre-clearance, but the possibility of
appearance of conflict of interest in such transactions is high.
Accordingly, all purchases and sales of shares of an RS Fund:
(i) should be made well in advance of the closing price calculation each
day, and
(ii) should not be made when in possession of material nonpublic
information.
(e) NO IPO'S. No Access Person shall acquire any securities offered in an
initial public offering.
(f) PRIVATE PLACEMENTS. No Access Person shall acquire any securities in a
private placement without both pre-clearance and special approval by the CEO.
(g) OTHER RESTRICTIONS. No Access Person shall engage in short term trading or
make other investments in contravention of the general policies that may be
established from time to time as set forth. An Access Person must hold a
security (other than an "excepted security") for a minimum of 60 days. This
policy only applies to profitable trades.
IV. EXEMPTED TRANSACTIONS/SECURITIES
The prohibitions of Section IV of this Code shall not apply to:
(a) Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control.
(b) Purchases or sales of securities which are not eligible for purchase or sale
by any Fund.
(c) Purchases or sales which are non-volitional on the part of either the Access
Person or the Trust (e.g., receipt of gifts).
(d) Purchases that are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer pro rata
to all holders of a class of its securities, to the extent such rights were
acquired from such issuer, and sales of such rights so acquired.
(f) Purchases and sales which have received the prior approval of the Compliance
Officer.
(g) Purchases and sales of securities, which are not included in the definition
of "Security" in Section II.g or are "excepted securities" as defined in Section
II.h. -- i.e., mutual fund shares (but not RS Fund shares), stock index options,
SPDR's, government securities and money market instruments.
V. REPORTING
(a) PRE-CLEARANCE AND IMMEDIATE REPORTING. All RSIM employees are currently
required to report all individual security transactions (and purchase/sales of
RSIM Funds) under rules specifically applicable to advisory and broker-dealer
organizations. Access persons must also seek pre-clearance of individual
security transactions and are required to have a duplicate confirmation of the
transaction sent to the RSIM compliance officer promptly following the
transaction. The only securities for which such pre-clearance and immediate
reporting is not required are "excepted securities" and shares of the RSIM
Funds.
(b) QUARTERLY REPORTS. In addition to contemporaneous reporting, all Access
Persons are required to review, and if necessary, correct or make additions to
quarterly reports generated within 10 days of the end of each calendar quarter,
listing all securities transactions except transactions in "excepted
securities." See subsection (c) below. Please note that purchases and sales of
shares of an RSIM Fund, which are not subject to pre-clearance and
contemporaneous reporting, are subject to quarterly reporting.
(c) Every quarterly report shall be made not later than ten (10) days after the
end of each calendar quarter 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.
(d) Copies of statements or confirmations containing the information specified
in paragraph (c) above may be submitted in lieu of listing the transactions.
Persons submitting statements will be deemed to have satisfied this reporting
requirement, and need only sign off quarterly on having complied.
(e) For periods in which no reportable transactions were effected, the quarterly
report shall contain a representation that no transactions subject to the
reporting requirements were effected during the relevant time period.
(f) ANNUAL REPORT. Annually, in conjunction with the quarterly report for the
quarter ending June 30, each Access Person shall be required to review, and if
necessary, correct or make additions to, an annual report, which lists all
security positions in which such Access Person has a direct or indirect
beneficial interest. (g) Any quarterly or annual report may contain a statement
that the report shall not be construed as an admission by the person making such
report that he has any direct or indirect beneficial ownership in the security
to which the report relates.
(h) An initial holdings report of all securities beneficially owned by such
person and the name of the broker with whom the Access Person maintained a
securities account must be submitted to Scott Smith or Marianne Clark for review
no later than 10 days after an employee of RSIM becomes an Access Person.
VI. EXCEPTIONS TO REPORTING REQUIREMENTS
(a) An independent Trustee, i.e., a Trustee of the RS Investment Trust who is
not an "interested person" (as defined in Section 2(a)(19) of the 1940 Act) of
the Funds, is not required to file a report on a transaction in a security
provided such Trustee neither knew nor, in the ordinary course of fulfilling his
or her official duties as a trustee of the Funds, should have known that, during
the 15-day period immediately preceding or after the date of the transaction by
the Trustee, such security is or was purchased or sold by a Fund or is or was
being considered for purchase or sale by a Fund by its investment adviser.
(b) Although an independent Trustee is exempt from the reporting requirements of
this Code, such Trustee may nevertheless voluntarily file a report representing
that he or she did not engage in any securities transactions which, to his or
her knowledge, involved securities that were being purchased or sold or
considered for purchase by any Fund during the 15-day period preceding or after
the date(s) of any transaction(s) by such Trustee. The failure to file such a
report, however, shall not be considered a violation of this Code of Ethics.
(c) Access Persons are not required to make a report with respect to an exempted
transactions/securities as described in Section V of this Code.
(d) Access Persons do not need to file multiple reports. Copies of a single
report can be used to satisfy the personal trading reports required by RSIM.
VII. IMPLEMENTATION
(a) In order to implement this Code of Ethics, a compliance officer and three
alternates have been designated for RSIM and the Funds. These individuals are:
Scott R. Smith
Marianne E. Clark (alternate)
Steven M. Cohen (alternate)
G. Randy Hecht -President and CEO (alternate)
(b) The compliance officer shall create a list of all "Access Persons" and
update the list with reasonable frequency.
(c) The compliance officer shall circulate a copy of this Code of Ethics to each
Access Person, together with an acknowledgment of receipt, which shall be signed
and returned to the Compliance Officer by each Access Person at least once each
year.
(d) The compliance officer or a compliance officer delegate is charged with
responsibility for ensuring that the pre-clearance and reporting requirements of
this Code of Ethics are adhered to by all Access Persons. The compliance officer
or compliance officer delegate shall be responsible for ensuring that the review
requirements of this Code of Ethics (see Section VIII) are performed in a prompt
manner. The compliance officer shall be responsible for enforcing the policies
set forth herein.
VIII. REVIEW
(a) The compliance officer shall review all reports of personal securities
transactions and compare such reports with pre-clearance forms and with
completed and contemplated portfolio transactions of each Fund to determine
whether noncompliance with the Code of Ethics and/or other applicable trading
procedures may have occurred. The compliance officer may delegate this function
to one or more persons.
(b) No person shall review his or her own reports. Before making any
determination that a non-compliant transaction may have been made by any person,
the compliance officer shall give such person an opportunity to supply
additional explanatory material. If a securities transaction of the compliance
officer is under consideration, an alternate shall act in all respects in the
manner prescribed herein for the designated compliance officer.
(c) If the compliance officer determines that noncompliance with the Code of
Ethics has or may have occurred, he or she shall, following consultation with
counsel, submit his or her written determination, together with the transaction
report, if any, and any additional explanatory material provided by the
individual, to G. Randall Hecht, who shall make an independent determination of
whether a violation has occurred.
(d) The compliance officer shall be responsible for maintaining a current list
of all Access Persons (including all Fund Trustees) and for identifying all
reporting Access Persons on such list, and shall take steps to ensure that all
reporting Access Persons have submitted reports in a timely manner. The
compliance officer may delegate the compilation of this information to
appropriate persons. Failure to submit timely reports will be communicated to G.
Randall Hecht and to the Funds' Board of Trustees.
IX. SANCTIONS
(a) If a material violation of this Code occurs or a preliminary determination
is made that a violation may have occurred, a report of the alleged violation
shall be made to the Board of Trustees.
(b) The Board of Trustees may impose such sanctions as it deems appropriate,
including, a letter of censure, suspension, or termination of employment, and/or
a disgorging of any profits made.
Please sign and date the attached form.
Detach and return to RSIM Compliance.
I FULLY UNDERSTAND AND HEREBY SUBSCRIBE TO THIS CODE OF ETHICS.
__________________________________
NAME
__________________________________
SIGNATURE
__________________________________
DATE
APPENDIX III
February 1, 2000
RS INVESTMENT MANAGEMENT CO. LLC
RS INVESTMENT MANAGEMENT, L.P.
RS INVESTMENT MANAGEMENT, INC.
RS GROWTH GROUP LLC
RS VALUE GROUP LLC
RS INVESTMENT TRUST
---------------------------
POLICY ON PERSONAL TRADING
---------------------------
SUMMARY
The following policy on personal trading, together with the enclosed Code of
Ethics, outlines all existing restrictions on personal securities transactions
for Access Persons of RS Mutual Funds. While it is our belief that personal
investing can lead an individual to be a better, more knowledgeable investor,
these guidelines have been written not only to ensure compliance with relevant
securities laws, but also to protect our investors and prevent any perception of
a potential conflict of interest.
Access Persons are defined as (i) officers, directors and general partners of
the two mutual fund advisers (RS Investment Management, Inc. and RS Investment
Management, L.P. -- collectively "RSIM"), as well as (ii) employees of RSIM and
officers, directors, partners who have substantial responsibility for or
knowledge of the investments of the mutual funds constituting series of the RS
(each, a "Fund"), and (iii) each member of the Funds' Board of Trustees. Members
of the immediate family of an Access Person living in the same household are
covered by this policy to the same extent as the Access Person. The policy also
applies to the immediate families living in the same household of all Access
Persons. The highlights of the policy are as follows:
1) PERSONAL ACCOUNTS
All personal brokerage accounts must be maintained at BancBoston Robertson
Stephens, Charles Schwab or Fidelity Investments. Any exceptions to this policy
must be approved by the Compliance Department.
2) PRE-CLEARANCE
All personal trades for individual securities for all Access Persons must be
pre-cleared by the Compliance Department using the attached form. After
pre-clearance has been granted, the trade must be completed by the end of the
business day, or the approval is void and the form must be resubmitted. Trades
for which pre-clearance is required include all securities except, open-end
mutual funds, stock index options, SPDR's, government securities and money
market securities. Obtaining pre-clearance for a trade does not guarantee that
the trade will not be later reversed should a Fund effect a subsequent trade in
the same security.
3) BLACKOUT PERIODS
An Access Person may not execute a securities transaction (other than an
"excepted securities") on any day during which any Fund in the RSIM Funds
complex has a pending "buy" or "sell" order in that same security or a related
security of the same issuer (e.g., common stock is a related security to an
option on common stock). However, it is not always possible to determine which
orders were executed until the following day. The fact of pre-clearance does not
mean that a trade will not end up being unwound if it is later ascertained that
one of the Funds traded in that security on the same day. Blackout periods may
be extended for certain securities. This policy applies to all Access people.
Additionally, portfolio managers and others who make investment decisions with
respect to a Fund are prohibited for seven (7) calendar days preceding and
following any Fund purchase or sale of that security and will include the entire
business day on which the last Fund purchase or sale activity occurs. Any
profits realized on a trade effected during the blackout period by a portfolio
manager or other individual with investment decision-making authority will be
disgorged to the Fund. The blackout period only applies to securities traded by
a Fund or Funds over which the individual exercises investment-making authority.
It does not apply to all Funds in the complex. The fact of pre-clearance and
execution within the same day of pre-clearance is not relevant.
Blackout periods may be extended for certain securities.
4) RESTRICTIONS ON SHORT-TERM TRADING
Access Persons are strongly discouraged from entering into securities
transactions for the purpose of achieving short-term gains. In addition to the
general prohibition against acquiring securities in the blackout period before
and immediately following Fund transactions, an Access Person must hold a
security (other than an excepted security, e.g., a stock index option) for a
minimum of 60 days. This policy only applies to profitable trades. Exceptions
may be made in the case of a medical or other emergency, provided that relevant
details are communicated at the time of pre-clearance.
5) INITIAL PUBLIC OFFERINGS
All Access Persons are strictly prohibited from acquiring securities in any
initial public offering.
6) PRIVATE PLACEMENTS
Investments by Access Persons in private placements require both pre-clearance
and special approval from the CEO.
7) SERVICE AS A DIRECTOR
Portfolio Managers and Access Persons will be permitted to serve as directors of
publicly traded companies and private companies in which the Funds may invest
only if the CEO determines that doing so would be in the best interest and would
not present a conflict of interest. All Fund investment decisions made or
participated in by such Director/Access Persons require pre-clearance from the
CEO.
8) DISCLOSURE
To the extent an Access Person maintains permitted brokerage accounts at
broker/dealers other than BancBoston Robertson Stephens, Charles Schwab & Co.,
or Fidelity Investments that Access Person must ensure that copies of trade
confirmations for their brokerage accounts and accounts of immediate family
living in the same household, are forwarded to the Compliance Department. Trade
confirmations will be cross-referenced against pre-clearance forms to ensure
that approval had been granted. In addition, Access Persons must make required
quarterly reports of securities transactions (or furnish brokerage statements)
and must sign off, at least annually, on receipt of and compliance with the Code
of Ethics.
PRE-AUTHORIZATION FOR PERSONAL TRADES
To: RSIM Compliance
Phone: (415) 591-2779
(415) 591-2728
Fax: (415) 591-2851
From: _________________________________ Date:___________________
I wish to effect the following trade for my personal account, an account in
which I have a beneficial interest, or an account belonging to one of my
immediate relatives living in the same household.
NAME of Security TICKER
# OF SHARES BUY SELL (CIRCLE ONE) PRICE ________
BROKERAGE FIRM ___________________________ & ACCOUNT #
THE PURCHASE/SALE IS BASED ON PERSONAL RESEARCH YES [ ] NO [ ] (You may be
required to provide documentation should there be a potential conflict).
I AM AWARE OF AN INTENDED OR POSSIBLE MUTUAL FUND TRADE IN THIS SECURITY
YES [ ] NO [ ]
I AGREE THAT IF I DO NOT EFFECT THE ABOVE TRADE ON THE DAY INDICATED BELOW, THE
APPROVAL IS NULL AND VOID AND THE REQUEST MUST BE RESUBMITTED. I REALIZE THAT IF
I AM AN EMPLOYEE WITH INVESTMENT DECISION MAKING AUTHORITY, AND ANY RS FUNDS
TRANSACTIONS OCCUR WITHIN 7 DAYS OF MY TRANSACTION THAT INVOLVE A FUND OVER
WHICH I HAVE AUTHORITY AND THE ABOVE SECURITY, THE TRADE WILL BE BROKEN AT MY
EXPENSE. I REALIZE THAT IF I DO NOT HAVE SUCH AUTHORITY, AND ANY FUND
TRANSACTIONS OCCUR ON THE SAME DAY AS MY TRANSACTION, THE TRADE WILL BE BROKEN
AT MY EXPENSE. FURTHERMORE, I AFFIRM THAT IF THIS IS A SALE OF STOCK, I HAVE
EITHER HELD IT FOR AT LEAST 60 DAYS OR I AM SELLING THE STOCK AT A LOSS.
------------------------------
AUTHORIZED
- -------------------------------- ------------------------------
SIGNED DATE
HARRIS ASSOCIATES L.P., HARRIS ASSOCIATES SECURITIES L.P. AND HARRIS ASSOCIATES
INVESTMENT TRUST
CODE OF ETHICS AND STATEMENT ON INSIDER TRADING
(AS AMENDED JUNE 9, 1998)
I. DEFINITIONS
A. Firm or Harris. The term "Firm" or "Harris" shall include Harris Associates
L.P. (HALP) and Harris Associates Securities L.P. (HASLP).
B. Trust. The term "Trust" shall mean Harris Associates Investment Trust (HAIT),
including The Oakmark Fund, The Oakmark International Fund, The Oakmark Equity &
Income Fund, The Oakmark International Small Cap Fund, The Oakmark Small Cap
Fund and any other series of shares of beneficial interest of HAIT (the
"Funds").
C. Employee. The term "Employee" shall include any person employed by the Firm,
whether on a full or part-time basis and all partners, officers, shareholders
and directors of the Firm.
D. Access Person. The term "Access Person" shall include any Employee of the
Firm, who offices at the Firm's main office.
E. Person Subject to this Code. Each Employee is subject to this Code.
F. Security. Security shall have the meaning set forth in Section 2(a)(36) of
the Investment Company Act, including any right to acquire such security, except
that it shall not include securities which are direct obligations of the
Government of the United States. 1
- --------
1 Sec. 2(a)(36) "Security" means any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation in
any profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract, voting-
trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, any put, call, straddle, option,
or privilege on any security (including a certificate of deposit) or on any
group or index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option, or privilege entered into on
a national securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a "security," or any certificate of
interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or purchase, any of the
foregoing.
The Act of October 13, 1982, Sec. 5, Pub. Law 97-303, 96 Stat. 1409, amended
Sec. 2(a)(36) by inserting after "mineral rights," the following: "any put,
call, straddle, option, or privilege on any security (including a certificate of
deposit) or on any group or index of securities (including any interest therein
or based on the value thereof), or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign currency".
1
G. Beneficial Interest or Ownership. The term "Beneficial Interest or 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 and rules thereunder, which includes any interest in which a person,
directly or indirectly, has or shares a direct or indirect pecuniary interest. A
pecuniary interest is the opportunity, directly or indirectly, to profit or
share in any profit derived from any transaction. Each Firm Employee will be
assumed to have a pecuniary interest, and therefore, beneficial interest or
ownership, in all securities held by the Employee, the Employee's spouse, all
members of the Employee's immediate family and adults sharing the same household
with the Employee (other than mere roommates) and all minor children of the
Employee and in all accounts subject to their direct or indirect influence or
control and/or through which they obtain the substantial equivalent of
ownership, such as trusts in which they are a trustee or beneficiary,
partnerships in which they are the general partner, corporations in which they
are a controlling shareholder or any other similar arrangement. Any questions an
Employee may have about whether an interest in a security or an account
constitutes beneficial interest or ownership should be directed to the Firm's
General Counsel.
II. CODE OF ETHICS
A. GENERAL STATEMENT
Harris seeks to foster a reputation for integrity and professionalism. That
reputation is a vital business asset. The confidence and trust placed in us by
investors in mutual funds and clients with accounts advised by the Firm is
something that is highly valued and must be protected. As a result, any activity
which creates even the suspicion of misuse of material non-public information by
the Firm or any of its Employees, which gives rise to or appears to give rise to
any breach of fiduciary duty owed to any Firm client, or which creates any
actual or potential conflict of interest between any Firm client and the Firm or
any of its Employees or even the appearance of any conflict of interest must be
avoided and is prohibited.
Additionally, the federal securities laws require that an investment
adviser maintain a record of every transaction in any security (except direct
obligations of the United States) in which any Employee of the adviser who is an
Access Person acquires any direct or indirect beneficial interest or ownership,
except any transaction in an account in which the Employee has no direct or
indirect control or influence.
To attempt to ensure that each Employee satisfies this Code of Ethics and
these record keeping obligations, the Firm has developed the following rules
relating to personal securities trading, outside employment, personal
investments with external investment managers and confidentiality.
B. RESTRICTIONS ON EMPLOYEE TRADING
No trading activity by an Employee in any security in which an Employee has
any beneficial
2
interest or ownership which is also the subject of a client portfolio purchase
or sale shall disadvantage or appear to disadvantage such client transaction.
Further, the following specific restrictions apply to all trading activity for
Employees who are Access Persons:
i) Any transaction in a security in anticipation of client orders
("frontrunning") is prohibited,
ii) Any transaction in a security which is the subject of a Firm
recommendation is prohibited until the tenth business day following
the dissemination of the recommendation, or any longer period
specified in this Code of Ethics,
iii) Any transaction in a security which the Employee who is an Access
Person knows or has reason to believe is being purchased or sold or
considered for purchase or sale2 by any investment company advised by
the Firm is prohibited until the transaction by such investment
company has been completed or consideration of such transaction is
abandoned,3
iv) Any same day transaction in a security in which any investment company
advised by the Firm has a pending or actual transaction is prohibited.
If an Employee who is an Access Person places a same day trade for
such security prior to the investment company placing an order the
Employee's order will be canceled,
v) Any transaction in a security within two business days after any
investment company advised by the Firm has traded in that security is
prohibited,
vi) Any transaction involving options relating to any security on the
Firm's approved list or which are held by any investment company
advised by the Firm is prohibited, and
vii) Any acquisition of an equity security in an initial public offering is
prohibited.
Additionally, no Employee of the Firm shall knowingly sell to or purchase
from the Funds or HAIT any security or other property except, in the case of the
Funds, securities issued by the Funds.
-------- 2 A security is "being considered for purchase or sale", the
earlier of, when a recommendation to purchase or sell has been made and
communicated or the security is placed on the research project list and, with
respect to the person making the recommendation, when such person seriously
considers making such a recommendation.
3 Among the clients of the Firm are private investment partnerships
(partnerships) in which various Employees of the Firm have equity interests.
This trading prohibition shall not restrict purchases or sales for the accounts
of such partnerships provided that the Trust and such accounts are treated
fairly and equitably in connection with such purchases and sales.
3
C. ADDITIONAL RESTRICTION ON FUND MANAGERS OF INVESTMENT COMPANY
ACCOUNTS.
Any Employee who is a fund manager of any investment company that is
advised by the Firm is prohibited from buying or selling a security within
fifteen calendar days before and after the investment company that he/she
manages trades in that security. Any profits realized on trades within the
proscribed periods shall be required to be disgorged.4
D. PROCEDURES TO IMPLEMENT TRADING RESTRICTIONS AND REPORTING
OBLIGATIONS.
1) Trading through Harris' Trading Desk.
All transactions in marketable securities (including options, but excluding
governments, short term paper and open-end mutual funds) in which an Employee
who is an Access Person has any beneficial interest or ownership or in any
accounts in which an Employee who is an Access Person has discretion, other than
fee paying accounts ("Access Person account"), must be processed through the
Firm's trading desk.
Transactions at other brokers or banks are not permitted except in unusual
circumstances and then only after the Employee who is an Access Person has: (i)
provided notice in writing to his/her Supervisor and the Compliance Department
prior to opening or placing an initial order in an account with such other
broker or bank, (ii) obtained the written approval of his/her Supervisor and the
Compliance Department prior to opening or placing an initial order in such
account, and (iii) provided such other broker or bank with a written notice of
the Access Person's affiliation with Harris and request that copies of
confirmations and statements be sent to the Firm's Compliance Department. A copy
of such written notice and request should also be provided to his/her Supervisor
and the Compliance Department.
Even after an Employee who is an Access Person has obtained approval to
execute transactions through another broker or bank, the Access Person must
still present the Firm's trading desk with an order ticket for an order to be
executed at the other broker or bank. In those exceptional situations in which
it is inappropriate for the Firm's trading desk to place the order, the Access
Person must promptly present the trading desk with a completed order ticket
reflecting the details of the transaction and clearly indicating that the
transaction has been completed.
2) Monitoring of Trades.
Transactions for an account of an Employee who is an Access Person that are
executed through the Firm's trading desk are to be monitored by the Trading
Department and reviewed and approved by the Head of the Investment Advisory
Department. These transactions are unsolicited brokerage
- --------
4Any profits disgorged shall be given to a tax exempt charitable
organization of Harris' choosing.
4
transactions, should be so marked on the original order ticket and may not be
executed if they are in conflict with discretionary orders. Should a conflict
arise, sharing of executions may be approved by the Head of the Investment
Advisory Department, or in his/her absence, the Manager of the Trading
Department. Employee accounts must be opened in the 40000 office range.
Transactions at other brokers or banks, in addition to being placed through
the trading desk, are to be monitored by the Compliance Department. To
accomplish this, an Employee who is an Access Person shall submit to the
Department within ten days after any transaction a report which includes the
name of the security, date of the transaction, nature of the transaction (i.e.
buy/sell), quantity, price, and broker or bank through which the transaction was
effected. This requirement may be satisfied by having the broker or bank send
the Firm duplicate copies of confirmations and statements. The Compliance
Department will maintain copies of all such transaction reports.
3) Cancellation of Trades.
Any transaction for an account of an Employee who is an Access Person is
subject to cancellation or reversal if it is determined by either the Head of
the Investment Advisory Department, the Manager of the Trading Department or the
Compliance Department that the transaction is or was in conflict with or
appeared to be in conflict with any client transaction, any of the above trading
restrictions of this Code of Ethics and Statement on Insider Trading.
Cancellations or reversals of transactions may be required after an extended
period past the settlement date. The Manager of the Trading Department may also
prevent the execution of orders for an Access Persons' account if it appears
that the trade may have to be canceled or reversed.
Client transactions include transactions for any investment company managed
by the Firm, any other discretionary advisory clients or any other accounts
managed or advised by Employees of the Firm for a fee.
The determination that a transaction of an Employee who is an Access Person
may conflict with a client transaction will be subjective and individualized and
may include questions about timely and adequate dissemination of information,
availability of bids and offers, as well as many other factors deemed pertinent
for that transaction or series of transactions. It is possible that a
cancellation or reversal of a transaction could be costly to an Access Person or
his/her family. Therefore, great care is required to adhere to the Firm's
trading restrictions and avoid conflicts or the appearance of conflicts.
4) Participation in Dividend Reinvestment Plans and Systematic Purchase
Plans.
Employees who are Access Persons may purchase securities through dividend
reinvestment plans or systematic purchase plans without processing such
transactions through the Firm's trading desk. Purchases are permitted only after
the Employee has: (i) provided notice in writing to his/her Supervisor and the
Compliance Department prior to opening or placing an initial purchase, and (ii)
obtained the
5
written approval of his/her Supervisor and the Compliance Department prior to
opening or placing an initial purchase. Even after the Access Person has
obtained approval to invest in such a plan, the Access Person must provide the
Compliance Department with duplicate copies of statements within ten days after
the end of each quarter. The Compliance Department will maintain copies of all
such transaction reports.
5) Reporting All Other Securities Transactions.
Because the obligations of an investment adviser to maintain records of
Employee's personal securities transactions is broader than the type of
transactions discussed above in this Section, all Employees have the following
additional reporting obligations. Any securities transaction not required to be
placed through the Firm's trading desk in which an Employee has any beneficial
interest or ownership (such as, real estate or oil and gas limited partnership
interests and other privately placed securities and mutual funds) must be
reported to the Compliance Department. This report must be submitted within ten
days after the end of each quarter and include: the title, price and amount of
the security involved, the date and nature of the transaction (i.e. buy/sell)
and the name of the broker or bank used, if any. This report may be in any form,
including a copy of a confirmation or monthly statement. However, no report is
necessary for any transaction in an account in which the Employee has no control
or influence.
6) Initial and Annual Reporting Requirements.
Each officer of HAI, non-independent trustee of the Trust, Harris portfolio
manager, member of the Harris stock selection group, Harris financial analyst
and Harris fund manager ("Reporting Person") shall initially disclose in writing
to the Compliance Department within 15 business days of becoming a Reporting
Person, and annually thereafter within 15 business days after each calendar
year-end, the names of all securities beneficially owned by such Reporting
Person as of the date of becoming a Reporting Person, or as of the preceding
December 31 for year-end reporting, including but not limited to stocks and
bonds(both domestic and foreign), mutual fund shares, options, limited
partnership interests and private placement interests.
E. CONFIDENTIALITY & OBLIGATIONS OF EMPLOYEES
During the period of employment with the Firm an Employee will have access
to certain "confidential information" concerning the Firm and its clients. This
information is a valuable asset and the sole property of the Firm and may not be
misappropriated and used outside of the Firm by an Employee or former Employee.
"Confidential Information", defined as all information not publicly available
about the business of the Firm, may include, but is not limited to, client and
prospect names and records, research, trading and portfolio information and
systems, information concerning externally managed entities or accounts which
have been considered or made on behalf of fee paying clients, and the financial
records of the Firm and/or its Employees. In order to protect the interests of
the Firm, an
6
Employee or ex-Employee shall not, without the express written consent of the
Firm's Chief Executive Officer, disclose directly or indirectly confidential
information to anyone outside of the Firm. An Employee should be extremely
careful to avoid inadvertent disclosures and to exercise maximum effort to keep
confidential information confidential. Any questions concerning the
confidentiality of information should be directed to the Chief Executive Officer
or the General Counsel. An abuse of the Firm's policy of confidentiality could
subject an Employee to immediate disciplinary action that may include dismissal
from the Firm.
F. OUTSIDE EMPLOYMENT, ASSOCIATIONS AND BUSINESS ACTIVITIES
1) Outside Employment and Associations.
It is Harris's policy not to permit Harris Employees who are Access Persons
to hold outside positions of authority, including that of being an officer,
partner, director or employee of another business entity (except in the case of
entities managed by the Firm). Also, Harris requires that all Employees who are
Access Persons make their positions with the Firm a full-time job. The approval
of Harris, and in some cases the approval of the NASD, is required before any
Employee who is an Access Person may hold any outside position for any business
organization, regardless of whether such position is compensated or not. Any
exception to this policy must be approved in writing by the Firm's Chief
Executive Officer and a copy of such approval provided by the Access Person to
the Compliance Department. Any change in the status of such approved position
must also be immediately reported in writing to the Compliance Department and
the Access Person's Supervisor. Any income or compensation received by an Access
Person for serving in such position must be paid in full to the Firm. Under no
circumstance may an Employee who is an Access Person represent or suggest that
Harris has approved or recommended the business activities of the outside
organization or any person associated with it.
2) Outside Business Activities.
To further avoid actual or potential conflicts of interest and to maintain
impartial investment advice, and equally important, the appearance of impartial
investment advice, each Employee who is an Access Person must disclose in
writing to the Compliance Department any special relationships and/or
investments or business activities that they or their families have which could
influence the investment activities of the Firm. If an Employee has any
questions about any activities and the need for disclosure, the Employee should
be cautious and direct any questions to the Firm's General Counsel.
G. PERSONAL INVESTMENTS WITH EXTERNAL MONEY MANAGERS.
All investments in which an Employee who is an Access Person has any
beneficial interest or ownership placed with external investment managers
(including interests in limited partnerships or trust vehicles, managed
accounts, variable annuities or foreign entities) or in any account in which an
Employee who is an Access Person has discretion must be approved in writing by
the Compliance
7
Department and the Chief Executive Officer prior to the commitment of initial
capital.
The Compliance Department will maintain a list of investment managers used
by Partnerships managed internally and a list of investment managers used by
Access Persons.
If an Employee who is an Access Person has been notified that an investment
manager is used by the Partnerships' managed internally, an Access Person must
notify the Compliance Department and the Head of the Multi-Manager Area of any
material withdrawal of their investment with such investment manager at least
two working days prior to an Access Person submitting any notice of such
withdrawal, To avoid a conflict of interest or the appearance of any conflict,
an Employee who is an Access Person should also note the reason for the
withdrawal if it relates to the investment manager's performance, organization
or perceived ability to execute their trading strategy.
III. STATEMENT ON INSIDER TRADING
A. BACKGROUND
Trading securities while in possession of material, nonpublic information
or improperly communicating that information to others may expose you to
stringent penalties. Criminal sanctions may include a fine of up to $1,000,000
and/or ten years imprisonment. The Securities and Exchange Commission (SEC) can
recover the profits gained or losses avoided through the violative trading,
obtain a penalty of up to three times the illicit windfall and issue an order
permanently barring you from the securities industry. Finally, you may be sued
by investors seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, Harris views seriously
any violation of this Policy Statement. Such violations constitute grounds for
disciplinary sanctions, including dismissal.
The law of insider trading is unsettled; an individual legitimately may be
uncertain about the application of the below Policy Statement in a particular
circumstance. Often, a single question can forestall disciplinary action or
complex legal problems. You should direct any questions relating to the Policy
Statement to the General Counsel, or, in her absence, the Head of the Investment
Research Department, the Head of the Investment Advisory Department or the
Compliance Department. You also must notify the General Counsel, or, in her
absence, the Head of the Investment Research Department, the Head of the
Investment Advisory Department or the Compliance Department immediately if you
have any reason to believe that a violation of the Policy Statement has occurred
or is about to occur.
B. POLICY STATEMENT ON INSIDER TRADING
No person to whom this Policy Statement applies, including you, may trade,
either personally or on behalf of others (such as mutual funds and private
accounts managed by Harris), while in possession of material, nonpublic
information; nor may such Harris personnel communicate material, nonpublic
8
information to others in violation of the law. This Policy Statement is drafted
broadly; it will be applied and interpreted in a similar manner. This Policy
Statement applies to securities trading and information handling by all
Employees of Harris who are Access Persons (including their spouses, minor
children and adult members of their households).
The section below reviews principles important to this Policy Statement.
1. What is Material Information?
Information is "material" when there is a substantial likelihood that a
reasonable investor would consider it important in making his or her investment
decisions. Generally, this is information whose disclosure will have a
substantial effect on the price of a company's securities. No simple "bright
line" test exists to determine when information is material; assessments of
materiality involve a highly fact- specific inquiry. For this reason, you should
direct any questions about whether information is material to the General
Counsel, or, in her absence, the Head of the Investment Research Department, the
Head of the Investment Advisory Department or Compliance Department.
Material information often relates to a company's results and operations
including, for example, dividend changes, earnings results, changes in
previously released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation problems, and
extraordinary management developments.
Material information also may relate to the market for a company's
securities. Information about a significant order to purchase or sell securities
may, in some contexts, be deemed material. Similarly, prepublication information
regarding reports in the financial press also may be deemed material.
2. What is Nonpublic Information?
Information is "nonpublic" until it has been disseminated broadly to
investors in the marketplace. Tangible evidence of such dissemination is the
best indication that the information is public. For example, information is
public after it has become available to the general public through a public
filing with the SEC or some other governmental agency, the Dow Jones "tape" or
the WALL STREET JOURNAL or some other publication of general circulation, and
after sufficient time has passed so that the information has been disseminated
widely.
3. Identifying Inside Information
Before executing any trade for yourself or others, including investment
companies or private accounts managed by Harris, you must determine whether you
have access to material, nonpublic information. If you think that you might have
access to material, nonpublic information, you should take the following steps:
i. Immediately alert the Trading Department to restrict trading in
the security by placing the security on the restricted list
maintained in the trading room. No reason or explanation should
be given to the Trading Department for the restriction.
ii. Report the information and proposed trade immediately to the
General Counsel, the Head of Investment Research Department or
the Head of the Investment Advisory Department.
iii. Do not purchase or sell the securities on behalf of yourself or
others, including investment companies or private accounts
managed by Harris.
iv. Do not communicate the information inside or outside Harris other
than to the above individuals.
v. After the above individuals have reviewed the issue, the Firm
will determine whether the information is material and nonpublic
and, if so, what action the Firm should take.
4. Contacts with Public Companies
For Harris, contacts with public companies represent an important part of
our research efforts. Harris may make investment decisions on the basis of the
Firm's conclusions formed through such contacts and analysis of
publicly-available information. Difficult legal issues arise, however, when, in
the course of these contacts, a Harris Employee or other person subject to this
Policy Statement becomes aware of material, nonpublic information. This could
happen, for example, if a company's Chief Financial Officer prematurely
discloses quarterly results to an analyst or an investor relations
representative makes a selective disclosure of adverse news to a handful of
investors. In such situations, Harris must make a judgment as to its further
conduct. To protect yourself, your clients and the Firm, you should contact the
General Counsel, or in her absence, the Head of the Investment Research
Department or the Head of Investment Advisory Department immediately if you
believe that you may have received material, nonpublic information.
5. Tender Offers
Tender offers represent a particular concern in the law of insider trading
for two reasons. First, tender offer activity often produces extraordinary
gyrations in the price of the target company's securities. Trading during this
time period is more likely to attract regulatory attention (and produces a
disproportionate percentage of insider trading cases). Second, the SEC has
adopted a rule which expressly forbids trading and "tipping" while in possession
of material, nonpublic information regarding a tender offer received from the
tender offeror, the target company or anyone acting on behalf of either.
Employees should exercise particular caution any time they become aware of
nonpublic information relating to a tender offer.
9
C. PROCEDURES TO IMPLEMENT THE POLICY STATEMENT
ON INSIDER TRADING
1. Personal Securities Trading
The restrictions on Employee trading and procedures to implement those
restrictions and the Firm's reporting obligations, which are set forth in
Sections II (B), (C), and (D) above, constitute the same procedures to implement
this Policy Statement. Review those procedures carefully and direct any
questions about their scope or applicability to the General Counsel.
2. Restrictions on Disclosures
Harris Employees shall not disclose any nonpublic information (whether or
not it is material) relating to Harris or its securities transactions to any
person outside Harris (unless such disclosure has been authorized by Harris).
Material, nonpublic information may not be communicated to anyone, including
persons within Harris, except as provided in Section III(B)(3) above. Such
information must be secured. For example, access to files containing material,
nonpublic information and computer files containing such information should be
restricted, and conversations containing such information, if appropriate at
all, should be conducted in private.
IV. RETENTION OF RECORDS
The Compliance Department or the Secretary of HAIT will maintain the
records listed below for a period of five years. Such records shall be
maintained at the Firm's principal place of business in an easily accessible
place:
(i) a list of all persons subject to the Code during that period;
(ii) receipts signed by all persons subject to the Code acknowledging
receipt of copies of the Code and acknowledging that they are
subject to it;
(iii)a copy of each Code of Ethics that has been in effect at any
time during the period; and
(iv) a copy of each report filed pursuant to the Code and a record of
any known violations and actions taken as a result thereof during
the period.
10
V. ACKNOWLEDGMENT
I have read and understand the Harris Code of Ethics and Statement on
Insider Trading. I certify that I will comply in all respects with its terms and
requirements. I understand that any violation of the Code and Statement may lead
to sanctions, including letters of sanction, suspension, removal from office or
termination of employment.
_________________________ _________________
Signature Date
__________________________
Name
11
LEXINGTON MANAGEMENT CORPORATION
MARKET SYSTEMS RESEARCH ADVISORS, INC.
CODE OF ETHICS
January 1, 2000
All Employees: Please complete and return pages 16 & 17
LEXINGTON MANAGEMENT CORPORATION
MARKET SYSTEMS RESEARCH ADVISORS, INC.
LEXINGTON GROUP OF MUTUAL FUNDS
AND AFFILIATES, THEREOF
CODE OF ETHICS CONCERNING
PERSONAL SECURITIES TRANSACTIONS
1. Purposes
Rule 17j-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"), generally proscribes fraudulent or manipulative practices with
respect to purchases or sales of securities held or to be acquired by investment
companies, if effected by associated persons of such companies. Section 204A of
the Investment Advisers Act of 1940, as amended ("Advisers Act"), requires every
registered investment adviser to establish, maintain and enforce written
policies and procedures reasonably designed to prevent the misuse of material,
nonpublic information by such investment adviser or any person associated with
such investment adviser.
The purpose of this Code of Ethics (concerning Personal Securities
Transactions (the "Code of Ethics") is to provide regulations and procedures
consistent with the 1940 Act and Rule 17j-1 and Section 204A of the Advisers
Act, designed to give effect to the general prohibitions set forth in Rule
17j-1(a), as follows:
(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.
In addition, this Code of Ethics sets forth procedures to deter the misuse of
material, nonpublic information, in Appendix I hereto.
The provisions of this Code of Ethics Concerning Personal Securities
Transactions and the attached Policy Statement on Insider Trading (the "Policy
Statement") shall apply to all officers, directors and employees of Lexington
Management Corporation and Market Systems Research Advisors, Inc.
2. Definitions
(a) "Adviser" means Lexington Management Corporation and Market
Systems Research Advisors, Inc. (and may, from time to time,
include other advisers).
(b) "Fund" means any registered investment company for which the
Adviser serves as investment adviser.
(c) "Access person" means any director, officer, or employee of the
Adviser.
(d) A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made
and communicated and, with respect to the person making the
recommendation, when such person seriously considers making
such a recommendation.
(e) "Beneficial ownership" pertains to transactions in which the
access person has a "beneficial interest". "Beneficial
interest" in a transaction includes any transaction (outside
of the Adviser's business) in which an access person has
direct or indirect influence or control.
Beneficial interest also pertains to
transactions by "immediate family" of an access person.
Immediate family of an access person is defined as any person
including a spouse, child, parent, or in-law, to whom the
access person contributes direct, material financial support.
(f) "Control" shall have the meaning set forth in Section 2(a)(9) of
the 1940 Act.
(g) "Purchase or sale of a security" includes, inter alia, the
writing of an option to purchase or sell a security.
(h) "Security" shall have the meaning set forth in Section
2(a)(36) of the 1940 Act, except that it shall not include
shares of registered open-end investment companies,
securities issued or guaranteed as to principal and interest
by the Government of the United States, short term debt
securities which are "government securities" within the
meaning of Section 2(a)(16) of the 1940 Act, bankers'
acceptances, bank certificates of deposit, commercial paper
and such other money market instruments as designated by the
Board of Directors of the Adviser. Additionally, "security"
shall include futures and other commodities, as well as
other instruments related in value to a Fund's portfolio
securities.
3. General Principals
(a) It is the policy of the Adviser that no access person shall
engage in any act, practice or course of conduct that would
violate the provisions of Rule 17j-1 set forth above.
(b) It is the policy of the Adviser that the interest of its
shareholders and the shareholders of a Fund are paramount and
come before the interests of any director, officer or employee
of the Adviser.
(c) Personal investment activities of all directors, officers and
employees of the Adviser shall be conducted in a manner that
shall avoid actual or potential conflicts of interest with the
Adviser, a Fund and its shareholders of either.
(d) Directors, officers and employees of the Adviser shall not use
their positions with the Adviser, or any investment
opportunities presented by virtue of their positions with the
Adviser, to the detriment of the Adviser, a Fund and the
shareholders of either.
4. Prohibited Purchases and Sales
(a) No access person shall purchase or sell, directly or
indirectly, or otherwise acquire any direct or indirect
beneficial ownership interest in, any security being
considered for purchase or sale, or being purchased or sold by
an account managed by the Adviser that has a pending "buy" or
"sell" order in the same security, until that order is
executed or withdrawn. Any profits realized on any transaction
in violation of this Section 4(a) of the Code of Ethics shall
be disgorged.
(b) No access persons who is a portfolio manager or other
investment professional relating to a mutual fund or
institutional account shall purchase or sell, directly or
indirectly, or otherwise acquire any direct or indirect
beneficial ownership interest in, any security being
considered for purchase or sale, or being purchased or sold
within seven calendar days of a purchase or sale of the same
security by the mutual fund or institutional account. This
seven day blackout period applies to portfolio managers who
manage the account(s) with the pending transaction, as well as
all securities analysts and trading personnel who support the
portfolio manager or account. Any profits realized on any
transaction in violation of this Section 4(b) of the Code of
Ethics shall be disgorged.
(c) No access person shall purchase or sell, directly or
indirectly, or otherwise acquire any direct or indirect
beneficial ownership interest in, any security at a time when
that Access Person intends, or knows of another's intention,
to purchase or sell those securities on behalf of an account
managed by the Adviser.
(d) No access person shall reveal to any other person (except in
the normal course of his or her duties on behalf of the
Adviser) any information regarding securities transactions by
the Fund or consideration by the Fund or the Adviser of any
such securities transactions.
(e) No access person shall recommend any securities transaction
to the Fund without having disclosed his or her interest, if
any, in such securities or the issuer thereof, including
without limitation (i) his or her direct or indirect
beneficial ownership of any securities of such issuer, (ii)
any contemplated transaction by such person in such
securities, (iii) any position with such issuer or its
affiliates, and (iv) any present or proposed business
relationship between such issuer or its affiliates, on the
one hand, and such person or any party in which such person
has a significant interest, on the other; provided, however,
that in the event the interest of such access person in such
securities or issuer is not material to his or her personal
net worth, or any contemplated transaction by such person in
such securities cannot reasonably be expected to have a
material adverse effect on any such transaction by the Fund
or on the market for the securities generally, such access
person shall not be required to disclose his or her interest
in the securities or issuer thereof in connection with any
such recommendation.
(f) No access person shall acquire any securities in an initial
public offering.
(g) No access person shall acquire any securities in a private
placement without the prior written approval of the
Adviser's Chief Executive Officer. In considering whether to
approve a private placement transaction, the Chief Executive
Officer shall take into account, among other factors,
whether the investment opportunity should be reserved for a
Fund and whether the opportunity is being offered to the
access person by virtue of his or her position with the
Adviser. Any authorized investment in a private placement
must be disclosed by such access person when he or she plays
any part in a Fund's subsequent consideration of an
investment in securities of the issuer, and any decision by
the Fund to purchase securities of the issuer, will be
subject to an independent review by personnel of the Adviser
with no personal interest in the issue.
(h) No access person shall profit in the purchase and sale, or
sale and purchase, of the same (or equivalent) securities
within 60 calendar days, without the prior written approval
of the Adviser's Chief Executive Officer. Any profits
realized on any unauthorized short-term trade shall be
disgorged. This prohibition shall not apply to the exercise
of any Lexington Global Asset Managers, Inc. ("LGAM") stock
options and the subsequent sale of LGAM common stock or to
any transaction in index futures, index options, including
webs, spiders or similar baskets of portfolio securities.
This prohibition shall also not apply to any exempt
security. Nothing in this restriction shall be deemed to
prohibit avoidance of loss during trading within a period
shorter than 60 calendar days. The Adviser's Chief Executive
Officer may grant limited exemptions to this restriction if
any access person can demonstrate extenuating circumstances.
(i) No access person shall purchase or sell any security for his
or her own account without obtaining prior written approval of
the transaction by a member of the Adviser's Compliance
Committee listed on Appendix II, using a preclearance form as
prescribed in Appendix III.
(j) No access person shall accept a gift in excess of the limits
contained in Section 3060 of the NASD Conduct Rules from any
entity doing business with or on behalf of the Adviser or a
Fund. An occasional meal, ticket to a sporting event or
theater, or comparable entertainment may be excluded from the
limits as well as candies or other food items (e.g., holiday
baskets) if shared with other employees of the Adviser.
(k) No access person shall serve on the board of directors of a
publicly traded company, or in any similar capacity, absent
the prior approval of this service by the Chief Executive
Officer of the Adviser, following the receipt of a written
request for approval.
5. Exempted Transactions
The prohibitions of Section 4 of this Code of Ethics shall not apply
to:
(a) Purchases or sales effected in any account over which the
access person has no direct or indirect influence or control.
(b) Purchases or sales which are non-volitional on the part of
either the affected person or the Fund.
(c) Purchases which are part of an automatic dividend reinvestment
plan.
(d) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities,
to the extent such rights were acquired from such issuer, and
sales of such rights so acquired.
(e) Purchases or sales which are only remotely potentially harmful
to the Fund because they would be very unlikely to affect a
highly institutional market, or because they clearly are not
related economically to the securities to be purchased, sold
or held by the Fund.
6. Reporting
(a) Upon commencement of employment by the Adviser, and annually
thereafter, each access person shall disclose in writing, in a
form acceptable to the Adviser's Compliance Committee, all
direct or indirect beneficial ownership interests of the
access person in "securities" as defined herein. Refer to
Appendix V.
(b) The Adviser's Compliance Committee shall notify each access
person that he or she is subject to this reporting
requirement, and shall deliver a copy of this policy to each
access person. The Compliance Officer shall annually obtain
written assurances from each access person that he or she is
aware of his or her obligations under this Code of Ethics and
has complied with the Code of Ethics and with its reporting
requirements.
(c) Each access person shall notify the Adviser's Compliance
Committee of all brokerage accounts in which he or she has any
beneficial interest (a) within two weeks of receipt of this
Code of Ethics, or (b) promptly after the later opening of the
account.
(d) Every access person must direct his or her broker to provide
the Adviser's Compliance Committee with duplicate copies of
confirmations of all personal securities transactions.
(e) Every access person shall report to the Adviser's Compliance
Committee the information described in Section 6(f) of this
Code of Ethics with respect to transactions in any security in
which such access person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in the
security; provided, however, that an access person shall not
be required to make a report with respect to transactions
effected for any account over which such person does not have
any direct or indirect influence.
(f) Every report shall be made not later than 10 calendar days
after the end of the calendar quarter in which the transaction
to which the report relates was effected, as indicated in
Appendix IV:
(i) The trade date of the transaction, and the title and
the number of shares or the par value of each security
involved;
(ii) The nature of the transaction (i.e., purchase, sale or
any other type of acquisition or disposition);
(iii)The number of shares or the par value of each security
involved;
(iv) The name of the broker, dealer or bank with or through
whom the transaction was effected.
(g) 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.
7. Sanctions
Upon discovering a violation of this Code of Ethics, the Board of
Directors of the Adviser may impose such sanctions as it deems appropriate,
including, INTER ALIA, a letter of censure or suspension or termination of the
employment of the violator. All material violations of this Code of Ethics and
any sanctions imposed with respect thereto shall be reported periodically to the
Board of Directors/Trustees of the Fund.
8. Insider Trading
The Board of Directors of the Adviser has adopted a policy statement on
insider trading and conflicts of interest (the "Policy Statement"), a copy of
which is attached hereto as Appendix I. All access persons are required by this
Code to read and familiarize themselves with their responsibilities under the
Policy Statement. All access persons shall sign a copy of the Policy Statement,
and the Adviser's Compliance Officer shall maintain a copy of each executed
Policy Statement.
9. Policy Regarding Specific Types of Accounts
The Code does not apply to transactions effected by the Lexington Corporate
Leaders Trust Fund, Corporate Leaders Trust Fund Certificates Series "A" or the
LPT Variable Insurance Trust (Lexington Corporate Leaders Portfolio) due to the
restricted nature of the investments for these accounts.
10. West Coast Trading Desk
The Code generally applies to transactions effected on the Adviser's
primary trading desk. With regard to Adviser's West Coast trading desk, please
refer to Appendix II.
11. Post Trade Monitoring
The Compliance Officer or designated Compliance official is responsible
for keeping records of the Code and any changes to the Code, approvals, reports
of personal securities holdings, annual certifications of Code compliance, all
Code violations and disciplinary procedures, and access persons quarterly
reports. Compliance with the Code will be monitored on an ongoing basis at least
quarterly by the designated Compliance official, by:
(a) comparing employee trades vs. client trades during blackout
periods,
(b) comparing employee purchases and sales of the same security
within a short period of time,
(c) ascertaining whether an employee purchased the correct security
within the preclearance period,
(d) engaging in random sampling of employee trades along with a
comparison of the trading activities of various clients and
individuals within the complex and
(e) reviewing reports for code violations.
12. Trading in Lexington Global Asset Managers, Inc. ("LGAM") Stock
Since the Adviser is a fully-owned and principal subsidiary of LGAM, a
publicly-held company, certain employees of the Adviser will be restricted from
trading LGAM stock during the period beginning on the first day of a new quarter
through the second business day following an LGAM earnings release. These
employees of the Adviser, for which this blackout pertains, consist of members
of the executive and senior management committees including their administrative
assistants; corporate compliance officers; members of the corporate accounting
department; and the human resources & payroll officer. The Principal Compliance
Officer (Lisa Curcio) is the only member of the Compliance Committee that is
authorized to preclear transactions in LGAM stock. In the absence of the
Principal Compliance Officer, any other member of the Adviser's Investment
Compliance Committee may temporarily approve the transaction. LGAM does maintain
its own Statement of Policy Concerning Trading Policies and Conflicts of
Interest.
APPENDIX I
POLICY STATEMENT ON INSIDER TRADING
A Introduction
Lexington Management Corporation and Market Systems Research Advisors,
Inc. (each referred to individually as "the Firm") seeks to foster a reputation
for integrity and professionalism. That reputation is a vital business asset.
The confidence and trust placed in us by our clients is something we should
value and endeavor to protect. To further that goal, this Policy Statement
implements procedures to deter the misuse of material, nonpublic information in
securities transactions.
Trading securities while in possession of material, nonpublic
information or improperly communicating that information to others may expose
you to stringent penalties. Criminal sanctions may include a fine of up to
$1,000,000 and/or ten year imprisonment. The Securities and Exchange Commission
("SEC") can recover the profits gained or losses avoided through the violative
trading, a penalty of up to three times the illicit windfall and an order
permanently barring you from the securities industry. Finally, you may be sued
by investors seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, the Firm views
seriously any violation of this Policy Statement. Such violations constitute
grounds for disciplinary sanctions, including dismissal.
B. Scope of the Policy Statement
This Policy Statement is drafted broadly; it will be applied and
interpreted in a similar manner. This Policy Statement applies to securities
trading and information handling by directors, officers, and employees of the
Firm (including spouses, minor children, and adult members of their households).
The law of insider trading is unsettled; and individual legitimately
may be uncertain about the application of the Policy Statement in a particular
circumstance. Often, a single question can forestall disciplinary action or
complex legal problems. You should direct any questions relating to the Policy
Statement to the Compliance Officer. You also must notify the Compliance Officer
immediately if you have any reason to believe that a violation of the Policy
Statement has occurred or is about to occur.
C. Policy Statement
No person to whom this Policy Statement applies, including you, may
trade, either personally or on behalf of others, while in possession of
material, nonpublic information; no such personnel may communicate material,
nonpublic information to others in violation of the law. This section reviews
principles important to the Policy Statement.
1. What is Material Information?
Information is "material" when there is a substantial
likelihood that a reasonable investor would consider it important in making his
or her investment decisions. Generally, this is information whose disclosure
will have a substantial effect on the price of a company's securities. No simple
"bright line" test exists to determine when information is material; assessments
of materiality involve a highly fact-specific inquiry. For this reason, you
should direct any questions about whether information is material to the
Compliance Officer.
Material information often relates to a company's results and
operations including, for example, dividend changes, earning results, changes in
previously released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation problems, and
extraordinary management developments.
Material information also may relate to the market for a
company's securities. Information about a significant order to purchase or sell
securities may, in some contexts, be deemed material. Similarly, prepublication
information regarding reports in the financial press also may be deemed
material. For example, the U.S. Supreme Court upheld the criminal convictions of
insider trading defendants who capitalized on prepublication information about
the Wall Street Journal`s "Heard on the Street" column.
2. What is Nonpublic Information?
Information is "public" when it has been disseminated broadly
to investors in the marketplace. Tangible evidence of such dissemination is the
best indication that the information is public. For example, information is
public after it has become available to the general public through a public
filing with the SEC or some other government agency, the Dow Jones "tape" or the
Wall Street Journal or some other publication of general circulation, and after
sufficient time has passed so that the information has been disseminated widely.
3. Identifying Inside Information
Before executing any trade for yourself or others, you must
determine whether you have access to material, nonpublic information. If you
think that you might have access to material, nonpublic information, you should
take the following steps:
(i) Report the information and proposed trade immediately to the
Compliance Officer.
(ii) Do not purchase or sell the securities on behalf of yourself
or others.
(iii)Do not communicate the information inside or outside the
Firm, other than to the Compliance Officer.
(iv) After the Compliance Officer has reviewed the issue, the
Firm will determine whether the information is material and
nonpublic and, if so, what action the Firm should take.
You should consult with the Compliance Officer before taking any
action. This degree of caution will protect you, your clients and the Firm.
4. Contact with Public Companies
The Firm's contacts with public companies represent an
important part of our research efforts. The Firm may make investment decisions
on the basis of conclusions formed through such contacts and analysis of
publicly-available information. Difficult legal issues arise, however, when, in
the course of these contacts, an employee of the Firm or other person subject to
this Policy Statement becomes aware of material, nonpublic information. This
could happen, for example, if a company's Chief Financial Officer prematurely
disclosed quarterly results to any analyst, or an investor relations
representative makes a selective disclosure of adverse news to a handful of
investors. In such situations, the Firm must make a judgment as to its further
conduct. To protect yourself, your clients and the firms, you should contact the
Compliance Officer immediately if you believe that you may have received
material, nonpublic information.
5. Tender Offers
Tender offers represent a particular concern in the law of
insider trading for two reasons. First, tender offer activity often produces
extraordinary gyrations in the price of the target company's securities. Trading
during this time period is more likely to attract regulatory attention (and
produces a disproportionate percentage of insider trading cases). Second, the
SEC has adopted a rule which expressly forbids trading and "tipping" while in
possession of material, nonpublic information regarding a tender offer received
from the tender offeror, the target company or anyone acting on behalf of
either. The Firm's employees and others subject to this Policy Statement should
exercise particular caution any time they become aware of nonpublic information
relating to a tender offer.
COMPLIANCE COMMITTEE
Carolyn Croney
Robert DeMichele
Peter Corniotes
Lisa Curcio
Richard Hisey
Prior written approval should be requested according to this sequence. If the
transaction is approved, the Committee member returns a copy of the signed form
to the employee.
EAST COAST AND WEST COAST TRADING DESKS
The Code generally applies to transactions effected on the Adviser's primary
trading desk (hereinafter referred to as the "East Coast trading desk"). Unless
otherwise indicated below, the Code does not apply to transactions effected on
the Adviser's West Coast trading desk located in Sacramento, California, except
as follows:
Personal securities transactions for the following officers will apply to
transactions effected on both the East Coast and West Coast trading desks:
Robert DeMichele
Alan Wapnick
James Vail
Personal securities transactions for the following officers will be at the
discretion of Robert DeMichele, Alan Wapnick or Jim Vail based upon trading
activity on the West Coast trading desk:
Lee Grichuhin
Andree Thomas
Bob Watson
John Wright
Only Robert DeMichele is authorized to sign a Preclearance form on behalf a
personal securities transaction that applies to the West Coast trading desk.
With respect to personal securities transactions for Robert DeMichele, any other
member of the Compliance Committee may approve his Preclearance form.
Officers not located on the East Coast premises may fax their Preclearance form
to either Robert DeMichele, Alan Wapnick or James Vail. Generally, buy/sell
instructions take a longer time to complete on the West Coast trading desk due
to the larger number of individual accounts. As new accounts are being
established, securities are constantly being purchased. Due to the nature of
West Coast trading, greater flexibility may be taken into consideration with
respect to the blackout period.
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Strong Capital Management, Inc.
October 22, 1999
i
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
<TABLE>
<CAPTION>
Table of Contents
I. INTRODUCTION.........................................................................................1
<S> <C>
A. Fiduciary Duty..............................................................................1
1. Place the interests of Advisory Clients first...................................................1
2. Avoid taking inappropriate advantage of their position..........................................1
3. Conduct all Personal Securities Transactions in full compliance with this Code including both the
preclearance and reporting requirements............................................1
B. Appendices to the Code......................................................................1
1. Definitions 2
2. Contact Persons.................................................................................2
3. Disclosure of Personal Holdings in Securities...................................................2
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of Attorney 2
5. Preclearance Request for Access Persons.........................................................2
6. Annual Code of Ethics Questionnaire.............................................................2
7. List of Broad-Based Indices.....................................................................2
8. Gift Policy 2
9. Insider Trading Policy..........................................................................2
10. Electronic Trading Authorization Form...........................................................2
11. Social Security Number/Tax Identification Form..................................................2
C. Application of the Code to Independent Fund Directors.......................................2
D. Application of the Code to Funds Subadvised by SCM..............................................2
II. PERSONAL SECURITIES TRANSACTIONS....................................................................2
A. Annual Disclosure of Personal Holdings by Access Persons....................................2
B. Preclearance Requirements for Access Persons................................................3
1. General Requirement.............................................................................3
2........Transactions Exempt from Preclearance Requirements..............................................3
a. ......Mutual Funds------3
b. ------No Knowledge------3
c. ------Certain Corporate Actions.......................................................................3
d. ------Rights------------3
e. ------Application to Commodities, Futures, Options on Futures and Options on Broad-Based Indices......3
f. ------Miscellaneous-----4
Table of Contents (continued)
C. Preclearance Requests.......................................................................4
1. Trade Authorization Request Forms...............................................................4
2. ......Review of Form..................................................................................4
3. ......Access Person Designees.........................................................................4
D. Prohibited Transactions.....................................................................5
1. Prohibited Securities Transactions.................................................5
a........Initial Public Offerings........................................................................5
b........Pending Buy or Sell Orders......................................................................5
c........Seven Day Blackout 5
d........Intention to Buy or Sell for Advisory Client....................................................6
e........60-Day Blackout...6
2. Always Prohibited Securities Transactions..........................................6
a........Inside Information 6
b........Market Manipulation 6
c........Large Positions in Registered Investment Companies..............................................6
d........Others............6
3. Private Placements.................................................................6
4. No Explanation Required for Refusals...............................................7
E. Execution of Personal Securities Transactions...............................................7
F. Length of Trade Authorization Approval......................................................7
G. Trade Reporting Requirements................................................................7
1........Reporting Requirement...........................................................................7
2........Disclaimers 8
3........Quarterly Review................................................................................8
4........Availability of Reports.........................................................................8
III. FIDUCIARY DUTIES...................................................................................9
A. Confidentiality.............................................................................9
B. Gifts.......................................................................................9
1........Accepting Gifts...9
2. Solicitation of Gifts...........................................................................9
3. Giving Gifts 9
C. Payments to Advisory Clients................................................................9
D. Corporate Opportunities.....................................................................9
E. Undue Influence............................................................................10
F. Service as a Director......................................................................10
G. ......Involvement in Criminal Matters or Investment-Related Civil Proceedings........................10
Table of Contents (continued)
IV. COMPLIANCE WITH THIS CODE OF ETHICS................................................................10
A. Code of Ethics Review Committee............................................................10
1........Membership, Voting, and Quorum.................................................................10
2........Investigating Violations of the Code...........................................................10
3........Annual Reports.................................................................................11
B. Remedies...................................................................................11
1. Sanctions 11
2........Sole Authority.................................................................................11
3........Review...11
C. Exceptions to the Code.....................................................................12
D. ......Compliance Certification.......................................................................12
E. ......Record Retention...............................................................................12
1........Code of Ethics.................................................................................12
2........Violations 12
3........Required Reports...............................................................................12
4........Access Person List.............................................................................12
F. Inquiries Regarding the Code...............................................................12
</TABLE>
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
Table of Appendices
<TABLE>
<CAPTION>
<S> <C> <C>
Appendix 1 (Definitions)...........................................................................13
Appendix 2 (Contact Persons).......................................................................16
Appendix 3 (Disclosure of Personal Holdings in Securities).........................................17
Appendix 4 (Acknowledgment of Receipt of Code of Ethics and
Limited Power of Attorney).........................................................18
Appendix 5 (Preclearance Request for Access Persons)...............................................19
Appendix 6 (Annual Code of Ethics Questionnaire)...................................................20
Appendix 7 (List of Broad-Based Indices)...........................................................23
Appendix 8 (Gift Policy)...........................................................................24
Appendix 9 (Insider Trading Policy)................................................................26
Appendix 10 (Electronic Trading Authorization Form) .................................................30
Appendix 11 (Social Security Number/Tax Identification Form) ........................................31
</TABLE>
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.,
and Flint Prairie, L. L. C.
Dated October 22, 1999
I. INTRODUCTION1
A.Fiduciary Duty. This Code of Ethics is based upon the principle that
directors, officers and associates of Strong Capital Management, Inc. ("SCM"),
Strong Investments, Inc. ("the Distributor"), the Strong Family of Mutual Funds
("the Strong Funds") and Flint Prairie, L. L. C. ("Flint Prairie") have a
fiduciary duty to place the interests of clients ahead of their own. The Code
applies to all Access Persons and focuses principally on preclearance 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 Advisory Clients of SCM.
As fiduciaries, Access Persons must at all times:
1. Place the interests of Advisory Clients first. Access Persons must
scrupulously avoid serving their own personal interests ahead of the
interests of the Advisory Clients of SCM. An Access Person may not induce
or cause an Advisory Client to take action, or not to take action, for
personal benefit rather than for the benefit of the Advisory Client. For
example, an Access Person would violate this Code by causing an Advisory
Client 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 position. The receipt
of investment opportunities, perquisites or gifts from persons seeking
business with the Strong Funds, SCM, the Distributor, Flint Prairie or
their clients could call into question the exercise of an Access Person's
independent judgment. Access persons may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of such
transactions.
3. Conduct all Personal Securities Transactions in full compliance
with this Code including both the preclearance and reporting requirements.
Doubtful situations should be resolved in favor of Advisory Clients.
Technical compliance with the Code's procedures will not automatically
insulate from scrutiny any trades that may indicate an abuse of fiduciary
duties.
B........Appendices to the Code. The appendices to this Code are attached
hereto, are a part of the Code and include the following:
1. Definitions--capitalized words as defined in the Code
(Appendix 1),
2. Contact Persons, including the Preclearance Officer designees
and the Code of Ethics Review Committee (Appendix 2),
3. Disclosure of Personal Holdings in Securities (Appendix 3),
4. Acknowledgment of Receipt of Code of Ethics and Limited Power
of Attorney (Appendix 4),
5. Preclearance Request for Access Persons (Appendix 5),
6. Annual Code of Ethics Questionnaire (Appendix 6),
7. List of Broad-Based Indices (Appendix 7),
8. Gift Policy (Appendix 8),
9.Insider Trading Policy (Appendix 9)
10. Electronic Trading Authorization Form (Appendix 10), and
11.Social Security Number/Tax Identification Form (Appendix 11).
C.Application of the Code to Independent Fund Directors. This Code
applies to Independent Fund Directors and requires Independent Fund
Directors and their Immediate Families to report Securities Transactions to
the Compliance Department in accordance with the trade reporting
requirements (Section II.G.). However, provisions of the Code relating to
the disclosure of personal holdings (Section II.A.), preclearance of trades
(Section II.B.), prohibited transactions (II.D.1.), large positions in
registered investment companies (Section II.D.2.c.), private placements
(Section II.D.3.), restrictions on serving as a director of a
publicly-traded company (Section III.F.) and receipt of gifts (Section
III.B.) do not apply to Independent Fund Directors.
D........Application of the Code to Funds Subadvised by SCM. This Code
does not apply to the directors, officers and general partners of Funds for
which SCM serves as a subadviser.
II. PERSONAL SECURITIES TRANSACTIONS
A........Annual Disclosure of Personal Holdings by Access Persons. Upon
designation as an Access Person, and thereafter on an annual basis, all Access
Persons must report on the Disclosure of Personal Holdings In Securities Form
(Appendix 3) (or a substantially similar form) all Securities, including
securities held in certificate form, in which they have a Beneficial Interest
and all Securities in non-client accounts for which they make investment
decisions (previously reported holdings, as well as those specifically excluded
from the definition of Security, need not be reported). This provision does not
apply to Independent Fund Directors.
B........Preclearance Requirements for Access Persons.
1. General Requirement. Except for the transactions set forth in
Section II.B.2., all Securities Transactions in which an Access Person or a
member of his or her Immediate Family has a Beneficial Interest must be
precleared with the Preclearance Officer or his designee. This provision
does not apply to transactions of Independent Fund Directors and their
Immediate Families.
2. Transactions Exempt from Preclearance Requirements. The following
Securities Transactions are exempt from the preclearance requirements set
forth in Section II.B.1. of this Code:
a. Mutual Funds. Securities issued by any registered open-end
investment companies (including but not limited to the Strong Funds);
b. No Knowledge. Securities Transactions where neither SCM, the
Access Person nor an Immediate Family member knows of the transaction
before it is completed (for example, Securities Transactions effected
for an Access Person by a trustee of a blind trust or discretionary
trades involving an investment partnership or investment club in which
the Access Person is neither consulted nor advised of the trade before
it is executed);
c. Certain Corporate Actions. Any acquisition or disposition of
Securities through stock dividends, dividend reinvestments, stock
splits, reverse stock splits, mergers, consolidations, spin-offs or
other similar corporate reorganizations or distributions generally
applicable to all holders of the same class of Securities. Odd-lot
tender offers are also exempt from the preclearance requirements;
however, all other tender offers must be precleared;
d. Rights. Any acquisition or disposition of Securities through
the exercise of rights, options, convertible bonds or other
instruments acquired in compliance with this Code;
e. Application to Commodities, Futures, Options on Futures and
Options on Broad-Based Indices. Commodities, futures (including
currency futures and futures on securities comprising part of a
broad-based, publicly traded market based index of stocks), options on
futures, options on currencies and options on certain indices
designated by the Compliance Department as broad-based are not subject
to preclearance or the seven day black out, 60-day profit disgorgement
and other prohibited transaction provisions of Section II.D.1. of the
Code but are subject to transaction reporting requirements (Section
II.G.). The options on indices designated by the Compliance Department
as broad-based may be changed from time to time and are listed in
Appendix 7.
The options on indices that are not designated as broad-based are
subject to the preclearance, seven-day blackout, 60-day profit
disgorgement, prohibited transaction and reporting provisions of the
Code.
f. Miscellaneous. Any transaction in the following: (1) bankers
acceptances; (2) bank certificates of deposit ("CDs"); (3) commercial
paper; (4) repurchase agreements (when backed by exempt securities);
(5) U.S. Government Securities; (6) the acquisition of equity
securities in dividend reinvestment plans ("DRIPs"), when the
acquisition is directly through the issuer or its non-broker agent;
(7) Securities of the employer of a member of the Access Person's
Immediate Family if such securities are beneficially owned through
participation by the Immediate Family member in a Profit Sharing plan,
401(k) plan, ESOP or other similar plan; and (8) other Securities as
may from time to time be designated in writing by the Code of Ethics
Review Committee on the grounds that the risk of abuse is minimal or
non-existent.
C. Preclearance Requests.
1. Trade Authorization Request Forms. Prior to entering an order for a
Securities Transaction that requires preclearance, the Access Person must
complete, in writing, a Preclearance Request For Access Persons Form
(Appendix 5) and submit the completed form to the Preclearance Officer (or
his or her designee). The Preclearance Request For Access Persons Form
requires Access Persons to provide certain information and to make certain
representations. Proposed Securities Transactions of the Preclearance
Officer that require preclearance must be submitted to his designee.
2. Review of Form. After receiving the completed Preclearance Request
For Access Persons Form, the Preclearance Officer (or his or her designee)
will (a) review the information set forth in the form, (b) independently
confirm whether the Securities are held by any Funds or other accounts
managed by SCM and whether there are any unexecuted orders to purchase or
sell the Securities by any Fund or accounts managed by SCM and (c) as soon
as reasonably practicable, determine whether to clear the proposed
Securities Transaction. The authorization, date, and time of the
authorization must be reflected on the Preclearance Request For Access
Persons Form. The Preclearance Officer (or his or her designee) will keep
one copy of the completed form for the Compliance Department, send one copy
to the Access Person seeking authorization and send the third copy to the
Trading Department, which will cause the transaction to be executed. If the
brokerage account is an Electronic Trading Account and the Access Person
has completed the Electronic Trading Authorization Form (Appendix 10), the
Access Person will execute the transaction on his or her own behalf and
will provide Compliance with a copy of the electronic confirmation by the
end of the next business day.
No order for a securities transaction for which preclearance authorization
is sought may be placed prior to the receipt of written authorization of
the transaction by the preclearance officer (or his or her designee).
Verbal approvals are not permitted.
3. Access Person Designees. If an Access Person is unable to
personally effect a personal Securities Transaction, such Access Person may
designate an individual at SCM to complete and submit for preclearance on
his or her behalf a Preclearance Request For Access Persons Form provided
the following requirements are satisfied:
a. The Access Person communicates the details of the trade and
affirms the accuracy of the representations and warranties contained
on the Form directly to such designated person; and
b. The designated person completes the Preclearance Request For
Access Persons Form on behalf of the Access Person in accordance with
the requirements of the Code and then executes the Access Person
Designee Certification contained in the Form. The Access Person does
not need to sign the Form so long as the foregoing certification is
provided.
D. Prohibited Transactions.
1. Prohibited Securities Transactions. The following Securities
Transactions for accounts in which an Access Person or a member of his or
her Immediate Family have a Beneficial Interest, to the extent they require
preclearance under Section II.B. above, are prohibited and will not be
authorized by the Preclearance Officer (or his or her designee) absent
exceptional circumstances:
a. Initial Public Offerings. Any purchase of Securities in an
initial public offering (other than a new offering of a registered
open-end investment company);
b. Pending Buy or Sell Orders. Any purchase or sale of Securities
on any day during which any Advisory Client has a pending "buy" or
"sell" order in the same Security (or Equivalent Security) until that
order is executed or withdrawn, unless the purchase or sale is a
Program Trade;
c. Seven Day Blackout. Purchases or sales of Securities by a
Portfolio Manager within seven calendar days of a purchase or sale of
the same Securities (or Equivalent Securities) by an Advisory Client
managed by that Portfolio Manager, unless the purchase or sale is a
Program Trade. For example, if a Fund trades in a Security on day one,
day eight is the first day the Portfolio Manager may trade that
Security for an account in which he or she has a beneficial interest;
d. Intention to Buy or Sell for Advisory Client. Purchases or
sales of Securities at a time when that Access Person intends, or
knows of another's intention, to purchase or sell that Security (or an
Equivalent Security) on behalf of an Advisory Client. This prohibition
applies whether the Securities Transaction is in the same (e.g., two
purchases) or the opposite (a purchase and sale) direction of the
transaction of the Advisory Client, unless the purchase or sale is a
Program Trade; and
e. 60-Day Blackout. (1) Sales of a Security within 60 days of the
purchase of the Security (or an Equivalent Security) in which the
Access Person has a Beneficial Interest and (2) purchases of a
Security within 60 days of the sale of the Security (or an Equivalent
Security) in which the Access Person had a Beneficial Interest, unless
in each case, the Access Person agrees to give up all profits on the
transaction to a charitable organization as specified by remedies
involving sanctions (Section IV.B.1.).
2. Always Prohibited Securities 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 (see Insider Trading Policy, Appendix 9);
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. Large Positions in Registered Investment Companies.
Transactions in a registered investment company, including Strong
Funds, which result in the Access Person owning five percent or more
of any class of securities in such investment company (this
prohibition does not apply to Independent Fund Directors); and
d. Others. Any other transactions deemed by the Preclearance
Officer (or his designee) to involve a conflict of interest, possible
diversion of corporate opportunity or an appearance of impropriety.
3. Private Placements. Acquisitions of Beneficial Interests in
Securities in a private placement by an Access Person is strongly
discouraged. The Preclearance Officer (or his or her designee) will give
permission only after considering, among other facts, whether the
investment opportunity should be reserved for Advisory Clients and whether
the opportunity is being offered to an Access Person by virtue of his or
her position as an Access Person. Access Persons who have been authorized
to acquire and have acquired securities in a private placement are required
to disclose that investment to the Compliance Department when they play a
part in any subsequent consideration of an investment in the issuer by an
Advisory Client. In such circumstances, the decision to purchase securities
of the issuer by an Advisory Client must be independently authorized by a
Portfolio Manager with no personal interest in the issuer. This provision
does not apply to Independent Fund Directors.
4. No Explanation Required for Refusals. In some cases, the
Preclearance Officer (or his or her designee) may refuse to authorize a
Securities Transaction for a reason that is confidential. The Preclearance
Officer is not required to give an explanation for refusing to authorize
any Securities Transaction.
E. Execution of Personal Securities Transactions. Unless an exception is
provided in writing by the Compliance Department, all transactions in Securities
subject to the preclearance requirements for which an Access Person or a member
of his or her Immediate Family has a Beneficial Interest shall be executed by
the Trading Department. However, if the Access Person's brokerage account is an
Electronic Trading Account, the transaction may be placed by the Access Person.
IN ALL INSTANCES, THE TRADING DEPARTMENT MUST GIVE PRIORITY TO CLIENT TRADES
OVER ACCESS PERSON TRADES.
F. Length of Trade Authorization Approval. The authorization provided by the
Preclearance Officer (or his or her designee) is effective until the earlier of
(1) its revocation; (2) the close of business on the second trading day after
the authorization is granted for transactions placed by the Trading Department
(for example, if authorization is provided on a Monday, it is effective until
the close of business on Wednesday); (3) the close of business of the same
trading day that the authorization is granted for transactions placed through an
Electronic Trading Account; or (4) the Access Person learns that the information
in the Trade Authorization Request Form is not accurate. If the order for the
Securities Transaction is not placed within that period, a new advance
authorization must be obtained before the Securities Transaction is placed. For
Securities Transactions placed by the Trading Department that have not been
executed within two trading days after the day the authorization is granted (for
example, in the case of a limit order or a Not Held Order), no new authorization
is necessary unless the person placing the original order for the Securities
Transaction amends it in any way.
G. Trade Reporting Requirements.
1. Reporting Requirement. Every Access Person and members of his or
her Immediate Family (including Independent Fund Directors and their
Immediate Families) must arrange for the Compliance Department to receive
directly from any broker, dealer or bank that effects any Securities
Transaction, duplicate copies of each confirmation for each such
transaction and periodic statements for each brokerage account in which
such Access Person has a Beneficial Interest. Additionally, securities held
in certificate form that are not included in the periodic statements, must
also be reported. To assist in making these arrangements, the Compliance
Department will send a letter to each brokerage firm based on the
information provided by the Access Person in Appendix 3.
The foregoing does not apply to transactions and holdings in (1) open-end
investment companies including but not limited to the Strong Funds, (2)
bankers acceptances, (3) bank certificates of deposit ("CDs"), (4)
commercial paper, (5) repurchase agreements when backed by exempt
securities, (6) U. S. Government Securities, (7) the acquisition of equity
securities in dividend reinvestment plans ("DRIPs"), when the acquisition
is directly through the issuer or its non-broker agent; or (8) securities
of the employer of a member of the Access Person's Immediate Family if such
securities are beneficially owned through participation by the Immediate
Family member in a Profit Sharing plan, 401(k) plan, ESOP or other similar
plan.
2. Disclaimers. Any report of a Securities Transaction for the benefit
of a person other than the individual in whose account the transaction is
placed may contain a statement that the report should not be construed as
an admission by the person making the report that he or she has any direct
or indirect beneficial ownership in the Security to which the report
relates.
3. Quarterly Review. At least quarterly, for Securities Transactions
requiring preclearance under this Code, the Preclearance Officer (or his or
her designee) shall compare the confirmations and periodic statements
provided pursuant to the trade reporting requirements (Section II.G.1.) to
the approved Trade Authorization Request Forms. Such review shall include:
a. Whether the Securities Transaction complied with this Code;
b. Whether the Securities Transaction was authorized in advance
of its placement;
c. Whether the Securities Transaction was executed within two
full trading days of when it was authorized;
d. Whether any Fund or accounts managed by SCM owned the
Securities at the time of the Securities Transaction, and;
e. Whether any Fund or separate accounts managed by SCM purchased
or sold the Securities in the Securities Transaction within at least
10 days of the Securities Transaction.
4. Availability of Reports. All information supplied pursuant to this
Code will be available for inspection by the Boards of Directors of SCM and
SFDI; the Board of Directors of each Strong Fund; the Code of Ethics Review
Committee; the Compliance Department; the Access Person's department
manager (or designee); any party to which any investigation is referred by
any of the foregoing, the SEC, any self-regulatory organization of which
the Strong Funds, SCM, the Distributor or Flint Prairie is a member, and
any state securities commission; as well as any attorney or agent of the
foregoing, the Strong Funds, SCM, the Distributor or Flint Prairie.
III. FIDUCIARY DUTIES
A. Confidentiality. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
Advisory Clients except to persons whose responsibilities require knowledge of
the information.
B. Gifts. The following provisions on gifts apply only to associates of
SCM, the Distributor and Flint Prairie.
1. Accepting Gifts. On occasion, because of their position with SCM,
the Distributor, the Strong Funds or Flint Prairie, associates may be
offered, or may receive without notice, gifts from clients, brokers,
vendors or other persons not affiliated with such entities. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts must
be declined or returned in order to protect the reputation and integrity of
SCM, the Distributor, the Strong Funds and Flint Prairie. Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 a
year), customary business meals, entertainment (e.g., sporting events) and
promotional items (e.g., pens, mugs, T-shirts) may be accepted. Please see
the Gift Policy (Appendix 8) for additional information.
If an associate receives any gift that might be prohibited under this
Code, the associate must inform the Compliance Department.
2. Solicitation of Gifts. Associates of SCM, the Distributor or Flint
Prairie may not solicit gifts or gratuities.
3. Giving Gifts. Associates of SCM, the Distributor or Flint Prairie
may not 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 clients of the
firm. Please see the Gift Policy (Appendix 9) for additional information.
C. Payments to Advisory Clients. Access Persons may not make any payments
to Advisory Clients in order to resolve any type of Advisory Client complaint.
All such matters must be handled by the Legal Department.
D. Corporate Opportunities. Access Persons may not take personal advantage
of any opportunity properly belonging to any Advisory Client, SCM, the
Distributor or Flint Prairie. This includes, but is not limited to, acquiring
Securities for one's own account that would otherwise be acquired for an
Advisory Client.
E. Undue Influence. Access Persons may not cause or attempt to cause any
Advisory Client to purchase, sell or hold any Security in a manner calculated to
create any personal benefit to the Access Person. If an Access Person or
Immediate Family Member stands to materially benefit from an investment decision
for an Advisory Client that the Access Person is recommending or participating
in, the Access Person must disclose to those persons with authority to make
investment decisions for the Advisory Client, any Beneficial Interest that the
Access Person (or Immediate Family) has in that Security or an Equivalent
Security, or in the issuer thereof, where the decision could create a material
benefit to the Access Person (or Immediate Family) or the appearance of
impropriety. If the Access Person in question is a person with authority to make
investment decisions for the Advisory Client, disclosure must also be made to
the Compliance Department. The person to whom the Access Person reports the
interest, in consultation with the Compliance Department, must determine whether
the Access Person will be restricted in making investment decisions.
F. Service as a Director. No Access Person, other than an Independent Fund
Director, may serve on the board of directors of a publicly-held company not
affiliated with SCM, the Distributor, the Strong Funds or Flint Prairie absent
prior written authorization by the Code of Ethics Review Committee. This
authorization will rarely, if ever, be granted and, if granted, will normally
require that the affected Access Person be isolated through "Chinese Wall" or
other procedures from those making investment decisions related to the issuer on
whose board the Access Person sits.
G. Involvement in Criminal Matters or Investment-Related Civil Proceedings.
Each Access Person must notify the Compliance Department, as soon as reasonably
practical, if arrested, arraigned, indicted or pleads no contest to any criminal
offense (other than minor traffic violations) or if named as a defendant in any
Investment-Related civil proceedings or any administrative or disciplinary
action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review Committee
shall consist of Senior Officers of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled; and in the
case of extended absences or periods of unavailability, alternates may be
selected by the majority vote of the remaining members of the Committee.
However, in the event that the General Counsel or Deputy General Counsel is
unavailable, at least one member of the Committee shall also be a member of the
Compliance Department.
2. Investigating Violations of the Code. The General Counsel, or his or her
designee, is responsible for investigating any suspected violation of the Code
and shall report the results of each investigation to the Code of Ethics Review
Committee. The Code of Ethics Review Committee is responsible for reviewing the
results of any investigation of any reported or suspected violation of the Code.
Any material violation of the Code by an associate of SCM, the Distributor or
Flint Prairie for which significant remedial action was taken will be reported
to the Boards of Directors of the Strong Funds at the next regularly scheduled
quarterly Board meeting.
3. Annual Reports. The Code of Ethics Review Committee will review the Code
at least once a year, in light of legal and business developments and experience
in implementing the Code and will prepare an annual report to the Boards of
Directors of SCM, the Distributor and each Strong Fund that:
a. Summarizes existing procedures concerning personal investing and
any changes in the procedures made during the past year;
b. Identifies any violation requiring significant remedial action
during the past year; and
c. Identifies any recommended changes in existing restrictions or
procedures based on its experience under the Code, evolving industry
practices or developments in applicable laws or regulations.
B. Remedies.
1. Sanctions. If the Code of Ethics Review Committee determines that
an Access Person has committed a violation of the Code, the Committee may
impose sanctions and take other actions 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 SEC, criminal referral and termination of employment for
cause. The Code of Ethics Review Committee may also 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
Code of Ethics Review Committee and shall be forwarded to a charitable
organization. No member of the Code of Ethics Review Committee may review
his or her own transaction.
2. Sole Authority. The Code of Ethics Review Committee has sole
authority, subject to the review set forth in Section IV.B.3. below, to
determine the remedy for any violation of the Code, including appropriate
disposition of any moneys forfeited pursuant to this provision. Failure to
promptly abide by a directive to reverse a trade or forfeit profits may
result in the imposition of additional sanctions.
3. Review. Whenever the Code of Ethics Review Committee determines
that an Access Person has committed a violation of this Code that merits
significant remedial action, it will report promptly to the Boards of
Directors of SCM and/or the Distributor (as appropriate), and no less
frequently than the quarterly meeting to the Boards of Directors of the
applicable Strong Funds, information relating to the investigation of the
violation, including any sanctions imposed. The Boards of Directors of SCM,
the Distributor and the Strong Funds may modify such sanctions as they deem
appropriate. Such Boards may have access to all information considered by
the Code of Ethics Review Committee in relation to the case. The Code of
Ethics Review Committee may determine whether to delay the imposition of
any sanctions pending review by the applicable Boards of Directors.
C. Exceptions to the Code. Although exceptions to the Code will rarely, if
ever, be granted, the General Counsel of SCM may grant exceptions to the
requirements of the Code on a case-by-case basis if he finds that the proposed
conduct involves negligible opportunity for abuse. All Material exceptions must
be in writing and must be reported as soon as practicable to the Code of Ethics
Review Committee and to the Boards of Directors of the SCM Funds at their next
regularly scheduled meeting after the exception is granted. Refer to Appendix 1
for the definition of "Material."
D. Compliance Certification. At least annually, all Access Persons will be
required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 6, or on a document substantially in the form of Appendix 6, that they
have complied with the Code in all respects.
E. Record Retention. SCM will, at its principal place of business, maintain
the following records in an easily accessible place, for at least six years and
will make records available to the SEC or any representative thereof at any
time:
1. Code of Ethics. A copy of the Code of Ethics which is, or at any
time has been, in effect.
2. Violations. A record of any violation of such Code of Ethics and
any action taken as a result of such violation.
3. Required Reports. A copy of each report made by an Access Person
pursuant to the Code of Ethics shall include records of the procedures
followed in connection with the preclearance and reporting requirements of
this Code and information relied on by the Preclearance Officer in
authorizing the Securities Transaction and in making the post-Securities
Transaction determination.
4. Access Person List. A list of all persons who are, or have been,
required to make reports pursuant to the Code of Ethics.
F. Inquiries Regarding the Code. The Compliance Department will answer any
questions about this Code or any other compliance-related matters.
Appendix 1
DEFINITIONS
"Access Person" means (1) every director, officer, and general partner of
SCM, the Distributor, the Strong Funds and Flint Prairie; (2) every associate of
SCM, the Distributor and Flint Prairie who, in connection with his or her
regular functions, makes, participates in, or obtains information regarding the
purchase or sale of a security by an Advisory Client's account; (3) every
associate of SCM, the Distributor and Flint Prairie who is involved in making
purchase or sale recommendations for an Advisory Client's account; (4) every
associate of SCM, the Distributor and Flint Prairie who obtains information
concerning such recommendations prior to their dissemination; and (5) such
agents of SCM, the Distributor, the Funds or Flint Prairie as the Compliance
Department shall designate who may be deemed an Access Person if they were an
associate of the foregoing. Any uncertainty as to whether an individual is an
Access Person should be brought to the attention of the Compliance Department.
Such questions will be resolved in accordance with, and this definition shall be
subject to, the definition of "Access Person" found in Rule 17j-1(e)(1)
promulgated under the Investment Company Act of 1940.
"Advisory Client" means any client (including both investment companies and
managed accounts) for which SCM serves as an investment adviser or subadviser,
renders investment advice, makes investment decisions or places orders through
its Trading Department.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, to
profit or share in any profit derived from a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts and controlling interests in corporations. Any uncertainty
as to whether an Access Person has a Beneficial Interest in a Security should be
brought to the attention of the Compliance Department. Such questions will be
resolved by reference to the principles set forth in the definition of
"beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the
Securities Exchange Act of 1934.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons listed on Appendix 2,
as such Appendix shall be amended from time to time.
"The Distributor" means Strong Investments, Inc.
"Electronic Trading Account" means a brokerage account held by an Access
Person where Securities Transactions are placed either electronically via the
Internet or the telephone. All such Securities Transactions must be precleared
by the Compliance Department.
"Equivalent Security" means any Security issued by the same entity as the
issuer of a subject Security that is convertible into the equity Security of the
issuer. Examples include options but are not limited to rights, stock
appreciation rights, warrants and convertible bonds.
"Fund" means an investment company registered under the Investment Company
Act of 1940 (or a portfolio or series thereof) for which SCM serves as an
adviser or subadviser.
<TABLE>
<CAPTION>
"Immediate Family" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
<S> <C> <C> <C>
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
</TABLE>
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate opportunity,
or appearances of impropriety which this Code is intended to prevent.
"Independent Fund Director" means an independent director of an investment
company for which SCM serves as the advisor.
"Legal Department" means the SCM Legal/Compliance Department.
"Material" for purposes of this reporting requirement, shall mean the
following:
1. Number of Shares - Any transaction for more than 1,000 shares shall be
deemed material and subject to reporting. Whether a transaction of 1,000
shares or less is material shall be determined on a case-by-case basis; in
particular, the less liquid a security is, the lower the threshold that
should be used for the materiality determination.
2. Dollar Value of Transaction - Any transaction with a dollar value in excess
of $25,000 shall be deemed material and subject to reporting. Whether a
transaction of $25,000 or less is material shall be determined on a
case-by-case basis.
3. Number of Transactions in a Year - The General Counsel may grant no more
than two exceptions per associate per year that are not subject to
reporting. For example, if the General Counsel has granted two exceptions
to an associate, any exception granted thereafter shall be deemed material
and subject to reporting (irrespective of the number of shares or other
circumstances of the transaction).
4. Consultation with Independent Counsel - In any case where the General
Counsel believes there is an issue of whether a proposed exception is
material and subject to reporting, he shall consult with counsel to the
independent directors for the Strong Funds. "Not Held Order" means an order
placed with a broker and ultimately executed at the discretion of the
broker.
"Portfolio Manager" means a person who has or shares principal day-to-day
responsibility for managing the portfolio of an Advisory Client.
"Preclearance Officer" means the person designated as the Preclearance
Officer in Appendix 2 hereof.
"Program Trade" is where a Portfolio Manager directs a trader to do trades
in either an index-type account or portion of account or, at a minimum, 25-30%
of the Securities in a non-index account. Program Trades for non-index type
accounts generally arise in any of three situations: (1) cash or other assets
are being added to an account and the Portfolio Manager instructs the trader
that new securities are to be bought in a manner that maintains the account's
existing allocations; (2) cash is being withdrawn from an account and the
Portfolio Manager instructs the trader that securities are to be sold in a
manner that maintains the account's current securities allocations; and (3) a
new account is established and the Portfolio Manager instructs the trader to buy
specific securities in the same allocation percentages as are held by other
client accounts.
"SEC" means the Securities and Exchange Commission.
"Security" includes stock; notes, bonds, debentures and other evidences of
indebtedness (including loan participations and assignments); limited
partnership interests; investment contracts; all derivative instruments of the
foregoing, such as options and warrants; and other items mentioned in Section
2(a)(36) of the 1940 Act, not specifically exempted by Rule 17j-1. Items
excluded from the definition of "Security" by Rule 17j-1 are U. S. Government
Securities, bankers acceptances, bank certificates of deposit, commercial paper
and shares of open-end investment companies. In addition, security does not
include futures, commodities, currencies or options on the aforementioned, but
the purchase and sale of such instruments are nevertheless subject to the
reporting requirements of the Code.
"Securities Transaction" means a purchase or sale of Securities in which an
Access Person or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
"U. S. Government Security" means any security issued or guaranteed as to
principal or interest by the United States or by a person controlled or
supervised by and acting as an instrumentality of the Government of the United
States pursuant to authority granted by the Congress of the United States or any
certificate of deposit for any of the foregoing.
Appendix 2
CONTACT PERSONS
Preclearance Officer
1. Stephen J. Shenkenberg, Deputy General Counsel and Chief Compliance Officer
of SCM
Designees of Preclearance Officer
1. Thomas A. Hooker
2. Linda E. Meints
3. John S. Weitzer
4. Kelly M. Zeroth
Compliance Department
1. Stephen J. Shenkenberg
2. Thomas A. Hooker
3. Kathleen A. Flanagan
4. Linda E. Meints
5. Kelly M. Zeroth
Code of Ethics Review Committee
1. Stephen J. Shenkenberg, Deputy General Counsel and Chief Compliance Officer
of SCM
2. Thomas A. Hooker, Director of Compliance
18
Appendix 3
<TABLE>
<CAPTION>
PERSONAL HOLDINGS IN SECURITIES
In accordance with Section II.A. of the Code of Ethics, please provide a
list of all Securities (other than those specifically excluded from the
definition of Security), including physical certificates held, in which each
Access Person has a Beneficial Interest, including those in accounts of the
Immediate Family of the Access Person and all Securities in non-client accounts
for which the Access Person makes investment decisions.
<S> <C>
(1) Name of Access Person: _____________________________________________________
(2) If different than (1), name of the person
in whose name the account is held: _____________________________________________________
(3) Relationship of (2) to (1): _____________________________________________________
(4) Broker at which Account is maintained: _____________________________________________________
(5) Account Number: _____________________________________________________
(6) Contact person at Broker and phone number _____________________________________________________
(7) For each account, attach the most recent account statement listing Securities in that account. If the
Access Person owns Beneficial Interests in Securities that are not listed in an attached account
statement, or holds the physical certificate, list them below:
Name of Security Quantity Value Custodian
1. ______________________________________________________________________________________________________________
2. ______________________________________________________________________________________________________________
3. ______________________________________________________________________________________________________________
4. ______________________________________________________________________________________________________________
5. ______________________________________________________________________________________________________________
6. ______________________________________________________________________________________________________________
</TABLE>
(Attach separate sheet if necessary.)
I certify that this form and the attached statements (if any) constitute
all of the Securities in which I have a Beneficial Interest, including those for
which I hold physical certificates, as well as those held in accounts of my
Immediate Family.
<TABLE>
<CAPTION>
<S> <C>
_____________________________________________________
Access Person Signature
Dated: __________________________________________ _____________________________________________________
Print Name
</TABLE>
Appendix 4
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
AND LIMITED POWER OF ATTORNEY
I acknowledge that I have received the Code of Ethics dated October 22, 1999,
and represent that:
1. In accordance with Section II.A. of the Code of Ethics, I will fully
disclose the Securities holdings in which I have, or a member of my Immediate
Family has, a Beneficial Interest.*
2. In accordance with Section II.B.1. of the Code of Ethics, I will obtain
prior authorization for all Securities Transactions in which I have, or a member
of my Immediate Family has, a Beneficial Interest except for transactions exempt
from preclearance under Section II.B. 2. of the Code of Ethics.*
3. In accordance with Section II.G.1. of the Code of Ethics, I will report
all Securities Transactions in which I have, or a member of my Immediate Family
has, a Beneficial Interest, except for transactions exempt from reporting under
Section II.G.1. of the Code of Ethics.
4. I will comply with the Code of Ethics in all other respects.
5. I agree to disgorge and forfeit any profits on prohibited transactions
in accordance with the requirements of the Code.*
I hereby appoint Strong Capital Management, Inc. as my attorney-in-fact for
the purpose of placing orders for and on my behalf to buy, sell, tender,
exchange, convert, and otherwise effectuate transactions in any and all stocks,
bonds, options, and other securities. I agree that Strong Capital Management,
Inc. shall not be liable for the consequences of any errors made by the
executing brokers in connection with such transactions.*
<TABLE>
<CAPTION>
<S> <C>
_____________________________________________________
Access Person Signature
_____________________________________________________
Print Name
Dated: ____________________________________________
</TABLE>
* Representations (1), (2) and (5) and the Limited Power of Attorney do not
apply to Independent Fund Directors.
31
Appendix 5
Ctrl. No:_________________________ Associate ID
#_______________________________
STRONG CAPITAL MANAGEMENT, INC.
PRECLEARANCE REQUEST FOR ACCESS PERSONS
<TABLE>
<CAPTION>
<S> <C>
1. Name of Access Person (and trading entity, if different): _________________________________________________________________
2. Name and symbol of Security: _________________________________________________________________
3. Maximum quantity to be purchased or sold: _________________________________________________________________
4. Name, account # & phone # of broker to effect transaction: _________________________________________________________________
5. Check if applicable: Purchase ____ Market Order ____
Sale ____ Limit Order ____ (Limit Order
Price: ___________)
Not Held Order ____
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
6. In connection with the foregoing transaction, I hereby make the following representations and warranties:
(a) I do not possess any material nonpublic information regarding the Security or the issuer of the Security.
(b) To my knowledge:
(1) The Securities or "equivalent" securities (i.e., securities issued by the same issuer) [ are / are
not ] (circle one) held by any investment companies or other accounts managed by SCM;
(2) There are no outstanding purchase or sell orders for this Security (or any equivalent security) by
any investment companies or other accounts managed by SCM; and
(3) None of the Securities (or equivalent securities) are actively being considered for purchase or
sale by any investment companies or other accounts managed by SCM.
(c)The Securities are not being acquired in an initial public offering.
(d)The Securities are not being acquired in a private placement or, if they are, I have reviewed Section
II.D.3. of the Code and have attached hereto a written explanation of such transaction.
(e)If I am a Portfolio Manager, none of the accounts I manage purchased or sold these Securities (or
equivalent securities) within the past seven calendar days and I do not expect any such client accounts
to purchase or sell these Securities (or equivalent securities) within seven calendar days of my
purchase or sale.
(f)If I am purchasing these Securities, I have not directly or indirectly (through any member of my
Immediate Family, any account in which I have a Beneficial Interest or otherwise) sold these Securities
(or equivalent securities) in the prior 60 days.
(g)If I am selling these Securities, I have not directly or indirectly (through any member of my Immediate
Family, any account in which I have a Beneficial Interest or otherwise) purchased these Securities (or
equivalent securities) in the prior 60 days.
(h)I have read the SCM Code of Ethics within the prior 12 months and believe that the proposed trade fully
complies with the requirements of the Code.
______________________________________________________________ _____________________________________________________________
Access Person Print Name
CERTIFICATION OF ACCESS PERSON DESIGNEE
The undersigned hereby certifies that the above Access Person (a) directly instructed me to complete this
form on his or her behalf, (b) to the best of my knowledge, was out of the office at the time of such instruction
and has not returned, and (c) confirmed to me that the representations and warranties contained in this form are
accurate.
______________________________________________________________ _____________________________________________________________
Access Person Designee Print Name
AUTHORIZATION
Authorized By:________________________________________________ Date:___________________
Time:_____________________________
PLACEMENT
Trader:_________________________ Date:________________ Time:__________________ Qty:_________________
EXECUTION
Trader:_________________________ Date:________________ Time:__________________ Qty:_________________
Price:_______________
(Original copy to Compliance Department, Yellow copy to Trading Department, Pink copy to Access Person)
_________ ________ __________________
revised 7/98
Confidential______ ________ __________________ Appendix 6
ANNUAL CODE OF ETHICS QUESTIONNAIRE1
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
Strong Investments, Inc.
and Flint Prairie, L. L. C.
September 14, 1999
Associate: ____________________________(please print name)
I. Introduction
Access Persons2 are required to answer the following questions for the year September 1, 1998, through
August 31, 1999. Answers of "No" to any of the questions in Sections II and III must be explained on the
"Attachment" on page 3. Upon completion, please sign and return the questionnaire by Monday, September 20th,
to Kelly Zeroth in the Compliance Department. All information provided is kept confidential to the maximum
extent possible. If you have any questions, please contact Kelly at extension 3549.
II. Annual certification of compliance with the Code of Ethics
A. Have you obtained preclearance for all Securities3 Transactions in which you have, or a member of your
Immediate Family has, a Beneficial Interest, except for transactions exempt from preclearance under the
Code of Ethics? (Circle "Yes" if there have been no Securities Transactions.)
Yes No ________(circle one)
B. Have you reported all Securities Transactions in which you have, or a member of your Immediate Family
has, a Beneficial Interest, except for transactions exempt from reporting under the Code of Ethics?
(Reporting requirements include arranging for the Compliance Department to receive, directly from your
broker, duplicate transaction confirmations and duplicate periodic statements for each brokerage account
in which you have, or a member of your Immediate Family has, a Beneficial Interest, as well as reporting
securities held in certificate form4. Circle "Yes" if there are no reportable transactions.)
Yes No (circle one)
C. Do you understand that you are prohibited from owning five percent or more of any class of security of a
registered investment company, and have you so complied?
Yes No ________(circle one)
D. Have you notified the Compliance Department if you have been arrested, arraigned, indicted, or have
plead no contest to any criminal offense, or been named as a defendant in any Investment-Related civil
proceedings, or administrative or disciplinary action? (Circle "Yes" if you have not been arrested,
arraigned, etc.)
Yes No (circle one)
E. Have you complied with the Code of Ethics in all other respects, including the gift policy?
Yes No (circle one)
List on the Attachment all reportable gifts5 given or received for the year September 1, 1998, through
August 31, 1999, noting the month, "counterparty," gift description, and estimated value.
III. Have you complied in all respects with the Insider Trading Policy dated January 1, 1999?
Yes No ________(circle one)
Answers of "No" to any of the questions in Sections II and III must be explained on the "Attachment" on page 3.
IV. Disclosure of directorships statement
A. Are you, or is any member of your Immediate Family, a director of any for-profit, privately held
companies6? (If "Yes," please list on the Attachment each company for which you are, or a member of
your Immediate Family is, a director.)
Yes No (circle one)
B. If the response to IV.A. is "Yes," do you have knowledge that any of the companies for which you are, or
a member of your Immediate Family is, a director will go public or be acquired within the next 12
months? (If the answer is "Yes," please be prepared to discuss this matter with a member of the
Compliance Department in the near future.)
Yes No (circle one)
I hereby represent that, to the best of my knowledge, the foregoing responses are true and complete. I
understand that any untrue or incomplete response may be subject to disciplinary action by the firm.
___________________________________________
Access Person Signature
_____________________________________________________ ___________________________________________
Print Name Date
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
Please explain all "No" responses to questions in Sections II and III:
____________________________________________________________________________________________________________________________________
Please list each company for which you are, or a member or your Immediate Family is, a director (Section IV):
____________________________________________________________________________________________________________________________________
================================= ============================== =============================== ==============================
Month Gift Giver / Receiver Gift Description Estimated Value
================================= ============================== =============================== ==============================
1. ___________________________________________________________________________________________________
2. ___________________________________________________________________________________________________
3. ___________________________________________________________________________________________________
4. ___________________________________________________________________________________________________
5. ___________________________________________________________________________________________________
6. ___________________________________________________________________________________________________
7. ___________________________________________________________________________________________________
8. ___________________________________________________________________________________________________
9. ___________________________________________________________________________________________________
10. __________________________________________________________________________________________________
(Continue on an additional sheet if necessary.)
Appendix 7
LIST OF BROAD-BASED INDICES
Listed below are the broad-based indices as designated by the Compliance Department. See Section II.B.2.e. for
additional information.
----------------------------------------------------------- ----------------------------- ------------------------
DESCRIPTION OF OPTION SYMBOL EXCHANGE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Computer Technology XCI AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Eurotop 100 ERT AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ----------------------
Biotechnology Index BTK AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Gold / Silver Index * AUX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Hong Kong Option Index HKO AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Inter@ctive Wk. Internet Index INX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Japan Index JPN AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Major Market Index * XMI AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Morgan Stanley High Tech Index MSH AMEX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
NASDAQ-100 NDX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
-------------------------------------------------------- ----------------------------- ------------------------
Oil Service Sector Index OSX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Pacific High Tech Index XPI PSE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Russell 2000 * RUT CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Semiconductor Sector SOX PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 100 * OEX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 400 Midcap Index * MID CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
S & P 500 * SPX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Technology Index TXX CBOE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Value Line Index * VLE PHLX
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
Wilshire Small Cap Index WSX PSE
----------------------------------------------------------- ----------------------------- ------------------------
----------------------------------------------------------- ----------------------------- ------------------------
* Includes LEAPs
----------------------------------------------------------- ----------------------------- ------------------------
Appendix 8
GIFT POLICY
The gift policy of Strong Capital Management, Inc., Strong Investments, Inc. and Flint Prairie, L. L. C.
covers both giving gifts to and accepting gifts from clients, brokers, persons with whom we do business or others
(collectively, "vendors"). It is based on the applicable requirements of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") and is included as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from vendors with a value in excess
of $100 per person per year and must report to the firm annually if they accept certain types of gifts. The NASD
defines a "gift" to include any kind of gratuity. Since giving or receiving any gifts in a business setting may
give rise to an appearance of impropriety or may raise a potential conflict of interest, we are relying on your
professional attitude and good judgment to ensure that our policy is observed to the fullest extent possible.
The discussion below is designed to assist you in this regard.
Questions regarding the appropriateness of any gift should be directed to the Legal/Compliance
Department.
1. Gifts Given By Associates
Under applicable NASD rules, an associate may not give any gift with a value in excess of $100 per year
to any person associated with a securities or financial organization, including exchanges, broker-dealers,
commodity firms, the news media, or clients of the firm. Please note, however, that the firm may not take a tax
deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift to a vendor -- appropriate
supervisory approval must be obtained before giving any gifts.
2. Gifts Accepted By Associates
On occasion, because of their position within the firm, associates may be offered, or may receive
without notice, gifts from vendors. Associates may not accept any gift or form of entertainment from vendors
(e.g., tickets to the theater or a sporting event where the vendor does not accompany the associate) other than
gifts of nominal value, which the NASD defines as under $100 in total from any vendor in any year (managers may,
if they deem it appropriate for their department, adopt a lower dollar ceiling). Any gift accepted by an
associate must be reported to the firm, subject to certain exceptions (see heading 4 below). In addition, note
that our gift policy does not apply to normal and customary business entertainment or to personal gifts (see
heading 3 below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift certificates) in any amount,
and under no circumstances may an associate solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity, particularly where it might be
awkward or impolite for an associate to decline a gift not permitted by our policy. In such case, the gift
should be forwarded to Legal, who will arrange for it to be donated to charity. Similarly, associates may wish
to suggest to vendors that, in lieu of an annual gift, the vendors make a donation to charity. In either
situation discussed in this paragraph, an associate would not need to report the gift to the firm (see heading 4
below).
3. Exclusion for Business Entertainment/Personal Gifts
Our gift policy does not apply to normal and customary business meals and entertainment with vendors.
For example, if an associate has a business meal and attends a sporting event or show with a vendor, that
activity would not be subject to our gift policy, provided the vendor is present. If, on the other hand, a
vendor gives an associate tickets to a sporting event and the associate attends the event without the vendor also
being present, the tickets would be subject to the dollar limitation and reporting requirements of our gift
policy. Under no circumstances may associates accept business entertainment that is extraordinary or extravagant
in nature.
In addition, our gift policy does not apply to usual and customary gifts given to or received from
vendors based on a personal relationship (e.g., gifts between an associate and a vendor where the vendor is a
family member or personal friend).
4. Reporting
The NASD requires gifts to be reported to the firm. Except as noted below, associates must report
annually all gifts given to or accepted from vendors (Legal will distribute the appropriate reporting form to
associates).
Associates are not required to report the following: (i) usual and customary promotional items given to
or received from vendors (e.g., hats, pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Legal, or (iii) food items consumed on the firm's premises (e.g., candy, popcorn,
etc.).
January 1, 1999
Appendix 9
INSIDER TRADING POLICY AND PROCEDURES
DESIGNED TO DETECT AND PREVENT INSIDER TRADING
A. Policy Statement.
1. Introduction. Strong Capital Management, Inc., Strong Investments, Inc., Heritage Reserve
Development Corporation, Flint Prairie, L. L. C. and such other companies which adopt these Policies and
Procedures (all of the foregoing entities are collectively referred to herein as "Strong") seek to foster a
reputation for integrity and professionalism. That reputation is a vital business asset. The confidence and
trust placed in Strong by clients is something we should value and endeavor to protect. To further that goal,
the Policy Statement implements procedures to deter the misuse of material, nonpublic information in securities
transactions.
2. Prohibitions. Accordingly, associates are prohibited from trading, either personally or on
behalf of others (including advisory clients), 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." This policy applies to every associate and extends to activities within and outside their duties at
Strong. Any questions regarding this policy should be referred to the Compliance Department.
3. General Sanctions. Trading securities while in possession of material, nonpublic information
or improperly communicating that information to others may expose you to stringent penalties. Criminal sanctions
may include a fine of up to $1,000,000 and/or ten years imprisonment. The SEC can recover the profits gained or
losses avoided through the violative trading, a penalty of up to three times the illicit windfall and an order
permanently barring you from the securities industry. Finally, you may be sued by investors seeking to recover
damages for insider trading violations.
4. Insider Trading Defined. 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 currently understood that the law generally prohibits:
a. trading by an insider, while in possession of material, nonpublic information;
b. 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;
c. recommending the purchase or sale of securities on the basis of material, nonpublic
information;
d. communicating material, nonpublic information to others; or
e. providing substantial assistance to someone who is engaged in any of the above
activities.
The elements of insider trading and the penalties for such unlawful conduct are described below. Any
associate who, after reviewing these Policies and Procedures has any question regarding insider trading should
consult with the Compliance Department. Often, a single question can forestall disciplinary action or complex
legal problems.
5. Tender Offers. Tender offers represent a particular concern in the law of insider trading for
two reasons. First, tender offer activity often produces extraordinary gyrations in the price of the target
company's securities. Trading during this time period is more likely to attract regulatory attention (and
produces a disproportionate percentage of insider trading cases). Second, the SEC has adopted a rule which
expressly forbids trading and "tipping" while in possession of material, nonpublic information regarding a tender
offer received from the tender offeror, the target company or anyone acting on behalf of either. Associates
should exercise particular caution any time they become aware of nonpublic information relating to a tender offer.
6. Contact the Compliance Department. To protect yourself, our clients, and Strong, you should
contact the Compliance Department immediately if you believe that you may have received material, nonpublic
information.
B. Procedures Designed to Detect and Prevent Insider Trading. The following procedures have been
established to aid Strong and all associates in avoiding insider trading, and to aid Strong in preventing,
detecting, and imposing sanctions against insider trading. Every associate must follow these procedures or risk
serious sanctions, including dismissal, substantial personal liability and criminal penalties. Any questions
about these procedures should be directed to the Compliance Department.
1. Initial Questions. Before trading in the Securities of a company about which an associate may
have potential inside information, an associate, whether trading for himself or herself or others, should ask
himself or herself the following questions:
a. Is the Information Material? Is this information that an investor would consider
important in making his or her investment decisions? Is this information that would substantially
affect the market price of the securities if generally disclosed?
b. Is the Information Nonpublic? To whom has this information been provided? Has the
information been effectively communicated to the market place by being published in Reuters, The Wall
Street Journal or other publications of general circulation?
2. Material and Nonpublic Information. If, after consideration of the above, any associate
believes that the information is material and nonpublic, or if an associate has questions as to whether the
information is material and nonpublic, he or she should take the following steps:
a. Report the matter immediately to the Compliance Department.
b. Do not purchase or sell the Securities either on the associate's own behalf or on the
behalf of others.
c. Do not communicate the information to anyone, other than to the Compliance Department.
d. After the Compliance Department has reviewed the issue, the associate will be
instructed to continue the prohibitions against trading and communication, or he or she will be allowed
to trade and communicate the information.
3. Confidentiality. Information in an associate's possession that is identified as material and
nonpublic may not be communicated to anyone, include persons within Strong, except as otherwise provided herein.
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 and conversations containing such information, if appropriate at all, should be conducted in
private (for example, not by cellular telephone to avoid potential interception).
4. Assistance of the Compliance Department. If, after consideration of the items set forth in
Section B.2., 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 the Compliance Department before trading or communicating the information to
anyone.
5. Reporting Requirement. In accordance with Strong's Code of Ethics, every associate must
arrange for the Compliance Department to receive directly from the broker, dealer, or bank in question, duplicate
copies of each confirmation for each Securities Transaction and periodic statement for each brokerage account in
which such associate has a beneficial interest.
C. Insider Trading Explanations.
1. Who is an Insider? The concept of "insider" is broad. It includes officers, directors and
associates 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 associates of such organizations. In addition, Strong
may become a temporary insider. According to the United States 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.
2. What is Material Information? Trading on inside 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. It need not be important that it would have changed the investor's decision to buy or
sell. No simple "bright line" test exists to determine when information is material; assessments of materiality
involve a highly fact-specific inquiry. For this reason, you should direct any question about whether
information is material to the Compliance Department.
Material information often relates to a company's results and operations including, for
example, dividend changes, earnings results, changes in previously released earnings estimates, significant
merger or acquisition proposals or agreements, major litigation, liquidation problems and extraordinary
management developments.
Material information also may relate to the market for a company's securities. Information
about a significant order to purchase or sell securities may, in some contexts, be deemed material.
Material information does not have to relate to a company's business. For example, in
Carpenter v. U.S., 108 U.S. 316 (1987), the United States 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 Wall Street Journal and whether those reports
would be favorable or unfavorable.
3. What is Nonpublic Information? Information is nonpublic until it has been effectively
disseminated broadly to investors in the market place. One must be able to point to some fact to show that the
information is generally public. For example, information found in a report filed with the SEC, or appearing in
Dow Jones, Reuters Economic Services, The Wall Street Journal, or other publications of general circulation would
be considered public.
4. What are the 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: (a) civil injunctions; (b) treble damages; (c) disgorgement of
profits; (d) jail sentences; (e) 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; and (f) 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.
In addition to the foregoing, any violation of this Policy with Respect to Insider Trading can
be expected to result in serious sanctions, including dismissal of the person or persons involved.
January 1, 1999
Appendix 10
ELECTRONIC TRADING AUTHORIZATION FORM
Authorization has been granted to _______________________________________ ("Access Person")
to open an Electronic Trading Account1 at ________________________________ ("Brokerage Firm").
As a condition of approval, the Access Person agrees to the following requirements, relating to all Securities
Transactions:
1. All Securities Transactions as defined in the Code of Ethics, except those specifically exempt, must be
precleared by the Compliance Department;
2. All Securities Transactions will be placed and executed by the close of the same trading day that the
authorization is granted, otherwise the authorization will expire. This includes Limit Orders. There
will be no open "until filled" orders;
3. The Access Person will provide the Compliance Department with documentation from the Internet Site that
shows when the order was placed and executed.
4. The Access Person will arrange for the Compliance Department to receive directly from the Electronic
Trading Firm, duplicate copies of each confirmation for each Securities Transaction and periodic
statements for each brokerage account in which the Access Person has a Beneficial Interest. The Access
Person may not place trades on his or her own behalf until these arrangements have been made.
5. The Access Person will comply with the Code of Ethics in all other respects.
I hereby agree to the terms and conditions stated above. Any abuse of this privilege may result in disciplinary
action by the firm.
_______________________________________________ __________________________
Access Person _________________ _________Date
AUTHORIZATION
_______________________________________________ ____________________________________
Director of Compliance (or designee)_______ _________Date_____
Appendix 11
TO: ALL ACCESS PERSONS________ __________________
FROM: Director of Compliance
Subject: Social Security Number/Tax ID Information
Strong's Code of Ethics requires the Compliance Department to monitor the personal investing activity of Access
Persons, including investments in mutual funds. To assist in this, we ask that you please provide your Social
Security Number, as well as the SSN of each member of your "Immediate Family". In addition, please list all
accounts in which you may have a "Beneficial Interest".
(Please refer to your copy of the Code of Ethics for a definition of the underlined words.)
Please complete this form return it to the Director of Compliance at your earliest convenience. Thank you for
your cooperation.
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
________________________________________________________________________
(Print Name) _________________ _________(SSN/TIN)
- --------
1 Capitalized words are defined in Appendix 1.
1 All definitions used in this questionnaire have the same meaning as those in the Code of Ethics.
2 Non-Access Persons and Independent Fund Directors of the Strong Funds must complete a separate questionnaire.
3 Security, as defined, does not include open-end investment companies, including the Strong Funds.
4 Please contact Kelly Zeroth if you are uncertain as to what confirmations and statements you have arranged for
the Compliance Department to receive.
5 Associates are not required to report the following: (i) usual and customary promotional items given to or
received from vendors, (ii) items donated to charity (through Legal), or (iii) food items consumed on the
premises. Entertainment - i.e., a meal or activity with the vendor present - does not have to be reported.
6 Per Section III.F. of the Code of Ethics, no Access Person, other than an Independent Fund Director, may serve
on the board of directors of a publicly held company.
1 Electronic Trading Account includes brokerage accounts where Securities Transactions are placed electronically
via the Internet or the telephone.
</TABLE>
MASSACHUSETTS FINANCIAL SERVICES COMPANY
STATEMENT OF POLICY ON
PERSONAL SECURITIES TRANSACTIONS
(CODE OF ETHICS)
AS ADOPTED BY THE AUDIT COMMITTEE
EFFECTIVE AS OF MARCH 1, 2000
As an investment advisory organization with substantial
responsibilities to clients, Massachusetts Financial Services Company ("MFS")
has an obligation to implement and maintain a meaningful policy governing the
securities transactions of its Directors, officers and employees ("MFS
representatives").1 This policy is intended to minimize conflicts of interest,
and even the appearance of conflicts of interest, between members of the MFS
organization and its clients in the securities markets as well as to effect
compliance with the Investment Company Act, the Investment Advisers Act and the
Securities Exchange Act. This policy inevitably will restrict MFS
representatives in their securities transactions, but this is the necessary
consequence of undertaking to furnish investment advice to clients. In addition
to complying with the specific rules, we all must be sensitive to the need to
recognize any conflict, or the appearance of conflict, of interest whether or
not covered by the rules. When such situations occur, the interests of our
clients must supersede the interest of MFS representatives.
1. GENERAL FIDUCIARY PRINCIPLES. All personal investment activities
conducted by MFS representatives are subject to compliance with the following
principles: (i) the duty at all times to place the interests of MFS' clients
first; (ii) the requirement that all personal securities transactions be
conducted consistent with this Code of Ethics and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an individual's
position of trust and responsibility; and (iii) the fundamental standard that
MFS representatives should not take inappropriate advantage of their positions.
2. APPLICABILITY OF RESTRICTIONS AND PROCEDURES. In recognition of the
different circumstances surrounding each MFS representative's employment,
various categories of MFS employees are subject to different restrictions under
this Code of Ethics. For purposes of applying this Code of Ethics, MFS employees
are divided into the general categories of Portfolio Managers, Investment
Personnel, Access Persons and Non-Access Persons, as each such term is defined
in Appendix A to this Code of Ethics, as amended from time to time by the Audit
Committee.
As used in this Code of Ethics, the term "securities" includes not only
publicly traded equity securities, but also privately issued equity securities,
shares of closed-end funds, fixed income securities (including municipal bonds
and many types of U.S. Government securities), futures, options, warrants,
rights, swaps, commodities and other similar instruments. Moreover, the
restrictions of this Code of Ethics apply to transactions by Access Persons
involving securities and other instruments related to, but not necessarily the
same as, securities held or to be acquired on behalf of an MFS client.
3. RESTRICTIONS ON PERSONAL SECURITIES TRANSACTIONS. No Access Person
shall trade in any security which is subject to a pending "buy" or "sell" order,
or is being considered for purchase or sale,2 for a client of MFS until such
order is executed or withdrawn or such a transaction is no longer being
considered. In addition, no Investment Personnel shall trade in any security
after an MFS client trades in such security or such security has been considered
for purchase or sale on behalf of an MFS client until: (i) the next business day
following such trade or consideration (in the case of a proposed trade by an
Investment Personnel in the same direction as the MFS client); or (ii) the
eighth calendar day thereafter (in the case of a proposed trade by an Investment
Personnel in the opposite direction from the MFS client's trade). No Portfolio
Manager shall trade in any security within at least seven calendar days before
or after an MFS client whose account he or she manages trades in such security
or such security has been considered for purchase or sale on behalf of such an
MFS client. Any profits realized on trades within these proscribed periods must
be disgorged to the affected MFS client or, in the event that the amount to be
disgorged is relatively minor or difficult to allocate, to charity. In addition,
no MFS representative shall provide any information about such transaction or
recommendation to any person other than in connection with the proper execution
of such purchase or sale for an MFS client's account.
Portfolio Managers should consider the problems inherent in purchasing
for their own account securities that are or may be suitable for a client's
portfolio. For example, a fortuitous early sale by the Manager for his or her
personal account may be criticized in hindsight if the same security later is
sold from the client's account at a lower price.
GIFTS AND TRANSFERS. A gift or transfer shall be excluded from the
preclearance requirements provided that the recipient represents in
writing that he, she, they or it has no present intention of selling
the donated security.
SHORT SALES. No Access Person shall effect a short sale in any security
held in a portfolio managed by MFS. Access Persons may engage in
transactions in options and futures, subject to special preclearance
rules applicable to certain of those transactions as described in
Section 5 below.
INITIAL PUBLIC OFFERINGS. The purchase by Access Persons of securities
(other than securities of registered open-end investment companies)
offered at fixed public offering price by underwriters or a selling
group is prohibited.3 Rights (including rights purchased to acquire an
additional full share) issued in respect of securities any Access
Persons owns may be exercised, subject to preclearance; the decision
whether or not to grant preclearance shall take into account, among
other factors, whether the investment opportunity should be reserved
for an MFS client and whether the investment opportunity is being or
was offered to the individual by virtue of his or her position with
MFS.
PRIVATE PLACEMENTS. Any acquisition by Access Persons of securities
issued in a private placement is subject to preclearance. The decision
whether or not to grant preclearance shall take into account, among
other factors, whether the investment opportunity should be reserved
for an MFS client and whether the investment opportunity is being
offered to the individual by virtue of his or her position with MFS.
Investment Personnel who have been precleared to acquire securities in
a private placement are required to disclose that investment when they
play a part in any subsequent consideration of an investment in the
issuer for an MFS client. In such circumstances, the decision to
purchase securities of the issuer for the MFS client shall be subject
to an independent review by Investment Personnel with no personal
interest in the issuer.
NOTE: Acquisitions of securities in private placements by country
clubs, yacht clubs and other similar entities need not be precleared,
but are subject to the reporting, disclosure and independent review
requirements.
PROHIBITION ON SHORT-TERM TRADING PROFITS. All Investment Personnel are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or equivalent) securities within 60 calendar
days. Any profits realized on such short-term trades must be disgorged
to the affected MFS client (if any) or, in the event that the amount to
be disgorged is relatively minor or difficult to allocate, to charity.
This restriction on short-term trading profits shall not apply to
transactions exempt from preclearance requirements, as described in
Section 8 below.
It is expected that all MFS representatives will follow these
restrictions in good faith and conduct their personal trading in keeping with
the intended purpose of this Code of Ethics. NOTE: ANY NON-ACCESS PERSON WHO
RECEIVES ANY INFORMATION ABOUT ANY PARTICULAR INVESTMENT RECOMMENDATION OR
EXECUTED OR PROPOSED TRANSACTION FOR ANY MFS CLIENT IS REQUIRED TO COMPLY WITH
ALL PRECLEARANCE AND OTHER REQUIREMENTS OF THIS CODE OF ETHICS APPLICABLE TO
ACCESS PERSONS. Any individual should feel free to take up with the Audit
Committee any case in which he or she feels inequitably burdened by these
policies. The Audit Committee may, in its sole discretion, grant appropriate
exceptions from the requirements of this Code of Ethics where warranted by
applicable facts and circumstances.
4. BENEFICIAL OWNERSHIP. The requirements of this Code of Ethics apply
to any account in which an MFS representative has (i) "direct or indirect
beneficial ownership" or (ii) any "direct or indirect influence or control."
Under applicable SEC interpretations, such "beneficial ownership" includes
accounts of a spouse, minor children and dependent relatives resident in the MFS
representative's house, as well as any other contract, relationship,
understanding or other arrangement which results in an opportunity for the MFS
representative to profit or share profits from a transaction in securities.
NOTE: The exception for accounts with respect to which an MFS
representative lacks "direct or indirect influence or control" is extremely
narrow, and should only be relied upon in cases which have been pre-approved in
writing by Stephen E. Cavan or Robert T. Burns of the Legal Department. Certain
"blind trust" arrangements approved by the Legal Department may be excluded from
the preclearance (but not the quarterly reporting) requirements of this Code of
Ethics.
5. PRECLEARANCE REQUIREMENTS. In order to facilitate compliance with
this Code of Ethics, preclearance requests must be made and approved before any
transaction may be made by an Access Person or for any other account
beneficially owned by an Access Person. A preclearance request in the form set
forth in MFS' automated Code of Ethics system, as amended from time to time,
should be completed and submitted electronically for any order for an Access
Person's own account or one described in Section 4 above, or, in the case of an
Access Person who wishes to preclear while outside of the Boston area, should
either: (i) be completed in the form attached hereto, as amended from time to
time, signed and submitted by facsimile machine, to the Compliance Department;
or (ii) be submitted by telephone call to the Compliance Department. Any
preclearance request received before 3:00 p.m. on a business day will be
responded to as soon as available on the following business day. Preclearance
requests will be reviewed by Equity and Fixed Income Department personnel who
will be kept apprised of recommendations and orders to purchase and sell
securities on behalf of MFS clients, the completion or cancellation of such
orders and the securities currently held in portfolios managed by MFS. Their
advice will be forwarded to the Compliance Department.
The preclearance process imposes significant burdens on the investment
and administrative departments within MFS. Accordingly, if the MFS Audit
Committee determines that an Access Person is making an excessive number of
preclearance requests, it reserves the right to limit such Access Person to a
certain number of preclearance requests per day or per period.
An Access Person who obtains electronic or written notice from the
Compliance Department indicating consent to an order which the Access Person
proposes to enter for his or her own account or one described in Section 4 above
may execute that order ONLY ON THE DAY WHEN SUCH NOTICE IS RECEIVED unless
otherwise stated on the notice. Such notices will always be electronic or in
writing; however, in the case of an Access Person who wishes to preclear a
transaction while outside the Boston area, the Compliance Department will also
provide oral confirmation of the content of the written notice.
Preclearance requests may be denied for any number of appropriate
reasons, most of which are confidential. For example, a preclearance request for
a security that is being considered for purchase or sale on behalf of an MFS
client may be denied for an extended period (e.g. 10 business days).
Accordingly, an Access Person is not entitled to receive any explanation or
reason if his or her preclearance request is denied, and repetitive requests for
an explanation by an Access Person will be deemed a violation of this Code of
Ethics.
SIGNIFICANT OWNERSHIP BY MFS CLIENTS. In cases where MFS clients own,
in the aggregate, 8% or more of the outstanding equity securities of an
issuer, requests by Access Persons to purchase the securities of such
issuer will be denied. Requests to preclear sales of such securities
may be granted, subject to the standard requirements set forth in
Section 3 above.
SECURITIES SUBJECT TO AUTOMATIC PURCHASES AND SALES FOR MFS CLIENTS.
Certain MFS funds and institutional accounts are managed such that the
securities held in such portfolios are regularly purchased or sold on
an equal proportionate basis so as to preserve specified percentage
weightings of such securities across such portfolios. Requests to
preclear purchases of securities held in such portfolios will be
denied. Requests to sell such securities may be granted, subject to the
standard preclearance requirements set forth in Section 3 above.
OPTIONS AND FUTURES TRANSACTIONS. Access Persons may purchase (to open)
and sell (to close) call and put options and futures contracts on
securities, subject to the preclearance and other requirements of this
Code of Ethics; however, an Access Person may neither buy a put option
on any security held in a portfolio managed by MFS nor write (sell to
open) options and futures contracts. In the case of purchased put and
call options, the preclearance of the exercise of such options as well
as their purchase and sale, is required. Preclearance of the exercise
of purchased put and call options shall be requested on the day before
the proposed exercise or, if notice to the writer of such options is
required before the proposed exercise date, the date before notice is
proposed to be given, setting forth the proposed exercise date as well
as the proposed notice date.4 Purchases and sales of options or futures
contracts to "close out" existing options or futures contracts must be
precleared.5
MFS CLOSED-END FUNDS. All transactions effected by any MFS
representative in shares of any closed-end fund for which MFS or one of
its affiliates acts as investment adviser shall be subject to
preclearance and reporting in accordance with this Code of Ethics.
Non-Access Persons are exempt from the preclearance and reporting
requirements set forth in this Code of Ethics with respect to
transactions in any other type of securities, so long as they have not
received any information about any particular investment recommendation
or executed or proposed transaction for any MFS client with respect to
such security.
6. DUPLICATE CONFIRMATION STATEMENT REQUIREMENT. In order to implement
and enforce the above policies, every Access Person shall arrange for his or her
broker to send MFS duplicate copies of all confirmation statements issued with
respect to the Access Person's transactions and all periodic statements for such
Access Person's securities accounts (or other accounts beneficially owned by
such Access Person). The Compliance Department will coordinate with brokerage
firms in order to assist Access Persons in complying with this requirement.
7. REPORTING REQUIREMENT. Each Access Person shall report on or before
the tenth day of each calendar quarter any securities transactions during the
prior quarter in accounts covered by Section 4 above. EMPLOYEES WHO FAIL TO
COMPLETE AND FILE SUCH QUARTERLY REPORTS ON A TIMELY BASIS WILL BE REPORTED TO
THE AUDIT COMMITTEE AND WILL BE SUBJECT TO SANCTIONS. Reports shall be reviewed
by the Compliance Department.
In filing the reports for accounts within these rules, please note:
(i) You must file a report for every calendar quarter even if you
had no reportable transactions in that quarter; all such reports
shall be completed and submitted in the form set forth in MFS'
automated Code of Ethics system.
(ii) Reports must show any sales, purchases or other acquisitions or
dispositions, including gifts, exercises of conversion rights
and exercises or sales of subscription rights. See Section 8
below for certain exceptions to this requirement.
(iii) Reports will be treated confidentially unless a review of
particular reports with the representative is required by the
Audit Committee.
(v) Reports are made available for review by the Boards of Trustees
of MFS investment company clients upon their request.
NOTE: Any Access Person who maintains all of his or her personal
securities accounts with one or more broker-dealer firms that send
confirmation and periodic account statements in an electronic format
approved by the Compliance Department, and who arranges for such firms
to send such statements (no less frequently than quarterly) required by
Section 6 above, shall not be required to prepare and file the
quarterly reports required by this Section 7. However, each such Access
Person shall be required to verify the accuracy and completeness of all
such statements on at least an annual basis.
8. CERTAIN EXCEPTIONS.
MUTUAL FUNDS. Transactions in shares of any open-end investment companies,
including funds for which the MFS organization is investment adviser, need not
be precleared or reported.
CLOSED-END FUNDS. Automatic reinvestments of distributions of
closed-end funds advised by MFS pursuant to dividend reinvestment plans of such
funds need only be reported. All other closed-end fund transactions must be
precleared and reported.
MFS COMMON STOCK. Transactions in shares of stock of MFS need not be
precleared or reported.
LARGE CAPITALIZATION STOCKS. Transactions in securities issued by
companies with market capitalizations of at least $5 billion generally will be
eligible for automatic preclearance (subject to certain exceptions), but must be
reported and are subject to post-trade monitoring. The Compliance Department
will maintain a list of issuers that meet this market capitalization
requirement. A preclearance request for a large capitalization company will be
denied whenever deemed appropriate.
U.S. GOVERNMENT SECURITIES. Transactions in U.S. Treasury securities
(including options and futures contracts and other derivatives with respect to
such securities) need not be precleared or reported. Option and futures
contracts on U.S. Government obligations (other than U.S. Treasury securities)
and securities indices need not be precleared but must be reported. Transactions
in U.S. Government securities offered on the basis of "non-competitive tender"
need not be precleared or reported. However, U.S. Government obligations (other
than U.S. Treasury securities) offered by "subscription" must be precleared and
reported.
OTHER EXCEPTIONS. Transactions in money market instruments and in
options on broad-based indices need not be precleared, although such
transactions must be reported. In addition, the following types of transactions
need not be precleared or reported: (i) stock dividends and stock splits; (ii)
foreign currency transactions; and (iii) transactions in real estate limited
partnership interests.
9. DISCLOSURE OF PERSONAL SECURITIES HOLDINGS. All Access Persons are
required to disclose all personal securities holdings within 10 days after
becoming an Access Person (i.e. upon commencement of employment with MFS or
transfer within MFS to an Access Person position) and thereafter on an annual
basis. Reports shall be reviewed by the Compliance Department.
10. GIFTS, ENTERTAINMENT AND FAVORS. MFS representatives must not make
business decisions that are influenced or appear to be influenced by giving or
accepting gifts, entertainment or favors. Investment Personnel are prohibited
from receiving any gift or other thing of more than de minimis value from any
person or entity that does business with or on behalf of MFS or its clients.
Invitations to an occasional meal, sporting event or other similar activity will
not be deemed to violate this restriction unless the occurrence of such events
is so frequent or lavish as to suggest an impropriety.
11. SERVICE AS A DIRECTOR. All MFS representatives are prohibited from
serving on the boards of directors of commercial business enterprises, absent
prior authorization by the Management Committee based upon a determination that
the board service would be consistent with the interests of MFS' clients. In the
relatively small number of instances in which board service is authorized, MFS
representatives serving as directors may be isolated from other MFS
representatives through "Chinese Wall" or other appropriate procedures.
12. CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS. All MFS
representatives (including Non-Access Persons) shall be required to certify
annually that (i) they have read and understand this Code of Ethics and
recognize that they are subject to its requirements applicable to them and (ii)
they have complied with all requirements of this Code of Ethics applicable to
them, and (in the case of Access Persons) have reported all personal securities
transactions (whether pursuant to quarterly reports from the Access Person or
duplicate confirmation statements and periodic reports from the Access Person's
broker-dealer) required to be reported pursuant to this Code of Ethics. This
certification shall apply to all accounts beneficially owned by an MFS
representative.
13. BOARDS OF TRUSTEES OF MFS FUNDS. Any material amendment to this
Code of Ethics shall be subject to the approval by each of the Boards of
Trustees (including a majority of the disinterested Trustees on each such Board)
of each of the registered investment companies with respect to which MFS, or any
subsidiary of MFS, acts as investment adviser. In addition, on at least an
annual basis, MFS shall provide each such Board with a written report that: (i)
describes issues that arose during the preceding year under this Code of Ethics,
including without limitation information about any material violations of this
Code of Ethics and any sanctions imposed with respect to such violations; and
(ii) certifies to each such Board that MFS has adopted procedures reasonably
necessary to prevent Access Persons from violating this Code of Ethics.
14. SANCTIONS. Any trading for an MFS representative's account which
does not evidence a good faith effort to comply with these rules will be subject
to Audit Committee review. If the Audit Committee determines that a violation of
this Code of Ethics or its intent has occurred, it may impose such sanctions as
it deems appropriate including forfeiture of any profit from a transaction
and/or termination of employment. Any violations resulting in sanctions will be
reported to the Boards of Trustees of MFS investment company clients and will be
reflected in the employee's personnel file.
APPENDIX A
CERTAIN DEFINED TERMS
As used in this Code of Ethics, the following shall terms shall have
the meanings set forth below, subject to revision from time to time by the Audit
Committee:
PORTFOLIO MANAGERS -- employees who are authorized to make investment
decisions for a mutual fund or client portfolio. Note: research
analysts are deemed to be Portfolio Managers with respect to the
entire portfolio of any fund managed collectively by a committee of
research analysts (e.g. MFS Research Fund).
INVESTMENT PERSONNEL -- all Portfolio Managers as well as research
analysts, traders and other members of the Equity Trading, Fixed Income
and Equity Research Departments.
ACCESS PERSONS -- all Portfolio Managers, Investment Personnel and
other members of the following departments or groups: Institutional
Advisors; Compliance; Fund Accounting; Investment Communications; and
Technology Services & Solutions ("TS&S") (excluding, however, TS&S
employees who are employed at Lafayette Corporate Center and certain
TS&S employees who may be specifically excluded by the Compliance or
Legal Departments); also included are members of the MFS Management
Committee, the MFS Administrative Committee and the MFS Operations
Committee. In certain instances, non-employee consultants and other
independent contractors may be deemed Access Persons and therefore be
subject to some or all of the requirements set forth in this Code of
Ethics.
NON-ACCESS PERSONS -- all employees of the following departments or
groups: Corporate Communications; Corporate Finance; Facilities
Management; Human Resources; Internal Audit (unless undergoing an audit
of an access area); Legal; MFS Service Center, Inc. (other than TS&S
employees who are employed at 500 Boylston Street); Retired Partners;
Travel and Conference Services; the International Division; MFS
International Ltd.; MFS Fund Distributors, Inc.; and MFS Retirement
Services, Inc. NOTE: ANY NON-ACCESS PERSON WHO RECEIVES ANY INFORMATION
ABOUT ANY PARTICULAR INVESTMENT RECOMMENDATION OR EXECUTED OR PROPOSED
TRANSACTION FOR ANY MFS CLIENT IS REQUIRED TO COMPLY WITH ALL
PRECLEARANCE AND OTHER REQUIREMENTS OF THIS CODE OF ETHICS APPLICABLE
TO ACCESS PERSONS. ANY NON-ACCESS PERSON WHO REGULARLY RECEIVES SUCH
INFORMATION WILL BE RECLASSIFIED AS AN ACCESS PERSON. IN ADDITION,
TRANSACTIONS IN SHARES OF THE MFS CLOSED-END FUNDS BY ALL MFS
REPRESENTATIVES ARE SUBJECT TO ALL SUCH PRECLEARANCE AND REPORTING
REQUIREMENTS (SEE SECTION 5 OF THIS CODE OF ETHICS).
PERSONAL SECURITIES TRANSACTION
PRECLEARANCE REQUEST
[ONLY FOR USE BY MFS EMPLOYEES
NOT LOCATED IN BOSTON]
DATE:_________________________, _____
All transactions must be precleared, regardless of their size, except those in
certain specific categories of securities that are exempted under the MFS Code
of Ethics. If necessary, continue on the reverse side. Please note that special
rules apply to the preclearance of option and futures transactions. If the
transaction is to be other than a straightforward sale or purchase of
securities, mark it with an asterisk and explain the nature of the transaction
on the reverse side. Describe the nature of each account in which the
transaction is to take place, i.e., personal, spouse, children, charitable
trust, etc.
<TABLE>
<CAPTION>
SALES
CUSIP/TICKER AMOUNT OR BROKER NATURE* OF
SECURITY NO. OF SHARES ACCOUNT
================================================================================
<S> <C> <C> <C>
--------------------------------------------------------------------------------
</TABLE>
PURCHASES
=========================================================================
-------------------------------------------------------------------------
I represent that I am not in possession of material non-public information
concerning the securities listed above or their issuer. If I am an MFS access
person charged with making recommendations to MFS with respect to any of the
securities listed above, I represent that I have not determined or been
requested to make a recommendation in that security except as permitted by the
MFS Code of Ethics.
---------------------------------------
Signature and Date
---------------------------------------
Name of MFS Access Person
(please print)
EXPLANATORY NOTES: This form must be filed by 3:00 p.m. on the business day
prior to the business day on which you wish to trade and covers all accounts in
which you have an interest, direct or indirect. This includes any account in
which you have "beneficial ownership" (unless you have no influence or control
over it) and non-client accounts over which you act in an advisory or
supervisory capacity. No trade can be effected until approval from the
Compliance Department has been obtained.
- -----------------------
* Check if you wish to claim that the reporting of the account or the securities
transaction shall not be construed as an admission that you have any direct or
indirect beneficial ownership in such account or securities.
- --------
1 Employees of MFS Institutional Advisors, Inc., MFS Fund Distributors,
Inc., MFS Retirement Services, Inc., MFS International Ltd., MFS International
(U.K.) Ltd., MFS Service Center, Inc., Vertex Investment Management Inc. and MFS
Heritage Trust Company also are covered by this Code of Ethics.
2 A security is deemed to have been "considered for purchase or sale"
when a recommendation to purchase or sell such security has been made and
communicated to a portfolio manager and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
3 The reason for this rule is that it precludes any possibility that
Access Persons might use MFS' clients' market stature as a means of obtaining
for themselves "hot" issues which otherwise might not be offered to them. In
addition, this rule eliminates the possibility that underwriters and selling
group members might seek by this means to gain favor with individuals in order
to obtain preferences from MFS.
4 Access Persons should note that this requirement may result in their
not being allowed to exercise an option purchased by them on the exercise date
they desire, and in the case of a "European" option on the only date on which
exercise is permitted by the terms of the option.
5 Access Persons should note that as a result of this requirement, they
may not be able to obtain preclearance consent to close out an option or futures
contract before the settlement date. If such an option or futures contract is
automatically closed out, the gain, if any, on such transaction will be
disgorged in the manner described in Section 3 above.
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
This Code of Ethics expresses the policy and procedures of our firm, and is
enforced to insure that no one is taking advantage of their position, or even
giving, the appearance of placing their own interests above that of the accounts
and shareholders we are serving. In this regard, Section 204A of the Investment
Advisers Act of 1940 ("Act") requires investment advisers to establish,
maintain, and enforce policies designed to prevent the misuse of nonpublic
information by the investment adviser and its associated persons. Moreover,
Section 206 of the Act, among other things, prohibits investment advisers from
engaging in any device, scheme, or artifice to defraud any existing or
prospective client.
In compliance with Sections 204A and 206 of the Act, this Code of Ethics
contains provisions reasonably necessary to eliminate the possibility of conduct
constituting the misuse of nonpublic information and/or fraud against any
existing or prospective client. As more specifically detailed below, this Code
prohibits all associated persons from trading in any securities listed on the
Restricted Trading List without prior written approval. The following
definitions apply as used herein:
The term "account" shall mean any advisory client of Select Advisors, Inc. or
its affiliated companies or subsidiaries and any mutual funds advised by Select
Advisors.
The term "Security" means any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest, option or participation in
any profit-sharing agreement, collateral-trust certificate, pre-organization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, or, in general, any
interest or instrument commonly known as a "security", or any certificate of
interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or purchase, any of the
foregoing; provided, however, that "security" shall not mean securities issued
by the government of the United States, bankers' acceptances, bank certificates
of deposit, commercial paper, shares of registered open-end investment
companies, variable annuity contracts and variable life insurance policies.
A security is "being considered for purchase or sale" when a recommendation to
purchase or sell such security has been made to an Investment Officer and the
Investment Officer is giving such recommendation serious consideration.
"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 and the rules and regulations thereunder. For a
further explanation of "beneficial ownership", see Exhibit A.
"Associated person" means any officer, director, advisor or employee of Select
Advisors, Inc. or its affiliates. Officers, directors and employees of London
Pacific Group Limited, its affiliates are not considered associated persons for
purposes of this Code of Ethics.
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
Affiliated companies include: Select Advisors, Inc., Select Capital Corp.,
Select Benefit Consultants, Inc., Capital Select Insurance or its affiliates or
subsidiaries.
PERSONAL SECURITIES ACCOUNTS OF ASSOCIATED PERSONS
"Associated person" as used herein, refers to any officer, director, advisor or
employee of Select Advisors, Inc. or its affiliates.
1. All associated persons must report to the designated Compliance Officer,
any securities transactions in which such associated person has, or by
reason of such transaction acquires, any direct or indirect beneficial
ownership in securities.
Every associated person must direct his/her broker(s) to transmit to the
Compliance Officer a duplicate of confirmations of all transactions, and
copies of the statements of the associated person's transactions, and
copies of the statements of the associated person's brokerage accounts,
whether existing currently or to be established in the future. The
transaction reports and/or duplicates should be addressed "Personal and
Confidential".
When an associated person opens a brokerage account, or whenever a person
with an existing brokerage account becomes an associated person, a letter
in the form annexed hereto as Exhibit E will be sent to the broker-dealer
involved, authorizing him or her to maintain the account. Information with
respect to brokerage accounts should be included on Exhibit D and all
changes must be reported to the Compliance Officer in writing upon
occurrence.
For each brokerage account that an associated person opens, the associated
person must give instructions to the broker to send copies of all
confirmations and monthly statements to:
Select Advisors, Inc.
Compliance Officer
-Personal and Confidential-
1755 Creekside Oaks Drive, Suite 290
Sacramento, CA 95833
2. In addition, every associated person proposing to purchase or sell,
directly or indirectly, any security in which he or she has, or by reason
of such transaction would acquire, any direct or indirect beneficial
ownership, must, except as provided in paragraph 5 below, notify and
receive prior written approval from Compliance Officer for securities
listed on the firm's Restricted Trading List.
3. Every associated person, in requesting approval for a securities
transaction in securities listed on the firm's Restricted Trading List, or
approval of any securities transactions by associated persons that do not
have access to the Restricted Trading List, shall complete a Personal
Investment Report in the form annexed hereto as Exhibit C to the Compliance
Officer.
4. Approval from Compliance Officer for a proposed purchase or sale will
normally be forthcoming whenever:
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
a) within the most recent 15 days, the security in question (i) has not
been purchased or sold by an Account or (ii) has not been included on
the Buy or Sell Lists or (iii) has not been under consideration for
addition to such Lists. The date of addition to such Lists is indicated
adjacent to each security on the List. However, if recommendation
activity is continuing, the trading prohibition stays effective for 15
days after the activity is complete;
b) such proposed purchase or sale would be only remotely potentially
harmful to an account because it would be very unlikely to affect a
highly institutional market. (Approval under this provision will not
generally be available when the accounts involved are mutual funds
advised by Select Advisors, Inc., affiliates or subsidiaries); or
c) the security in question is clearly not related economically to a
security to be purchased, sold or held on an account.
5. The prohibition in paragraph 2 above and paragraph 9 below, against
purchases or sales absent prior approval, shall not apply to:
a) Purchases or sales effected in any account over which the
associated person does not have direct or indirect influence or
control;
b) Transactions which are non-volitional on the part of the
associated person;
c) Purchases which are part of an automatic dividend reinvestment
plan;
d) Purchases effected upon the exercise or rights issued by an
issuer pro rata to all holders of a class or its securities, to
the extent such rights were acquired from such issuer, and sales
of such rights so acquired;
e) Purchases or sales of repurchase agreements; and
f) Purchases or sales of securities which are not eligible for
purchase or sale by an account.
6. The purchase of new issues or privately offered stock usually involves
questions of regulations or rules, conflicts of interest or personal
advantage at the expense of an account and, therefore, participation in
such offerings is prohibited.
7. All personal matters discussed with Compliance Officer and all
confirmations, account statements and Personal Investments shall be kept in
confidence but, of course, will be available for inspection by the Boards
of Directors of Select Advisors, Inc. or Select Capital Corporation and by
the regulatory agencies.
8. Any violations of this Code of Ethics will be reported by Compliance
Officer to the Board of Directors having jurisdiction over the account.
9. If it is determined by Compliance Officer that a violation of this Code
of Ethics has occurred and that the person violating this Code of Ethics
has purchased or sold a security at a more advantageous price than that
obtained by one of the accounts, such person shall be required to
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
offer to sell to or purchase from the account, as the case may be, such
security at the more advantageous price to the account. If this cannot be
consummated, then Compliance Officer shall take such other course of action
as he/she may deem appropriate. With respect to any violation of this Code
of Ethics, Compliance Officer may take any preventive, remedial, or other
action which he/she may deem appropriate. In determining whether or not
there has been, or may be, a conflict of interest between the accounts and
any person subject to this Code of Ethics, Compliance Officer shall
consider all of the relevant facts and circumstances. Sanctions under this
Code may include: termination of the associated person, resignation of the
director, or disgorgement of any profits received from a securities
transaction done in violation of this Code.
SELECT ADVISORS, INC. AND ITS CLIENTS
"Associated person" as used herein refers to any officer, Advisor or employee of
Select Advisors, Inc. or its affiliates.
1. Every associated person, making any investment recommendation or taking
any investment action, shall exercise diligence and thoroughness, and shall
have a reasonable and adequate basis for any such recommendations or
action. No associated person shall undertake independent practice for
compensation in competition with Select Advisors, Inc.
2. The associated persons of Select Advisors, Inc., its affiliates shall
conduct themselves in a manner consistent with the highest ethical
standards. They shall avoid any action, whether for personal profit or
otherwise, that results in an actual or potential conflict of interest, or
the appearance of a conflict of interest, which maybe otherwise detrimental
to the interest of Select Advisors, Inc.
3. An associated person having discretion as to the selection of
broker-dealers to execute securities transactions for a Select Advisors'
client shall select broker-dealers solely on the basis of the services
provided directly or indirectly by such brokers to the clients advised by
Select Advisors, Inc. An associated person shall not, directly or
indirectly, receive a fee or commission from any source in connection with
the sale or purchase of any security for a Select Advisors client without
prior approval of the Compliance Officer.
4. All associated persons shall take all steps reasonably necessary to
provide that all brokerage orders for the purchase and sale of securities
for the account of the client shall be kept confidential until the
information is reported to the Securities and Exchange Commission, the
clients or shareholders in the normal course of business.
5. All associated persons shall comply strictly with procedures to ensure
compliance with applicable Federal and State laws and regulations of
Governmental agencies and self-regulatory organizations. The associated
persons shall not knowingly participate in, assist, or condone
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
any acts in violation of any statute or regulations governing securities
matters, nor any act which would violate any provision of this Code of
Ethics, or any rules adopted hereunder.
6. Each associated person having supervisory responsibility shall exercise
reasonable supervision over associated persons subject to his or her
control, with a view to preventing any violation by such persons of
applicable statutes or regulation, and the provision of the Code of Ethics.
7. Any associated person encountering evidence that acts in violation of
applicable statutes or regulations or provisions of the Code of Ethics have
occurred shall report such evidence to Compliance Officer.
8. Conflicts of interest generally result from a situation in which an
individual has personal interests in a matter that is or may be competitive
with his/her responsibilities to other persons or entities or where an
individual has or may have competing obligations or responsibilities to two
or more persons or entities. In the case of the relationship between a
client on the one hand, and Select Advisors, Inc., its associated persons
and their respective affiliates, on the other hand, such conflicts may
result from the purchase or sale of securities for the account of a client
and for the personal account of the individual involved or the account of
any affiliated person or from the purchase or sale for the account of the
client of securities in the purchase or sale for the account of the client
of securities in which an associated person of Select Advisors, Inc. or
affiliates has an interest. In these cases, all potential or actual
conflicts must be disclosed and the first preference and priority must be
to avoid such conflicts of interest whenever possible, and where they
unavoidably occur, to resolve them in a manner not disadvantageous to the
client.
9. In order to ensure against conflicts of interest, no associated person
shall engage in a securities transaction presenting a conflict of interest
or potential conflict of interest without obtaining prior written approval
from the Compliance Officer. Such transactions will not be authorized by
the Compliance Officer unless it is determined, in his/her discretion, that
such transactions are not disadvantageous to the clients of Select
Advisors, Inc. or its Affiliates.
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
"Beneficial ownership of a security" includes securities held by:
(a) Your spouse, minor children or relatives who share the same house with
you; (b) an estate for your benefit; (c) a trust, of which (i) you are a
trustee or you or members of your immediate family have a vested interest
in the income or corpus of the trust, or (ii) you own a vested beneficial
interest, or (iii) you are the settlor and you have the power to revoke the
trust without the consent of all the beneficiaries; (d) a partnership in
which you are a partner; (e) a corporation (other than with respect to
treasury shares of the corporation) of which you are an officer, director
or 10% stockholder; (f) any other person if, by reason of contract,
understanding, relationship, agreement or other arrangement, you obtain
therefrom benefits substantially equivalent to those of ownership; or (g)
your spouse or minor children or any other person, if, even though you do
not obtain therefrom the above mentioned benefits of ownership, you can
vest or revest title in yourself at once or at some future time.
A beneficial owner of a security also includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship
or otherwise, has or shares voting power and/or investment power with
respect to such security. Voting power includes the power to vote, or to
direct the voting of such security, and investment power includes the power
to dispose, or to direct the disposition of such security. A person is the
beneficial owner of a security if he or she has the right to acquire
beneficial ownership of such security at any time within sixty days.
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
I hereby acknowledge receipt of the Code of Ethics of Select Advisor's Inc. and
Affiliated Companies.
I further acknowledge intention to comply, in all respects, with both the spirit
and letter of this Code.
___________________________
Signature
___________________________
Print Name
___________________________
Date
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
PERSONAL INVESTMENT REPORT
CODE OF ETHICS
To: Compliance Officer
From:
Date:
Name of Security: # of Shares or $ Amount
Broker/Dealer:
Purchase: Sale
Market Order: GTC (Date)
Comments:
(Signature)
Comments:
Approved by:
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
TO: Associated Persons of Select Advisors, Inc./Select Capital Corporation
FROM: Compliance Officer
SUBJECT: Brokerage Account Update
Please complete this questionnaire and return to Compliance Officer promptly.
[ ] I do not have a brokerage account at any broker/dealer
[ ]The following is a list of all the brokerage accounts that are maintained
for me or in which I have a "beneficial ownership":
ACCOUNT
BROKER/DEALER ADDRESS ACCOUNT # REGISTRATION
Associated person's Name (Print)
Associated person's Signature
Date
Beneficial ownership is defined in accordance with the rules of the Securities
and Exchange Commission and means generally the power to vote or dispose of
shares, regardless of any economic interest therein.
SELECT ADVISORS, INC./SELECT CAPITAL CORPORATION
Dear :
We have been informed that , an associated person of Select Advisor's Inc. or
its affiliated companies or subsidiaries, has opened an account with you.
This letter will serve to authorize you to maintain this account.
Please send duplicate copies of all confirmations and month-end statements to
the undersigned marked:
Compliance Officer
Personal & Confidential
FAO: ( client's name)
1755 Creekside Oaks Drive, Suite 290
Sacramento, CA 95833
Sincerely,
Compliance Officer
