As filed with the Securities and Exchange Commission on April 9, 2007
1933 Act File No. 333-
1940 Act File No. 811-22044
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. | |
POST-EFFECTIVE AMENDMENT NO. | |
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. | |
(CHECK APPROPRIATE BOX OR BOXES)
EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-8260
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ALAN R. DYNNER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
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NAME AND ADDRESS (OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
MARK P. GOSHKO, ESQ.
KIRKPATRICK & LOCKHART PRESTON GATES
ELLIS LLP
STATE STREET FINANCIAL CENTER
ONE LINCOLN STREET
BOSTON, MASSACHUSETTS 02111
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. | |
It is proposed that this filing will become effective (check appropriate
box):
| | when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Common Shares of Beneficial Interest, $0.01 par value 50,000 $20.00 $1,000,000 $30.70 |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this Prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 9, 2007
INVESTMENT OBJECTIVES. Eaton Vance Risk-Managed Diversified Equity Income Fund (the "Fund") is a newly organized, diversified, closed-end management investment company. The Fund's primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. Relative to other equity income funds, the Fund seeks to provide less volatile returns and reduced exposure to loss of value during stock market declines. In pursuing its investment objectives, the Fund will evaluate returns on an after-tax basis, seeking to minimize and defer shareholder federal income taxes.
PORTFOLIO MANAGEMENT STRATEGIES. Under normal market conditions, the Fund's investment program will consist primarily of owning a diversified portfolio of common stocks and employing a variety of options strategies. The Fund will seek to earn high levels of tax-advantaged income and gains by (1) investing in stocks that pay dividends that qualify for favorable federal income tax treatment, (2) writing (selling) put options on individual stocks deemed attractive for purchase, and (3) writing (selling) stock index call options with respect to a portion of its common stock portfolio value. To reduce the Fund's risk of loss due to a decline in the value of the general equity market, the Fund will purchase index put options with respect to a substantial portion of the value of its common stock portfolio. Options on broad-based stock indices generally qualify for treatment as "section 1256 contracts," as defined in the Internal Revenue Code of 1986, as amended, on which capital gains and losses are generally treated as 60% long-term and 40% short-term, regardless of holding period. (CONTINUED ON INSIDE FRONT COVER)
This Prospectus sets forth information you should know before investing in the shares of the Fund.
BECAUSE THE FUND IS NEWLY ORGANIZED, ITS COMMON SHARES ("COMMON SHARES") HAVE NO HISTORY OF PUBLIC TRADING. THE SHARES OF CLOSED-END INVESTMENT COMPANIES OFTEN TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE, WHICH MAY INCREASE INVESTORS' RISK OF LOSS.
INVESTING IN THE FUND'S COMMON SHARES INVOLVES CERTAIN RISKS. SEE "INVESTMENT OBJECTIVES, POLICIES AND RISKS-RISK CONSIDERATION" BEGINNING ON PAGE.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
PER SHARE TOTAL(1)(2)
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Public Offering Price $20.00 $
Sales Load $0.90 $
Estimated Offering Expenses (1) (2) $0.04 $
Proceeds to the Fund $19.06 $
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(1) In addition to the sales load, the Fund will pay offering costs of up to $0.04 per share, estimated to total $ , which will reduce the "Proceeds to the Fund" (above). Eaton Vance or an affiliate has agreed to pay the amount by which the aggregate of all of the Fund's offering costs (other than sales loads) exceeds $0.04 per share. Eaton Vance or an affiliate has agreed to reimburse all organizational costs.
(2) The underwriters may also purchase up to an additional Common Shares at the public offering price, less the sales load, within 45 days from the date of this Prospectus to cover over-allotments, if any. If such option is exercised in full, the total public offering price, sales load, estimated offering expenses and proceeds to the Fund will be $ , $ , $ , and $ , respectively.
(3) Eaton Vance has agreed to pay from its own assets a structuring fee to each of [ ], [ ] and [ ] [and additional compensation to ]. [Eaton Vance (not the Fund) may pay certain qualifying underwriters a marketing and structuring fee, additional compensation, or a sales incentive fee in connection with the offering.] See "Underwriting." Eaton Vance (not the Fund) will pay for services provided pursuant to an agreement between and Eaton Vance and any qualifying underwriter. See "Underwriting." The total compensation received by the underwriters will not exceed 9.0% of the total public offering price of the Common Shares offered hereby.
The underwriters expect to deliver the Common Shares to purchasers on or about , 2007
THE DATE OF THIS PROSPECTUS IS [ ], 2007
(continued from previous page)
INVESTMENT ADVISER AND SUB-ADVISER. The Fund's investment adviser is Eaton Vance Management ("Eaton Vance" or the "Adviser"). As of December 31, 2006, Eaton Vance and its subsidiaries managed approximately $133.1 billion on behalf of funds, institutional clients and individuals, including approximately $83.7 billion in equity assets. Eaton Vance has engaged Rampart Investment Management Company, Inc. ("Rampart" or the "Sub-Adviser") as a sub-adviser of the Fund. Rampart, founded in 1983, specializes in options management and trading for institutional, high net worth and investment company clients. Rampart managed approximately $7.5 billion in assets as of December 31, 2006. Eaton Vance will be responsible for the Fund's overall investment program, structuring and managing the Fund's common stock portfolio, including tax-loss harvesting and other tax-management techniques, providing consultation to the Sub-Adviser and supervising the performance of the Sub-Adviser. Rampart will be responsible for providing advice on and execution of the Fund's options strategy.
PORTFOLIO CONTENTS. Under normal market conditions, the Fund will invest at least 80% of its total assets in a combination of (1) dividend-paying common stocks, (2) stocks and other liquid assets the value of which is subject to written put options on individual stocks, and (3) common stocks the value of which is subject to written index call options. In addition, under normal market conditions, the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks. The Fund will invest primarily in common stocks of United States issuers, but may invest up to 40% of its assets in common stocks of foreign issuers, including up to 5% of its total assets in securities of issuers located in emerging markets. The Fund may not invest 25% or more of its total assets in the securities of issuers in any single industry. The Fund will emphasize investments in stocks that pay dividends that qualify for federal income taxation at rates applicable to long- term capital gains. The Fund will emphasize writing put options on individual stocks that the Adviser believes are attractive for purchase at prices at or above the exercise price of the put options written.
The Fund generally intends to buy put options and write call options on one or more broad-based stock indices that the Adviser believes collectively approximate the characteristics of its common stock portfolio (or that portion of its portfolio against which options are purchased and written). The Fund intends initially to buy put options and write call options primarily on the S&P 500 Composite Stock Price Index{reg-trade-mark} ("S&P 500"), and may also initially buy put options and write call options on other domestic and foreign stock indices. Over time, the indices on which the Fund buys put options and writes call options may vary as a result of changes in the availability and liquidity of various listed index options, changes in stock portfolio holdings, the Adviser's evaluation of equity market conditions and other factors. Initially, the Fund expects to purchase index put options with respect to 100% of the value of its common stock portfolio. The buying of index put options will reduce the Fund's cash available for distribution from other sources, including from selling put options on individual stocks and index call options
Writing put options on individual stocks involves a tradeoff between the options premiums received and exposure to declines in value of the stocks against which put options are written. Writing index call options involves a tradeoff between the option premiums received and reduced participation in potential future stock price appreciation. Purchasing index put options is a risk management technique that involves a tradeoff between the options premiums paid and a potential increase in value of the options positions in a stock market decline. To the extent that the individual stocks held by the Fund and/or the stocks subject to written put options decrease in value more than the index or indices subject to purchased put options, the strategy of purchasing index put options will provide only limited or no protection with respect to the value of the Fund's assets and may result in worse performance for the Fund than if it did not buy index put options.
Due to tax considerations, the Fund intends to limit the overlap between its stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis. The Fund's stock holdings will normally include stocks not included in the indices on which it purchases put options and writes call options
THE FUND SEEKS TO GENERATE CURRENT EARNINGS FROM DIVIDENDS ON STOCKS HELD AND FROM OPTION PREMIUMS. The Fund intends to employ a variety of tax-management techniques and strategies as described herein, seeking in part to minimize the Fund's ordinary income (other than qualified dividend income) and net realized short-term capital gains in excess of net realized long-term capital losses and Fund expenses. To the extent that the Fund's ordinary income (other than qualified dividend income) and net realized short-term gains over net realized long-term losses exceed Fund expenses, dividends with respect to such amounts when paid to Common Shareholders (as defined below) will be taxable as ordinary income.
EXCHANGE LISTING. The Fund intends to apply for listing of it Common Shares on the New York Stock Exchange under the symbol "[ ]." Because the Fund is newly organized, its Common Shares have no history of public trading. The shares of closed-end management investment companies frequently trade at a discount from their net asset value. The returns earned by holders of the Fund's Common Shares ("Common Shareholders") who purchase their shares in this offering and sell their shares below net asset value will be reduced.
Eaton Vance believes that the Fund may be appropriate for investors seeking an investment vehicle that combines regular distributions and the potential for capital appreciation. The Fund may be particularly well suited for taxpaying investors who can benefit from the minimization and deferral of federal income taxes that the Fund seeks to provide.
The Fund's net asset value and distribution rate will vary and may be affected by numerous factors, including changes in stock prices, dividend rates, option premiums and other factors. An investment in the Fund may not be appropriate for all investors. There is no assurance that the Fund will achieve its investment objectives.
Please read and retain this Prospectus for future reference. A Statement of Additional Information dated 2007 has been filed with the Securities and Exchange Commission and can be obtained without charge by calling 1-800-225-6265 or by writing to the Fund. A table of contents to the Statement of Additional Information is located at page [ ] of this Prospectus. This Prospectus incorporates by reference the entire Statement of Additional Information. The Statement of Additional Information is available along with shareholder reports and other Fund-related materials at the Securities and Exchange Commission's public reference room in Washington, DC (call 1-202-942- 8090 for information on the operation of the reference room), from the EDGAR database on the Securities and Exchange Commission's internet site (http://www.sec.gov), upon payment of copying fees by writing to the Securities and Exchange Commission's public reference section, Washington, DC 20549-0102; or by electronic mail at publicinfo@sec.gov. The Fund's address is The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109 and its telephone number is 1-800-225-6265.
The Fund's shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The Fund is not sponsored, endorsed, sold or promoted by any index sponsor. No index sponsor has passed on the legality or suitability of, or the accuracy or adequacy of, descriptions and disclosures relating to the Fund. No index sponsor has made any representation or warranty, express or implied, to the Common Shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly, or the ability of any index to track general stock market performance. The indices are determined, composed and calculated by the respective index sponsors without regard to the Fund or its use of the indices for option writing. The index sponsors have no obligation to take the needs of the Fund or its Common Shareholders into consideration in determining, composing or calculating the indices. No index sponsor is responsible for or has participated in the determination of the timing of, price of, or number of Common Shares of the Fund to be issued. No index sponsor has any liability in connection with the management, administration, marketing or trading of the Fund.
THE INDEX SPONSORS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE INDICES OR ANY DATA INCLUDED THEREIN. THE INDEX SPONSORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, THE COMMON SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES IN THE FUND'S OPTIONS WRITING PROGRAM. IN PUBLISHING THE INDICES, THE INDEX SPONSORS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL AN INDEX SPONSOR HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
You should rely only on the information contained or incorporated by reference in this Prospectus. The Fund has not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Fund is not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The Fund will notify shareholders promptly of any material change to this Prospectus during the period the Fund is required to deliver the Prospectus. The Fund's business, financial condition and results of operations may have changed since the date of this Prospectus.
TABLE OF CONTENTS
Prospectus Summary.......................................................... Summary of Fund Expenses.................................................... The Fund.................................................................... Use of Proceeds............................................................. Investment Objectives and Policies.......................................... Risk Factors................................................................ Management of the Fund...................................................... Distributions............................................................... Federal Income Tax Matters.................................................. Dividend Reinvestment Plan.................................................. Description of Capital Structure............................................ Underwriting................................................................ Custodian and Transfer Agent................................................ Legal Opinions.............................................................. Reports to Shareholders..................................................... Independent Registered Public Accounting Firm............................... Additional Information...................................................... Table of Contents for the Statement of Additional Information............... The Fund's Privacy Policy...................................................
Until , 2007 (25 days after the date of this Prospectus), all dealers that buy, sell or trade the Common Shares, whether or not participating in this offering, may be required to deliver a Prospectus. This requirement is in addition to the dealers' obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information that you should consider before investing in the Eaton Vance Risk-Managed Diversified Equity Income Fund's common shares ("Common Shares"). You should review the more detailed information contained in this Prospectus and in the Statement of Additional Information, especially the information set forth under the heading "Investment Objectives and Policies" and "Risk Factors."
THE FUND.................................. Eaton Vance Risk- Managed Diversified Equity
Income Fund (the "Fund") is a newly organized,
diversified, closed- end management investment
company. The Fund seeks to provide current
income and gains, with a secondary objective of
capital appreciation. Investments are based on
Eaton Vance Management's ("Eaton Vance" or the
"Adviser") and Rampart Investment Management
Company, Inc.'s ("Rampart" or the "Sub-Adviser")
internal research and management. An investment
in the Fund may not be appropriate for all
investors.
THE OFFERING.............................. The Fund is offering Common Shares of beneficial
interest, par value $.01 per share, through a
group of underwriters (the "Underwriters") led
by [ ], and . The Common Shares of beneficial
interest are called "Common Shares." The
Underwriters have been granted an option by the
Fund to purchase up to an additional Common
Shares solely to cover orders in excess of
Common Shares. The initial public offering price
is $20.00 per Common Share. The minimum purchase
in this offering is 100 Common Shares ($2,000).
See "Underwriting." Eaton Vance or an affiliate
has agreed to (i) reimburse all organizational
costs of the Fund and (ii) pay all offering
costs (other than sales load) that exceed $.04
per Common Share.
INVESTMENT OBJECTIVES AND STRATEGIES...... The Fund's primary investment objective is to
provide current income and gains, with a
secondary objective of capital appreciation.
Relative to other equity income funds, the Fund
seeks to provide less volatile returns and
reduced exposure to loss of value during stock
market declines. In pursuing its investment
objectives, the Fund will evaluate returns on an
after- tax basis, seeking to minimize and defer
shareholder federal income taxes. There can be
no assurance that the Fund will achieve its
investment objectives.
Under normal market conditions, the Fund's
investment program will consist primarily of
owning a diversified portfolio of common stocks
and employing a variety of options strategies.
The Fund will seek to earn high levels of
tax-advantaged income and gains by (1) investing
in stocks that pay dividends that qualify for
favorable federal income tax treatment, (2)
writing (selling) put options on individual
stocks, and (3) writing (selling) stock index
call options with respect to a portion of its
common stock portfolio value. To reduce the
Fund's risk of loss due to a decline in the
value of the general equity market, the Fund
will purchase index put options with respect to
a substantial portion of the value of its common
stock portfolio. Options on broad-based stock
indices generally qualify for treatment as
"section 1256 contracts" as defined in the
Internal Revenue Code of 1986, as amended (the
"Code"), on which capital gains and losses are
generally treated as 60% long- term and 40%
short- term, regardless of holding period.
Under normal market conditions, the Fund will
invest at least 80% of its total assets in a
combination of (1) dividend-paying common
stocks, (2) stocks and other liquid assets the
value of which is subject to written put options
on individual stocks, and (3) common stocks the
value of which is subject to written index call
options. In addition, under normal market
conditions, the Fund will purchase index put
options with respect to at least 80% of the
value of its investments in common stocks. The
Fund will emphasize investments in stocks that
pay dividends that qualify for federal income
taxation at rates applicable to long- term
capital gains. The Fund will emphasize writing
put options on individual stocks that the
Adviser believes are attractive for purchase at
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prices at or above the exercise of the put
options written.
The Fund will invest primarily in common stocks
of United States issuers. The Fund may invest up
to 40% of its total assets in securities of
foreign issuers, including securities evidenced
by American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") and European
Depositary Receipts ("EDRs"). The Fund may
invest up to 5% of its total assets in
securities of emerging market issuers. The Fund
expects that its assets will normally be
invested across a broad range of industries and
market sectors. The Fund may not invest 25% or
more of its total assets in the securities of
issuers in any single industry. The Fund may
invest a portion of its assets in stocks of mid-
capitalization companies. Eaton Vance generally
considers mid-capitalization companies to be
those companies having market capitalizations
within the range of capitalizations for the S&P
MidCap 400 Index (the "S&P MidCap 400"). As of
January 31, 2007, the median market
capitalization of companies in the S&P MidCap
400 was approximately $2.57 billion.
The Fund generally intends to buy put options
and write call options on one or more
broad-based stock indices that the Adviser
believes collectively approximate the
characteristics of its common stock portfolio
(or that portion of its portfolio against which
options are purchased and written). The Fund
intends initially to buy put options and write
call options primarily on the S&P 500 Composite
Stock Price Index{reg-trade-mark} ("S&P 500"),
and may also initially buy put options and write
call options on other domestic and foreign stock
indices. Over time, the indices on which the
Fund buys put options and writes call options
may vary as a result of changes in the
availability and liquidity of various listed
index options, changes in stock portfolio
holdings, the Adviser's evaluation of equity
market conditions and other factors.
Under normal market circumstances, the Fund will
purchase index put options with respect to at
least 80% of the value of its investments in
common stocks to reduce the Fund's risk of loss
due to a decline in the value of the general
equity market. Initially, the Fund expects to
purchase index put options with respect to 100%
of the value of its common stock portfolio.
Writing put options on individual stocks
involves a tradeoff between the options premiums
received and exposure to declines in value of
the stocks against which put options are
written. Writing index call options involves a
tradeoff between the option premiums received
and reduced participation in potential future
stock price appreciation. Purchasing index put
options is a risk management technique that
involves a tradeoff between the options premiums
paid and a potential increase in value of the
options positions in a stock market decline. To
the extent that the individual stocks held by
the Fund and/or the stocks subject to written
put options decrease in value more than the
index or indices subject to purchased put
options, the strategy of purchasing index put
options will provide only limited or no
protection with respect to the value of the
Fund's assets and may result in worse
performance for the Fund than if it did not buy
index put options. In implementing this
strategy, the Fund generally will use premiums
earned on writing put options on individual
stocks and on selling index call options to
purchase index put options. Accordingly, the
buying of index put options will reduce the
Fund's earnings available for distribution from
other sources, including from selling index call
options and put options on individual stocks.
As the seller of put options on individual
stocks the Fund will seek to benefit from the
receipt of option premiums. If the price of the
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stock closes above the exercise price on the option valuation date the Fund retains the premium received and has no obligation to the purchaser. If the price of the stock closes at or below the exercise price on the options valuation date, the Fund may be obligated to purchase the stock at the exercise price. As the seller of index call options, the Fund will receive cash (the premiums) from option purchasers. The purchaser of an index call option has the right to any appreciation in the value of the applicable index over a fixed price (the exercise price) as of a specified date in the future (the option valuation date). Generally, the Fund intends to sell call options that are slightly "out-of-the- money" (i.e., the exercise price generally will be slightly above the current level of the applicable index when the option is sold). The Fund may also sell index options that are more substantially "out-of-the-money." Such options that are more substantially "out-of-the-money" provide greater potential for the Fund to realize capital appreciation, but generally would pay a lower premium than options that are slightly "out-of-the- money." In writing index options, the Fund will, in effect, sell the potential appreciation in the value of the applicable index above the exercise price in exchange for the option premium received. If, at expiration, an index call option sold by the Fund is exercised, the Fund will pay the purchaser the difference between the cash value of the applicable index and the exercise price of the option. The premium, the exercise price and the market value of the applicable index will determine the gain or loss realized by the Fund as the seller of the index call option. As the purchaser of an index put option, the Fund will seek to benefit from a decline in the market prices of the underlying index. The Fund will pay a premium to the seller of the option for the right to receive payments of cash to the extent that the value of the applicable index declines below a fixed price (the exercise price) as of a specified date in the future (the option valuation date). If the index price is above the exercise price of the option as of the option valuation date, the options expires worthless and the Fund will not be able to recover the option premium paid to the seller. The Fund's policies that, under normal market conditions, the Fund will invest at least 80% of its total assets in a combination of (1) dividend-paying common stocks, (2) stocks and other liquid assets the value of which is subject to written put options on individual stocks, and (3) common stocks the value of which is subject to written index call options and that the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks are non- fundamental policies that may be changed by the Fund's Board of Trustees (the "Board") without Common Shareholder approval following the provision of 60 days' prior written notice to Common Shareholders. In implementing the Fund's investment strategy, the Adviser and Sub-Adviser intend to employ a variety of techniques and strategies designed to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund as described below. The S&P 500 is an unmanaged index of 500 stocks maintained and published by Standard & Poor's that is market-capitalization weighted and generally representative of the performance of larger stocks traded in the United States. The Fund is not sponsored, endorsed, sold or promoted by any index sponsor. No index sponsor has passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to the Fund. No index sponsor has made any representation or warranty, express or implied, to the Common Shareholders of the Fund or any member of the public regarding the advisability of investing in |
securities generally or in the Fund
particularly, or the ability of any index to
track general stock market performance. The
indices are determined, composed and calculated
by the respective index sponsors without regard
to the Fund or its use of the indices for option
writing. The index sponsors have no obligation
to take the needs of the Fund or its Common
Shareholders into consideration in determining,
composing or calculating the indices. No index
sponsor is responsible for or has participated
in the determination of the timing of, price of,
or number of Common Shares of the Fund to be
issued. No index sponsor has any liability in
connection with the management, administration,
marketing or trading of the Fund.
THE INDEX SPONSORS DO NOT GUARANTEE THE ACCURACY
AND/OR UNINTERRUPTED CALCULATION OF THE INDICES
OR ANY DATA INCLUDED THEREIN. THE INDEX SPONSORS
MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE FUND, THE COMMON
SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE INDICES IN THE FUND'S OPTIONS
WRITING PROGRAM. IN PUBLISHING THE INDICES, THE
INDEX SPONSORS MAKE NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIM ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
AN INDEX SPONSOR HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE,
INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT SELECTION STRATEGIES.......... Eaton Vance will be responsible for the Fund's
overall investment program, structuring and
managing the Fund's common stock portfolio,
including tax-loss harvesting and other tax-
management techniques, providing consultation to
the Sub-Adviser and supervising the performance
of the Sub-Adviser. The Fund's investments will
be actively managed, and securities may be
bought or sold on a daily basis. Rampart will be
responsible for providing advice on and
execution of the Fund's options strategy.
A team of Eaton Vance investment professionals
is responsible for the overall management of the
Fund's investments, including decisions about
asset allocation and securities selection. The
portfolio managers utilize information provided
by, and the expertise of, the Adviser's research
staff in making investment decisions. Investment
decisions are made primarily on the basis of
fundamental research, which involves
consideration of the various company- specific
and general business, economic and market
factors that may influence the future
performance of individual companies and equity
investments therein. The Adviser will also
consider a variety of other factors in
constructing and maintaining the Fund's stock
portfolio, including, but not limited to, stock
dividend yields and payment schedules, overlap
between the Fund's stock holdings and the
indices on which it has outstanding options
positions, realization of tax loss harvesting
opportunities and other tax management
considerations.
The Adviser believes that a strategy of owning a
portfolio of common stocks, writing (selling)
put options on individual stocks deemed
attractive for purchase, selling index call
options with respect to a portion of portfolio
value, and purchasing index put options on a
substantial portion of portfolio value can
provide current income and gains and an
attractive risk-return profile during a variety
of equity market conditions. The Fund will sell
only "covered" call and put options. An index
call option is considered covered if the Fund
maintains with its custodian assets determined
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to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the index. An index call option also is covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid (in accordance with procedures established by the Board). In order for put options written on individual stocks to be considered "covered" the Fund must (1) maintain with its custodian assets determined to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the stock, (2) continue to own an equivalent number of puts of the same "series" (that is, puts on the same underlying security having the same exercise prices and expiration dates as those written by the Fund), or an equivalent number of puts of the same "class" (that is, puts on the same underlying security) with exercise prices greater than those it has written (or, if the exercise prices of the puts it holds are less than the exercise prices of those it has written, it will deposit the difference with its custodian in a segregated account) or (3) sell short the securities underlying the put option at the same or a higher price than the exercise price on the put option written. Compared to selling call options on individual stocks, the Adviser believes that selling index call options can achieve better tax and transactional efficiency because listed options on broad-based securities indices generally qualify as "section 1256 contracts" under the Code subject to specialized tax treatment and because the markets for index options are generally deeper and more liquid than options on individual stocks. Although the Fund generally and initially expects to write stock index call options with respect to only a portion of its common stock portfolio value, the Fund may in market circumstances deemed appropriate by the Adviser write index call options on up to 100% of its assets. In certain market circumstances, the Fund may forego writing index call options. To avoid being subject to the "straddle rules" under federal income tax law, the Fund intends to limit the overlap between its stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis. Similarly, the Fund also will seek to avoid being subject to the straddle rules with respect to writing call options and purchasing put options on the same index. Under the "straddle rules," "offsetting positions with respect to personal property" generally are considered to be straddles. In general, investment positions will be offsetting if there is a substantial diminution in the risk of loss from holding one position by reason of holding one or more other positions. The Fund expects that the index call options it writes and index put options it purchases will not be considered straddles because its stock holdings will be sufficiently dissimilar from the components of each index on which it has open options positions under applicable guidance established by the Internal Revenue Service (the "IRS"). Under certain circumstances, however, the Fund may enter into options transactions or certain other investments that may constitute positions in a straddle. The Fund's options strategy is designed to produce current cash flow from options premiums and to moderate the volatility of the Fund's returns. This option strategy is generally of a hedging nature, and is not designed to speculate on equity market performance. The Adviser does not intend to sell index call options or put options on individual stocks representing amounts greater than the value of the Fund's common stock portfolio (i.e., take a "naked" position). The Adviser generally intends to sell index options that are exchange-listed and "European style," meaning that the options may only be exercised on the expiration date of the option. Since listed options on individual stocks in the United States are generally "American style," meaning the options may be |
exercised at any time during the option period, the Adviser believes that substantially all of the single stock options written by the Fund will be American style. Exchange- traded index options are typically settled in cash and provide that the holder of the option has the right to receive an amount of cash determined by the excess of the exercise-settlement value of the index over the exercise price of the option. The exercise- settlement value is calculated based on opening sales prices of the component index stocks on the option valuation date, which is the last business day before the expiration date. Generally, the Adviser intends to sell index call options that are slightly "out-of-the- money," meaning that option exercise prices generally will be slightly above the current level of the index at the time the options are written. The Fund may also sell index call options that are more substantially "out-of- the-money." Such options that are more substantially "out-of- the-money" provide greater potential for the Fund to realize capital appreciation on its portfolio stocks but generally would pay a lower premium than options that are slightly "out-of-the-money." The Adviser expects initially to follow a primary call options strategy of selling index call options with a remaining maturity of between approximately one and three months and maintaining its short call options positions until approximately their option valuation date, at which time replacement call option positions with a remaining maturity within this range are written. In certain market circumstances, the Fund may forego writing index call options. In implementing the Fund's investment strategy, the Adviser intends to employ a variety of techniques and strategies designed to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund. These include: (1) investing in stocks that pay dividends that qualify for federal income taxation at rates applicable to long- term capital gains and complying with the holding period and other requirements for favorable tax treatment; (2) selling index call options and purchasing index put options that qualify for treatment as "section 1256 contracts" under the Code on which capital gains and losses are generally treated as 60% long-term and 40% short-term, regardless of holding period; (3) limiting the overlap between the Fund's stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis so that the Fund's stock holdings and index call options are not subject to the "straddle rules;" (4) avoiding offsetting positions in written index call options and purchased index put options that would be subject to the "straddle rules," (5) engaging in a systematic program of tax-loss harvesting in the Fund's stock portfolio, periodically selling stock positions that have depreciated in value to realize capital losses that can be used to offset capital gains realized by the Fund; and (6) managing the sale of appreciated stock positions so as to minimize the Fund's net realized short- term capital gains in excess of net realized long-term capital losses. When an appreciated security is sold, the Fund intends to select for sale the share lots resulting in the most favorable tax treatment, generally those with holding periods sufficient to qualify for long-term capital gains treatment that have the highest cost basis. As described above, the Fund intends to emphasize investments in stocks that pay dividends that qualify for federal income taxation at rates applicable to long- term capital gains. Under federal income tax law enacted in 2003, the qualified dividend income of individuals and other noncorporate taxpayers is taxed at long-term capital gain tax rates if certain holding period and other requirements are met. Qualified dividends are dividends from domestic corporations and dividends from foreign corporations that meet certain specified criteria. The Fund generally can pass the tax treatment of qualified dividend income it receives through to Common Shareholders. For dividends the Fund receives to qualify for tax-advantaged treatment, the Fund must hold stock paying qualified dividends for more than 60 days during the 121-day period beginning 60 |
days before the ex- dividend date (or more than 90 days during the associated 181-day period, in the case of certain preferred stocks). In addition, the Fund cannot be obligated to make related payments (pursuant to a short sale or otherwise) with respect to positions in any security that is substantially similar or related property with respect to such stock. Similar provisions apply to each Common Shareholder's investment in the Fund. In order for qualified dividend income paid by the Fund to a Common Shareholder to be taxable at long-term capital gains rates, the Common Shareholder must hold his or her Fund shares for more than 60 days during the 121-day period surrounding the ex- dividend date. The provisions of the Code applicable to qualified dividend income are effective through 2010. Thereafter, qualified dividend income will be subject to tax at ordinary income rates unless further legislative action is taken. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income in 2011 unless further legislative action is taken. Options on broad-based equity indices that trade on a national securities exchange registered with the Securities and Exchange Commission (the "SEC") or a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission generally qualify for treatment as "section 1256 contracts" under the Code. Options on broad-based equity indices that trade on other exchanges, boards of trade or markets designated by the United States Secretary of Treasury also qualify for treatment as "section 1256 contracts" under the Code. Because only a small number of exchanges, boards and markets outside the United States have to date received the necessary designation, most foreign-traded stock index options do not currently qualify for treatment as "section 1256 contracts" under the Code. To the extent that the Fund writes options on indices based upon foreign stocks, the Fund generally intends to sell options on broad- based foreign country and/or regional stock indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code. Options on foreign indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code may trade in substantially lower volumes and with substantially wider bid-ask spreads than other options contracts on the same or similar indices that trade on other markets outside the United States. To implement its options program most effectively, the Fund may sell index options that do not qualify as "section 1256 contracts" under the Code. Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or settlement of the positions, and would be treated as short- term gain or loss. The foregoing policies relating to investments in common stocks and options are the Fund's primary investment policies. In addition to its primary investment policies, the Fund may invest to a limited extent in other types of securities and engage in certain other investment practices. In addition to writing index call options, the Fund may write call options on up to 20% of the value of its total assets on futures contracts based upon broad-based securities indices. The Fund's use of such options on index futures would be substantially similar to its use of options directly on indices. The Fund may also invest up to 20% of its total assets in derivative instruments acquired for hedging, risk management and investment purposes (to gain exposure to securities, securities markets, market indices and/or currencies consistent with its investment objectives and policies), provided that no more than 10% of the Fund's total assets may be invested in such derivative instruments acquired |
for non-hedging purposes. The loss on derivative
instruments (other than purchased options) may
substantially exceed an investment in these
instruments. To seek to protect against price
declines in securities holdings with large
accumulated gains, the Fund may use various
hedging techniques (such as the purchase and
sale of futures contracts on stocks and stock
indices and options thereon, equity swaps,
covered short sales, forward sales of stocks and
the purchase and sale of forward currency
exchange contracts and currency futures). By
using these techniques rather than selling
appreciated securities, the Fund can, within
certain limitations, reduce its exposure to
price declines in the securities without
currently realizing substantial capital gains
under current federal tax law. Derivative
instruments may also be used by the Fund to
enhance returns or as a substitute for the
purchase or sale of securities. As a general
matter, dividends received on hedged stock
positions are characterized as ordinary income
and are not eligible for favorable tax
treatment. Dividends received on securities with
respect to which the Fund is obligated to make
related payments (pursuant to short sales or
otherwise) will be treated as fully taxable
ordinary income (i.e., income other than tax-
advantaged dividends). In addition, use of
derivatives may give rise to short-term capital
gains and other income that would not qualify
for favorable tax treatment. See "Federal Income
Tax Matters" and "Investment objectives and
policies."
LISTING.................................. The Fund intends to apply for listing of its
Common Shares on the New York Stock Exchange
under the symbol "[ ]."
INVESTMENT ADVISER, ADMINISTRATOR AND SUB- Eaton Vance, a wholly owned subsidiary of Eaton
ADVISER................................... Vance Corp., is the Fund's investment adviser
and administrator. The Adviser and its
subsidiaries managed approximately $133.1
billion on behalf of funds, institutional
clients and individuals as of December 31, 2006,
including approximately $83.7 billion in equity
assets. Eaton Vance has also engaged Rampart as
a sub- adviser. Rampart, founded in 1983,
specializes in options management and trading
for institutional, high net worth and investment
company clients. Rampart managed approximately
$7.5 billion in assets as of December 31, 2006.
Eaton Vance will be responsible for the Fund's
overall investment program, structuring and
managing the Fund's common stock portfolio,
including, tax-loss harvesting and other tax-
management techniques, providing consultation to
the Sub-Adviser and supervising the performance
of the Sub-Adviser. Rampart will be responsible
for providing advice on and execution of the
Fund's options strategy. See "Management of the
Fund."
DISTRIBUTIONS............................ Commencing with the Fund's first distribution,
the Fund intends to make regular quarterly
distributions to Common Shareholders sourced
from the Fund's cash available for distribution.
"Cash available for distribution" will consist
of the Fund's dividends and interest income
after payment of Fund expenses, net option
premiums, and net realized and unrealized gains
on stock investments. The Fund's net
distribution rate may be adjusted from time to
time. The Board may modify this distribution
policy at any time without obtaining the
approval of Common Shareholders. The initial
distribution is expected to be declared
approximately 75 days and paid approximately 90
to 120 days after the completion of this
offering, depending on market conditions.
The Fund's annual distributions will likely
differ from annual net investment income. The
investment income of the Fund will consist of
all dividend and interest income accrued on
portfolio investments, short-term capital gain
(including short- term gains on option positions
and gains on the sale of portfolio investments
held for one year or less) in excess of
long-term capital loss and income from certain
hedging transactions, less all expenses of the
Fund. Expenses of the Fund will be accrued each
day. To the extent that the Fund's net
investment income for any year exceeds the total
quarterly distributions paid during the year,
the Fund will make a special distribution at or
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near year-end of such excess amount as may be
required. Over time, all of the Fund's
investment company taxable income will be
distributed.
At least annually, the Fund intends to
distribute any net capital gain (which is the
excess of net long-term capital gain over net
short-term capital loss) or, alternatively, to
retain all or a portion of the year's net
capital gain and pay federal income tax on the
retained gain. As provided under federal tax
law, Common Shareholders of record as of the end
of the Fund's taxable year will include their
attributable share of the retained gain in their
income for the year as a long-term capital gain,
and will be entitled to a tax credit or refund
for the tax deemed paid on their behalf by the
Fund. The Fund may treat the cash value of tax
credit and refund amounts in connection with
retained capital gains as a substitute for
equivalent cash distributions.
If the Fund's total quarterly distributions in
any year exceed the amount of its net investment
income for the year, any such excess would be
characterized as a return of capital for federal
income tax purposes to the extent not designated
as a capital gain dividend. Distributions in any
year may include a substantial return of capital
component. Under the Investment Company Act of
1940, as amended (the "1940 Act"), for any
distribution that includes amounts from sources
other than net income, the Fund is required to
provide Common Shareholders a written statement
regarding the components of such distribution.
Such a statement will be provided at the time of
any distribution believed to include any such
amounts.
To permit the Fund to maintain more stable
distributions, distribution rates will be based
on projected annual cash available from
distribution. As a result, the distributions
paid by the Fund for any particular quarter may
be more or less than the amount of cash
available for distribution from that quarterly
period. In certain circumstances, the Fund may
be required to sell a portion of its investment
portfolio to fund distributions. Distributions
will reduce the Common Shares' net asset value.
The Fund has applied for an order from the
Securities and Exchange Commission granting it
an exemption from Section 19(b) of the 1940 Act
and Rule 19b- 1 thereunder to permit the Fund to
include realized long-term capital gains as a
part of its regular distributions to Common
Shareholders more frequently than would
otherwise be permitted by the 1940 Act
(generally once per taxable year). In the event
that such an exemptive order is obtained, the
Fund will consider increasing the frequency of
its regular distributions to Common Shareholders
from quarterly to monthly. The Fund does not
intend to designate more than the permitted
number of capital gain distributions until it
receives such an exemptive order.
Common Shareholders may automatically reinvest
some or all of their distributions in additional
Common Shares under the Fund's dividend
reinvestment plan. See "Distributions" and
"Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN............... The Fund has established a dividend reinvestment
plan (the "Plan"). Under the Plan, unless a
Common Shareholder elects to receive
distributions in cash, all distributions will be
automatically reinvested in additional Common
Shares, either purchased in the open market or
newly issued by the Fund if the Common Shares
are trading at or above their net asset value.
Common Shareholders who intend to hold their
Common Shares through a broker or nominee should
contact such broker or nominee regarding the
Plan. See "Dividend Reinvestment Plan."
CLOSED-END STRUCTURE..................... Closed-end funds differ from traditional,
open-end management investment companies
(commonly referred to as "mutual funds") in that
closed-end funds generally list their shares for
trading on a securities exchange and do not
redeem their shares at the option of the
shareholder. By comparison, mutual funds issue
securities that are redeemable at net asset
value at the option of the shareholder and
typically engage in a continuous offering of
their shares.
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Shares of closed-end funds frequently trade at a
discount from their net asset value. In
recognition of this possibility and that any
such discount may not be in the interest of
Common Shareholders, the Fund's Board, in
consultation with Eaton Vance, from time to time
may review possible actions to reduce any such
discount. The Board might consider open market
repurchases or tender offers for Common Shares
at net asset value. There can be no assurance
that the Board will decide to undertake any of
these actions or that, if undertaken, such
actions would result in the Common Shares
trading at a price equal to or close to net
asset value per Common Share. The Board might
also consider the conversion of the Fund to an
open-end mutual fund. The Board believes,
however, that the closed-end structure is
desirable, given the Fund's investment
objectives and policies. Investors should
assume, therefore, that it is highly unlikely
that the Board would vote to convert the Fund to
an open-end investment company.
SPECIAL RISK CONSIDERATIONS.............. The following describes various principal risks
of investing in the Fund. A more detailed
description of these and other risks of
investing in the Fund are described under
"Investment Objectives, Policies and Risks-Risk
Considerations" in this Prospectus and under
"Additional Investment Information and
Restrictions" in the Fund's Statement of
Additional Information.
NO OPERATING HISTORY. The Fund is a newly
organized, diversified closed-end investment
company with no history of operations and is
designed for long-term investors and not as a
trading vehicle.
INVESTMENT AND MARKET RISK. An investment in
Common Shares is subject to investment risk,
including the possible loss of the entire
principal amount invested. An investment in
Common Shares represents an indirect investment
in the securities owned by the Fund, which are
generally traded on a securities exchange or in
the over-the- counter markets. The value of
these securities, like other market investments,
may move up or down, sometimes rapidly and
unpredictably. Because the Fund normally intends
to sell stock index call options on a portion of
its common stock portfolio value, the Fund's
appreciation potential from equity market
performance will be more limited than if the
Fund did not engage in selling stock index call
options. The Common Shares at any point in time
may be worth less than the original investment,
even after taking into account any reinvestment
of distributions.
ISSUER RISK. The value of securities held by the
Fund may decline for a number of reasons that
directly relate to the issuer, such as
management performance, financial leverage and
reduced demand for the issuer's goods and
services.
EQUITY RISK. Under normal market conditions, the
Fund's investment program will consist primarily
of owning a diversified portfolio of common
stocks. Therefore, a principal risk of investing
in the Fund is equity risk. Equity risk is the
risk that the value of securities held by the
Fund will fluctuate or fall due to general
market or economic conditions, perceptions
regarding the industries in which the issuers of
securities held by the Fund participate, and the
particular circumstances and performance of
companies whose securities the Fund holds.
Although common stocks have historically
generated higher average returns than
fixed-income securities over the long term,
common stocks also have experienced
significantly more volatility in returns. An
adverse event, such as an unfavorable earnings
report, may depress the value of equity
securities of an issuer held by the Fund; the
price of common stock of an issuer may be
particularly sensitive to general movements in
the stock market; or a drop in the stock market
may depress the price of most or all of the
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common stocks held by the Fund. In addition, common stock of an issuer in the Fund's portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other possible reasons, the issuer of the security experiences a decline in its financial condition. Common stocks in which the Fund will invest are structurally subordinated to preferred stocks, bonds and other debt instruments in a company's capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stocks or debt instruments of such issuers. Finally, common stock prices may be sensitive to rising interest rates, as the costs of capital rise and borrowing costs increase. LIMITATIONS ON EQUITY MARKET RISK MANAGEMENT STRATEGY. In order to manage the risk of a decline in the value of the general equity market, the Fund will purchase index put options on a substantial portion of the value of its common stock portfolio. There are a number of limitations on the extent to which Common Shareholders of the Fund may benefit from this risk management strategy. First, an index put option only provides a hedge against a general market decline to the extent of the strike price on the option. A decline in the value of the index subject to a put above the strike price could result in certain circumstances in the option expiring worthless without providing protection against the amount of the decline above the strike price. Second, there is a risk that the value of an index subject to purchased put options will not correlate with the value of the Fund's portfolio holdings. Accordingly, the value of the index may remain flat or increase in value at times when the Fund's portfolio holdings are decreasing in value. Similarly, the index may decrease in value but to a lesser extent than the Fund's portfolio holdings. In all such cases, the index put option would provide only a limited or no hedge against a decline in the value of the Fund's portfolio holdings. Finally, correlation risks are also presented in connection with the Fund's selling of put options on individual stocks. The Fund's primary put options strategy of purchasing index puts and selling puts on individual stocks is predicated on the Adviser's ability to identify stocks that will decrease in value (or increase in value) relative to the index subject to the purchased put in declining market circumstances. To the extent that the individual stocks subject to put options decrease more than the value of the indices subject to purchased put options, the strategy of purchasing index puts and selling puts on individual stocks will provide only limited or no protection with respect to the value of the Fund's assets subject to written put options and may result in greater losses to the Fund than a strategy that does not involve buying and selling put options. RISKS OF INVESTING IN MID-CAP COMPANIES. The Fund may make investments in stocks of companies whose market capitalization is considered middle sized or "mid-cap." Mid-cap companies often are newer or less established companies than larger capitalization companies. Investments in mid-cap companies carry additional risks because earnings of these companies tend to be less predictable; they often have limited product lines, markets, distribution channels or financial resources; and the management of such companies may be dependent upon one or a few key people. The market movements of equity securities of mid-cap companies may be more abrupt or erratic than the market movements of equity securities of larger, more established companies or the stock market in general. Historically, mid-cap companies have sometimes gone through extended periods when they did not perform as well as larger companies. In addition, equity securities of mid-cap companies generally are less liquid than those of larger |
companies. This means that the Fund could have greater difficulty selling such securities at the time and price that the Fund would like. RISK OF SELLING INDEX CALL OPTIONS. Under normal market conditions, a portion of the Fund's common stock portfolio value will be subject to written index call options. The purchaser of an index call option has the right to any appreciation in the value of the index over the exercise price of the call option as of the valuation date of the option. Because their exercise is settled in cash, sellers of index call options such as the Fund cannot provide in advance for their potential settlement obligations by acquiring and holding the underlying securities. The Fund intends to mitigate the risks of its options activities by writing options on one or more broad-based stock indices that the Adviser believes collectively approximate the characteristics of the Fund's common stock portfolio (or that portion of its portfolio against which options are written). The Fund will not, however, hold stocks that fully replicate the indices on which it writes call options. Due to tax considerations, the Fund intends to limit the overlap between its stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis. The Fund's stock holdings will normally include stocks not included in the indices on which it writes call options. Consequently, the Fund bears the risk that the performance of its stock portfolio will vary from the performance of the indices on which it writes call options. For example, the Fund will suffer a loss if the S&P 500 appreciates substantially above the exercise price of S&P 500 call options written by the Fund while the securities held by the Fund in the aggregate fail to appreciate as much or decline in value over the life of the written option. Index options written by the Fund will be priced on a daily basis. Their value will be affected primarily by changes in the prices and dividend rates of the underlying common stocks in such index, changes in actual or perceived volatility of such index and the remaining time to the options' expiration. The trading price of index call options will also be affected by liquidity considerations and the balance of purchase and sale orders. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well- conceived and well- executed options program may be adversely affected by market behavior or unexpected events. As the writer of index call options, the Fund will forgo, during the option's life, the opportunity to profit from increases in the value of the applicable index above the sum of the option premium received and the exercise price of the call option, but retains the risk of loss, minus the option premium received, should the value of the applicable index decline. When a call option is exercised, the Fund will be required to deliver an amount of cash determined by the excess of the value of the applicable index at contract termination over the exercise price of the option. Thus, the exercise of index call options sold by the Fund may require the Fund to sell portfolio securities to generate cash at inopportune times or for unattractive prices. To the extent that the Fund writes options on indices based upon foreign stocks, the Fund generally intends to sell options on broad-based foreign country and/or regional stock indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code. Options on foreign indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code may trade in substantially lower volumes and with substantially wider bid-ask spreads than other options contracts on the same or similar indices that trade on other markets outside the United States. To implement its options program most effectively, the Fund may sell index options that do not qualify as "section 1256 contracts" under the Code. Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or settlement of the positions and would |
be treated as short-term gain or loss. The trading price of options may be adversely affected if the market for such options becomes less liquid or smaller. The Fund may close out a call option by buying the option instead of letting it expire or be exercised. There can be no assurance that a liquid market will exist when the Fund seeks to close out a call option position by buying the option. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation (the "OCC") may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled to discontinue the trading of options (or a particular class or series of options) at some future date. If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The hours of trading for options may not conform to the hours during which common stocks held by the Fund are traded. To the extent that the options markets close before the markets for securities, significant price and rate movements can take place in the securities markets that would not be reflected concurrently in the options markets. Index call options are marked to market daily and their value is affected by changes in the value and dividend rates of the securities represented in the underlying index, changes in interest rates, changes in the actual or perceived volatility of the associated index and the remaining time to the options' expiration, as well as trading conditions in the options market. PUT OPTIONS RISKS. The Fund may write put options on individual stocks held by the Fund. The Fund may also purchase index put options. An index put option is a contract that represents the right to sell the cash value of an index at the exercise price at the expiration date of the option. As the purchaser of an index option, the Fund would pay to the writer (seller) of the option cash (premium), and the Fund has the right to receiver from the seller the amount by which the cash value of the index is below the exercise price at or until the expiration date of the option. If the Fund exercises the index put option, the seller would pay the Fund the difference between the cash value of the index and the exercise price. In effect the seller agrees to accept the potential depreciation in the value of the index below the exercise price during the term of the option in exchange for the premium. Put options on individual stocks operate similarly. The Fund as the seller of the put option will receive a premium from the purchaser in return for the right of the purchaser to sell the underlying security to the Fund at a specified price and obligating the Fund to purchase the underlying security from the purchaser at that price. In the event of a substantial depreciation in the value of the underlying security, the Fund may incur a substantial loss. Successful put strategies require the anticipation of future movements in securities prices, interest rates and other economic factors. The success of any put strategy involves the ability of the Adviser to correctly predict the movement of the stock or index underlying the put option. If the Adviser incorrectly predicts the movement of the underlying instrument, the Fund could experience a significant loss. No assurances can be given that the Adviser's judgment in this respect will be correct. When the Fund writes (sells) put options on individual stocks to earn income from premiums received, the Fund faces the risk that |
the stock price will fall below the strike price, forcing the Fund to purchase the stock underlying the put. If the underlying stock prices have declined significantly, the Fund could experience significant losses. The effectiveness of purchasing index put options when used only as a hedging technique will depend upon the extent to which price movements in the Fund's portfolio investments correlate with prices movements in the underlying index of the purchased put option. Successful use by the Fund of index put options will be subject to the ability of the Adviser to predict correctly changes in the relationship of the underlying index to the Fund's portfolio holdings. The use of such index put options cannot serve as a complete hedge since the price movement of the index underlying the option will not necessarily follow the price movements of the Fund's portfolio securities. Put options can be highly volatile instruments. This may cause the options to react to market changes differently than the portfolio securities. A put option acquired by the Fund and not sold prior to expiration will expire worthless if the price of the stock or index at expiration exceeds the exercise price of the option, thereby causing the Fund to lose its entire investment in the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it had purchased. If the Fund were unable to close out an option that it had purchased, it would have to exercise the option in order to realize any profit or the option may expire worthless. Stock market indices on which the Fund may purchase options positions likely will not mirror the Fund's actual portfolio holdings. The effectiveness of index put options as hedges against declines in the Fund's stock portfolio will be limited to the extent that the performance of the underlying index does not correlate with that of the Fund's holdings. RISKS OF SELLING CALL OPTIONS ON INDIVIDUAL STOCKS. The risks of selling call options on individual stocks are similar to the risks associated with selling index call options. In addition, the number of call options the Fund can write is limited by the number of shares of common stock the Fund holds, and further limited by the fact that listed call options on individual common stocks generally trade in units representing 100 shares of the underlying stock. Furthermore, the Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Adviser or Sub- Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and may impose certain other sanctions. The Fund will not write "naked" or uncovered call options. TAX RISK. Reference is made to "Federal Income Tax Matters" for an explanation of the federal income tax consequences and attendant risks of investing in the Fund. Although the Fund seeks to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund, there can be no assurance that it will be successful in this regard. The tax treatment and characterization of the Fund's distributions may change over time due to changes in the Fund's mix of investment returns and changes in the federal tax laws, regulations and administrative and judicial interpretations. The provisions of the Code applicable to qualified dividend income are set to expire at the close of 2010. Thereafter, the |
Fund's distributions to Common Shareholders of qualified dividend income will be subject to tax at the higher rates that apply to ordinary income unless further legislative action is taken. There can be no assurances that after 2010, such qualified dividends will be available to the Fund and its Common Shareholders. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income beginning in 2011 unless further legislative action is taken. Distributions paid on the Common Shares may be characterized variously as non- qualified dividends (taxable at ordinary income rates), qualified dividends (generally taxable at long-term capital gains rates), capital gains dividends (taxable at long-term capital gains rates) or return of capital (generally not currently taxable). The ultimate tax characterization of the Fund's distributions made in a calendar year may not finally be determined until after the end of that calendar year. Distributions to a Common Shareholder that are return of capital will be tax free to the amount of the Common Shareholder's current tax basis in his or her Common Shares, with any distribution amounts exceeding such basis treated as capital gain on a deemed sale of Common Shares. Common Shareholders are required to reduce their tax basis in Common Shares by the amount of tax-free return of capital distributions received, thereby increasing the amount of capital gain (or decreasing the amount of capital loss) to be recognized upon a later disposition of the Common Shares. In order for Fund distributions of qualified dividend income to be taxable at favorable long-term capital gains rates, a Common Shareholder must meet certain prescribed holding period and other requirements with respect to his or her Common Shares. If positions held by the Fund were treated as "straddles" for federal income tax purposes, dividends on such positions would not constitute qualified dividend income subject to favorable income tax treatment. Gain or loss on positions in a straddle are subject to special (and generally disadvantageous) rules as described under "Federal Income Tax Matters." DISTRIBUTION RISK. The quarterly distributions Common Shareholders will receive from the Fund will be sourced from the Fund's dividends and interest income after payment of Fund expenses, net option premiums, and net realized and unrealized gains on stock investments. The Fund's cash available for distribution may vary widely over the short- and long-term. Dividends on common stocks are not fixed but are declared at the discretion of the issuer's board of directors. If stock market volatility and/or stock prices decline, the level of premiums from writing index call options and the amounts available for distribution from the Fund's options activity will likely decrease as well. Payments to purchase put options and to close written call and put options will reduce amounts available for distribution from call and put option premiums received and proceeds of closing put options. Net realized and unrealized gains on the Fund's stock investments will be determined primarily by the direction and movement of the United States stock market and the particular stocks held. There can be no assurance that quarterly distributions paid by the Fund to the Common Shareholders will be maintained at initial levels or increase over time. FOREIGN SECURITY RISK. The value of foreign securities is affected by changes in currency rates, foreign tax laws (including withholding tax), government policies (in this country or abroad), relations between nations and trading, settlement, custodial and other operational risks. In addition, the costs of investing abroad (such as foreign brokerage costs, custodial expenses and other fees) are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than markets in the United States. Foreign investments also could be affected by |
other factors not present in the United States, including expropriation of assets, armed conflict, confiscatory taxation, lack of uniform accounting and auditing standards, less publicly available financial and other information and potential difficulties in enforcing contractual obligations or repatriating capital invested in foreign countries. As an alternative to holding foreign-traded securities, the Fund may invest in dollar- denominated securities of foreign companies that trade on United States exchanges or in the United States over-the-counter market (including depositary receipts, which evidence ownership in underlying foreign securities). Since the Fund may invest in securities denominated or quoted in currencies other than the United States dollar, the Fund may be affected by changes in foreign currency exchange rates (and exchange control regulations) which affect the value of investments held by the Fund and the accrued income and appreciation or depreciation of the investments in United States dollars. Changes in foreign currency exchange rates relative to the United States dollar will affect the United States dollar value of the Fund's assets denominated in that currency and the Fund's return on such assets as well as any temporary uninvested reserves in bank deposits in foreign currencies. In addition, the Fund will incur costs in connection with conversions between various currencies. Because foreign companies may not be subject to accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to United States companies, there may be less or less reliable publicly available information about a foreign company than about a domestic company. There is generally less government supervision and regulation of securities exchanges, broker-dealers and listed companies than in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlements of portfolio transactions for, or loss of certificates of, portfolio securities. Payment for securities before delivery may be required. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could adversely affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Foreign securities markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable United States companies. The risks of foreign investments described above apply to an even greater extent to investments in emerging markets. EMERGING MARKET SECURITY RISK. The Fund may invest up to 5% of its total assets in securities of issuers located in emerging markets. The risks of foreign investments described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the United States and developed foreign markets. Disclosure and regulatory standards in many respects are less stringent than in the United States and developed foreign markets. There also may be a lower level of monitoring and regulation of securities markets in emerging market countries and the activities of investors in such markets and enforcement of existing regulations may be limited. Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of certain emerging countries. Economies in emerging markets |
generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values, and other protectionist measures imposed or negotiated by the countries with which they trade. The economies of these countries also have been and may continue to be adversely affected by economic conditions in the countries in which they trade. The economies of countries with emerging markets may also be predominantly based on only a few industries or dependent on revenues from particular commodities. In addition, custodial services and other costs relating to investment in foreign markets may be more expensive in emerging markets than in many developed foreign markets, which could reduce the Fund's income from such securities. In many cases, governments of emerging countries continue to exercise significant control over their economies, and government actions relative to the economy, as well as economic developments generally, may affect the Fund's investments in those countries. In addition, there is a heightened possibility of expropriation or confiscatory taxation, imposition of withholding taxes on dividend and interest payments, or other similar developments that could affect investments in those countries. There can be no assurance that adverse political changes will not cause the Fund to suffer a loss of any or all of its investments. INTEREST RATE RISK. The premiums from writing index call options and amounts available for distribution from the Fund's options activity may decrease in declining interest rate environments. The value of the Fund's common stock investments may also be influenced by changes in interest rates. Higher yielding stocks and stocks of issuers whose businesses are substantially affected by changes in interest rates may be particularly sensitive to interest rate risk. DERIVATIVES RISK. In addition to writing index call options, the risks of which are described above, the Fund may invest up to 20% of its total assets in other derivative investments acquired for hedging, risk management and investment purposes. Derivative transactions including options on securities and securities indices and other transactions in which the Fund may engage (such as futures contracts and options thereon, swaps and short sales) may subject the Fund to increased risk of principal loss due to unexpected movements in stock prices, changes in stock volatility levels and interest rates, and imperfect correlations between the Fund's securities holdings and indices upon which derivative transactions are based. Derivatives can be illiquid, may disproportionately increase losses, and may have a potentially large impact on the Fund's performance. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments. The Fund also will be subject to credit risk with respect to the counterparties to any over-the-counter derivatives contracts entered into by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or no recovery in such circumstances. Derivatives may disproportionately increase losses and have a potentially large negative impact on the Fund's performance. LIQUIDITY RISK. The Fund may invest up to 15% of its total assets in securities for which there is no readily available trading market or which are otherwise illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to |
raise cash to meet its obligations. In addition, the limited liquidity could affect the market price of the securities, thereby adversely affecting the Fund's net asset value, and at times may make the disposition of securities impracticable. INFLATION RISK. Inflation risk is the risk that the purchasing power of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions thereon can decline. PORTFOLIO TURNOVER RISK. The Fund will buy and sell securities to seek to accomplish its investment objectives. Portfolio turnover generally involves expense to the Fund, including brokerage commissions and other transaction costs on the sale of securities and reinvestment in other securities. The Fund expects to maintain high turnover in index call options, based on the Adviser's intent to sell index call options on a portion of its stock portfolio value and the Fund's initial expectation to roll forward its options positions approximately every one to three months. [The Fund expects to maintain high turnover in its put options activities, based on the Adviser's intent to sell put options on a portion of its stock portfolio.] For its stock holdings, the Fund's annual portfolio turnover rate is expected to exceed that of the indices on which the Fund writes call options due to turnover in connection with the Fund's active stock selection, tax loss harvesting, and other strategies. On an overall basis, the Fund expects that its annual turnover rate will exceed 100%. A high turnover rate (100% or more) necessarily involves greater trading costs to the Fund. MARKET PRICE OF COMMON SHARES. The Fund's share price will fluctuate and, at the time of sale, shares may be worth more or less than the original investment or the Fund's then current net asset value. The Fund cannot predict whether its shares will trade at a price at, above or below its net asset value. Shares of closed-end funds frequently trade at a discount to net asset value. FINANCIAL LEVERAGE RISK. Although the Fund has no current intention to do so, the Fund is authorized and reserves the flexibility to utilize leverage through the issuance of preferred shares and/or borrowings, including the issuance of debt securities. In the event that the Fund determines in the future to utilize investment leverage, there can be no assurance that such a leveraging strategy will be successful during any period in which it is employed. Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value and market price of the Common Shares and the risk that fluctuations in distribution rates on any preferred shares or fluctuations in borrowing costs may affect the return to Common Shareholders. To the extent the returns derived from securities purchased with proceeds received from leverage exceeds the cost of leverage, the Fund's distributions may be greater than if leverage had not been used. Conversely, if the returns from the securities purchased with such proceeds are not sufficient to cover the cost of leverage, the amount available for distribution to Common Shareholders will be less than if leverage had not been used. In the latter case, Eaton Vance, in its best judgment, may nevertheless determine to maintain the Fund's leveraged position if it deems such action to be appropriate. The costs of an offering of preferred shares and/or a borrowing program would be borne by Common Shareholders and consequently would result in a reduction of the net asset value of Common Shares. In addition, the fee paid to Eaton Vance will be calculated on the basis of the Fund's average daily gross assets, including proceeds from the issuance of preferred shares and/or borrowings, so the fee will be higher when leverage is utilized. In this regard, holders of preferred shares do not bear the investment advisory fee. Rather, Common Shareholders bear the portion of the investment advisory fee attributable to the assets |
purchased with the proceeds of the preferred shares offering. MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. Eaton Vance, Rampart and the individual portfolio managers invest the assets of the Fund as they deem appropriate in implementing the Fund's investment strategy. Accordingly, the success of the Fund depends upon the investment skills and analytical abilities of Eaton Vance, Rampart and the individual portfolio managers to develop and actively implement investment strategies that achieve the Fund's investment objectives. There is no assurance that Eaton Vance, Rampart and the individual portfolio managers will be successful in developing and implementing the Fund's investment strategy. Subjective decisions made by Eaton Vance, Rampart and the individual portfolio managers may cause the Fund to incur losses or to miss profit opportunities on which it could otherwise have capitalized. MARKET DISRUPTION. The aftermath of the war in Iraq and the continuing occupation of Iraq, instability in the Middle East and terrorist attacks in the U.S. and around the world may have resulted in market volatility and may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the U.S. and worldwide. The Fund does not know how long the securities markets will continue to be affected by these events and cannot predict the effects of the occupation or similar events in the future on the U.S. economy and securities markets. Given the risks described above, an investment in the Common Shares may not be appropriate for all investors. You should carefully consider your ability to assume these risks before making an investment in the Fund. ANTI-TAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust includes provisions that could limit the ability of other persons or entities to acquire control of the Fund or to change the composition of its Board. These provisions may deprive Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See "Risk Factors" and "Description of Capital Structure - Anti-Takeover Provisions in the Agreement and Declaration of Trust." |
SUMMARY OF FUND EXPENSES
The purpose of the table below is to help you understand all fees and expenses that you, as a Common Shareholder, would bear directly or indirectly. See "Management of the Fund."
SHAREHOLDER TRANSACTION EXPENSES Sales load paid by you (as a percentage of offering price)............ 4.50% Expenses borne by Common Shareholders................................. 0.20%(1)(2) Dividend reinvestment plan fees....................................... None(3) |
PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES
-------------
ANNUAL EXPENSES
Management fees...................................................... 1.00%
Other expenses....................................................... 0.20%(4)
----
Total annual expenses................................................ 1.20%
====
|
The Other expenses, and correspondingly the Total annual expenses, shown in the table are based on estimated amounts for the Fund's first year of operations and assume that the Fund issues approximately 12,500,000 Common Shares. If the Fund issues fewer Common Shares, these expenses generally would increase. See "Management of the Fund" and "Dividend Reinvestment Plan."
EXAMPLE
The following example illustrates the expenses that you would pay on a $1,000 investment in Common Shares (including the sales load of $45 and estimated offering expenses of this offering of $2), assuming (i) total annual expenses of 1.20% of net assets attributable to Common Shares and (ii) a 5% annual return*:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $59 $83 $110 $186 |
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER.
* The example assumes that the estimated Other expenses set forth in the Annual Expenses table are accurate, and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Fund's actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
(1) EATON VANCE OR AN AFFILIATE HAS AGREED TO REIMBURSE ALL ORGANIZATIONAL COSTS AND PAY ALL OFFERING COSTS (OTHER THAN SALES LOADS) THAT EXCEED $0.04 PER COMMON SHARE (0.20% OF THE OFFERING PRICE).
(2) EATON VANCE HAS AGREED TO PAY FROM ITS OWN ASSETS A STRUCTURING FEE TO EACH OF [ ] AND [ ] [AND ADDITIONAL COMPENSATION TO ]. [EATON VANCE MAY PAY CERTAIN QUALIFYING UNDERWRITERS A MARKETING AND STRUCTURING FEE, ADDITIONAL COMPENSATION, OR A SALES INCENTIVE FEE IN CONNECTION WITH THE OFFERING.] SEE "UNDERWRITING."
(3) YOU WILL BE CHARGED A $5.00 SERVICE CHARGE AND PAY BROKERAGE CHARGES IF YOU DIRECT THE PLAN AGENT TO SELL YOUR COMMON SHARES HELD IN A DIVIDEND REINVESTMENT ACCOUNT.
(4) ESTIMATED EXPENSES BASED ON THE CURRENT FISCAL YEAR.
THE FUND
Eaton Vance Risk-Managed Diversified Equity Income Fund (the "Fund") is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act" or the "Investment Company Act"). The Fund was organized as a Massachusetts business trust on April 4, 2007 pursuant to a Declaration of Trust governed by the laws of The Commonwealth of Massachusetts and has no operating history. The Fund's principal office is located at The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109, and its telephone number is 1-800-225-6265.
This Prospectus relates to the initial public offering of the Fund's Common Shares of beneficial interest, $0.01 par value (the "Common Shares"). See "Underwriting."
USE OF PROCEEDS
The net proceeds of this offering of Common Shares will be approximately $ (or $------------- assuming exercise of the Underwriters' overallotment option in full), which, after payment of the estimated offering expenses, will be invested in accordance with the Fund's investment objectives and policies as soon as practicable, but, in no event, assuming normal market conditions, later than three months after the receipt thereof. Pending such investment, the proceeds may be invested in high-quality, short-term debt securities, cash and/or cash equivalents. Eaton Vance or an affiliate has agreed to (i) reimburse all organizational costs of the Fund and (ii) pay all offering costs of the Fund (other than sales load) that exceed $.04 per Common Share.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. Relative to other equity income funds, the Fund seeks to provide less volatile returns and reduced exposure to loss of value during stock market declines. In pursuing its investment objectives, the Fund will evaluate returns on an after-tax basis, seeking to minimize and defer shareholder federal income taxes. There can be no assurance that the Fund will achieve its investment objectives.
Under normal market conditions, the Fund's investment program will consist primarily of owning a diversified portfolio of common stocks and employing a variety of options strategies. The Fund will seek to earn high levels of tax- advantaged income and gains by (1) investing in stocks that pay dividends that qualify for favorable federal income tax treatment, (2) writing (selling) put options on individual stocks deemed attractive for purchase, and (3) writing (selling) stock index call options with respect to a portion of its common stock portfolio value. To reduce the Fund's risk of loss due to a decline in the value of the general equity market, the Fund will purchase index put options with respect to a substantial portion of the value of its common stock portfolio. Options on broad-based stock indices generally qualify for treatment as "section 1256 contracts," as defined in the Internal Revenue Code of 1986, as amended, on which capital gains and losses are generally treated as 60% long- term and 40% short-term, regardless of holding period.
PRIMARY INVESTMENT POLICIES
GENERAL COMPOSITION OF THE FUND. Under normal market conditions, the Fund will invest at least 80% of its total assets in a combination of (1) dividend-paying common stocks, (2) stocks and other liquid assets the value of which is subject to written put options on individual stocks, and (3) common stocks the value of which is subject to written index call options. In addition, under normal market conditions, the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks. The Fund will emphasize investments in stocks that pay dividends that qualify for federal income taxation at rates applicable to long-term capital gains. The Fund will emphasize writing put options on individual stocks that the Adviser believes are attractive for purchase at prices at or above the exercise of the put options written.
The Fund will invest primarily in common stocks of United States issuers. The Fund may invest up to 40% of its total assets in securities of foreign issuers, including securities evidenced by American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and European Depositary Receipts ("EDRs"). The Fund may invest up to 5% of its total assets in securities of emerging market issuers. The Fund expects that its assets will normally be invested across a broad range of industries and market sectors. The Fund may not invest 25% or more of its total assets in the securities of issuers in any single industry. The Fund may invest a portion of its assets in stocks of mid-capitalization companies. Eaton Vance generally considers mid-capitalization companies to be those companies having market capitalizations within the range of capitalizations for the S&P MidCap 400 Index (the "S&P MidCap 400"). As of January 31, 2007, the median market capitalization of companies in the S&P MidCap 400 was approximately $2.57 billion.
The Fund generally intends to buy put options and write call options on one or more broad-based stock indices that the Adviser believes collectively approximate the characteristics of its common stock portfolio (or that portion of its portfolio against which options are purchased and written). The Fund intends initially to buy put options and write call options primarily on the S&P 500 Composite Stock Price Index{reg-trade-mark} ("S&P 500"), and may also initially buy put options and write call options on other domestic and foreign stock indices. Over time, the indices on which the Fund buys put options and writes call options may vary as a result of changes in the availability and liquidity of various listed index options, changes in stock portfolio holdings, the Adviser's evaluation of equity market conditions and other factors.
Under normal market circumstances, the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks to reduce the Fund's risk of loss due to a decline in the value of the general equity market. Initially, the Fund expects to purchase index put options with respect to 100% of the value of its common stock portfolio.
Writing put options on individual stocks involves a tradeoff between the options premiums received and exposure to declines in value of the stocks against which put options are written. Writing index call options involves a tradeoff between the option premiums received and reduced participation in potential future stock price appreciation. Purchasing index put options is a risk management technique that involves a tradeoff between the options premiums paid and a potential increase in value of the options positions in a stock market decline. To the extent that the individual stocks held by the Fund and/or the stocks subject to written put options decrease in value more than the index or indices subject to purchased put options, the strategy of purchasing index put options will provide only limited or no protection with respect to the value of the Fund's assets and may result in worse performance for the Fund than if it did not buy index put options. In implementing this strategy, the Fund generally will use premiums earned on writing put options on individual stocks and on selling index call options to purchase index put options. Accordingly, the buying of index put options will reduce the Fund's earnings available for distribution from other sources, including from selling index call options and put options on individual stocks.
As the seller of put options on individual stocks the Fund will seek to benefit from the receipt of option premiums. If the price of the stock closes above the exercise price on the option valuation date the Fund retains the premium received and has no obligation to the purchaser. If the price of the stock closes at or below the exercise price on the options valuation date, the Fund may be obligated to purchase the stock at the exercise price. As the seller of index call options, the Fund will receive cash (the premiums) from option purchasers. The purchaser of an index call option has the right to any appreciation in the value of the applicable index over a fixed price (the exercise price) as of a specified date in the future (the option valuation date). Generally, the Fund intends to sell call options that are slightly "out- of-the-money" (i.e., the exercise price generally will be slightly above the current level of the applicable index when the option is sold). The Fund may also sell index options that are more substantially "out-of-the-money." Such options that are more substantially "out-of-the-money" provide greater potential for the Fund to realize capital appreciation, but generally would pay a lower premium than options that are slightly "out-of-the-money." In writing index options, the Fund will, in effect, sell the potential appreciation in the value of the applicable index above the exercise price in exchange for the option premium received. If, at expiration, an index call option sold by the Fund is exercised, the Fund will pay the purchaser the difference between the cash value of the applicable index and the exercise price of the option. The premium, the exercise price and the market value of the applicable index will determine the gain or loss realized by the Fund as the seller of the index call option.
As the purchaser of an index put option, the Fund will seek to benefit from a decline in the market prices of the underlying index. The Fund will pay a premium to the seller of the option for the right to receive payments of cash to the extent that the value of the applicable index declines below a fixed price (the exercise price) as of a specified date in the future (the option valuation date). If the index price is above the exercise price of the option as of the option valuation date, the options expires worthless and the Fund will not be able to recover the option premium paid to the seller.
The Fund's policies that, under normal market conditions, the Fund will invest at least 80% of its total assets in a combination of (1) dividend-paying common stocks, (2) stocks and other liquid assets the value of which is subject to written put options on individual stocks, and (3) common stocks the value of which is subject to written index call options and that the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks are non-fundamental policies that may be changed by the Fund's Board of Trustees (the "Board") without Common Shareholder approval following the provision of 60 days' prior written notice to Common Shareholders.
In implementing the Fund's investment strategy, the Adviser and Sub-Adviser intend to employ a variety of techniques and strategies designed to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund as described below.
The S&P 500 is an unmanaged index of 500 stocks maintained and published by Standard & Poor's that is market-capitalization weighted and generally representative of the performance of larger stocks traded in the United States.
The Fund is not sponsored, endorsed, sold or promoted by any index sponsor. No index sponsor has passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to the Fund. No index sponsor has made any representation or warranty, express or implied, to the Common Shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly, or the ability of any index to track general stock market performance. The indices are determined, composed and calculated by the respective index sponsors without regard to the Fund or its use of the indices for option writing. The index sponsors have no obligation to take the needs of the Fund or its Common Shareholders into consideration in determining, composing or calculating the indices. No index sponsor is responsible for or has participated in the determination of the timing of, price of, or number of Common Shares of the Fund to be issued. No index sponsor has any liability in connection with the management, administration, marketing or trading of the Fund.
THE INDEX SPONSORS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE INDICES OR ANY DATA INCLUDED THEREIN. THE INDEX SPONSORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, THE COMMON SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES IN THE FUND'S OPTIONS WRITING PROGRAM. IN PUBLISHING THE INDICES, THE INDEX SPONSORS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL AN INDEX SPONSOR HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT STRATEGY. The Adviser believes that a strategy of owning a portfolio of common stocks, writing (selling) put options on individual stocks deemed attractive for purchase, selling index call options with respect to a portion of portfolio value, and purchasing index put options on a substantial portion of portfolio value can provide current income and gains and an attractive risk-return profile during a variety of equity market conditions. The Fund will sell only "covered" call and put options. An index call option is considered covered if the Fund maintains with its custodian assets determined to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the index. An index call option also is covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid (in accordance with procedures established by the Board). In order for put options written on individual stocks to be considered "covered" the Fund must (1) maintain with its custodian assets determined to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the stock, (2) continue to own an equivalent number of puts of the same "series" (that is, puts on the same underlying security having the same exercise prices and expiration dates as those written by the Fund), or an equivalent number of puts of the same "class" (that is, puts on the same underlying security) with exercise prices greater than those it has written (or, if the exercise prices of the puts it holds are less than the exercise prices of those it has written, it will deposit the difference with its custodian in a segregated account) or (3) sell short the securities underlying the put option at the same or a higher price than the exercise price on the put option written.
Compared to selling call options on individual stocks, the Adviser believes that selling index call options can achieve better tax and transactional efficiency because listed options on broad-based securities indices generally qualify as "section 1256 contracts" under the Code subject to specialized tax treatment and because the markets for index options are generally deeper and more liquid than options on individual stocks. Although the Fund generally and initially expects to write stock index call options with respect to only a portion of its common stock portfolio value, the Fund may in market circumstances deemed appropriate by the Adviser write index call options on up to 100% of its assets. In certain market circumstances, the Fund may forego writing index call options.
To avoid being subject to the "straddle rules" under federal income tax law, the Fund intends to limit the overlap between its stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis. Similarly, the Fund also will seek to avoid being subject to the straddle rules with respect to writing call options and purchasing put options on the same index. Under the "straddle rules," "offsetting positions with respect to personal property" generally are considered to be straddles. In general, investment positions will be offsetting if there is a substantial diminution in the risk of loss from holding one position by reason of holding one or more other positions. The Fund expects that the index call options it writes and index put options it purchases will not be considered straddles because its stock holdings will be sufficiently dissimilar from the components of each index on which it has open options positions under applicable guidance established by the Internal Revenue Service (the "IRS"). Under certain circumstances, however, the Fund may enter into options transactions or certain other investments that may constitute positions in a straddle.
The Fund's options strategy is designed to produce current cash flow from options premiums and to moderate the volatility of the Fund's returns. This option strategy is generally of a hedging nature, and is not designed to speculate on equity market performance.
The Adviser does not intend to sell index call options or put options on individual stocks representing amounts greater than the value of the Fund's common stock portfolio (i.e., take a "naked" position). The Adviser generally intends to sell index options that are exchange-listed and "European style," meaning that the options may only be exercised on the expiration date of the option. Since listed options on individual stocks in the United States are
generally "American style," meaning the options may be exercised at any time during the option period, the Adviser believes that substantially all of the single stock options written by the Fund will be American style. Exchange- traded index options are typically settled in cash and provide that the holder of the option has the right to receive an amount of cash determined by the excess of the exercise-settlement value of the index over the exercise price of the option. The exercise-settlement value is calculated based on opening sales prices of the component index stocks on the option valuation date, which is the last business day before the expiration date. Generally, the Adviser intends to sell index call options that are slightly "out-of-the-money," meaning that option exercise prices generally will be slightly above the current level of the index at the time the options are written. The Fund may also sell index call options that are more substantially "out-of-the-money." Such options that are more substantially "out-of-the-money" provide greater potential for the Fund to realize capital appreciation on its portfolio stocks but generally would pay a lower premium than options that are slightly "out-of-the-money." The Adviser expects initially to follow a primary call options strategy of selling index call options with a remaining maturity of between approximately one and three months and maintaining its short call options positions until approximately their option valuation date, at which time replacement call option positions with a remaining maturity within this range are written. In certain market circumstances, the Fund may forego writing index call options.
In implementing the Fund's investment strategy, the Adviser intends to employ a variety of techniques and strategies designed to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund. These include: (1) investing in stocks that pay dividends that qualify for federal income taxation at rates applicable to long- term capital gains and complying with the holding period and other requirements for favorable tax treatment; (2) selling index call options and purchasing index put options that qualify for treatment as "section 1256 contracts" under the Code on which capital gains and losses are generally treated as 60% long-term and 40% short-term, regardless of holding period; (3) limiting the overlap between the Fund's stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis so that the Fund's stock holdings and index call options are not subject to the "straddle rules;" (4) avoiding offsetting positions in written index call options and purchased index put options that would be subject to the "straddle rules," (5) engaging in a systematic program of tax-loss harvesting in the Fund's stock portfolio, periodically selling stock positions that have depreciated in value to realize capital losses that can be used to offset capital gains realized by the Fund; and (6) managing the sale of appreciated stock positions so as to minimize the Fund's net realized short-term capital gains in excess of net realized long-term capital losses. When an appreciated security is sold, the Fund intends to select for sale the share lots resulting in the most favorable tax treatment, generally those with holding periods sufficient to qualify for long-term capital gains treatment that have the highest cost basis.
As described above, the Fund intends to emphasize investments in stocks that pay dividends that qualify for federal income taxation at rates applicable to long-term capital gains. Under federal income tax law enacted in 2003, the qualified dividend income of individuals and other noncorporate taxpayers is taxed at long-term capital gain tax rates if certain holding period and other requirements are met. Qualified dividends are dividends from domestic corporations and dividends from foreign corporations that meet certain specified criteria. The Fund generally can pass the tax treatment of qualified dividend income it receives through to Common Shareholders. For dividends the Fund receives to qualify for tax-advantaged treatment, the Fund must hold stock paying qualified dividends for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (or more than 90 days during the associated 181-day period, in the case of certain preferred stocks). In addition, the Fund cannot be obligated to make related payments (pursuant to a short sale or otherwise) with respect to positions in any security that is substantially similar or related property with respect to such stock. Similar provisions apply to each Common Shareholder's investment in the Fund. In order for qualified dividend income paid by the Fund to a Common Shareholder to be taxable at long-term capital gains rates, the Common Shareholder must hold his or her Fund shares for more than 60 days during the 121-day period surrounding the ex-dividend date. The provisions of the Code applicable to qualified dividend income are effective through 2010. Thereafter, qualified dividend income will be subject to tax at ordinary income rates unless further legislative action is taken. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income in 2011 unless further legislative action is taken.
Options on broad-based equity indices that trade on a national securities exchange registered with the Securities and Exchange Commission (the "SEC") or a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission generally qualify for treatment as "section 1256 contracts" under the Code. Options on broad-based equity indices that trade on other exchanges, boards of trade or markets designated by the United States Secretary of Treasury also qualify for treatment as "section 1256 contracts" under the Code. Because only a small number of exchanges, boards and markets outside the United States have to date received the necessary designation, most foreign- traded stock index options do not currently qualify for treatment as "section 1256 contracts" under the Code. To the extent that the Fund writes options on indices based upon foreign stocks, the Fund generally intends to sell options on broad-based foreign country and/or regional stock indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code. Options on foreign indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code may trade in substantially lower volumes and with
substantially wider bid-ask spreads than other options contracts on the same or similar indices that trade on other markets outside the United States. To implement its options program most effectively, the Fund may sell index options that do not qualify as "section 1256 contracts" under the Code. Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or settlement of the positions, and would be treated as short-term gain or loss.
The foregoing policies relating to investments in common stocks and options are the Fund's primary investment policies. In addition to its primary investment policies, the Fund may invest to a limited extent in other types of securities and engage in certain other investment practices. In addition to writing index call options, the Fund may write call options on up to 20% of the value of its total assets on futures contracts based upon broad-based securities indices. The Fund's use of such options on index futures would be substantially similar to its use of options directly on indices. The Fund may also invest up to 20% of its total assets in derivative instruments acquired for hedging, risk management and investment purposes (to gain exposure to securities, securities markets, market indices and/or currencies consistent with its investment objectives and policies), provided that no more than 10% of the Fund's total assets may be invested in such derivative instruments acquired for non-hedging purposes. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments. To seek to protect against price declines in securities holdings with large accumulated gains, the Fund may use various hedging techniques (such as the purchase and sale of futures contracts on stocks and stock indices and options thereon, equity swaps, covered short sales, forward sales of stocks and the purchase and sale of forward currency exchange contracts and currency futures). By using these techniques rather than selling appreciated securities, the Fund can, within certain limitations, reduce its exposure to price declines in the securities without currently realizing substantial capital gains under current federal tax law. Derivative instruments may also be used by the Fund to enhance returns or as a substitute for the purchase or sale of securities. As a general matter, dividends received on hedged stock positions are characterized as ordinary income and are not eligible for favorable tax treatment. Dividends received on securities with respect to which the Fund is obligated to make related payments (pursuant to short sales or otherwise) will be treated as fully taxable ordinary income (i.e., income other than tax-advantaged dividends). In addition, use of derivatives may give rise to short-term capital gains and other income that would not qualify for favorable tax treatment. See "Federal Income Tax Matters" and "Investment objectives and polices."
TAX-MANAGED INVESTING. Taxes are a major influence on the net after-tax returns that investors receive on their taxable investments. There are five potential sources of returns for a Common Shareholder: (1) appreciation or depreciation in the value of the Common Shares; (2) distributions of qualified dividend income; (3) distributions of other investment income and net short-term capital gains; (4) distributions of long-term capital gains (and long-term capital gains retained by the Fund); and (5) distributions of return of capital. These different sources of investment returns are subject to widely varying federal income tax treatment. Distributions of other investment income (i.e., non-qualified dividend income) and net realized short-term gains are taxed currently as ordinary income, at rates as high as 35%. Distributions of qualified dividend income and net realized long-term gains (whether distributed or retained by the Fund) are taxed currently at rates up to 15% for individuals and other noncorporate taxpayers (provided in the case of qualified dividend income that certain holding period and other requirements are met). Generally, return from unrealized appreciation and depreciation in the value of Common Shares and distributions characterized as return of capital are not taxable until the Common Shareholder sells his or her Common Shares. Upon sale, a capital gain or loss equal to the difference between the amount realized on the sale and the Common Shareholder's adjusted tax basis is realized. Capital gain is considered long-term and is taxed at rates up to 15% for individuals and other noncorporate taxpayers if the Common Shareholder has held his or her shares more than one year. Otherwise, capital gain is considered short-term and is taxed at rates up to 35%. The after-tax returns achieved by a Common Shareholder will be substantially influenced by the mix of different types of returns subject to varying federal income tax treatment.
In implementing the Fund's investment strategy, the Adviser intends to employ a variety of techniques and strategies designed to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund. These include: (1) investing in stocks that pay dividends that qualify for federal income taxation at rates applicable to long- term capital gains and complying with the holding period and other requirements for favorable tax treatment; (2) selling index call options and purchasing index put options that qualify for treatment as "section 1256 contracts" under the Code on which capital gains and losses are generally treated as 60% long-term and 40% short-term, regardless of holding period; (3) limiting the overlap between the Fund's stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis so that the Fund's stock holdings and index call options are not subject to the "straddle rules;" (4) avoiding offsetting positions in written index call options and purchased index put options that would be subject to the "straddle rules," (5) engaging in a systematic program of tax-loss harvesting in the Fund's stock portfolio, periodically selling stock positions that have depreciated in value to realize capital losses that can be used to offset capital gains realized by the Fund; and (6) managing the sale of appreciated stock positions so as to minimize the Fund's net realized short-term capital gains in excess of net realized long-term capital losses. When an appreciated security is sold, the Fund intends to select for sale the share lots resulting in the most favorable tax treatment, generally those with holding periods sufficient to qualify for long-term capital gains treatment that have the highest cost basis.
The Fund intends to emphasize investments in stocks that pay dividends that qualify for federal income taxation at rates applicable to long-term capital gains. Under federal income tax law enacted in 2003, the qualified dividend income of individuals and other noncorporate taxpayers is taxed at long-term
capital gain tax rates if certain holding period and other requirements are met. Qualified dividends are dividends from domestic corporations and dividends from foreign corporations that meet certain specified criteria. The Fund generally can pass the tax treatment of qualified dividend income it receives through to Common Shareholders. For dividends the Fund receives to qualify for tax- advantaged treatment, the Fund must hold stock paying qualified dividends for more than 60 days during the 121-day period beginning 60 days before the ex- dividend date (or more than 90 days during the associated 181-day period, in the case of certain preferred stocks). In addition, the Fund cannot be obligated to make related payments (pursuant to a short sale or otherwise) with respect to positions in any security that is substantially similar or related property with respect to such stock. Similar provisions apply to each Common Shareholder's investment in the Fund. In order for qualified dividend income paid by the Fund to a Common Shareholder to be taxable at long-term capital gains rates, the Common Shareholder must hold his or her Fund shares for more than 60 days during the 121-day period surrounding the ex-dividend date. The provisions of the Code applicable to qualified dividend income are effective through 2010. Thereafter, qualified dividend income will be subject to tax at ordinary income rates unless further legislative action is taken. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income in 2011 unless further legislative action is taken.
Options on broad-based equity indices that trade on a national securities exchange registered with the Securities and Exchange Commission (the "SEC") or a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission generally will qualify for treatment as "section 1256 contracts." Options on broad-based equity indices that trade on other exchanges, boards of trade or markets designated by the United States Secretary of Treasury also qualify for treatment as "section 1256 contracts." Because only a small number of exchanges, boards and markets outside the United States have to date received the necessary designation, most foreign-traded stock index options do not currently qualify for treatment as "section 1256 contracts." To the extent that the Fund writes options on indices based upon foreign stocks, the Fund generally intends to sell options on broad-based foreign country and/or regional stock indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts." Options on foreign indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code may trade in substantially lower volumes and with substantially wider bid-ask spreads than other options contracts on the same or similar indices that trade on other markets outside the United States. To implement its options program most effectively, the Fund may sell index options that do not qualify as "section 1256 contracts." Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or settlement of the positions, and would be treated as short-term gain or loss.
To seek to protect against price declines in securities holdings with large accumulated gains, the Fund may use various hedging techniques (such as the sale of futures contracts on stocks and stock indices and options thereon, equity swaps, covered short sales, and forward sales of stocks). By using these techniques rather than selling appreciated securities, the Fund can, within certain limitations, reduce its exposure to price declines in the securities without currently realizing substantial capital gains under current federal tax law. Derivative instruments may also be used by the Fund to enhance returns or as a substitute for the purchase or sale of securities. As a general matter, dividends received on hedged stock positions are characterized as ordinary income and are not eligible for favorable tax treatment. Dividends received on securities with respect to which the Fund is obligated to make related payments (pursuant to short sales or otherwise) will be treated as fully taxable ordinary income (i.e., income other than tax-advantaged qualified dividend income). In addition, use of derivatives may give rise to short-term capital gains and other income that would not qualify for favorable tax treatment. As indicated above, in addition to writing index call options, the Fund may invest up to 20% of its total assets in derivative instruments acquired for hedging, risk management and investment purposes (to gain exposure to securities, securities markets, markets indices and/or currencies consistent with its investment objectives and policies), provided that no more than 10% of the Fund's total assets may be invested in such derivative instruments acquired for non-hedging purposes. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments.
COMMON STOCKS. Under normal market conditions, the Fund's investment program will consist primarily of owning a diversified portfolio of common stocks. Common stock represents an equity ownership interest in the issuing corporation. Holders of common stock generally have voting rights in the issuer and are entitled to receive common stock dividends when, as and if declared by the corporation's board of directors. Common stock normally occupies the most subordinated position in an issuer's capital structure. Returns on common stock investments consist of any dividends received plus the amount of appreciation or depreciation in the value of the stock.
Although common stocks have historically generated higher average returns than fixed-income securities over the long term and particularly during periods of high or rising concerns about inflation, common stocks also have experienced significantly more volatility in returns and may not maintain their real value during inflationary periods. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. Also, the prices of common stocks are sensitive to general movements in the stock market and a drop in the stock market may depress the price of common stocks to which the Fund has exposure. Common stock prices fluctuate for many reasons, including changes in investors' perceptions of the financial condition
of an issuer or the general condition of the relevant stock market, or when political or economic events affecting the issuer occur. In addition, common stock prices may be sensitive to rising interest rates as the costs of capital rise and borrowing costs increase.
FOREIGN SECURITIES. The Fund may invest up to 40% of its total assets in securities of non-United States issuers, including up to 5% of its total assets in securities of issuers located in emerging markets. The value of foreign securities is affected by changes in currency rates, foreign tax laws (including withholding tax), government policies (in this country or abroad), relations between nations and trading, settlement, custodial and other operational risks. In addition, the costs of investing abroad are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than markets in the United States. Foreign investments also could be affected by other factors not present in the United States, including expropriation, armed conflict, confiscatory taxation, lack of uniform accounting and auditing standards, less publicly available financial and other information and potential difficulties in enforcing contractual obligations. As an alternative to holding foreign-traded securities, the Fund may invest in dollar-denominated securities of foreign companies that trade on United States exchanges or in the United States over-the-counter market (including depositary receipts, which evidence ownership in underlying foreign securities). Dividends received with respect to stock of a foreign corporation may qualify for the reduced rates of federal income taxation applicable to qualified dividend income only if such corporation satisfies the requirements to be a "qualified foreign corporation" as defined in the Code.
The Fund may invest in ADRs, EDRs and GDRs, which are certificates evidencing ownership of shares of foreign issuers and are alternatives to purchasing directly the underlying foreign securities in their national markets and currencies. However, they continue to be subject to many of the risks associated with investing directly in foreign securities. These risks include foreign exchange risk as well as the political and economic risks of the underlying issuer's country. ADRs, EDRs and GDRs may be sponsored or unsponsored. Unsponsored receipts are established without the participation of the issuer. Unsponsored receipts may involve higher expenses, may not pass through voting or other shareholder rights, and may be less liquid than sponsored receipts.
OPTIONS GENERALLY. The Fund's options activities will include (1) writing index call options in circumstances where the Adviser believes that the earnings from options premiums will be beneficial to the Fund relative to the lost potential for capital appreciation on portfolio stocks above the strike price of the options and, (2) purchasing index put options and writing put options on individual strategies that the Adviser believes are attractive at the lower strike price.
Writing index call options involves a tradeoff between the option premiums received and reduced participation in potential future stock price appreciation. Purchasing index put options involves a tradeoff between benefiting from an anticipated decline in the value of the applicable index and paying the option premium to the seller. Writing put options on individual stocks involves a tradeoff between the options premiums received and increased exposure to potential future decline in value of the stocks against which puts are written. The Adviser does not intend to sell index call options or put options representing amounts greater than the value of the Fund's common stock portfolio (i.e., take a "naked" position). The Adviser generally intends to sell index options that are exchange-listed and "European style," meaning that the options may only be exercised on the expiration date of the option. Since listed options on individual stocks in the United States are generally "American style," meaning the options may be exercised at any time during the option period, the Adviser believes that substantially all of the single stock options written by the Fund will be American style.
The Fund will sell only "covered" call and put options. An index call option is considered covered if the Fund maintains with its custodian assets determined to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the index. An index call option also is covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid (in accordance with procedures established by the Board). In order for put options on individual stocks to be considered "covered" the Fund must (1) maintain with its custodian assets determined to be liquid (in accordance with procedures established by the Board) in an amount at least equal to the contract value of the stock, (2) continue to own an equivalent number of puts of the same "series" (that is, puts on the same underlying security having the same exercise prices and expiration dates as those written by the Fund), or an equivalent number of puts of the same "class" (that is, puts on the same underlying security) with exercise prices greater than those it has written (or, if the exercise prices of the puts it holds are less than the exercise prices of those it has written, it will deposit the difference with its custodian in a segregated account) or (3) sell short the securities underlying the put option at the same or a higher price than the exercise price on the put option written.
If an option written by the Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires. The Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option when purchased. The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. In most cases, net gains from the Fund's option strategy will be short-term capital gains which, for federal income tax purposes, will constitute net investment company taxable income. See "Distributions--Federal income tax matters."
The principal factors affecting the market value of an option include supply and demand, interest rates, the current market price of the underlying security in relation to the exercise price of the option, the actual or perceived volatility of the underlying security, and the time remaining until the expiration date. The premium paid for an option purchased by the Fund is an asset of the Fund. The premium received for an option written by the Fund is recorded as an asset and equivalent liability. The Fund then adjusts over time the liability to the market value of the option. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices or otherwise at fair value as determined by the Board of the Fund. The transaction costs of buying and selling options consist primarily of commissions (which are imposed in opening, closing, exercise and assignment transactions), but may also include margin and interest costs in particular transactions. The impact of transaction costs on the profitability of a transaction may often be greater for options transactions than for transactions in the underlying securities because these costs are often greater in relation to options premiums than in relation to the prices of underlying securities. Transaction costs may be especially significant in option strategies calling for multiple purchases and sales of options, such as spreads or straddles. Transaction costs may be different for transactions effected in foreign markets than for transactions effected in U.S. markets.
INDEX OPTIONS GENERALLY. The Fund will pursue its objectives in part by writing (selling) stock index call options with respect to a portion of its common stock portfolio value. The Fund generally intends to sell index options that are exchange-listed and "European style," meaning that the options may be exercised only on the expiration date of the option. Index options differ from options on individual stocks in that index options (i) typically are settled in cash rather than by delivery of securities (meaning the exercise of an index option does not involve the actual purchase or sale of securities) and (ii) reflect price fluctuations in a group of securities or segments of the securities market rather than price fluctuations in a single security.
United States listed options contracts are originated and standardized by the Options Clearing Corporation (the "OCC"). Currently, United States listed index options are available on approximately [89] indexes, with new listings added periodically. In the United States, the Fund generally intends to sell index call options that are issued, guaranteed and cleared by the OCC. The Fund may also sell index call options in the United States and outside the United States that are not issued, guaranteed or cleared by the OCC. The Adviser believes that there exists sufficient liquidity in the index options markets to fulfill the Fund's requirements to implement its strategy.
SELLING INDEX CALL OPTIONS. The Fund's index option strategy is designed to produce current cash flow from options premiums and to moderate the volatility of the Fund's returns. This index option strategy is of a hedging nature, and is not designed to speculate on equity market performance.
As the seller of index call options, the Fund will receive cash (the premium) from the purchasers thereof. The purchaser of an index option has the right to any appreciation in the value of the applicable index over a fixed price (the exercise price) as of a specified date in the future (the option valuation date). Generally, the Fund intends to sell index call options that are slightly "out-of-the-money" (i.e., the exercise price generally will be slightly above the current level of the applicable index when the option is sold). The Fund may also sell index options that are more substantially "out-of-the-money." Such options that are more substantially "out-of-the-money" provide greater potential for the Fund to realize capital appreciation on its portfolio stocks but generally would pay a lower premium than options that are slightly "out-of-the- money." When it writes index call options, the Fund will, in effect, sell the potential appreciation in the value of the applicable index above the exercise price in exchange for the option premium received. If, at expiration, an index call option sold by the Fund is exercised, the Fund will pay the purchaser the difference between the cash value of the applicable index and the exercise price of the option. The premium, the exercise price and the market value of the applicable index will determine the gain or loss realized by the Fund as the seller of the index call option.
Prior to expiration, the Fund may close an option position by making an offsetting market purchase of identical option contracts (same type, underlying index, exercise price and expiration). The cost of closing transactions and payments in settlement of exercised options will reduce the net option premiums available for distribution to Common Shareholders by the Fund. The reduction in net option premiums due to a rise in stock prices should generally be offset, at least in part, by appreciation in the value of common stocks held and by the opportunity to realize higher premium income from selling new index options at higher exercise prices.
In certain extraordinary market circumstances, to limit the risk of loss on the Fund's index option strategy, the Fund may enter into "spread" transactions by purchasing index call options with higher exercise prices than those of index call options written. The Fund will only engage in such transactions when Eaton
Vance and Rampart believe that certain extraordinary events temporarily have depressed equity prices and substantial short-term appreciation of such prices is expected. By engaging in spread transactions in such circumstances the Fund will reduce the limitation imposed on its ability to participate in such recovering equity markets that exist if the Fund only writes index call options. The premiums paid to purchase such call options are expected to be lower than the premiums earned from the call options written at lower exercise prices. However, the payment of these premiums will reduce amounts available for distribution from the Fund's option activity.
For written index options that qualify as "section 1256 contracts," the Fund's gains and losses thereon generally will be treated as 60% long-term and 40% short-term capital gain or loss, regardless of holding period. In addition, the Fund generally will be required to "mark to market" (i.e., treat as sold for fair market value) each outstanding index option position at the close of each taxable year (and on October 31 of each year for excise tax purposes) and to adjust the amount of gain or loss subsequently realized to reflect the marking to market. Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or exercise of the positions and would be treated as short-term gain or loss.
There are three items needed to identify a particular index option contract: (1) the expiration month, (2) the exercise (or strike) price and (3) the type (i.e., call or put). For example, a January 2005 1200 strike S&P 500 call option provides the option holder the right to receive $100 multiplied by the positive difference between the January option exercise-settlement value of the S&P 500 (determined on January 20, 2005 based on opening sales prices of the component index stocks on that date) and 1200. A call option whose exercise price is above the current price of the underlying index is called "out-of-the-money" and a call option whose exercise price is below the current price of the underlying index is called "in-the-money."
The following is a conceptual example of the returns that may be achieved from a buy-write investment strategy that consists of holding a portfolio of stocks whose performance matches the S&P 500 and selling S&P 500 call options on the full value of the stock position. This example is not meant to represent the performance of actual option contracts or the Fund. In particular, it should be noted that the example is based upon writing call options on a single index while holding a portfolio of securities precisely matching the index. In implementing its options strategy, the Fund may write options on a number of different representative indices, will not hold stocks precisely matching these indices, and generally intends to write options on only a portion of the value of its portfolio of common stocks. In addition, the example does not account for the cost of options transactions, which would lower returns.
A holder of a portfolio of common stocks writes (sells) January 2005 1200 strike S&P 500 call options on December 17, 2004 when the S&P 500 is at 1198.63. When written, the options are 1.37 points (0.110%) "out of the money." The options writer receives $14.41 (1.20%) per option written. Assume that the portfolio of stocks held by the options writer matches the performance of the S&P 500 over the period until the January exercise-settlement value of the S&P 500 is determined on January 20, 2005.
In the example, the return over the period until option expiration earned
by the holder of a portfolio of stocks whose performance matches the S&P 500 and
who writes S&P 500 index call options on the full value of the portfolio
position and maintains the options position until expiration will be as follows:
(1) if the S&P 500 declines 1.20%, the option will expire worthless and the
holder will have a net return of zero (option premium offsets loss in stock
portfolio); (2) if the S&P 500 is flat, the option will again expire worthless
and the holder will have a net return of 1.20% (option premium plus no gain or
loss on portfolio); (3) if the S&P 500 rises 0.11%, the option will again expire
with no value and the holder will have a net return of 1.31% (option premium
plus 0.11% portfolio return); and (4) if the index rises more than 0.11%, the
exercise of the option would limit portfolio gain to 0.11% and total net return
to 1.31%. If the index value at exercise exceeds the exercise price, returns
over the period from the position are capped at 1.31%. On an annualized basis,
before accounting for the costs of the options transactions, in this example
option premiums increase returns by approximately 12.9% in down, flat and
moderately up markets; annualized returns in this example for the buy-write
strategy, before accounting for the costs of the options transactions, are
capped at approximately 14.1% in a strong up market.
As demonstrated in the example, writing index call options can lower the variability of potential return outcomes and can enhance returns in three of four market performance scenarios (down, flat or moderately up). Only when the level of the index at option expiration exceeds the sum of the premium received and the option exercise price would the buy-write strategy be expected to provide lower returns than the stock portfolio-only alternative. The amount of downside protection afforded by the buy-write strategy in declining market scenarios is limited, however, to the amount of option premium received. If an index declines by an amount greater than the option premium, a buy-write strategy consisting of owning all of the stocks in the index and writing index options on the value thereof would generate an investment loss. The Fund's returns from implementing a buy-write strategy using index options will also be substantially affected by the performance of the Fund's stock portfolio versus the indices on which it writes call options and by the percentage of portfolio value on which options are written. The returns on the Fund's portfolio are unlikely to be the same as the returns on the indices on which it writes options.
PUT OPTIONS. Put options are contracts that give the holder of the option, in return for a premium, the right to sell to the writer of the option the security/index underlying the option at a specified exercise price at any time during the term of the option. As discussed above, the Fund will purchase index
put options and write (sell) put options on individual stocks held in the portfolio to help protect against a decline in the value of the Fund's portfolio securities. The premiums paid to acquire put options will reduce amounts available for distribution from the Fund's options activity. The Fund generally will emphasize purchasing index put options and writing put options on individual stocks that the Adviser believes are attractive at the lower strike price. In implementing this strategy, the Fund generally will use premiums earned on writing put options on individual stocks to purchase index put options. Accordingly, under such circumstances, the buying and selling of put options should not reduce the Fund's earnings available for distribution. In addition, the Fund may engage in purchasing index put options in an amount greater than its writing of options on individual stocks. In such circumstances, the premiums on purchases of index put options will reduce the earnings otherwise available from other sources, including premiums earned from writing index call options. Although the Adviser does not intend this as the Fund's primary put strategy, the Fund reserves the right to purchase index put options in the absence of a program of writing options on individual stocks as a general hedge against potential declines in equity markets. In such circumstances, premiums paid to purchase such index put options will not be offset in whole or in part by premiums received from writing put options on individual stocks and will reduce the earnings available to the Fund from all other sources. [Finally, although also not a part of the Fund's primary put strategy, the Fund reserves the right to write put options on individual stocks in the absence of purchasing index put options when the Adviser believes that these stocks will increase in value. This technique would generate premium earnings that are not offset by premiums paid on purchasing index put options. However, this would provide no hedge against a general market decline and would compound losses if the stocks subject to the puts decrease in value.] The Fund intends initially to primarily write call options on the S&P 500[, and may also initially write call options on other domestic and foreign stock indices.][Over time, the indices on which the Fund writes call options may vary as a result of changes in the availability and liquidity of various listed index options, changes in stock portfolio holdings, the Adviser's evaluation of equity market conditions and other factors.]
ADDITIONAL INVESTMENT PRACTICES
In addition to its primary investment strategies as described above, the Fund may engage in the following investment practices.
TEMPORARY INVESTMENTS. During unusual market circumstances, the Fund may temporarily invest a substantial portion of its assets in cash or cash equivalents. Cash equivalents are highly liquid, short-term securities such as commercial paper, time deposits, certificates of deposit, short-term notes and short-term United States government obligations. In moving to a substantial temporary investments position and in transitioning from such a position back into conformity with the Fund's normal investment policies, the Fund may incur transaction costs that would not be incurred if the Fund had remained fully invested in accordance with such normal policies. The transition to and from a substantial temporary investments position may also result in the Fund having to sell common stocks and/or close out options positions and then later purchase common stocks and open new options positions in circumstances that might not otherwise be optimal. The Fund's investment in such temporary investments under unusual market circumstances may not be in furtherance of the Fund's investment objectives.
DIVIDEND CAPTURE TRADING. The Fund may seek to enhance the level of tax- advantaged dividend income it receives by engaging in dividend capture trading. In a dividend capture trade, the Fund sells a stock on or shortly after the stock's ex-dividend date and uses the sale proceeds to purchase one or more other stocks that are expected to pay dividends before the next dividend payment on the stock being sold. Through this practice, the Fund may receive more dividend payments over a given time period than if it held a single stock. In order for dividends received by the Fund to qualify for favorable tax treatment, the Fund must comply with the holding period and other requirements set forth in the preceding paragraph. By complying with applicable holding period and other requirements while engaging in dividend capture trading, the Fund may be able to enhance the level of tax-advantaged dividend income it receives because it will receive more dividend payments qualifying for favorable treatment during the same time period than if it simply held its portfolio stocks. The use of dividend capture trading strategies will expose the Fund to increased trading costs and potentially higher short-term gain or loss.
WRITING CALL OPTIONS ON INDIVIDUAL STOCKS. The Fund may also write (sell) covered call options on individual common stocks held. A call option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from the writer of the call option the security underlying the option at a specified exercise or "strike" price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Certain options, known as "American style" options may be exercised at any time during the term of the option. Other options, known as "European style" options, may be exercised only on the expiration date of the option. Since listed options on individual stocks in the United States are generally American style options, the Adviser believes that to the extend the Fund writes single-stock call options such options written or acquired by the Fund will be American style options. Exchange-traded options on stock indices are generally European style options.
The Fund will write call options on individual stocks held by the Fund in order to generate earnings and offset a portion of a market decline in the underlying common stock. The Fund will only write (sell) options on common stocks held in the Fund's portfolio. It may not sell "naked" call options, i.e.,
options representing more shares of the stock than are held in the portfolio. The standard contract size for an exchange-listed single-stock option is 100 shares of the common stock.
Exchange listed options contracts are originated and standardized by an independent entity called the Options Clearing Corporation (the "OCC"). Currently, listed options are available on over 2,300 stocks with new listings added periodically. The Fund will write (sell) call options that are generally issued, guaranteed and cleared by the OCC. Listed call options are traded on the American Stock Exchange, Chicago Board Options Exchange International Securities Exchange, New York Stock Exchange, Pacific Stock Exchange and Philadelphia Stock Exchange. With multiple exercise prices and expiration dates for options on different stocks, the Adviser and Sub-Adviser believe that there exist sufficient opportunities in the options market to meet the needs of the Fund's investment program.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Securities may be purchased on a "forward commitment" or "when-issued" basis (meaning securities are purchased or sold with payment and delivery taking place in the future) in order to secure what is considered to be an advantageous price and yield at the time of entering into the transaction. However, the return on a comparable security when the transaction is consummated may vary from the return on the security at the time that the forward commitment or when-issued transaction was made. From the time of entering into the transaction until delivery and payment is made at a later date, the transacted securities are subject to market fluctuations. In forward commitment or when-issued transactions, if the seller or buyer, as the case may be, fails to consummate the transaction, the counterparty may miss the opportunity of obtaining a price or yield considered to be advantageous. Forward commitment or when-issued transactions may occur a month or more before delivery is due. However, no payment or delivery is made until payment is received or delivery is made from the other party to the transaction. The Fund does not intend to enter into forward commitment or when-issued transactions for the purpose of investment leverage.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its total assets in securities for which there is no readily available trading market or that are otherwise illiquid. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, and securities eligible for resale pursuant to Rule 144A thereunder. Section 4(2) and Rule 144A securities may, however, be treated as liquid by the Adviser pursuant to procedures adopted by the Board, which require consideration of factors such as trading activity, availability of market quotations and number of dealers willing to purchase the security. If the Fund invests in Rule 144A securities, the level of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.
It may be difficult to sell illiquid securities at a price representing their fair value until such time as such securities may be sold publicly. Where registration is required, a considerable period may elapse between a decision by the Fund to sell the securities and the time when it would be permitted to sell. Thus, the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund may also acquire securities through private placements under which it may agree to contractual restrictions on the resale of such securities. Such restrictions might prevent their sale at a time when such sale would otherwise be desirable.
OTHER DERIVATIVE INSTRUMENTS. In addition to the intended strategy of selling index call options, the Fund may invest up to 20% of its total assets in other derivative instruments (which are instruments that derive their value from another instrument, security or index) acquired for hedging, risk management and investment purposes (to gain exposure to securities, securities markets, markets indices and/or currencies consistent with its investment objectives and policies), provided that no more than 10% of the Fund's total assets may be invested in such derivative instruments for non-hedging purposes. These strategies may be executed through the use of derivative contracts in the United States or abroad. In the course of pursuing these investment strategies, the Fund may purchase and sell derivative contracts based on equity and fixed-income indices and other instruments, purchase and sell futures contracts and options thereon, and enter into various transactions such as swaps, caps, floors or collars. In addition, derivatives may also include new techniques, instruments or strategies that are not currently available. Derivative instruments may be used by the Fund to enhance returns or as a substitute for the purchase or sale of securities. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments.
SWAPS. Swap contracts may be purchased or sold to hedge against fluctuations in securities prices, interest rates or market conditions, to mitigate non- payment or default risk or to gain exposure to particular securities, baskets of securities, indices or currencies. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) on different currencies, securities, baskets of currencies or securities, indices or other instruments, which returns are calculated with respect to a "notional amount," i.e., the designated referenced amount of exposure to the underlying instruments. The Fund will enter into swaps only on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. If the other party to a swap defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive. The net amount of the excess, if any, of the Fund's obligations over its entitlements will be maintained in a segregated account by the Fund's custodian. The Fund will not enter into any swap unless the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. Swaps are traded in the over-the-counter market. The use of swaps is a highly specialized
activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the total return performance of the Fund would be unfavorably affected.
TOTAL RETURN SWAPS. Total return swaps are contracts in which one party agrees to make payments of the total return from the designated underlying asset(s), which may include securities, baskets of securities, or securities indices during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from other designated underlying asset(s).
INTEREST RATE SWAPS. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments).
FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell various kinds of financial futures contracts and options thereon to seek to hedge against changes in stock prices or interest rates, for other risk management purposes or to gain exposure to certain securities, indices and currencies. Futures contracts may be based on various securities indices and securities. Such transactions involve a risk of loss or depreciation due to adverse changes in securities prices, which may exceed the Fund's initial investment in these contracts. The Fund will only purchase or sell futures contracts or related options in compliance with the rules of the Commodity Futures Trading Commission. These transactions involve transaction costs. Sales of futures contracts and related options generally result in realization of short-term or long-term capital gain depending on the period for which the investment is held. To the extent that any futures contract or options on futures contract held by the Fund is a "section 1256 contract" under the Code, the contract will be marked-to-market annually and any gain or loss will be treated as 60% long-term and 40% short-term, regardless of the holding period for such contract.
SHORT SALES. The Fund may sell a security short if it owns at least an equal amount of the security sold short or another security convertible or exchangeable for an equal amount of the security sold short without payment of further compensation (a short sale against-the-box). In a short sale against- the-box, the short seller is exposed to the risk of being forced to deliver stock that it holds to close the position if the borrowed stock is called in by the lender, which would cause gain or loss to be recognized on the delivered stock. The Fund expects normally to close its short sales against-the-box by delivering newly acquired stock.
Short sales against-the-box can be a tax-efficient alternative to the sale of an appreciated securities position. The ability to use short sales against-the- box as a tax-efficient management technique with respect to holdings of appreciated securities is limited to circumstances in which the hedging transaction is closed out not later than thirty days after the end of the Fund's taxable year in which the transaction was initiated, and the underlying appreciated securities position is held unhedged for at least the next sixty days after the hedging transaction is closed. Not meeting these requirements would trigger the recognition of gain on the underlying appreciated securities position under the federal tax laws applicable to constructive sales.
SECURITIES LENDING. The Fund may seek to earn income by lending portfolio securities to broker-dealers or other institutional borrowers. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the securities loaned if the borrower of the securities fails financially. Loans will be made only to organizations whose credit quality or claims paying ability is considered by the Adviser to be at least investment grade and when the expected return, net of administrative expenses and any finders' fees, justifies the attendant risk. Securities loans currently are required to be secured continuously by collateral in cash, cash equivalents (such as money market instruments) or other liquid securities held by the custodian and maintained in an amount at least equal to the market value of the securities loaned. The financial condition of the borrower will be monitored by the Adviser on an ongoing basis.
BORROWINGS. The Fund may borrow money to the extent permitted under the 1940 Act as interpreted, modified or otherwise permitted by the regulatory authority having jurisdiction. Although it does not currently intend to do so, the Fund may in the future from time to time borrow money to add leverage to the portfolio. The Fund may also borrow money for temporary administrative purposes or to meet temporary cash needs.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement, the Fund temporarily transfers possession of a portfolio instrument to another party, such as a bank or broker- dealer, in return for cash. At the same time, the Fund agrees to repurchase the instrument at an agreed upon time (normally within seven days) and price, which reflects an interest payment. The Fund may enter into such agreements when it is able to invest the cash acquired at a rate higher than the cost of the agreement, which would increase earned income. Income realized on reverse repurchase agreements is taxable as ordinary income.
When the Fund enters into a reverse repurchase agreement, any fluctuations in the market value of either the securities transferred to another party or the securities in which the proceeds may be invested would affect the market value of the Fund's assets. As a result, such transactions may increase fluctuations in the market value of the Fund's assets. There is a risk that large
fluctuations in the market value of the Fund's assets could affect net asset value and the market price of Common Shares. Because reverse repurchase agreements may be considered to be the practical equivalent of borrowing funds, they constitute a form of leverage and may be subject to leverage risks. Such agreements will be treated as subject to investment restrictions as mentioned above under "Borrowings." If the Fund reinvests the proceeds of a reverse repurchase agreement at a rate lower than the cost of the agreement, entering into the agreement will lower the Fund's cash available for distribution.
PORTFOLIO TURNOVER. The Fund will buy and sell securities to seek to accomplish its investment objectives. Portfolio turnover generally involves expense to the Fund, including brokerage commissions and other transaction costs on the sale of securities and reinvestment in other securities. The Fund expects to maintain high turnover in index call options, based on the Adviser's intent to sell index call options on a portion of its stock portfolio value and the Fund's initial expectation to roll forward its options positions approximately every one to three months. For its stock holdings, the Fund's annual portfolio turnover rate is expected to exceed that of the indices on which the Fund writes call options due to turnover in connection with the Fund's active stock selection, tax loss harvesting, and other strategies. On an overall basis, the Fund expects that its annual turnover rate will exceed 100%. A high turnover rate (100% or more) necessarily involves greater trading costs to the Fund.
RISK CONSIDERATIONS
NO OPERATING HISTORY. The Fund is a newly organized, diversified closed-end investment company with no history of operations and is designed for long-term investors and not as a trading vehicle.
INVESTMENT AND MARKET RISK. An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in Common Shares represents an indirect investment in the securities owned by the Fund, which are generally traded on a securities exchange or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Because the Fund normally intends to sell stock index call options on a portion of its common stock portfolio value, the Fund's appreciation potential from equity market performance will be more limited than if the Fund did not engage in selling stock index call options. The Common Shares at any point in time may be worth less than the original investment, even after taking into account any reinvestment of distributions.
ISSUER RISK. The value of securities held by the Fund may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services.
EQUITY RISK. Under normal market conditions, the Fund's investment program will consist primarily of owning a diversified portfolio of common stocks. Therefore, a principal risk of investing in the Fund is equity risk. Equity risk is the risk that the value of securities held by the Fund will fall due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate, and the particular circumstances and performance of companies whose securities the Fund holds. Although common stocks have historically generated higher average returns than fixed-income securities over the long term, common stocks also have experienced significantly more volatility in returns. An adverse event, such as an unfavorable earnings report, may depress the value of equity securities of an issuer held by the Fund; the price of common stock of an issuer may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the common stocks held by the Fund. In addition, common stock of an issuer in the Fund's portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other possible reasons, the issuer of the security experiences a decline in its financial condition. Common stocks in which the Fund will invest are structurally subordinated to preferred stocks, bonds and other debt instruments in a company's capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stocks or debt instruments of such issuers. Finally, common stock prices may be sensitive to rising interest rates, as the costs of capital rise and borrowing costs increase.
LIMITATIONS ON EQUITY MARKET RISK MANAGEMENT STRATEGY. In order to manage the risk of a decline in the value of the general equity market, the Fund will purchase index put options on a substantial portion of the value of its common stock portfolio. There are a number of limitations on the extent to which Common Shareholders of the Fund may benefit from this risk management strategy.
First, an index put option only provides a hedge against a general market decline to the extent of the strike price on the option. A decline in the value of the index subject to a put above the strike price could result in certain circumstances in the option expiring worthless without providing protection against the amount of the decline above the strike price.
Second, there is a risk that the value of an index subject to purchased put options will not correlate with the value of the Fund's portfolio holdings. Accordingly, the value of the index may remain flat or increase in value at times when the Fund's portfolio holdings are decreasing in value. Similarly, the index may decrease in value but to a lesser extent than the Fund's portfolio holdings. In all such cases, the index put option would provide only a limited
or no hedge against a decline in the value of the Fund's portfolio holdings.
Finally, correlation risks are also presented in connection with the Fund's selling of put options on individual stocks. The Fund's primary put options strategy of purchasing index puts and selling puts on individual stocks is predicated on the Adviser's ability to identify stocks that will decrease in value (or increase in value) relative to the index subject to the purchased put in declining market circumstances. To the extent that the individual stocks subject to put options decrease more than the value of the indices subject to purchased put options, the strategy of purchasing index puts and selling puts on individual stocks will provide only limited or no protection with respect to the value of the Fund's assets subject to written put options and may result in greater losses to the Fund than a strategy that does not involve buying and selling put options.
RISKS OF INVESTING IN MID-CAP COMPANIES. The Fund may make investments in stocks of companies whose market capitalization is considered middle sized or "mid-cap." Mid-cap companies often are newer or less established companies than larger companies. Investments in mid-cap companies carry additional risks because earnings of these companies tend to be less predictable; they often have limited product lines, markets, distribution channels or financial resources; and the management of such companies may be dependent upon one or a few key people. The market movements of equity securities of mid-cap companies may be more abrupt or erratic than the market movements of equity securities of larger, more established companies or the stock market in general. Historically, mid-cap companies have sometimes gone through extended periods when they did not perform as well as larger companies. In addition, equity securities of mid-cap companies generally are less liquid than those of larger companies. This means that the Fund could have greater difficulty selling such securities at the time and price that the Fund would like.
RISKS OF SELLING INDEX CALL OPTIONS. Under normal market conditions, a portion of the Fund's common stock portfolio value will be subject to written index call options. The purchaser of an index call option has the right to any appreciation in the value of the index over the exercise price of the call option as of the valuation date of the option. Because their exercise is settled in cash, sellers of index call options such as the Fund cannot provide in advance for their potential settlement obligations by acquiring and holding the underlying securities. The Fund intends to mitigate the risks of its written index call positions by writing options on one or more broad-based stock indices that the Adviser believes collectively approximate the characteristics of its common stock portfolio (or that portion of its portfolio against which options are written). However, the Fund does not intend to acquire and hold a portfolio of exactly the same stocks as the indices on which it writes call options. Due to tax considerations, the Fund intends to limit the overlap between its stock holdings (and any subset thereof) and each index on which it has outstanding options positions to less than 70% on an ongoing basis. The Fund's stock holdings will normally include stocks not included in the indices on which it writes call options. Consequently, the Fund bears the risk that the performance of the Fund's stock portfolio will vary from the performance of the indices on which it writes call options. For example, the Fund will suffer a loss if the S&P 500 appreciates substantially above the exercise price of S&P 500 call options written by the Fund while the securities held by the Fund in the aggregate fail to appreciate as much or decline in value over the life of the written option. Index options written by the Fund will be priced on a daily basis. Their value will be affected primarily by changes in the price and dividend rates of the underlying common stocks in such index, changes in actual or perceived volatility of such index and the remaining time to the options' expiration. The trading price of index call options will also be affected by liquidity considerations and the balance of purchase and sale orders.
A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived and well-executed options program may be adversely affected by market behavior or unexpected events. As the writer of index call options, the Fund will forgo, during the option's life, the opportunity to profit from increases in the value of the applicable index above the sum of the option premium received and the exercise price of the call option, but retains the risk of loss, minus the option premium received, should the value of the applicable index decline. When a call option is exercised, the Fund will be required to deliver an amount of cash determined by the excess of the value of the applicable index at contract termination over the exercise price of the option. Thus, the exercise of index call options sold by the Fund may require the Fund to sell portfolio securities to generate cash at inopportune times or for unattractive prices.
To the extent that the Fund writes options on indices based upon foreign stocks, the Fund generally intends to sell options on broad-based foreign country and/or regional stock indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts." Options on foreign indices that are listed for trading in the United States or which otherwise qualify as "section 1256 contracts" under the Code may trade in substantially lower volumes and with substantially wider bid-ask spreads than other options contracts on the same or similar indices that trade on other markets outside the United States. To implement its options program most effectively, the Fund may sell index options that do not qualify as "section 1256 contracts." Gain or loss on index options not qualifying as "section 1256 contracts" under the Code would be realized upon disposition, lapse or settlement of the positions and would be treated as short-term gain or loss.
The trading price of options may be adversely affected if the market for such options becomes less liquid or smaller. The Fund may close out a call option by buying the option instead of letting it expire or be exercised. There can be no assurance that a liquid market will exist when the Fund seeks to close
out a call option position by buying the option. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Options Clearing Corporation (the "OCC") may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled to
discontinue the trading of options (or a particular class or series of options)
at some future date. If trading were discontinued, the secondary market on that
exchange (or in that class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The hours of trading for options may not conform to the hours during which common stocks held by the Fund are traded. To the extent that the options markets close before the markets for securities, significant price and rate movements can take place in the securities markets that would not be reflected concurrently in the options markets. Index call options are marked to market daily and their value is affected by changes in the value and dividend rates of the securities represented in the underlying index, changes in interest rates, changes in the actual or perceived volatility of the associated index and the remaining time to the options' expiration, as well as trading conditions in the options market.
PUT OPTIONS RISKS. The Fund may write put options on individual stocks held by the Fund. The Fund may also purchase index put options. An index put option is a contract that represents the right to sell the cash value of an index at the exercise price at the expiration date of the option. As the purchaser of an index option, the Fund would pay to the writer (seller) of the option cash (premium), and the Fund has the right to receiver from the seller the amount by which the cash value of the index is below the exercise price at or until the expiration date of the option. If the Fund exercises the index put option, the seller would pay the Fund the difference between the cash value of the index and the exercise price. In effect the seller agrees to accept the potential depreciation in the value of the index below the exercise price during the term of the option in exchange for the premium. Put options on individual stocks will operate similarly. The Fund as the seller of the put option will receive a premium from the purchaser in return for the right of the purchaser to sell the underlying security to the Fund at a specified price and obligating the Fund to purchase the underlying security from the purchaser at that price. In the event of a substantial depreciation in the value of the underlying security, the Fund may incur a substantial loss.
Successful put strategies require the anticipation of future movements in securities prices, interest rates and other economic factors. The success of any put strategy involves the ability of the Adviser to correctly predict the movement of the stock or index underlying the put option. If the Adviser incorrectly predicts the movement of the underlying instrument, the Fund could experience a significant loss. No assurances can be given that the Adviser's judgment in this respect will be correct. When the Fund writes (sells) put options on individual stocks to earn income from premiums received, the Fund faces the risk that the stock price will fall below the strike price, forcing the Fund to purchase the stock underlying the put. If the underlying stock prices have declined significantly, the Fund could experience significant losses. The effectiveness of purchasing index put options when used only as a hedging technique will depend upon the extent to which price movements in the Fund's portfolio investments correlate with prices movements in the underlying index of the purchased put option. Successful use by the Fund of index put options will be subject to the ability of the Adviser to predict correctly changes in the relationship of the underlying index to the Fund's portfolio holdings. The use of such index put options cannot serve as a complete hedge since the price movement of the index underlying the option will not necessarily follow the price movements of the Fund's portfolio securities.
Put options can be highly volatile instruments. This may cause the options to react to market changes differently than the portfolio securities. A put option acquired by the Fund and not sold prior to expiration will expire worthless if the price of the stock or index at expiration exceeds the exercise price of the option, thereby causing the Fund to lose its entire investment in the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it had purchased. If the Fund were unable to close out an option that it had purchased, it would have to exercise the option in order to realize any profit or the option may expire worthless. Stock market indices on which the Fund may purchase options positions likely will not mirror the Fund's actual portfolio holdings. The effectiveness of index put options as hedges against declines in the Fund's stock portfolio will be limited to the extent that the performance of the underlying index does not correlate with that of the Fund's holdings.
RISKS OF SELLING CALL OPTIONS ON INDIVIDUAL STOCKS. The risks of selling call options on individual stocks are similar to the risks associated with selling index call options. In addition, the number of call options the Fund can write is limited by the number of shares of common stock the Fund holds, and further limited by the fact that listed call options on individual common stocks generally trade in units representing 100 shares of the underlying stock. Furthermore, the Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Adviser or Sub-Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and may impose certain other sanctions. The Fund will not write "naked" or uncovered call options.
TAX RISK. Reference is made to "Federal Income Tax Matters" for an explanation of the federal income tax consequences and attendant risks of investing in the Fund. Although the Fund seeks to minimize and defer the federal income taxes incurred by Common Shareholders in connection with their investment in the Fund, there can be no assurance that it will be successful in this regard. The tax treatment and characterization of the Fund's distributions may change over time due to changes in the Fund's mix of investment returns and changes in the federal tax laws, regulations and administrative and judicial interpretations. The provisions of the Code applicable to qualified dividend income are set to expire at the close of 2010. Thereafter, the Fund's distributions to Common Shareholders of qualified dividend income will be subject to tax at the higher rates that apply to ordinary income unless further legislative action is taken. There can be no assurances that after 2010, such qualified dividends will be available to the Fund and its Common Shareholders. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income beginning in 2011 unless further legislative action is taken. Distributions paid on the Common Shares may be characterized variously as non-qualified dividends (taxable at ordinary income rates), qualified dividends (generally taxable at long-term capital gains rates), capital gains dividends (taxable at long-term capital gains rates) or return of capital (generally not currently taxable). The ultimate tax characterization of the Fund's distributions made in a calendar year may not finally be determined until after the end of that calendar year. Distributions to a Common Shareholder that are return of capital will be tax free to the amount of the Common Shareholder's current tax basis in his or her Common Shares, with any distribution amounts exceeding such basis treated as capital gain on a deemed sale of Common Shares. Common Shareholders are required to reduce their tax basis in Common Shares by the amount of tax-free return of capital distributions received, thereby increasing the amount of capital gain (or decreasing the amount of capital loss) to be recognized upon a later disposition of the Common Shares. In order for Fund distributions of qualified dividend income to be taxable at favorable long-term capital gains rates, a Common Shareholder must meet certain prescribed holding period and other requirements with respect to his or her Common Shares. If positions held by the Fund were treated as "straddles" for federal income tax purposes, dividends on such positions would not constitute qualified dividend income subject to favorable income tax treatment. Gain or loss on positions in a straddle are subject to special (and generally disadvantageous) rules as described under "Federal Income Tax Matters."
DISTRIBUTION RISK. The quarterly distributions Common Shareholders will receive from the Fund will be sourced from the Fund's dividends and interest income after payment of Fund expenses, net option premiums, and net realized and unrealized gains on stock investments. The Fund's cash available for distribution may vary widely over the short- and long-term. Dividends on common stocks are not fixed but are declared at the discretion of the issuer's board of directors. If stock market volatility and/or stock prices decline, the level of premiums from writing index call options and the amounts available for distribution from the Fund's options activity will likely decrease as well. Payments to purchase put options and to close written call and put options will reduce amounts available for distribution from call and put option premiums received and proceeds of closing put options. Net realized and unrealized gains on the Fund's stock investments will be determined primarily by the direction and movement of the United States stock market and the particular stocks held. There can be no assurance that quarterly distributions paid by the Fund to the Common Shareholders will be maintained at initial levels or increase over time.
FOREIGN SECURITY RISK. The value of foreign securities is affected by changes in currency rates, foreign tax laws (including withholding tax), government policies (in this country or abroad), relations between nations and trading, settlement, custodial and other operational risks. In addition, the costs of investing abroad (such as foreign brokerage costs, custodial expenses and other fees) are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than markets in the United States. Foreign investments also could be affected by other factors not present in the United States, including expropriation of assets, armed conflict, confiscatory taxation, lack of uniform accounting and auditing standards, less publicly available financial and other information and potential difficulties in enforcing contractual obligations or repatriating capital invested in foreign countries. As an alternative to holding foreign-traded securities, the Fund may invest in dollar-denominated securities of foreign companies that trade on United States exchanges or in the United States over-the-counter market (including depositary receipts, which evidence ownership in underlying foreign securities). Since the Fund may invest in securities denominated or quoted in currencies other than the United States dollar, the Fund will be affected by changes in foreign currency exchange rates (and exchange control regulations) which affect the value of investments held by the Fund and the accrued income and appreciation or depreciation of the investments in United States dollars. Changes in foreign currency exchange rates relative to the United States dollar will affect the United States dollar value of the Fund's assets denominated in that currency and the Fund's return on such assets as well as any temporary uninvested reserves in bank deposits in foreign currencies. In addition, the Fund will incur costs in connection with conversions between various currencies. Foreign securities may not be eligible for the reduced rate of taxation applicable to qualified dividend income.
Because foreign companies may not be subject to accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to United States companies, there may be less publicly available information about a foreign company than about a domestic company. There is generally less government supervision and regulation of securities exchanges, broker-dealers and listed companies than in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlements of portfolio transactions for, or loss of certificates of, portfolio securities. Payment for securities before delivery may be required. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could adversely affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Foreign securities markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable United States companies.
EMERGING MARKET SECURITY RISK. The Fund may invest up to 5% of its total assets in securities of issuers located in emerging markets. The risks of foreign investments described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the United States and developed foreign markets. Disclosure and regulatory standards in many respects are less stringent than in the United States and developed foreign markets. There also may be a lower level of monitoring and regulation of securities markets in emerging market countries and the activities of investors in such markets and enforcement of existing regulations may be limited. Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of certain emerging countries. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values, and other protectionist measures imposed or negotiated by the countries with which they trade. The economies of these countries also have been and may continue to be adversely affected by economic conditions in the countries in which they trade. The economies of countries with emerging markets may also be predominantly based on only a few industries or dependent on revenues from particular commodities. In addition, custodial services and other costs relating to investment in foreign markets may be more expensive in emerging markets than in many developed foreign markets, which could reduce the Fund's income from such securities.
In many cases, governments of emerging countries continue to exercise significant control over their economies, and government actions relative to the economy, as well as economic developments generally, may affect the Fund's investments in those countries. In addition, there is a heightened possibility of expropriation or confiscatory taxation, imposition of withholding taxes on dividend and interest payments, or other similar developments that could affect investments in those countries. There can be no assurance that adverse political changes will not cause the Fund to suffer a loss of any or all of its investments.
INTEREST RATE RISK. The premiums from writing index call options and amounts available for distribution from the Fund's options activity may decrease in declining interest rate environments. The value of the Fund's common stock investments may also be influenced by changes in interest rates. Higher yielding stocks and stocks of issuers whose businesses are substantially affected by changes in interest rates may be particularly sensitive to interest rate risk.
DERIVATIVES RISK. In addition to writing index call options, the risks of which are described above, the Fund may invest up to 20% of its total assets in other derivative investments acquired for hedging, risk management and investment purposes. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments. Derivative transactions including options on securities and securities indices and other transactions in which the Fund may engage (such as futures contracts and options thereon, swaps and short sales) may subject the Fund to increased risk of principal loss due to unexpected movements in stock prices, changes in stock volatility levels and interest rates, and imperfect correlations between the Fund's securities holdings and indices upon which derivative transactions are based. Derivatives can be illiquid, may disproportionately increase losses, and may have a potentially large impact on the Fund's performance. The Fund also will be subject to credit risk with respect to the counterparties to any over- the-counter derivatives contracts entered into by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or no recovery in such circumstances. Derivatives may disproportionately increase losses and have a potentially large negative impact on the Funds' performance.
LIQUIDITY RISK. The Fund may invest up to 15% of its total assets in securities for which there is no readily available trading market or which are otherwise illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. In addition, the limited
liquidity could affect the market price of the securities, thereby adversely affecting the Fund's net asset value, and at times may make the disposition of securities infeasible.
INFLATION RISK. Inflation risk is the risk that the purchasing power of assets or income from investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions thereon can decline.
PORTFOLIO TURNOVER RISK. The Fund will buy and sell securities to seek to accomplish its investment objectives. Portfolio turnover generally involves expense to the Fund, including brokerage commissions and other transaction costs on the sale of securities and reinvestment in other securities. The Fund expects to maintain high turnover in index call options, based on the Adviser's intent to sell index call options on a portion of its stock portfolio value and the Fund's initial expectation to roll forward its options positions approximately every one to three months. [The Fund expects to maintain high turnover in its put options activities, based on the Adviser's intent to sell put options on a portion of its stock portfolio.] For its stock holdings, the Fund's annual portfolio turnover rate is expected to exceed that of the indices on which the Fund writes call options due to turnover in connection with the Fund's active stock selection, tax loss harvesting, and other strategies. On an overall basis, the Fund expects that its annual turnover rate will exceed 100%. A high turnover rate (100% or more) necessarily involves greater trading costs to the Fund.
MARKET PRICE OF COMMON SHARES. The Fund's share price will fluctuate and, at the time of sale, shares may be worth more or less than the original investment or the Fund's then current net asset value. The Fund cannot predict whether its shares will trade at a price at, above or below its net asset value. Shares of closed-end funds frequently trade at a discount to net asset value.
FINANCIAL LEVERAGE RISK. Although the Fund has no current intention to do so, the Fund is authorized and reserves the flexibility to utilize leverage through the issuance of preferred shares and/or borrowings, including the issuance of debt securities. In the event that the Fund determines in the future to utilize investment leverage, there can be no assurance that such a leveraging strategy will be successful during any period in which it is employed. Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value and market price of the Common Shares and the risk that fluctuations in distribution rates on any preferred shares or fluctuations in borrowing costs may affect the return to Common Shareholders. To the extent the returns derived from securities purchased with proceeds received from leverage exceeds the cost of leverage, the Fund's distributions may be greater than if leverage had not been used. Conversely, if the returns from the securities purchased with such proceeds are not sufficient to cover the cost of leverage, the amount available for distribution to Common Shareholders will be less than if leverage had not been used. In the latter case, Eaton Vance, in its best judgment, may nevertheless determine to maintain the Fund's leveraged position if it deems such action to be appropriate. The costs of an offering of preferred shares and/or a borrowing program would be borne by Common Shareholders and consequently would result in a reduction of the net asset value of Common Shares. In addition, the fee paid to Eaton Vance will be calculated on the basis of the Fund's average daily gross assets, including proceeds from the issuance of preferred shares and/or borrowings, so the fee will be higher when leverage is utilized. In this regard, holders of preferred shares do not bear the investment advisory fee. Rather, Common Shareholders bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of the preferred shares offering.
MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. Eaton Vance, Rampart and the individual portfolio managers invest the assets of the Fund as they deem appropriate in implementing the Fund's investment strategy. Accordingly, the success of the Fund depends upon the investment skills and analytical abilities of Eaton Vance, Rampart and the individual portfolio managers to develop and actively implement investment strategies that achieve the Fund's investment objectives. There is no assurance that Eaton Vance, Rampart and the individual portfolio managers will be successful in developing and implementing the Fund's investment strategy. Subjective decisions made by Eaton Vance, Rampart and the individual portfolio managers may cause the Fund to incur losses or to miss profit opportunities on which it could otherwise have capitalized.
MARKET DISRUPTION. The aftermath of the war in Iraq and the continuing occupation of Iraq, instability in the Middle East and terrorist attacks in the U.S. and around the world may have resulted in market volatility and may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the U.S. and worldwide. The Fund does not know how long the securities markets will continue to be affected by these events and cannot predict the effects of the occupation or similar events in the future on the U.S. economy and securities markets. Given the risks described above, an investment in the Common Shares may not be appropriate for all investors. You should carefully consider your ability to assume these risks before making an investment in the Fund.
ANTI-TAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust includes provisions that could limit the ability of other persons or entities to acquire control of the Fund or to change the composition of its Board. These provisions may deprive Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See "Description of Capital Structure - Anti-Takeover Provisions in the Agreement and Declaration of Trust."
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties performed by the Adviser under the Advisory Agreement (as defined below) and the Sub-Adviser under the Sub-Advisory Agreement (as defined below), is the responsibility of the Fund's Board under the laws of The Commonwealth of Massachusetts and the 1940 Act.
THE ADVISER
Eaton Vance acts as the Fund's investment adviser under an Investment Advisory Agreement (the "Advisory Agreement"). The Adviser's principal office is located at The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. Eaton Vance, its affiliates and predecessor companies have been managing assets of individuals and institutions since 1924 and of investment funds since 1931. Eaton Vance (or its affiliates) currently serves as the investment adviser to investment funds and various individual and institutional clients with combined assets under management of approximately $133.1 billion as of December 31, 2006, including approximately $83.7 billion in equity assets. Eaton Vance is a direct, wholly-owned subsidiary of Eaton Vance Corp., a publicly-held holding company, which through its subsidiaries and affiliates engages primarily in investment management, administration and marketing activities.
Under the general supervision of the Fund's Board, Eaton Vance will be
responsible for the Fund's overall investment program, structuring and managing
the Fund's common stock portfolio, including tax-loss harvesting and other tax-
management techniques, providing consultation to the Sub-Adviser and supervising
the performance of the Sub-Adviser. As described below under the caption "The
Sub-Adviser," Rampart will be responsible for providing advice on and execution
of the Fund's options strategy. The Adviser will furnish to the Fund investment
advice and office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser will compensate all Trustees and officers
of the Fund who are members of the Adviser's organization and who render
investment services to the Fund, and will also compensate all other Adviser
personnel who provide research and investment services to the Fund. In return
for these services, facilities and payments, the Fund has agreed to pay the
Adviser as compensation under the Advisory Agreement an annual fee in the amount
of [ ]% of the average daily gross assets of the Fund. For purposes of the
Advisory Agreement and the Sub-Advisory Agreement, gross assets of the Fund
means total assets of the Fund, including any form of investment leverage that
the Fund may in the future determine to utilize, minus all accrued expenses
incurred in the normal course of operations, but not excluding any liabilities
or obligations attributable to any future investment leverage obtained through
(i) indebtedness of any type (including, without limitation, borrowing through a
credit facility/commercial paper program or the issuance debt securities), (ii)
the issuance of preferred shares or other similar preference securities, (iii)
the reinvestment of collateral received for securities loaned in accordance with
the Fund's investment objectives and policies and/or (iv) any other means.
During any future periods in which the Fund is using leverage, the fees paid to
Eaton Vance for investment advisory services will be higher than if the Fund did
not use leverage because the fees paid will be calculated on the basis of the
Fund's gross assets, including proceeds from any borrowings and from the
issuance of preferred shares.
Walter A. Row and Michael A. Allison are the Fund's portfolio managers and together are responsible for managing the Fund's overall investment program, structuring and managing the Fund's common stock portfolio, providing consultation to the Sub-Adviser and supervising the performance of the Sub- Adviser. Mr. Row and Mr. Allison are the portfolio managers responsible for the day-to-day management of Eaton Vance's responsibilities with respect to the Fund's investment portfolio.
Mr. Row is Vice President and Director of Equity Research at Eaton Vance. He is a member of Eaton Vance's Equity Strategy Committee and co-manager of six other Eaton Vance registered closed-end funds. He has been a member of Eaton's Vance's equity investment team since 1996, and has 26 years of investment experience.
Mr. Allison is a Vice President of Eaton Vance, a member of the Equity Strategy Committee and co-manager of two other Eaton Vance registered closed-end fund and a privately offered equity fund sponsored by Eaton Vance. He has been a member of Eaton Vance's equity investment team since 2000, and has 19 years of investment experience.
THE SUB-ADVISER
Eaton Vance has engaged Rampart to serve as a sub-adviser to the Fund to provide advice on and execution of the Fund's options strategy. Rampart's principal office is located at One International Place, Boston, Massachusetts 02110. Founded in 1983, Rampart provides customized options program management utilizing listed equity and index options to a spectrum of institutional, high net worth and investment company clients. Rampart managed approximately $7.5 billion in assets as of December 31, 2006.
Ronald M. Egalka is the portfolio manager at Rampart responsible for the development and implementation of the options strategy utilized in managing the Fund.
Mr. Egalka is President and CEO of Rampart. He is also President of Rampart Securities, Inc., an affiliate of Rampart and a NASD member broker/dealer. Mr. Egalka oversees the development and implementation of options investment strategies employed by Rampart clients. Mr. Egalka is co-manager of six other Eaton Vance registered closed-end funds.
Under the terms of the Sub-Advisory Agreement (the "Sub-Advisory Agreement") between Eaton Vance and Rampart, Eaton Vance (and not the Fund) will pay Rampart a fee at an annual rate equal to [ ]% of the value of the Fund's average daily gross assets that is subject to written call options. Pursuant to the terms of the Advisory Agreement, Eaton Vance, upon approval by the Board, may terminate the Sub-Advisory Agreement and Eaton Vance may assume full responsibility for the services provided by Rampart without the need for approval by shareholders of the Fund.
The Fund, the Adviser and the Sub-Adviser have adopted codes of ethics relating to personal securities transactions (the "Codes of Ethics"). The Codes of Ethics permit Adviser and Sub-Adviser personnel to invest in securities (including securities that may be purchased or held by the Fund) for their own accounts, subject to certain pre-clearance, reporting and other restrictions and procedures contained in such Codes of Ethics.
The Fund's shareholder reports will contain information regarding the basis for the Trustees' approval of the Fund's Advisory and Sub-Advisory Agreements.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS
The Statement of Additional Information provides additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of securities in the Fund.
THE ADMINISTRATOR
Eaton Vance serves as administrator of the Fund. Under an Administration Agreement with the Fund (the "Administration Agreement"), Eaton Vance is responsible for managing the business affairs of the Fund, subject to the supervision of the Fund's Board. Eaton Vance will furnish to the Fund all office facilities, equipment and personnel for administering the affairs of the Fund. Eaton Vance's administrative services include recordkeeping, preparation and filing of documents required to comply with federal and state securities laws, supervising the activities of the Fund's custodian and transfer agent, providing assistance in connection with the Board and shareholders' meetings, providing service in connection with any repurchase offers and other administrative services necessary to conduct the Fund's business. Eaton Vance currently receives no compensation for providing administrative services to the Fund. In addition to the management fee, the Fund pays all costs and expenses of its operation, including compensation of its Trustees (other than those affiliated with the Adviser), custodial expenses, dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of preparing Fund documents and reports to governmental agencies, and taxes and filing or other fees, if any.
DISTRIBUTIONS
Commencing with the Fund's first distribution, the Fund intends to make regular quarterly distributions to Common Shareholders sourced from the Fund's cash available for distribution. "Cash available for distribution" will consist of the Fund's dividends and interest income after payment of Fund expenses, net option premiums, and net realized and unrealized gains on stock investments. The Fund's net distribution rate may be adjusted from time to time. The Board may modify this distribution policy at any time without obtaining the approval of Common Shareholders. The initial distribution is expected to be declared approximately 75 days and paid approximately 90 to 120 days after the completion of this offering, depending on market conditions. Distributions are not expected to depend on financial leverage.
The Fund's annual distributions will likely differ from annual net investment income. The investment income of the Fund will consist of all dividend and interest income accrued on portfolio investments, short-term capital gain (including short-term gains on option positions and gains on the sale of portfolio investments held for one year or less) in excess of long-term capital loss and income from certain hedging transactions, less all expenses of the Fund. Expenses of the Fund will be accrued each day. To the extent that that Fund's net investment income for any year exceeds the total quarterly distributions paid during the year, the Fund will make a special distribution at or near year-end of such excess amount as may be required. Over time, all of the Fund's investment company taxable income will be distributed.
At least annually, the Fund intends to distribute any net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) or, alternatively, to retain all or a portion of the year's net capital gain and pay federal income tax on the retained gain. As provided under federal tax law, Common Shareholders of record as of the end of the Fund's taxable year will include their attributable share of the retained gain in their income for the year as a long-term capital gain, and will be entitled to a tax credit or refund for the tax paid on their behalf by the Fund. The Fund may treat the cash value of tax credit and refund amounts in connection with retained capital gains as a substitute for equivalent cash distributions. The Adviser does not believe that retaining net capital gains and paying tax thereon would have a material adverse effect on the Fund or the Common Shareholders.
If, for any calendar year, as discussed above, the total distributions made exceed the Fund's net investment taxable income and net capital gains, the excess generally will be treated as a tax-free return of capital to each Common Shareholder (up to the amount of the Common Shareholder's basis in his or her Common Shares) and thereafter as gain from the sale of Common Shares. The amount treated as a tax-free return of capital will reduce the Common Shareholder's adjusted basis in his or her Common Shares, thereby increasing his or her potential gain or reducing his or her potential loss on the subsequent sale of his or her Common Shares. Distributions in any year may include a substantial return of capital component. Under the 1940 Act, for any distribution that includes amounts from sources other than net income, the Fund is required to provide Common Shareholders a written statement regarding the components of such distribution. Such a statement will be provided at the time of any distribution believed to include any such amounts.
To permit the Fund to maintain more stable distributions, distribution rates will be based on projected annual cash available for distribution. As a result, the distributions paid by the Fund for any particular quarter may be more or less than the amount of cash available for distribution for that quarterly period. In certain circumstances, the Fund may be required to sell a portion of its investment portfolio to fund distributions. Distributions will reduce the Common Shares' net asset value.
Common Shareholders may automatically reinvest some or all of their distributions in additional Common Shares under the Fund's dividend reinvestment plan. See "Dividend Reinvestment Plan."
The Fund has applied for an order from the Securities and Exchange Commission granting it an exemption from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder to permit the Fund to include realized long-term capital gains as a part of its regular distributions to Common Shareholders more frequently than would otherwise be permitted by the 1940 Act (generally once per taxable year). In the event that such an exemptive order is obtained, the Fund will consider increasing the frequency of its regular distributions to Common Shareholders from quarterly to monthly. The Fund does not intend to designate more than the permitted number of capital gain distributions until it receives such an exemptive order.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based on the advice of Kirkpatrick & Lockhart Preston Gates Ellis LLP, counsel to the Fund. The Fund intends to elect to be treated and to qualify each year as a regulated investment company (a "RIC") under the Code. Accordingly, the Fund intends to satisfy certain requirements relating to sources of its income and diversification of its assets and to distribute substantially all of its net income and net short-term capital gains (after reduction by net long term capital losses and any available capital loss carryforwards) in accordance with the timing requirements imposed by the Code, so as to maintain its regulated investment company status and to avoid paying federal income or excise tax thereon. To the extent it qualifies for treatment as a regulated investment company and satisfies the above-mentioned distribution requirements, the Fund will not be subject to federal income tax on income paid to its shareholders in the form of dividends or capital gains distributions.
At least annually, the Fund intends to distribute any net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) or, alternatively, to retain all or a portion of the year's net capital gain and pay federal income tax on the retained gain. As provided under federal tax law, Common Shareholders of record as of the end of the Fund's taxable year will include their attributable share of the retained gain in their income for the year as long-term capital gain (regardless of holding period in the Common Shares), and will be entitled to a tax credit or refund for the tax paid on their behalf by the Fund. Common Shareholders of record for the retained capital gain will also be entitled to increase their tax basis in their Common Shares by 65 percent of the allocated gain. Distributions of the Fund's net capital gain ("capital gain distributions"), if any, are taxable to Common Shareholders as long-term capital gain, regardless of their holding period in the Common Shares. Distributions of the Fund's net realized short-term gains will be taxable as ordinary income.
If, for any calendar year, the Fund's total distributions exceed the Fund's current and accumulated earnings and profits, the excess will be treated as a tax-free return of capital to each Common Shareholder (up to the amount of the Common Shareholder's basis in his or her Common Shares) and thereafter as gain from the sale of Common Shares (assuming the Common Shares are held as a capital asset). The amount treated as a tax-free return of capital will reduce the Common Shareholder's adjusted basis in his or her Common Shares, thereby increasing his or her potential gain or reducing his or her potential loss on the subsequent sale or other disposition of his or her Common Shares. See below
for a summary of the maximum tax rates applicable to long-term capital gain (including capital gain distributions). A corporation that owns Fund shares generally will not be entitled to the dividends received deduction ("DRD") with respect to all (or any prescribed percentage) of the distributions it receives from the Fund. Fund distributions that are attributable to qualified dividend income received by the Fund from certain domestic corporations may be designated by the Fund as being eligible for the DRD.
If the Fund does not qualify as a RIC for any taxable year, the Fund's taxable income will be subject to corporate income taxes, and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to the shareholder as ordinary income. Such distributions generally would be eligible (i) to be treated as qualified dividend income in the case of individual and other noncorporate shareholders and (ii) for the DRD in the case of corporate shareholders. In addition, in order to requalify for taxation as a RIC, the Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
Certain of the Fund's investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) convert dividends that would otherwise constitute qualified dividend income into ordinary income, (ii) treat dividends that would otherwise be eligible for the corporate DRD as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gain into short-term capital gain or ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited), (vi) cause the Fund to recognize income or gain without a corresponding receipt of cash, (vii) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (viii) adversely alter the characterization of certain complex financial transactions, and (ix) produce income that will not qualify as good income for purposes of the income requirement that applies to RICs. While it may not always be successful in doing so, the Fund will seek to avoid or minimize the adverse tax consequences of its investment practices.
For the Fund's index call options and index put options that qualify as "section 1256 contracts," Code Section 1256 generally will require any gain or loss arising from the lapse, closing out or exercise of such positions to be treated as 60% long-term and 40% short-term capital gain or loss. In addition, the Fund generally will be required to "mark to market" (i.e., treat as sold for fair market value) each outstanding index option position at the close of each taxable year (and on October 31 of each year for excise tax purposes). If a "section 1256 contract" held by the Fund at the end of a taxable year is sold or closed out in the following year, the amount of any gain or loss realized on such sale will be adjusted to reflect the gain or loss previously taken into account under the "mark to market" rules. In addition to most index call options, "section 1256 contracts" under the Code include certain other options contracts, certain regulated futures contracts, and certain other financial contracts.
The Fund's index call options and index put options that do not qualify as "section 1256 contracts" under the Code generally will be treated as equity options governed by Code Section 1234. Pursuant to Code Section 1234, if a written option expires unexercised, the premium received is short-term capital gain to the Fund. If the Fund enters into a closing transaction, the difference between the premium received for writing the option, and the amount paid to close out its position is short-term capital gain or loss. If a call option written by the Fund that is not a "section 1256 contract" is cash settled, any resulting gain or loss will be short-term. With respect to a put that is purchased by the Fund, if the option is sold, any resulting gain or loss will be a capital gain or loss, and will be short-term or long-term, depending upon the holding period for the option. If the option expires, the resulting loss is a capital loss and is short-term or long-term, depending upon the holding period for the option. If the option is exercised, the amount paid to acquire the position reduces the resulting gain or increases the resulting loss.
The Code contains special rules that apply to "straddles," defined generally as the holding of "offsetting positions with respect to personal property." For example, the straddle rules normally apply when a taxpayer holds stock and an offsetting option with respect to such stock or substantially identical stock or securities. In general, investment positions will be offsetting if there is a substantial diminution in the risk of loss from holding one position by reason of holding one or more other positions. The Fund expects that the index call options it writes will not be considered straddles for this purpose because the Fund's portfolio of common stocks will be sufficiently dissimilar from the components of each index on which it has outstanding options positions under applicable guidance established by the IRS. Under certain circumstances, however, the Fund may enter into options transactions or certain other investments that may constitute positions in a straddle. If two or more positions constitute a straddle, recognition of a realized loss from one position must generally be deferred to the extent of unrecognized gain in an offsetting position. In addition, long-term capital gain may be recharacterized as short-term capital gain, or short-term capital loss as long-term capital loss. Interest and other carrying charges allocable to personal property that is part of a straddle are not currently deductible but must instead be capitalized. Similarly, "wash sale" rules apply to prevent the recognition of loss by the Fund from the disposition of stock or securities at a loss in a case in which identical or substantially identical stock or securities (or an option to acquire such property) is or has been acquired within a prescribed period.
The Code allows a taxpayer to elect to offset gains and losses from positions that are part of a "mixed straddle." A "mixed straddle" is any straddle in which one or more but not all positions are "section 1256 contracts." The Fund may be eligible to elect to establish one or more mixed straddle accounts for certain of its mixed straddle trading positions. The mixed straddle account rules require a daily "marking to market" of all open positions in the account and a daily netting of gains and losses from all positions in the account. At the end of a taxable year, the annual net gains or losses from the mixed straddle account are recognized for tax purposes. The net capital gain or loss is treated as 60% long-term and 40% short-term capital gain or loss if attributable to the "section 1256 contract" positions, or all short-term capital gain or loss if attributable to the non-section 1256 contract positions.
The Fund may recognize gain (but not loss) from a constructive sale of certain "appreciated financial positions" if the Fund enters into a short sale, offsetting notional principal contract, or forward contract transaction with respect to the appreciated position or substantially identical property. Appreciated financial positions subject to this constructive sale treatment include interests (including options and forward contracts and short sales) in stock and certain other instruments. Constructive sale treatment does not apply if the transaction is closed out not later than thirty days after the end of the taxable year in which the transaction was initiated, and the underlying appreciated securities position is held unhedged for at least the next sixty days after the hedging transaction is closed.
Gain or loss from a short sale of property is generally considered as capital gain or loss to the extent the property used to close the short sale constitutes a capital asset in the Fund's hands. Except with respect to certain situations where the property used to close a short sale has a long-term holding period on the date the short sale is entered into, gains on short sales generally are short-term capital gains. A loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, "substantially identical property" has been held by the Fund for more than one year. In addition, entering into a short sale may result in suspension of the holding period of "substantially identical property" held by the Fund.
Gain or loss on a short sale will generally not be realized until such time as the short sale is closed. However, as described above in the discussion of constructive sales, if the Fund holds a short sale position with respect to securities that has appreciated in value, and it then acquires property that is the same as or substantially identical to the property sold short, the Fund generally will recognize gain on the date it acquires such property as if the short sale were closed on such date with such property. Similarly, if the Fund holds an appreciated financial position with respect to securities and then enters into a short sale with respect to the same or substantially identical property, the Fund generally will recognize gain as if the appreciated financial position were sold at its fair market value on the date it enters into the short sale. The subsequent holding period for any appreciated financial position that is subject to these constructive sale rules will be determined as if such position were acquired on the date of the constructive sale.
Under the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "2003 Tax Act"), certain dividend distributions paid by the Fund (whether paid in cash or reinvested in additional Common Shares) to individual taxpayers are taxed at rates applicable to net long-term capital gains (15%, or 5% for individuals in the 10% or 15% tax brackets). This tax treatment applies only if certain holding period and other requirements are satisfied by the Common Shareholder, as discussed below, and the dividends are attributable to qualified dividend income received by the Fund itself. For this purpose, "qualified dividend income" means dividends received by the Fund from United States corporations and "qualified foreign corporations," provided that the Fund satisfies certain holding period and other requirements in respect of the stock of such corporations.
Subject to certain exceptions, a "qualified foreign corporation" is any foreign corporation that is either (i) incorporated in a possession of the United States (the "possessions test"), or (ii) eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary of the Treasury determines is satisfactory for these purposes and which includes an exchange of information program (the "treaty test"). The Secretary of the Treasury has currently identified tax treaties between the United States and 55 other countries that satisfy the treaty test. Subject to the same exceptions, a foreign corporation that does not satisfy either the possessions test or the treaty test will still be considered a "qualified foreign corporation" with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States. The Treasury Department has issued a notice stating that common or ordinary stock, or an ADR in respect of such stock, is considered "readily tradable" if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934, as amended, or on the National Association of Securities Dealers Automated Quotations system. Foreign corporations that are passive foreign investment companies will not be "qualified foreign corporations."
In order for qualified dividends paid by the Fund to a Common Shareholder to be taxable at long-term capital gains rates, the Common Shareholder must hold his or her Common Shares for more than 60 days during the 121-day period surrounding the ex-dividend date. For dividends the Fund receives to qualify for tax-advantaged treatment, the Fund must hold stock paying qualified dividend income for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (or more than 90 days during the associated 181-day period, in the case of certain preferred stocks). In addition, neither a Common Shareholder nor the Fund can be obligated to make related payments (pursuant to a short sale or otherwise) with respect to positions in any security that is substantially similar or related property with respect to his or her Common Shares or such stock, respectively. Gains on option positions treated as short- term and other short-term gains, interest income and non-qualified dividends are not eligible for the lower tax rate. The special rules relating to the taxation
of ordinary income dividends paid by the Fund that are attributable to the Fund's qualified income only apply to taxable years beginning before January 1, 2011. Thereafter, all of the Fund's distributions that are characterized as dividends, other than capital gain distributions, will be fully taxable at ordinary income tax rates unless further Congressional action is taken. There can be no assurance as to what portion of the Fund's dividend distributions will qualify for favorable treatment under the 2003 Tax Act. The Fund's investment program and the tax treatment of Fund distributions may be affected by IRS interpretations of the Code and future changes in tax laws and regulations, including changes resulting from the "sunset" provisions described above that would have the effect of repealing the favorable treatment of qualified dividend income and reimposing the higher tax rates applicable to ordinary income in 2011 unless further legislative action is taken.
The Fund will inform Common Shareholders of the source and tax status of all distributions promptly after the close of each calendar year.
Selling Common Shareholders will generally recognize gain or loss in an amount equal to the difference between the amount realized on the sale and the Common Shareholder's adjusted tax basis in the Common Shares sold. If the Common Shares are held as a capital asset, the gain or loss will be a capital gain or loss. The maximum tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate for gains recognized on the sale of capital assets held for one year or less (in 2007, 35%), or (ii) 15% for gains recognized on the sale of capital assets held for more than one year (as well as any capital gain distributions) (5% for individuals in the 10% or 15% tax brackets). Any loss on a disposition of Common Shares held for six months or less will be treated as a long-term capital loss to the extent of any capital gain distributions received with respect to those Common Shares. For purposes of determining whether Common Shares have been held for six months or less, the holding period is suspended for any periods during which the Common Shareholder's risk of loss is diminished as a result of holding one or more other positions in substantially similar or related property, or through certain options or short sales. Any loss realized on a sale or exchange of Common Shares will be disallowed to the extent those Common Shares are replaced by other Common Shares within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Common Shares (whether through the reinvestment of distributions or otherwise). In that event, the basis of the replacement Common Shares will be adjusted to reflect the disallowed loss.
An investor should be aware that, if Common Shares are purchased shortly before the record date for any taxable distribution (including a capital gain distribution), the purchase price likely will reflect the value of the distribution and the investor then would receive a taxable distribution that is likely to reduce the trading value of such Common Shares, in effect resulting in a taxable return of some of the purchase price. Taxable distributions to certain individuals and certain other non-corporate Common Shareholders, including those who have not provided their correct taxpayer identification number and other required certifications, may be subject to "backup" federal income tax withholding at the fourth lowest rate of tax applicable to a single individual (in 2007, 28%).
An investor should also be aware that the benefits of the reduced tax rate applicable to long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual shareholders.
The foregoing briefly summarizes some of the important federal income tax consequences to Common Shareholders of investing in Common Shares, reflects the federal tax law as of the date of this Prospectus, and does not address special tax rules applicable to certain types of investors, such as corporate and foreign investors. A more complete discussion of the tax rules applicable to the Fund and the Common Shareholders can be found in the Statement of Additional Information that is incorporated by reference into this Prospectus. Unless otherwise noted, this discussion assumes that an investor is a United States person and holds Common Shares as a capital asset. This discussion is based upon current provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change or differing interpretations by the courts or the IRS retroactively or prospectively. Investors should consult their tax advisors regarding other federal, state or local tax considerations that may be applicable in their particular circumstances, as well as any proposed tax law changes. The Fund has not received a formal opinion of tax counsel. However, the Adviser previously received an opinion from tax counsel with respect to certain tax matters presented by the Fund in connection with the offering of a similar closed-end fund managed by the Adviser and has been informed by such counsel that there have not been intervening changes in the law relating to these matters.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's dividend reinvestment plan (the "Plan"), unless a Common Shareholder elects to receive distributions in cash, all distributions (including capital gain dividends) will be automatically reinvested in Common Shares.
[American Stock Transfer & Trust Company] ("AST") (the "Plan Agent") serves as agent for the Common Shareholders in administering the Plan. Common Shareholders who elect not to participate in the Plan will receive all Fund distributions in cash paid by check mailed directly to the Common Shareholder of record (or, if the Common Shares are held in street or other nominee name, then
to the nominee) by AST, as disbursing agent. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received by the Plan Agent prior to any distribution record date.
Common Shares will be acquired by the Plan Agent or an independent broker- dealer for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional previously authorized but unissued Common Shares from the Fund ("newly issued Common Shares") or (ii) by purchase of outstanding Common Shares on the open market ("open-market purchases") on the New York Stock Exchange or elsewhere. If, on the payment date for the distribution, the net asset value per Common Share is equal to or less than the market price per Common Share plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Plan Agent will invest the distribution amount in newly issued Common Shares on behalf of the participants. The number of newly issued Common Shares to be credited to each participant's account will be determined by dividing the dollar amount of the distribution by the net asset value per Common Share on the date the Common Shares are issued, provided that the maximum discount from the then current market price per Common Share on the date of issuance may not exceed 5%. If on the distribution payment date the net asset value per Common Share is greater than the market value plus estimated brokerage commissions (such condition being referred to herein as "market discount"), the Plan Agent will invest the distribution amount in Common Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the distribution payment date, the Plan Agent will have up to 30 days after the distribution payment date to invest the distribution amount in Common Shares acquired in open-market purchases. If, before the Plan Agent has completed its open-market purchases, the market price of a Common Share exceeds the net asset value per Common Share, the average per Common Share purchase price paid by the Plan Agent could exceed the net asset value of the Fund's Common Shares, resulting in the acquisition of fewer Common Shares than if the distribution had been paid in newly issued Common Shares on the distribution payment date. Therefore, the Plan provides that if the Plan Agent is unable to invest the full distribution amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will invest the uninvested portion of the distribution amount in newly issued Common Shares.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Common Shareholders for tax records. Common Shares in the account of each Plan participant will be held by the Plan Agent on behalf of the Plan participant, and each Common Shareholder's proxy will include those Common Shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for Common Shares held pursuant to the Plan in accordance with the instructions of the participants. In the case of Common Shareholders such as banks, brokers or nominees that hold Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record Common Shareholder's name and held for the account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares issued directly by the Fund as a result of distributions payable either in Common Shares or in cash. However, each Plan participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of distributions.
Common Shareholders participating in the Plan may receive benefits not available to Common Shareholders not participating in the Plan. If the market price (plus commissions) of the Fund's Common Shares is above their net asset value, participants in the Plan will receive Common Shares of the Fund purchased at a discount to market price and having a current value that exceeds the cash distributions they would have otherwise received on their Common Shares. If the market price (plus commissions) of the Fund's Common Shares is below their net asset value, Plan participants will receive Common Shares with a net asset value that exceeds the cash distributions they would have otherwise received on their Common Shares. There may, however, be insufficient Common Shares available in the market at prices below net asset value to satisfy the Plan's requirements, in which case the Plan Agent will acquire newly issued Common Shares. Also, since the Fund does not redeem its Common Shares, the price on resale of Common Shares may be more or less than their net asset value.
Experience under the Plan may indicate that changes are desirable. Accordingly, upon 30 days' notice to Plan participants, the Fund reserves the right to amend or terminate the Plan. A Plan participant will be charged a $5.00 service charge and pay brokerage charges whenever he or she directs the Plan Agent to sell Common Shares held in a distribution reinvestment account.
All correspondence concerning the Plan should be directed to the Plan Agent at [American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 10038.] Please call 1-800-937-5449 between the hours of 9:00 a.m. and 5:00 p.m. Eastern Time if you have questions regarding the Plan.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated and filed with the Secretary of The Commonwealth on October 5, 2005 (the "Declaration of Trust"). The Declaration of Trust provides that the Board may authorize separate classes of shares of beneficial interest. The Board has authorized an unlimited number of Common Shares. The Fund intends to hold annual meetings of Common Shareholders in compliance with the requirements of the New York Stock Exchange.
COMMON SHARES
The Declaration of Trust permits the Fund to issue an unlimited number of full and fractional common shares of beneficial interest, $0.01 par value per share. Each Common Share represents an equal proportionate interest in the assets of the Fund with each other Common Share in the Fund. Holders of Common Shares will be entitled to the payment of distributions when, as and if declared by the Board. The 1940 Act or the terms of any future borrowings or issuance of preferred shares may limit the payment of distributions to the holders of Common Shares. Each whole Common Share shall be entitled to one vote as to matters on which it is entitled to vote pursuant to the terms of the Declaration of Trust on file with the Securities and Exchange Commission. Upon liquidation of the Fund, after paying or adequately providing for the payment of all liabilities of the Fund and the liquidation preference with respect to any outstanding preferred shares, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Board may distribute the remaining assets of the Fund among the holders of the Common Shares. The Declaration of Trust provides that Common Shareholders are not liable for any liabilities of the Fund, and requires inclusion of a clause to that effect in agreements entered into by the Fund and, in coordination with the Fund's By- laws, indemnifies shareholders against any such liability. Although shareholders of an unincorporated business trust established under Massachusetts law may, in certain limited circumstances, be held personally liable for the obligations of the business trust as though they were general partners, the provisions of the Fund's Declaration of Trust and By-laws described in the foregoing sentence make the likelihood of such personal liability remote.
The Fund has no current intention to issue preferred shares or to borrow money. However, if at some future time there are any borrowings or preferred shares outstanding, the Fund may not be permitted to declare any cash distribution on its Common Shares, unless at the time of such declaration, (i) all accrued distributions on preferred shares or accrued interest on borrowings have been paid and (ii) the value of the Fund's total assets (determined after deducting the amount of such distribution), less all liabilities and indebtedness of the Fund not represented by senior securities, is at least 300% of the aggregate amount of such securities representing indebtedness and at least 200% of the aggregate amount of securities representing indebtedness plus the aggregate liquidation value of the outstanding preferred shares. In addition to the requirements of the 1940 Act, the Fund may be required to comply with other asset coverage requirements as a condition of the Fund obtaining a rating of preferred shares from a nationally recognized statistical rating agency (a "Rating Agency"). These requirements may include an asset coverage test more stringent than under the 1940 Act. This limitation on the Fund's ability to make distributions on its Common Shares could in certain circumstances impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company for federal income tax purposes. If the Fund were in the future to issue preferred shares or borrow money, it would intend, however, to the extent possible to purchase or redeem preferred shares or reduce borrowings from time to time to maintain compliance with such asset coverage requirements and may pay special distributions to the holders of the preferred shares in certain circumstances in connection with any potential impairment of the Fund's status as a regulated investment company. Depending on the timing of any such redemption or repayment, the Fund may be required to pay a premium in addition to the liquidation preference of the preferred shares to the holders thereof.
The Fund has no present intention of offering additional Common Shares, except as described herein. Other offerings of its Common Shares, if made, will require approval of the Board. Any additional offering will not be sold at a price per Common Share below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing Common Shareholders or with the consent of a majority of the Fund's outstanding Common Shares. The Common Shares have no preemptive rights.
The Fund generally will not issue Common Share certificates. However, upon written request to the Fund's transfer agent, a share certificate will be issued for any or all of the full Common Shares credited to an investor's account. Common Share certificates that have been issued to an investor may be returned at any time.
REPURCHASE OF COMMON SHARES AND OTHER METHODS TO ADDRESS POTENTIAL DISCOUNT
Because shares of closed-end management investment companies frequently trade at a discount to their net asset values, the Board has determined that from time to time it may be in the interest of Common Shareholders for the Fund to take corrective actions to reduce trading discounts in the Common Shares. The Board, in consultation with Eaton Vance, will review at least annually the possibility of open market repurchases and/or tender offers for the Common Shares and will consider such factors as the market price of the Common Shares, the net asset value of the Common Shares, the liquidity of the assets of the Fund, the effect on the Fund's expenses, whether such transactions would impair the Fund's status as a regulated investment company or result in a failure to comply with applicable asset coverage requirements, general economic conditions and such other events or conditions that may have a material effect on the
Fund's ability to consummate such transactions. There are no assurances that the Board will, in fact, decide to undertake either of these actions or, if undertaken, that such actions will result in the Common Shares trading at a price equal to or approximating their net asset value. The Board, in consultation with Eaton Vance, may from time to time review other possible actions to reduce trading discounts in the Common Shares.
PREFERRED SHARES
The Fund has no current intention of issuing any shares other than the Common Shares. However, the Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest with preference rights (the "preferred shares") in one or more series, with rights as determined by the Board, by action of the Board without the approval of the Common Shareholders.
Under the requirements of the 1940 Act, the Fund must, immediately after the issuance of any preferred shares, have an "asset coverage" of at least 200%. Asset coverage means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior securities representing indebtedness of the Fund, if any, plus the aggregate liquidation preference of the preferred shares. If the Fund seeks a rating for preferred shares, asset coverage requirements in addition to those set forth in the 1940 Act may be imposed. The liquidation value of any preferred shares would be expected to equal their aggregate original purchase price plus redemption premium, if any, together with any accrued and unpaid distributions thereon (on a cumulative basis), whether or not earned or declared. The terms of any preferred shares, including their distribution rate, voting rights, liquidation preference and redemption provisions, will be determined by the Board (subject to applicable law and the Fund's Declaration of Trust) if and when it authorizes preferred shares. The Fund may issue preferred shares that provide for the periodic redetermination of the distribution rate at relatively short intervals through an auction or remarketing procedure, although the terms of such preferred shares may also enable the Fund to lengthen such intervals. At times, the distribution rate as redetermined on any preferred shares could exceed the Fund's return after expenses on the investment of proceeds from the preferred shares and the Fund's leveraged capital structure would result in a lower rate of return to Common Shareholders than if the Fund were not so structured.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the terms of any preferred shares may entitle the holders of preferred shares to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus redemption premium, if any, together with accrued and unpaid dividends, whether or not earned or declared and on a cumulative basis) before any distribution of assets is made to Common Shareholders. After payment of the full amount of the liquidating distribution to which they are entitled, the preferred shareholders would not be entitled to any further participation in any distribution of assets by the Fund. Holders of preferred shares, voting as a class, would be entitled to elect two of the Fund's Trustees, if any preferred shares are issued. Under the 1940 Act, if at any time dividends on the preferred shares are unpaid in an amount equal to two full years' dividends thereon, the holders of all outstanding preferred shares, voting as a class, will be entitled to elect a majority of the Board until all dividends in default have been paid or declared and set apart for payment. In addition, if required by a Rating Agency rating the preferred shares or if the Board determines it to be in the best interests of the Common Shareholders, issuance of the preferred shares may result in more restrictive provisions than required under the 1940 Act. In this regard, holders of preferred shares may, for example, be entitled to elect a majority of the Fund's Board if only one dividend on the preferred shares is in arrears.
In the event of any future issuance of preferred shares, the Fund likely would seek a credit rating for such preferred shares from a Rating Agency. In such event, as long as preferred shares are outstanding, the composition of its portfolio will reflect guidelines established by such Rating Agency. Based on previous guidelines established by Rating Agencies for the securities of other issuers, the Fund anticipates that the guidelines with respect to any preferred shares would establish a set of tests for portfolio composition and asset coverage that supplement (and in some cases are more restrictive than) the applicable requirements under the 1940 Act. Although no assurance can be given as to the nature or extent of the guidelines that may be imposed in connection with obtaining a rating of any preferred shares, the Fund anticipates that such guidelines would include asset coverage requirements that are more restrictive than those under the 1940 Act, restrictions on certain portfolio investments and investment practices and certain mandatory redemption requirements relating to any preferred shares. No assurance can be given that the guidelines actually imposed with respect to any preferred shares by a Rating Agency would be more or less restrictive than those described in this Prospectus.
CREDIT FACILITY/COMMERCIAL PAPER PROGRAM
The Fund has no current intention to borrow money for the purpose of obtaining investment leverage. If, in the future, the Fund determines to engage in investment leverage using borrowings, the Fund may enter into definitive agreements with respect to a credit facility/commercial paper program or other borrowing program ("Program"), pursuant to which the Fund would expect to be entitled to borrow up to a specified amount. Any such borrowings would constitute financial leverage. Borrowings under such a Program would not be expected to be convertible into any other securities of the Fund. Outstanding amounts would be expected to be prepayable by the Fund prior to final maturity without significant penalty, and no sinking fund or mandatory retirement provisions would be expected to apply. Outstanding amounts would be payable at
maturity or such earlier times as required by the agreement. The Fund may be required to prepay outstanding amounts under the Program or incur a penalty rate of interest in the event of the occurrence of certain events of default. The Fund would be expected to indemnify the lenders under the Program against liabilities they may incur in connection with the Program.
In addition, the Fund expects that any such Program would contain covenants that, among other things, likely would limit the Fund's ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and may require asset coverage ratios in addition to those required by the 1940 Act. The Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Fund expects that any Program would have customary covenant, negative covenant and default provisions. There can be no assurance that the Fund will enter into an agreement for a Program on terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, any such Program may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares or debt securities.
EFFECTS OF POSSIBLE FUTURE LEVERAGE
As discussed above, the Fund has no current intention to issue preferred shares or to borrow money for the purpose of obtaining investment leverage. In the event that the Fund determines in the future to utilize investment leverage, there can be no assurance that such a leveraging strategy would be successful during any period in which it is employed. Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value and market price of the Common Shares and the risk that fluctuations in distribution rates on any preferred shares or fluctuations in borrowing costs may affect the return to Common Shareholders. To the extent that amounts available for distribution derived from securities purchased with the proceeds of leverage exceed the cost of such leverage, the Fund's distributions would be greater than if leverage had not been used. Conversely, if the amounts available for distribution derived from securities purchased with leverage proceeds are not sufficient to cover the cost of leverage, distributions to Common Shareholders would be less than if leverage had not been used. In the latter case, Eaton Vance, in its best judgment, may nevertheless determine to maintain the Fund's leveraged position if it deems such action to be appropriate. The costs of an offering of preferred shares and/or a borrowing program would be borne by Common Shareholders and consequently would result in a reduction of the net asset value of Common Shares. See "Risk Factors - Financial Leverage Risk."
In addition, the fee paid to Eaton Vance will be calculated on the basis of the Fund's average daily gross assets, including proceeds from the issuance of preferred shares and/or borrowings, so the fees would be higher if leverage is utilized. In this regard, holders of preferred shares would not bear the investment advisory fee. Rather, Common Shareholders would bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of the preferred shares offering. See "Risk Factors - Financial Leverage Risk."
ANTI-TAKEOVER PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board and could have the effect of depriving Common Shareholders of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. These provisions may have the effect of discouraging attempts to acquire control of the Fund, which attempts could have the effect of increasing the expenses of the Fund and interfering with the normal operation of the Fund. The Board is divided into three classes, with the term of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board. A Trustee may be removed from office only for cause by a written instrument signed by the remaining Trustees or by a vote of the holders of at least two-thirds of the class of shares of the Fund that elected such Trustee and are entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the holders of at least 75% of the outstanding shares of each class of the Fund, voting as a class, then entitled to vote to approve, adopt or authorize certain transactions with 5%-or-greater holders of a class of shares and their associates, unless the Board shall by resolution have approved a memorandum of understanding with such holders, in which case normal voting requirements would be in effect. For purposes of these provisions, a 5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of any class of beneficial interest of the Fund. The transactions subject to these special approval requirements are: (i) the merger or consolidation of the Fund or any subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance of any securities of the Fund to any Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any substantial part of the assets of the Fund to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in exchange for securities of the Fund, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period).
The Board has determined that provisions with respect to the Board and the 75% voting requirements described above, which voting requirements are greater than the minimum requirements under Massachusetts law or the 1940 Act, are in the best interest of Common Shareholders generally. Reference should be made to the Declaration of Trust on file with the Securities and Exchange Commission for the full text of these provisions.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end management investment company at any time if approved by the lesser of (i) two-thirds or more of the Fund's then outstanding Common Shares and preferred shares (if any), each voting separately as a class, or (ii) more than 50% of the then outstanding Common Shares and preferred shares (if any), voting separately as a class if such conversion is recommended by at least 75% of the Trustees then in office. If approved in the foregoing manner, conversion of the Fund could not occur until 90 days after the shareholders' meeting at which such conversion was approved and would also require at least 30 days' prior notice to all shareholders. Conversion of the Fund to an open-end management investment company also would require the redemption of any outstanding preferred shares and could require the repayment of borrowings, which would eliminate any future leveraged capital structure of the Fund with respect to the Common Shares. In the event of conversion, the Common Shares would cease to be listed on the New York Stock Exchange or other national securities exchange or market system. The Board believes that the closed-end structure is desirable, given the Fund's investment objectives and policies. Investors should assume, therefore, that it is unlikely that the Board would vote to convert the Fund to an open-end management investment company. Shareholders of an open-end management investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. If the Fund were to convert to an open-end investment company, the Fund expects it would pay all such redemption requests in cash, but would likely reserve the right to pay redemption requests in a combination of cash or securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Fund were converted to an open-end fund, it is likely that new Common Shares would be sold at net asset value plus a sales load.
UNDERWRITING
[ ], [ ], [ ], and [ ] are acting as the representatives of the underwriters ("Underwriter") named below. Subject to the terms and conditions stated in the underwriting agreement, dated the date of this prospectus, each Underwriter named below has agreed to purchase, and the Fund has agreed to sell to that Underwriter, the number of Common Shares set forth opposite the Underwriter's name.
The underwriting agreement provides that the obligations of the Underwriters to purchase the Common Shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The Underwriters are obligated to purchase all the Common Shares (other than those covered by the over-allotment option described below) shown in the table above if any of the Common Shares are purchased.
The Underwriters propose to offer some of the Common Shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the Common Shares to dealers at the public offering price less a concession not to exceed $ per share. The sales load the Fund will pay of $0.90 per share is equal to 4.5% of the initial public offering price. The Underwriters may allow, and dealers may reallow, a concession not to exceed $ per share on sales to other dealers. If all of the Common Shares are not sold at the initial public offering price, the representatives may change the public offering price and other selling terms. Investors must pay for any Common Shares purchased on or before , 2007. The representatives have advised the Fund that the Underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.
ADDITIONAL COMPENSATION
The Adviser (and not the Fund) has agreed to pay to [ ], from its own assets, a structuring fee for advice relating to the structure, design and organization of the Fund as well as services related to the sale and distribution of the Fund's Common Shares in the amount of $ . The structuring fee paid to [ ] will not exceed 0. % of the total public offering price of the Common Shares sold in this offering.
[The Adviser (and not the Fund) may also pay certain qualifying Underwriters a marketing and structuring fee, a sales incentive fee, or additional compensation in connection with the offering.]
The total amount of the underwriter compensation payments described above will not exceed 4.5% of the total public offering price of the shares offered hereby. The sum total of all compensation to the Underwriters in connection with this public offering of Common Shares, including sales load and all forms of additional compensation or structuring or sales incentive fee payments to the Underwriters and other expenses, will be limited to not more than 9.0% of the total public offering price of the Common Shares sold in this offering.
The Fund has granted to the Underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to additional Common Shares at the public offering price less the sales load. The Underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent such option is exercised, each Underwriter must purchase a number of additional Common Shares approximately proportionate to that Underwriter's initial purchase commitment.
The Fund has agreed that, for a period of 180 days from the date of this Prospectus, it will not, without the prior written consent of [ ], on behalf of the Underwriters, dispose of or hedge any Common Shares or any securities convertible into or exchangeable for Common Shares. [ ], in its sole discretion, may release any of the securities subject to these agreements at any time without notice.
The Underwriters have undertaken to sell Common Shares to a minimum of 2,000 beneficial owners in lots of 100 or more shares to meet the New York Stock Exchange distribution requirements for trading.
The Fund intends to apply for listing of its Common Shares on the New York Stock Exchange under the symbol "[ ]."
The following table shows the sales load that the Fund will pay to the Underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional Common Shares.
No Exercise Full Exercise
----------- -------------
Per Share $ $
Total $ $
|
The Fund, the Adviser and the Sub-Adviser have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the Underwriters may be required to make because of any of those liabilities. Certain Underwriters may make a market in the Common Shares after trading in the Common Shares has commenced on the NYSE. No Underwriter, however, is obligated to conduct market- making activities and any such activities may be discontinued at any time without notice, at the sole discretion of the Underwriter. No assurance can be given as to the liquidity of, or the trading market for, the Common Shares as a result of any market-making activities undertaken by any Underwriter. This prospectus is to be used by any Underwriter in connection with the offering and, during the period in which a prospectus must be delivered, with offers and sales of the Common Shares in market-making transactions in the over-the-counter market at negotiated prices related to prevailing market prices at the time of the sale.
In connection with the offering, [ ], on behalf of itself and the other Underwriters, may purchase and sell Common Shares in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of Common Shares in excess of the number of Common Shares to be purchased by the Underwriters in the offering, which creates a syndicate short position. "Covered" short sales are sales of Common Shares made in an amount up to the number of Common Shares represented by the Underwriters' over-allotment option. In determining the source of Common Shares to close out the covered syndicate short position, the Underwriters will consider, among other things, the price of Common Shares available for purchase in the open market as compared to the price at which they may purchase Common Shares through the over-allotment option.
Transactions to close out the covered syndicate short position involve either purchases of Common Shares in the open market after the distribution has been completed or the exercise of the over-allotment option. The Underwriters may also make "naked" short sales of Common Shares in excess of the over-allotment option. The Underwriters must close out any naked short position by purchasing Common Shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of Common Shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of Common Shares in the open market while the offering is in progress.
The Underwriters may impose a penalty bid. Penalty bids allow the Underwriting syndicate to reclaim selling concessions allowed to an underwriter or a dealer for distributing Common Shares in this offering if the syndicate repurchases of Common Shares to cover syndicate short positions or to stabilize the purchase price of the Common Shares.
Any of these activities may have the effect of preventing or retarding a decline in the market price of Common Shares. They may also cause the price of Common Shares to be higher than the price that would otherwise exist in the open market in the absence of these transactions.
The Underwriters may conduct these transactions on the New York Stock Exchange or in the over-the-counter market, or otherwise. If the Underwriters commence any of these transactions, they may discontinue them at any time.
A prospectus in electronic format may be made available on the websites maintained by one or more of the Underwriters. Other than the prospectus in electronic format, the information on any such Underwriter's website is not part of this prospectus. The representatives may agree to allocate a number of Common Shares to Underwriters for sale to their online brokerage account holders. The representatives will allocate Common Shares to Underwriters that may make Internet distributions on the same basis as other allocations. In addition, Common Shares may be sold by the Underwriters to securities dealers who resell Common Shares to online brokerage account holders.
The Fund anticipates that, from time to time, certain Underwriters may act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters.
Certain Underwriters may, from time to time, engage in transactions with or perform services for the Adviser, the Sub-Adviser and their affiliates in the ordinary course of business.
Prior to the initial public offering of Common Shares, the Adviser purchased Common Shares from the Fund in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act.
The principal business address of [ ] is [ ].
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, Massachusetts 02116 is the custodian of the Fund and will maintain custody of the securities and cash of the Fund. IBT maintains the Fund's general ledger and computes net asset value per share daily. IBT also attends to details in connection with the sale, exchange, substitution, transfer and other dealings with the Fund's investments and receives and disburses all funds. IBT also assists in preparation of shareholder reports and the electronic filing of such reports with the SEC.
[American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, New York 10038] is the transfer agent and dividend disbursing agent of the Fund.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Kirkpatrick & Lockhart Preston Gates Ellis LLP, Boston, Massachusetts, and for the Underwriters by [ ]. [ ] may rely as to certain matters of Massachusetts law on the opinion of Kirkpatrick & Lockhart Preston Gates Ellis LLP, Boston, Massachusetts.
REPORTS TO SHAREHOLDERS
The Fund will send to Common Shareholders unaudited semi-annual and audited annual reports, including a list of investments held.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ] are the independent registered public accounting firm for the Fund and will audit the Fund's financial statements.
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not contain all of the information set forth in the Registration Statement that the Fund has filed with the SEC. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations. The Statement of Additional Information can be obtained without charge by calling 1- 800- 225-6265.
Statements contained in this Prospectus as to the contents of any contract or other documents referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which this Prospectus forms a part, each such statement being qualified in all respects by such reference.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
THE FUND'S PRIVACY POLICY
The Eaton Vance organization is committed to ensuring your financial privacy. Each of the financial institutions identified below has in effect the following policy ("Privacy Policy") with respect to nonpublic personal information about its customers:
o Only such information received from you, through application forms or otherwise, and information about your Eaton Vance fund transactions will be collected. This may include information such as name, address, social security number, tax status, account balances and transactions.
o None of such information about you (or former customers) will be disclosed to anyone, except as permitted by law (which includes disclosure to employees necessary to service your account). In the normal course of servicing a customer's account, Eaton Vance may share information with unaffiliated third parties that perform various required services such as transfer agents, custodians and broker/dealers.
o Policies and procedures (including physical, electronic and procedural safeguards) are in place that are designed to protect the confidentiality of such information.
o We reserve the right to change our Privacy Policy at any time upon
proper notification to you. Customers may want to review our Privacy
Policy periodically for changes by accessing the link on our homepage:
www.eatonvance.com.
Our pledge of privacy applies to the following entities within the Eaton Vance organization: the Eaton Vance Family of Funds, Eaton Vance Management, Eaton Vance Investment Counsel, Boston Management and Research, and Eaton Vance Distributors, Inc.
In addition, our Privacy Policy only applies to those Eaton Vance customers who are individuals and who have a direct relationship with us. If a customer's account (i.e., fund shares) is held in the name of a third-party financial adviser/broker-dealer, it is likely that only such adviser's privacy policies apply to the customer. This notice supersedes all previously issued privacy disclosures.
For more information about Eaton Vance's Privacy Policy, please call 1-800- 262-1122.
(EATON VANCE LOGO)
EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND
PRELIMINARY
PROSPECTUS
[ ]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION APRIL 9, 2007
STATEMENT OF ADDITIONAL INFORMATION
, 2007
EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265
TABLE OF CONTENTS
PAGE Additional investment information and restrictions........................ Trustees and officers.................................................... Investment advisory and other services.................................... Determination of net asset value.......................................... Portfolio trading......................................................... Taxes..................................................................... Other information......................................................... Independent registered public accounting firm............................. Report of independent registered public accounting firm................... Financial statements..................................................... Notes to financial statements............................................. Appendix A: Proxy voting policies and procedures.......................... A-
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND (THE "FUND") DATED , 2007 (THE "PROSPECTUS"), AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-225-6265.
Capitalized terms used in this SAI and not otherwise defined have the meanings given them in the Fund's Prospectus.
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
Primary investment strategies are described in the Prospectus. The following is a description of the various investment policies that may be engaged in, whether as a primary or secondary strategy, and a summary of certain attendant risks. Eaton Vance and the Sub-Adviser may not buy any of the following instruments or use any of the following techniques unless they believe that doing so will help to achieve the Fund's investment objectives.
EQUITY INVESTMENTS. As described in the Prospectus, the Fund invests primarily in common stocks.
PREFERRED STOCKS. The Fund may invest in preferred stocks of both domestic and foreign issuers. Under normal market conditions, the Fund expects, with respect to that portion of its total assets invested in preferred stocks, to invest only in preferred stocks of investment grade quality as determined by S&P, Fitch or Moody's or, if unrated, determined to be of comparable quality by Eaton Vance. The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event of a downgrade of an assessment of credit quality or the withdrawal of a rating. Preferred stocks involve credit risk, which is the risk that a preferred stock will decline in price, or fail to pay dividends when expected, because the issuer experiences a decline in its financial status. In addition to credit risk, investment in preferred stocks involves certain other risks as more fully described in the Prospectus.
DERIVATIVE INSTRUMENTS. In addition to the intended strategy of selling index call options, the Fund may invest up to 20% of its total assets in other derivative investments (which are instruments that derive their value from another instrument, security or index) acquired for hedging, risk management and investment purposes. These strategies may be executed through the use of derivative contracts in the United States or abroad. In the course of pursuing these investment strategies, the Fund may purchase and sell derivative contracts based on exchange-listed and equity and fixed-income indices and other instruments; purchase and sell futures contracts and options thereon; and enter into various transactions such as swaps, caps, floors or collars. In addition, derivatives may include new techniques, instruments or strategies that are permitted as regulatory changes occur. Derivative instruments may be used by the Fund to enhance returns or as a substitute for the purchase or sale of securities. Transactions in derivative instruments involve a risk of loss or depreciation due to unanticipated adverse changes in securities prices, interest rates, indices or the other financial instruments' prices; the inability to close out a position; default by the counterparty; imperfect correlation between a position and the desired hedge; tax constraints on closing out positions; and portfolio management constraints on securities subject to such transactions. The loss on derivative instruments (other than purchased options) may substantially exceed an investment in these instruments. In addition, the entire premium paid for purchased options may be lost before they can be profitably exercised. Transaction costs are incurred in opening and closing positions. Derivative instruments may sometimes increase or leverage exposure to a particular market risk, thereby increasing price volatility. Over-the-counter ("OTC") derivative instruments, equity swaps and forward sales of stocks involve an enhanced risk that the issuer or counterparty will fail to perform its contractual obligations. Some derivative instruments are not readily marketable or may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in an exchange-traded derivative instrument, which may make the contract temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or futures option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent the closing out of positions to limit losses. The staff of the SEC takes the position that certain purchased OTC options, and assets used as cover for certain written OTC options, are illiquid. The ability to terminate OTC derivative instruments may depend on the cooperation of the counterparties to such contracts. For thinly traded derivative instruments, the only source of price quotations may be the selling dealer or counterparty. In addition, certain provisions of the Internal Revenue Code of 1986, as amended (the "Code") limit the use of derivative instruments. The Fund has claimed an exclusion from the definition of a Commodity Pool Operator ("CPO") under the Commodity Exchange Act and therefore is not subject to registration or regulation as a CPO. There can be no assurance that the use of derivative instruments will be advantageous.
Foreign exchange traded futures contracts and options thereon may be used only if the Adviser determines that trading on such foreign exchange does not entail risks, including credit and liquidity risks, that are materially greater than the risks associated with trading on CFTC-regulated exchanges.
SHORT SALES
The Fund may sell a security short if it owns at least an equal amount of the security sold short or another security convertible or exchangeable for an equal amount of the security sold short without payment of further compensation (a short sale against-the-box).
Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. Short-selling exposes the Fund to unlimited risk with respect to that security due to the lack of an upper limit on the price to which an instrument can rise. Although the Fund reserves the right to utilize short sales, the Adviser is under no obligation to utilize short sales at all.
SECURITIES LENDING
As described in the Prospectus, the Fund may seek to earn income by lending portfolio securities to broker-dealers and other institutional investors. Cash collateral received by the Fund in respect of loaned securities is invested in Eaton Vance Cash Collateral Fund, LLC ("Cash Collateral Fund"), a privately offered investment company holding high quality, U.S. dollar denominated money market instruments. As compensation for its services as manager, Eaton Vance is paid a fee at a rate of 0.08% annually of the average daily net assets of Cash Collateral Fund. Eaton Vance pays all of Cash Collateral Fund's custody, audit and other ordinary operating expenses, excluding extraordinary, non-recurring items such as expenses incurred in connection with litigation, proceedings, claims and reorganization expenses. Payments to Eaton Vance for managing Cash Collateral Fund are in addition to the investment advisory fee paid by the Fund to Eaton Vance.
CASH EQUIVALENTS
The Fund may invest in cash equivalents to invest daily cash balances or for temporary defensive purposes. Cash equivalents are highly liquid, short-term securities such as commercial paper, time deposits, certificates of deposit, short-term notes and short-term U.S. Government obligations and may include Cash Management Portfolio, an affiliated money market fund which invests in such short-term securities.
EXCHANGE-TRADED FUNDS
The Fund may invest in shares of exchange-traded funds (collectively, "ETFs"), which are designed to provide investment results corresponding to an index. These indexes may be either broad-based, sector or international and may include Standard & Poor's Depositary Receipts ("SPDRs"), DIAMONDS, Nasdaq-100 Index Tracking Stock (also referred to as "Nasdaq-100 Shares"), iShares exchange-traded funds ("iShares"), such as iShares Russell 2000 Growth Index Fund and HOLDRS (Holding Company Depositary Receipts). ETFs usually are units of beneficial interest in an investment trust or represent undivided ownership interests in a portfolio of securities, in each case with respect to a portfolio of all or substantially all of the component securities of, and in substantially the same weighting as, the relevant benchmark index. The benchmark indices of SPDRs, DIAMONDS and Nasdaq-100 Shares are the Standard & Poor's 500 Stock Index, the Dow Jones Industrial Average and the Nasdaq-100 Index, respectively. The benchmark index for iShares varies, generally corresponding to the name of the particular iShares fund. ETFs are designed to provide investment results that generally correspond to the price and yield performance of the component securities (or commodities) of the benchmark index. ETFs are listed on an exchange and trade in the secondary market on a per-share basis.
Investments in ETFs are generally subject to limits in the 1940 Act on investments in other investment companies. The values of ETFs are subject to change as the values of their respective component securities (or commodities) fluctuate according to market volatility. Investments in ETFs that are designed to correspond to an equity index involve certain inherent risks generally associated with investments in a broadly based portfolio of common stocks, including the risk that the general level of stock prices may decline, thereby adversely affecting the value of ETFs invested in by the Fund. Moreover, the Fund's investments in ETFs may not exactly match the performance of a direct investment in the respective indices to which they are intended to correspond due to the temporary unavailability of certain index securities in the secondary market or other extraordinary circumstances, such as discrepancies with respect to the weighting of securities.
Typically, ETF programs bear their own operational expenses, which are deducted from the dividends paid to investors. To the extent that the Fund invests in ETFs, the Fund must bear these expenses in addition to the expenses of its own operation.
POOLED INVESTMENT VEHICLES
The Fund reserves the right to invest up to 10% of its total assets, calculated at the time of purchase, in the securities of pooled investment vehicles including other investment companies unaffiliated with the Adviser. The Fund will indirectly bear its proportionate share of any management fees paid by pooled investment vehicles in which it invests in addition to the advisory fee paid by the Fund. Please refer to "Cash Equivalents" for additional information about investment in other investment companies. The 10% limitation does not apply to the Fund's investment in money market funds and certain other pooled investment vehicles. If the Fund invests in Cash Management Portfolio, an affiliated money market fund, the management fee paid on such investment will be credited against the Fund's management fee.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, which as used in this SAI means the lesser of (a) 67% of the shares of the Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b) more than 50% of outstanding shares of the Fund. As a matter of fundamental policy, the Fund may not:
(1) Borrow money, except as permitted by the Investment Company Act of 1940, as amended (the "1940 Act"). The 1940 Act currently requires that any indebtedness incurred by a closed-end investment company have an asset coverage of at least 300%;
(2) Issue senior securities, as defined in the 1940 Act, other than (i) preferred shares which immediately after issuance will have asset coverage of at least 200%, (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%, or (iii) the borrowings permitted by investment restriction (1) above. The 1940 Act currently defines "senior security" as any bond, debenture, note or similar obligation or instrument constituting a security and evidencing indebtedness and any stock of a class having priority over any other class as to distribution of assets or payment of dividends. Debt and equity securities issued by a closed-end investment company meeting the foregoing asset coverage provisions are excluded from the general 1940 Act prohibition on the issuance of senior securities;
(3) Purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities). The purchase of investment assets with the proceeds of a permitted borrowing or securities offering will not be deemed to be the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as it may technically be deemed to be an underwriter under the Securities Act of 1933, as amended, in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loans, loan interests, debt securities and other obligations in which the Fund is authorized to invest in accordance with its investment objectives and policies, (b) entering into repurchase agreements and (c) lending its portfolio securities;
(6) Purchase or sell real estate, although it may purchase and sell securities which are secured by interests in real estate and securities of issuers which invest or deal in real estate. The Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities;
(7) Purchase or sell physical commodities or contracts for the purchase or sale of physical commodities. Physical commodities do not include futures contracts with respect to securities, securities indices, currency or other financial instruments;
(8) With respect to 75% of its total assets, invest more than 5% of its total assets in the securities of a single issuer or purchase more than 10% of the outstanding voting securities of a single issuer, except obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and except securities of other investment companies; and
(9) Invest 25% or more of its total assets in any single industry or group of industries (other than securities issued or guaranteed by the U.S. government or its agencies or instrumentalities).
In regard to 5(c), the value of the securities loaned by the Fund may not exceed 33 1/3% of its total assets.
The Fund may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities. The 1940 Act currently requires that the Fund have 300% asset coverage with respect to all borrowings other than temporary borrowings.
For purposes of construing restriction (9), securities of the U.S. Government, its agencies, or instrumentalities are not considered to represent industries. Municipal obligations backed by the credit of a governmental entity are also not considered to represent industries.
The Fund has adopted the following nonfundamental investment policy which may be changed by the Board without approval of the Fund's shareholders. As a matter of nonfundamental policy, the Fund may not make short sales of securities or maintain a short position, unless at all times when a short position is open the Fund either owns an equal amount of such securities or owns securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short.
Upon the Board's approval, the Fund may invest more than 10% of its total assets in one or more other management investment companies (or may invest in affiliated investment companies) to the extent permitted by the 1940 Act and rules thereunder.
Whenever an investment policy or investment restriction set forth in the Prospectus or this SAI states a maximum percentage of assets that may be invested in any security or other asset or describes a policy regarding quality standards, such percentage limitation or standard shall be determined immediately after and as a result of the Fund's acquisition of such security or asset. Accordingly, any later increase or decrease resulting from a change in values, assets or other circumstances or any subsequent rating change made by a rating service (or as determined by the Adviser if the security is not rated by a rating agency) will not compel the Fund to dispose of such security or other asset. Notwithstanding the foregoing, the Fund must always be in compliance with the borrowing policies set forth above.
TRUSTEES AND OFFICERS
The Trustees of the Fund are responsible for the overall management and supervision of the affairs of the Fund. The Trustees and officers of the Fund are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. The "noninterested Trustees" consist of those Trustees who are not "interested persons" of the Fund, as that term is defined under the 1940 Act. The business address of each Trustee and officer is The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton Vance Corp., "EV" refers to Eaton Vance, Inc., "BMR" refers to Boston Management and Research, and "EVD" refers to Eaton Vance Distributors Inc. EVC and EV are the corporate parent and trustee, respectively, of Eaton Vance and BMR. Eaton Vance has engaged Rampart Investment Management Company, Inc. ("Rampart" or the "Sub-Adviser") to serve as sub-adviser to the Fund to provide advice on and execution of the construction of the Fund's equity portfolio and options strategy, pursuant to an investment sub-advisory agreement (the "Sub-Advisory Agreement") between the Adviser and Rampart. Each officer affiliated with Eaton Vance may hold a position with other Eaton Vance affiliates that is comparable to his or her position with Eaton Vance listed below.
[INDEPENDENT TRUSTEE INFORMATION IN REQUIRED TABULAR FORMAT TO BE ADDED BY AMENDMENT UPON ELECTION OF FULL BOARD OF TRUSTEES]
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
----------------------------------------------------------------------------------------------------------------------------------
TRUSTEES
Alan R. Dynner Trustee and Since 4/4/07 Vice President, Secretary and 170 None
11/9/41 Secretary Chief Legal Counsel of BMR,
Eaton Vance, EVD,
EV and EVC.
Officer of 170
registered
investment
companies managed
by Eaton Vance or
BMR.
5
|
Frederick S. Marius Trustee and Since 4/4/07 Vice President of Eaton Vance 0 None
10/31/63 Assistant Management and BMR since 2004.
Secretary Previously President and
General Counsel of
Quantitative Investment
Advisors, Inc. and U.S. Boston
Capital Corporation. Officer
of 12 registered investment
companies managed by Eaton
Vance or BMR.
----------
(1) INCLUDES BOTH MASTER AND FEEDER FUNDS IN MASTER-FEEDER STRUCTURE.
(2) CLASS I TRUSTEES WHOSE TERM EXPIRES IN [2007].
(3) CLASS II TRUSTEES WHOSE TERM EXPIRES IN [2008].
(4) CLASS III TRUSTEES WHOSE TERM EXPIRES IN [2009].
|
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
TERM OF OFFICE
POSITION(S) AND LENGTH
NAME AND DATE OF BIRTH WITH THE FUND OF SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
------------------------------------------------------------------------------------------------------------------------------------
Duncan W. Richardson President and Chief Since 4/4/07 Executive Vice President and Chief Equity Investment
10/26/57 Executive Officer Officer of EVC, Eaton Vance and BMR. Officer of 71
registered investment companies managed by Eaton Vance or
BMR.
Thomas E. Faust Jr. Vice President Since 4/4/07 President of Eaton Vance, BMR, EVC and EV, and Director
5/31/58 of EVC; Chief Investment Officer of Eaton Vance, BMR and
EVC. Officer of 71 registered investment companies and 5
private investment companies managed by Eaton Vance or
BMR.
James B. Hawkes Vice President Since 4/4/07 Chairman, and Chief Executive Officer of BMR, Eaton
11/9/41 Vance, EVC and EV; Director of EV; Vice President and
Director of EVD. Trustee and/or officer of 170 registered
investment companies in the Eaton Vance Fund Complex.
Michael A. Allison Vice President Since 4/4/07 Vice President of Eaton Vance and BMF. Officer of two
10/26/64 registered investment companies managed by Eaton Vance or
BMR.
Walter A. Row, III Vice President Since 4/4/07 Director of Equity Research and a Vice President of Eaton
7/20/57 Vance and BMR. Officer of 33 registered investment
companies managed by Eaton Vance or BMR.
Barbara E. Campbell Treasurer and Since 4/4/07 Vice President of BMR and Eaton Vance. Officer of 170
6/19/57 Principal Financial registered investment companies managed by Eaton Vance or
and Accounting Officer BMR.
Paul M. O'Neil Chief Compliance Since 4/4/07 Vice President of Eaton Vance and BMR. Officer of 170
7/11/53 Officer registered investment companies managed by Eaton Vance or
BMR.
|
[The Board of Trustees of the Fund has several standing Committees, including the Governance Committee, the Audit Committee, and the Special Committee. Each such Committee is comprised of only noninterested Trustees.]
[Ms. [ ] (Chair) and Messrs. [ ], [ ], [ ], and [ ] are members of the Governance Committee of the Board of Trustees of the Fund. The purpose of the Governance Committee is to consider, evaluate and make recommendations to the Board of Trustees with respect to the structure, membership and operation of the Board of Trustees and the Committees thereof, including the nomination and
selection of noninterested Trustees and a Chairperson of the Board of Trustees and compensation of such persons.]
[The Governance Committee will, when a vacancy exists or is anticipated, consider any nominee for noninterested Trustee recommended by a shareholder if such recommendation is submitted in writing to the Governance Committee, contains sufficient background information concerning the candidate including evidence the candidate is willing to serve as a noninterested Trustee if selected for the position and is received in a sufficiently timely manner.]
[Messrs. [ ] (Chair), [ ], [ ], [ ] and Ms. [ ] are members of the Audit
Committee of the Board of Trustees of the Fund. The Board of Trustees has
designated Messrs. [ ], [ ] and [ ], each a noninterested Trustee, as audit
committee financial experts. The Audit Committee's purposes are to (i) oversee
the Fund's accounting and financial reporting processes, its internal control
over financial reporting, and, as appropriate, the internal control over
financial reporting of certain service providers; (ii) oversee or, as
appropriate, assist Board oversight of the quality and integrity of the Fund's
financial statements and the independent audit thereof; (iii) oversee, or, as
appropriate, assist Board oversight of, the Fund's compliance with legal and
regulatory requirements that relate to the Fund's accounting and financial
reporting, internal control over financial reporting and independent audits;
(iv) approve prior to appointment the engagement and, when appropriate,
replacement of the independent registered public accounting firm, and, if
applicable, nominate the independent registered public accounting firm to be
proposed for shareholder ratification in any proxy statement of the Fund; (v)
evaluate the qualifications, independence and performance of the independent
registered public accounting firm and the audit partner in charge of leading the
audit; and (vi) prepare, as necessary, audit committee reports consistent with
the requirements of Rule 306 of Regulation S-K for inclusion in the proxy
statement of the Fund.]
[Messrs. [ ] (Chair), [ ], [ ], [ ] and [ ] are currently members of the Special Committee of the Board of Trustees of the Fund. The purposes of the Special Committee are to consider, evaluate and make recommendations to the Board of Trustees concerning the following matters: (i) contractual arrangements with each service provider to the Fund, including advisory, sub-advisory, transfer agency, custodial and fund accounting, distribution services and administrative services; (ii) any and all other matters in which any of the Fund service providers (including Eaton Vance or any affiliated entity thereof) has an actual or potential conflict of interest with the interests of the Fund, or investors therein; and (iii) any other matter appropriate for review by the non-interested Trustees, unless the matter is within the responsibilities of the Audit Committee or the Governance Committee of the Fund.]
[As of the date of this SAI, the Governance Committee has met [ ], the Audit Committee has met [ ] and the Special Committee has [ ].]
The Fund's shareholder reports will contain information regarding the basis for the Trustees' approval of the Advisory Agreement and the Sub-Advisory Agreement.
SHARE OWNERSHIP
[The following table shows the dollar range of equity securities beneficially owned by each Trustee in the Fund and all Eaton Vance Funds overseen by the Trustee as of December 31, 2006. None of the Trustees own shares of the Fund since the Fund has not commenced operations.] [TO BE COMPLETED BY AMENDMENT]
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES OWNED IN ALL REGISTERED
EQUITY SECURITIES FUNDS OVERSEEN BY TRUSTEE IN THE
NAME OF TRUSTEE OWNED IN THE FUND EATON VANCE FUND COMPLEX
--------------- ----------------- ----------------------------------
INTERESTED TRUSTEE
[ ]
NON-INTERESTED TRUSTEES
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
----------
(1) Includes shares which may be deemed to be beneficially owned through the Trustee Deferred Compensation Plan.
|
[As of December 31, 2006, no non-interested Trustee or any of their immediate family members owned beneficially or of record any class of securities of EVC, EVD, Rampart or any person controlling, controlled by or under common control with EVC, EVD or Rampart.]
[During the calendar years ended December 31, 2005 and December 31, 2006, no non-interested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD, Rampart or any person controlling, controlled by or under common control with EVC, EVD or Rampart;
2. Any direct or indirect material interest in any transaction or series
of similar transactions with (i) the Fund; (ii) another fund managed by EVC
or Rampart, distributed by EVD or a person controlling, controlled by or
under common control with EVC, EVD or Rampart; (iii) EVC, EVD or Rampart;
(iv) a person controlling, controlled by or under common control with EVC,
EVD or Rampart; or (v) an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Fund; (ii) another fund managed by EVC or Rampart, distributed by EVD or a person controlling, controlled by or under common control with EVC, EVD or Rampart; (iii) EVC, EVD or Rampart; (iv) a person controlling, controlled by or under common control with EVC, EVD or Rampart; or (v) an officer of any of the above.]
[During the calendar years ended December 31, 2005 and December 31, 2006 no officer of EVC, EVD, Rampart or any person controlling, controlled by or under common control with EVC, EVD or Rampart served on the Board of Directors of a company where a noninterested Trustee of the Fund or any of their immediate family members served as an officer.]
[Trustees of the Fund who are not affiliated with the Adviser may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested by the Fund in the shares of one or more funds in the Eaton Vance Family of Funds, and the amount paid to the Trustees under the Trustees' Plan will be determined based upon the performance of such investments. Deferral of Trustees' fees in accordance with the Trustees' Plan will have a negligible effect on the Fund's assets, liabilities, and net income per share, and will not obligate the Fund to retain the services of any Trustee or obligate the Fund to pay any particular level of compensation to the Trustee. The Fund does not have a retirement plan for its Trustees.]
[The fees and expenses of the Trustees of the Fund are paid by the Fund. (A Trustee of the Fund who is a member of the Eaton Vance organization receives no compensation from the Fund.) For the Fund's fiscal year ending [ ], 200[ ], it is anticipated that the Trustees of the Fund will earn the following compensation in their capacities as Trustees of the Fund. For the year ended December 31, 2006, the Trustees earned the following compensation in their capacities as Trustees of the funds in the Eaton Vance fund complex(1).
[ ] [ ] [ ] [ ] [ ] [ ] [ ]
SOURCE OF COMPENSATION OF
-------------------------
Fund*................................................... $ $ $ $ $ $ $
Fund Complex(1)......................................... $ $ $ $ $ $ $
----------
* ESTIMATED
(1) AS OF [ ], 2007, THE EATON VANCE FUND COMPLEX CONSISTED OF [170] REGISTERED INVESTMENT COMPANIES OR SERIES THEREOF.
(2) INCLUDES $ OF DEFERRED COMPENSATION.
(3) INCLUDES $ OF DEFERRED COMPENSATION.
(4) INCLUDES $ OF DEFERRED COMPENSATION.]
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PROXY VOTING POLICY. The Fund is subject to the Eaton Vance Funds Proxy Voting Policy and Procedures, pursuant to which the Trustees have delegated proxy voting responsibility to the Adviser and adopted the Adviser's proxy voting policies and procedures (the "Policies") which are attached as Appendix A to this SAI. The Trustees will review the Fund's proxy voting records from time to time and will annually consider approving the Policies for the upcoming year. An independent proxy voting service has been retained to assist in the voting of
the Fund proxies through the provision of vote analysis, implementation and recordkeeping and disclosure services. In the event that a conflict of interest arises between the Fund's shareholders and the Adviser or any of its affiliates or any affiliate of the Fund, the Adviser will generally refrain from voting the proxies related to the companies giving rise to such conflict until it consults with the Board of the Fund, except as contemplated under the Fund Policy. The Board's Special Committee will instruct the Adviser on the appropriate course of action. The Fund's and the Adviser's Proxy Voting Policies and Procedures are attached as Appendix A to this SAI.
Information on how the Fund voted proxies relating to portfolio securities during the 12 month period ended June 30, 2006 will be available (1) without charge, upon request, by calling 1-800-262-1122, and (2) on the SEC's website at http://www.sec.gov.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER. Eaton Vance, its affiliates and its predecessor companies have been managing assets of individuals and institutions since 1924 and of investment companies since 1931. They maintain a large staff of experienced fixed-income, senior loan and equity investment professionals to service the needs of their clients. The fixed-income group focuses on all kinds of taxable investment-grade and high-yield securities, tax-exempt investment-grade and high-yield securities, and U.S. Government securities. The senior loan group focuses on senior floating rate loans, unsecured loans and other floating rate debt securities such as notes, bonds and asset backed securities. The equity group covers stocks ranging from blue chip to emerging growth companies. Eaton Vance and its affiliates act as adviser to a family of mutual funds, and individual and various institutional accounts, including corporations, hospitals, retirement plans, universities, foundations and trusts.
The Fund will be responsible for all of its costs and expenses not expressly stated to be payable by Eaton Vance under the Advisory Agreement or Administration Agreement. Such costs and expenses to be borne by the Fund include, without limitation: custody and transfer agency fees and expenses, including those incurred for determining net asset value and keeping accounting books and records; expenses of pricing and valuation services; the cost of share certificates; membership dues in investment company organizations; expenses of acquiring, holding and disposing of securities and other investments; fees and expenses of registering under the securities laws; stock exchange listing fees and governmental fees; rating agency fees and preferred share remarketing expenses; expenses of reports to shareholders, proxy statements and other expenses of shareholders' meetings; insurance premiums; printing and mailing expenses; interest, taxes and corporate fees; legal and accounting expenses; compensation and expenses of Trustees not affiliated with Eaton Vance; expenses of conducting repurchase offers for the purpose of repurchasing Fund shares; and investment advisory and administration fees. The Fund will also bear expenses incurred in connection with any litigation in which the Fund is a party and any legal obligation to indemnify its officers and Trustees with respect thereto, to the extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect for an initial period of two years until [ ], 2009, and from year to year thereafter so long as such continuance is approved at least annually (i) by the vote of a majority of the noninterested Trustees of the Fund or of the Adviser, such vote being cast in person at a meeting specifically called for the purpose of voting on such approval and (ii) by the Board of Trustees of the Fund or by vote of a majority of the outstanding shares of the Fund. The Fund's Administration Agreement continues in effect from year to year so long as such continuance is approved at least annually by the vote of a majority of the Fund's Trustees. Each agreement may be terminated at any time without penalty on sixty (60) days' written notice by the Trustees of the Fund or Eaton Vance, as applicable, or by vote of the majority of the outstanding shares of the Fund. Each agreement will terminate automatically in the event of its assignment. Each agreement provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations or duties to the Fund under such agreements on the part of Eaton Vance, Eaton Vance shall not be liable to the Fund for any loss incurred, to the extent not covered by insurance.
The Advisory Agreement provides that Eaton Vance may engage one or more investment sub-advisers to assist with some or all aspects of the management of the Fund's investments subject to such approvals as are required under the 1940 Act. Pursuant to these provisions, Eaton Vance has engaged Rampart, as a sub-adviser to provide assistance with the development, implementation and execution of the Fund's options strategy. The Advisory Agreement provides that Eaton Vance may terminate any sub-advisory agreement entered into and directly assume any functions performed by the sub-adviser, upon approval of the Board of Trustees, without the need for approval of the shareholders of the Fund.
Pursuant to an investment advisory agreement between the Adviser and the Fund, the Fund has agreed to pay an investment advisory fee, payable on a monthly basis, at an annual rate of [1.00]% of the average daily gross mean total assets of the Fund, including any form of investment leverage that the Fund may in the future determine to utilize, minus all expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to any future investment leverage obtained through (i) indebtedness of any type (including without limitation, borrowing through a credit facility/commercial paper program or the issuance of debt securities), (ii) the
issuance of preferred shares or other similar preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Fund's investment objectives and policies and/or (iv) any other means.
Eaton Vance is a business trust organized under Massachusetts law. EV serves as trustee of Eaton Vance. Eaton Vance and EV are wholly-owned subsidiaries of EVC, a Maryland corporation and publicly-held holding company. EVC through its subsidiaries and affiliates engages primarily in investment management, administration and marketing activities. The Directors of EVC are James B. Hawkes, Thomas E. Faust Jr., Ann E. Berman, John G.L. Cabot, Leo I. Higdon, Jr., Vincent M. O'Reilly, Dorothy E. Puhy and Winthrop H. Smith, Jr. All shares of the outstanding Voting Common Stock of EVC are deposited in a Voting Trust, the Voting Trustees of which are Messrs. Hawkes, Faust, Jeffrey P. Beale, Cynthia J. Clemson, Alan R. Dynner, Michael R. Mach, Robert B. Macintosh, Thomas M. Metzold, Scott H. Page, Duncan W. Richardson, G. West Saltonstall, Judith A. Saryan, William M. Steul, Payson F. Swaffield, and Michael W. Weilheimer (all of whom are officers of Eaton Vance). The Voting Trustees have unrestricted voting rights for the election of Directors of EVC. All of the outstanding voting trust receipts issued under said Voting Trust are owned by certain of the officers of BMR and Eaton Vance who are also officers, or officers and Directors of EVC and EV. As indicated under "Trustees and Officers," all of the officers of the Fund (as well as Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance organization.
EVC and its affiliates and their officers and employees from time to time have transactions with various banks, including the custodian of the Fund, IBT. It is Eaton Vance's opinion that the terms and conditions of such transactions were not and will not be influenced by existing or potential custodial or other relationships between the Fund and such banks.
THE SUB-ADVISER. Rampart acts as the Fund's investment sub-adviser and provides advice and assistance in pursuing the Fund's options strategy pursuant to a sub-advisory agreement between the Adviser and Rampart (the "Sub-Advisory Agreement"). Rampart, a Massachusetts corporation, was founded in 1983 by its current owners Ronald M. Egalka and David R. Fraley. The Sub-Adviser provides customized investment management services within a core competency in options to a spectrum of institutional clients. Since its inception, the Sub-Adviser has continuously expanded its computer modeling and analytical capabilities and created tools to capitalize on opportunities in the capital markets. Rampart's principal office is located at One International Place, Boston, MA 02110. As of December 31, 2006 Rampart had approximately $7.5 billion of assets under management.
Under the terms of its Sub-Advisory Agreement, Rampart provides advice and assistance with the development, implementation and execution of the Fund's options strategy, all subject to the supervision and direction of the Fund's Board of Trustees and the Adviser. For services rendered by Rampart under the Sub-Advisory Agreement, Eaton Vance pays Rampart a fee, payable monthly, in an annual amount equal to [0.05%] of the value of the Fund's average daily gross assets that is subject to written call options.
The Sub-Advisory Agreement with Rampart continues until [ ], 2009 and from year to year thereafter if approved annually (i) by the Fund's Board of Trustees or by the holders of a majority of its outstanding voting securities and (ii) by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of any party to the Sub-Advisory Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The Sub-Advisory Agreement terminates automatically on its assignment and may be terminated without penalty on 60 days written notice at the option of either the Adviser, by the Fund's Board of Trustees or by a vote of a majority (as defined in the 1940 Act) of the Fund's outstanding shares or by Rampart upon 3 months notice. As discussed above, Eaton Vance may terminate the Sub-Advisory Agreement with Rampart and directly assume responsibility for the services provided by Rampart upon approval by the Board of Trustees without the need for approval of the shareholders of the Fund.
The Sub-Advisory Agreement with Rampart provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, Rampart is not liable for any error or judgment or mistake of law or for any loss suffered by the Fund.
PORTFOLIO MANAGERS. The portfolio managers of the Fund are Walter A. Row and Michael A. Allison of Eaton Vance and Ronald M. Egalka of Rampart. Each portfolio manager manages other investment companies and/or investment accounts in addition to the Fund. The following tables show, as of , 2006, the number of accounts each portfolio manager managed in each of the listed categories and the total assets in the accounts managed within each category. The table also shows the number of accounts with respect to which the advisory fee is based on the performance of the account, if any, and the total assets in those accounts.
NUMBER OF TOTAL ASSETS
ACCOUNTS OF ACCOUNTS
NUMBER PAYING A PAYING A
OF TOTAL ASSETS OF PERFORMANCE PERFORMANCE
ACCOUNTS ACCOUNTS* FEE FEE*
-------- --------------- ----------- -----------
MICHAEL A. ALLISON
Registered Investment Companies**........................................ $ $
Other Pooled Investment Vehicles......................................... $ $
Other Accounts........................................................... $ $
RONALD M. EGALKA
Registered Investment Companies**........................................ $ $
Other Pooled Investment Vehicles......................................... $ $
Other Accounts........................................................... $ $
WALTER A. ROW, III
Registered Investment Companies**........................................ $ $
Other Pooled Investment Vehicles......................................... $ $
Other Accounts........................................................... $ $
----------
* In millions of dollars.
** For registered investment companies, assets represent net assets of all open-end investment companies and
gross assets of all closed-end investment companies.
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None of the portfolio managers beneficially owned shares of the Fund as of the date of this SAI.
It is possible that conflicts of interest may arise in connection with the portfolio managers' management of the Fund's investments on the one hand and the investments of other accounts for which the Fund manager is responsible for on the other. For example, a portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Fund and other accounts he advises. In addition due to differences in the investment strategies or restrictions between the Fund and the other accounts, a portfolio manager may take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by a portfolio manager may compensate the investment adviser based on the performance of the securities held by that account. The existence of such a performance based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities. Whenever conflicts of interest arise, the portfolio manager will endeavor to exercise his discretion in a manner that he believes is equitable to all interested persons.
EATON VANCE'S COMPENSATION STRUCTURE AND METHOD TO DETERMINE COMPENSATION. Compensation of the Adviser's portfolio managers and other investment professionals has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) annual stock-based compensation consisting of options to purchase shares of EVC's nonvoting common stock and/or restricted shares of EVC's nonvoting common stock. The Adviser's investment professionals also receive certain retirement, insurance and other benefits that are broadly available to all the Adviser's employees. Compensation of the Adviser's investment professionals is reviewed primarily on an annual basis. Cash bonuses, stock-based compensation awards, and adjustments in base salary are typically paid or put into effect at or shortly after the October 31st fiscal year-end of EVC.
The Adviser compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities and the total return performance of managed funds and accounts versus appropriate peer groups or benchmarks. Performance is normally based on periods ending on the September 30th preceding fiscal year-end. Fund performance is evaluated primarily versus peer groups of funds as determined by Lipper Inc. and/or Morningstar, Inc. In evaluating the performance of a fund and its manager, emphasis is normally placed on three-year performance, with consideration of performance over longer and shorter periods. For funds that are tax-managed or otherwise have an objective of after-tax returns, performance is measured net of taxes. For other funds, performance is evaluated on a pre-tax basis. In addition to rankings within peer groups of funds on the basis of absolute performance, consideration may also be given to risk-adjusted performance. For funds with an investment objective other than total return (such as current income), consideration will also be given to the fund's success in achieving its objective. For managers responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis, based on averages or weighted averages among managed funds and accounts. Funds and accounts that have performance-based advisory fees are not accorded disproportionate weightings in measuring aggregate portfolio manager performance.
The compensation of portfolio managers with other job responsibilities (such as heading an investment group or providing analytical support to other portfolios) will include consideration of the scope of such responsibilities and the managers' performance in meeting them.
The Adviser seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. The Adviser participates in investment-industry compensation surveys and utilizes survey data as a factor in determining salary, bonus and stock-based compensation levels for portfolio managers and other investment professionals. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of the Adviser and its parent company. The overall annual cash bonus pool is based on a substantially fixed percentage of pre-bonus operating income. While the salaries of the Adviser's portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in manager performance and other factors as described herein. For a high performing portfolio manager, cash bonuses and stock-based compensation may represent a substantial portion of total compensation.
RAMPART'S COMPENSATION STRUCTURE AND METHOD TO DETERMINE COMPENSATION. The identified Rampart portfolio manager is a founding shareholder. The compensation of the identified portfolio manager has two primary components: (1) a base salary, and (2) an annual cash bonus. There are also certain retirement, insurance and other benefits that are broadly available to all Rampart employees. Compensation of Rampart investment professionals is reviewed primarily on an annual basis. Cash bonuses and adjustments in base salary are typically paid or put into effect at or shortly after the June 30 fiscal year-end of Rampart.
Rampart compensates its founding shareholders/identified portfolio managers based primarily on the scale and complexity of their responsibilities. The performance of portfolio managers is evaluated primarily based on success in achieving portfolio objectives for managed funds and accounts. Rampart seeks to compensate all portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. This is reflected in the founding shareholders/identified portfolio managers' salaries.
Salaries and profit participations are also influenced by the operating performance of Rampart. While the salaries of Rampart's founding shareholders/identified portfolio managers are comparatively fixed, profit participations may fluctuate substantially from year to year, based on changes in financial performance.
CODES OF ETHICS
The Adviser, Rampart and the Fund have adopted Codes of Ethics governing personal securities transactions. Under the Codes of Ethics, Eaton Vance and Rampart employees may purchase and sell securities (including securities held or eligible for purchase by the Fund) subject to certain pre-clearance and reporting requirements and other procedures.
The Codes of Ethics can be reviewed and copied at the Securities and Exchange Commission's public reference room in Washington, DC (call 1-202-942-8090 for information on the operation of the public reference room); on the EDGAR Database on the SEC's Internet site (http://www.sec.gov); or, upon payment of copying fees, by writing, to the SEC's public reference section, Washington, DC 20549-0102, or by electronic mail at publicinfo@sec.gov.
INVESTMENT ADVISORY SERVICES
Under the general supervision of the Fund's Board of Trustees, Eaton Vance will carry out the investment and reinvestment of the assets of the Fund, will furnish continuously an investment program with respect to the Fund, will determine which securities should be purchased, sold or exchanged, and will implement such determinations and will supervise the overall activities of the Sub-Adviser. Eaton Vance will furnish to the Fund investment advice and provide related office facilities and personnel for servicing the investments of the Fund. Eaton Vance will compensate all Trustees and officers of the Fund who are members of the Eaton Vance organization and who render investment services to the Fund, and will also compensate all other Eaton Vance personnel who provide research and investment services to the Fund.
ADMINISTRATIVE SERVICES
Under the Administration Agreement, Eaton Vance is responsible for managing the business affairs of the Fund, subject to the supervision of the Fund's Board of Trustees. Eaton Vance will furnish to the Fund all office facilities, equipment and personnel for administering the affairs of the Fund. Eaton Vance will compensate all Trustees and officers of the Fund who are members of the Eaton Vance organization and who render executive and administrative services to the Fund, and will also compensate all other Eaton Vance personnel who perform management and administrative services for the Fund. Eaton Vance's administrative services include recordkeeping, preparation and filing of documents required to comply with federal and state securities laws, supervising the activities of the Fund's custodian and transfer agent, providing assistance in connection with the Trustees' and shareholders' meetings, providing services
in connection with repurchase offers, if any, and other administrative services necessary to conduct the Fund's business.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined no less frequently than daily, on each day that the New York Stock Exchange (the "Exchange") is open for trading, as of the close of regular trading on the Exchange (normally 4:00 p.m. New York time). The Fund's net asset value per share is determined by IBT, in the manner authorized by the Trustees of the Fund. Net asset value is computed by dividing the value of the Fund's total assets, less its liabilities, by the number of shares outstanding.
The Trustees of the Fund have established the following procedures for fair valuation of the Fund's assets under normal market conditions. Marketable securities listed on foreign or United States securities exchanges generally are valued at closing sale prices or, if there were no sales, at the mean between the closing bid and asked prices therefor on the exchange where such securities are principally traded (unless an active over-the-counter market in an exchange listed security better reflects current market value). Marketable securities listed in the NASDAQ National Market System are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sale prices are not available are valued at the mean between the latest bid and asked prices. An exchange-traded option is valued on the valuation day as the "Primary Market" quote reported by the Option Pricing Authority ("OPRA"). OPRA gathers options quotations from the six major United States Options exchanges and reports the last sale price from any exchange on which the option is listed. If no such sales are reported, such portion will be valued at the mean of the closing bid and asked prices on the valuation day on the exchange on which the options are primarily traded, or if such option is reported by the Option Clearing Corporation ("OCC") the Fund will use the last reported sales price reported on the OCC at the time of pricing or such other method the Trustees determine is appropriate. When the Fund writes a call option it records the premium as an asset and equivalent liability and thereafter adjusts the liability to the market value of the option determined in accordance with the preceding sentence.
The Adviser and the valuation committee may implement new pricing
methodologies or expand mark-to-market valuation of debt securities whose market
prices are not readily available in the future, which may result in a change in
the Fund's net asset value per share. The Fund's net asset value per share will
also be affected by fair value pricing decisions and by changes in the market
for such debt securities. In determining the fair value of a debt security, the
Adviser will consider relevant factors, data, and information, including: (i)
the characteristics of and fundamental analytical data relating to the debt
security, including the cost, size, current interest rate, period until next
interest rate reset, maturity and base lending rate of the debt security, the
terms and conditions of the debt security and any related agreements, and the
position of the debt security in the borrower's debt structure; (ii) the nature,
adequacy and value of the collateral, including the Fund's rights, remedies and
interests with respect to the collateral; (iii) the creditworthiness of the
borrower, based on an evaluation of its financial condition, financial
statements and information about the borrower's business, cash flows, capital
structure and future prospects; (iv) information relating to the market for the
debt security, including price quotations for and trading in the debt security
and interests in similar debt securities and the market environment and investor
attitudes towards the debt security and interests in similar debt securities;
(v) the experience, reputation, stability and financial condition of the agent
and any intermediate participants in the debt security; and (vi) general
economic and market conditions affecting the fair value of the debt security.
The fair value of each debt security is reviewed and approved by the Adviser's
valuation committee and the Fund's Trustees.
Debt securities for which the over-the-counter market is the primary market are normally valued on the basis of prices furnished by one or more pricing services at the mean between the latest available bid and asked prices. OTC options are valued at prices obtained from a broker (typically the counterparty to the options) on the valuation day. Financial futures contracts listed on commodity exchanges and exchange-traded options are valued at closing settlement prices. Short-term obligations having remaining maturities of less than 60 days are valued at amortized cost, which approximates value, unless the Trustees determine that under particular circumstances such method does not result in fair value. As authorized by the Trustees, debt securities (other than short-term obligations) may be valued on the basis of valuations furnished by a pricing service which determines valuations based upon market transactions for normal, institutional-size trading units of such securities. Securities for which there is no such quotation or valuation and all other assets are valued at fair value as determined in good faith by or at the direction of the Fund's Trustees considering relevant factors, data and information, including the market value of freely tradable securities of the same class in the principal market on which such securities are normally traded.
All other securities are valued at fair value as determined in good faith by or at the direction of the Trustees.
The daily valuation of foreign equity securities held by the Fund generally is determined as of the close of trading on the principal exchange on which such securities trade. Events occurring after the close of trading on foreign exchanges may result in adjustments to the valuation of foreign securities to more accurately reflect their fair value as of the close of regular trading on the Exchange. The Fund may rely on an independent pricing service in making any such adjustment. Foreign securities held by the Fund will be valued in U.S. dollars; such values will be computed by the custodian based on foreign currency exchange rate quotations supplied by an independent quotation service.
PORTFOLIO TRADING
Decisions concerning the execution of portfolio security transactions, including the selection of the market and the executing firm, are made by Eaton Vance, the Fund's Adviser or Rampart as the Sub-Adviser. As used below, "Adviser" refers to Eaton Vance and Rampart, as applicable. The Adviser is also responsible for the execution of transactions for all other accounts managed by it. The Adviser places the portfolio security transactions of the Fund and of all other accounts managed by it for execution with many firms. The Adviser uses its best efforts to obtain execution of portfolio security transactions at prices which are advantageous to the Fund and at reasonably competitive spreads or (when a disclosed commission is being charged) at reasonably competitive commission rates. In seeking such execution, the Adviser will use its best judgment in evaluating the terms of a transaction, and will give consideration to various relevant factors, including without limitation the full range and quality of the executing firm's services, the value of the brokerage and research services provided, the responsiveness of the firm to the Adviser, the size and type of the transaction, the nature and character of the market for the security, the confidentiality, speed and certainty of effective execution required for the transaction, the general execution and operational capabilities of the executing firm, the reputation, reliability, experience and financial condition of the firm, the value and quality of the services rendered by the firm in this and other transactions, and the reasonableness of the spread or commission, if any.
Transactions on stock exchanges and other agency transactions involve the payment of negotiated brokerage commissions. Such commissions vary among different broker-dealer firms, and a particular broker-dealer may charge different commissions according to such factors as the difficulty and size of the transaction and the volume of business done with such broker-dealer. Transactions in foreign securities often involve the payment of brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid or received usually includes an undisclosed dealer markup or markdown. In an underwritten offering the price paid often includes a disclosed fixed commission or discount retained by the underwriter or dealer.
Although spreads or commissions paid on portfolio security transactions will, in the judgment of the Adviser, be reasonable in relation to the value of the services provided, commissions exceeding those which another firm might charge may be paid to broker-dealers who were selected to execute transactions on behalf of the Adviser's clients in part for providing brokerage and research services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, as amended, a broker or dealer who executes a portfolio transaction on behalf of the Fund may receive a commission which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such compensation was reasonable in relation to the value of the brokerage and research services provided. This determination may be made on the basis of that particular transaction or on the basis of overall responsibilities which the Adviser and its affiliates have for accounts over which they exercise investment discretion. In making any such determination, the Adviser will not attempt to place a specific dollar value on the brokerage and research services provided or to determine what portion of the commission should be related to such services. Brokerage and research services may include advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; effecting securities transactions and performing functions incidental thereto (such as clearance and settlement); and the "Research Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the advisers of investment companies, institutions and other investors to receive research, analytical, statistical and quotation services, data, information and other services, products and materials which assist such advisers in the performance of their investment responsibilities ("Research Services") from broker-dealer firms which execute portfolio transactions for the clients of such advisers and from affiliates of executing broker-dealers. Advisers also commonly receive Research Services from research providers that are not affiliated with an executing broker-dealer, but which have entered into payment arrangements involving an executing broker-dealer ("Third Party Research Services"). Under a typical Third Party Research Services payment arrangement, the research provider agrees to provide services to an Adviser in exchange for specified payments to
the research provider by a broker-dealer that executes portfolio transactions for clients of the Adviser. The Adviser and the executing broker-dealer enter into a related agreement specifying the amount of brokerage business the Adviser will direct to the executing broker-dealer to offset payments made by the executing broker-dealer for Third Party Research Services received by the Adviser. For example, the Adviser may agree to direct brokerage business generating $45,000 in commissions on portfolio transactions to a broker-dealer firm as consideration for the executing broker-dealer making payments of $30,000 to a provider of Third Party Research Services. The ratio of the commissions to be paid to an executing broker-dealer as consideration for Third Party Research Services over the cost borne by the executing broker-dealer in connection with providing such services to the Adviser is referred to herein as the "Third Party Research Services Payment Ratio."
Consistent with the foregoing practices, the Adviser receives Research Services from many broker-dealer firms with which the Adviser places the Fund's transactions and from third parties with which these broker-dealers have arrangements. The Fund and the Adviser may also receive Research Services from underwriters and dealers in fixed-price offerings, which Research Services are reviewed and evaluated by the Adviser in connection with its investment responsibilities.
Research Services received by the Advisers may include such matters as general economic, political, business and market information, industry and company reviews, evaluations of securities and portfolio strategies and transactions, proxy voting data and analysis services, technical analysis of various aspects of the securities market, recommendations as to the purchase and sale of securities and other portfolio transactions, financial, industry and trade publications, news and information services, pricing and quotation equipment and services, and research oriented computer hardware, software, databases and services. Any particular Research Service obtained through a broker-dealer may be used by the Adviser in connection with client accounts other than those accounts which pay commissions to such broker-dealer. Any such Research Service may be broadly useful and of value to the Adviser in rendering investment advisory services to all or a significant portion of its clients, or may be relevant and useful for the management of only one client's account or of a few clients' accounts, or may be useful for the management of merely a segment of certain clients' accounts, regardless of whether any such account or accounts paid commissions to the broker-dealer through which such Research Service was obtained. The advisory fee paid by the Fund is not reduced because the Adviser receives such Research Services. The Adviser evaluates the nature and quality of the various Research Services obtained through broker-dealer firms and attempts to allocate sufficient portfolio security transactions to such firms to ensure the continued receipt of Research Services which the Adviser believes are useful or of value to it in rendering investment advisory services to its clients.
In the event that the Adviser executes Fund securities transactions with a broker-dealer and the associated commission is consideration for Third Party Research Services (as described above), the Adviser has agreed to reduce the advisory fee payable by the Fund by an amount equal to the commission payment associated with the transaction divided by the applicable Third Party Research Services Payment Ratio.
Some executing broker-dealers develop and make available directly to their brokerage customers proprietary Research Services ("Proprietary Research Services"). As a general matter, broker-dealers bundle the cost of Proprietary Research Services with trade execution services rather than charging separately for each. In such circumstances, the independent cost or other value of the Proprietary Research Services cannot be determined. The advisory fee paid by the Fund will not be reduced in connection with the receipt of Proprietary Research Services by the Adviser.
The investment companies sponsored by the Adviser or its affiliates may allocate brokerage commissions to acquire information relating to the performance, fees and expenses of such companies and other mutual funds, which information is used by the Directors or Trustees of such companies to fulfill their responsibility to oversee the quality of the services provided by various entities, including the Adviser. Such companies may also pay cash for such information.
Securities considered as investments for the Fund may also be appropriate for other investment accounts managed by the Adviser or its affiliates. Whenever decisions are made to buy or sell securities by the Fund and one or more of such other accounts simultaneously, the Adviser will allocate the security transactions (including "hot" issues) in a manner which it believes to be equitable under the circumstances. As a result of such allocations, there may be instances where the Fund will not participate in a transaction that is allocated among other accounts. If an aggregated order cannot be filled completely, allocations will generally be made on a pro rata basis. An order may not be allocated on a pro rata basis where, for example: (i) consideration is given to portfolio managers who have been instrumental in developing or negotiating a particular investment; (ii) consideration is given to an account with specialized investment policies that coincide with the particulars of a specific investment; (iii) pro rata allocation would result in "odd-lot" or DE MINIMIS amounts being allocated to a portfolio or other client; or (iv) where the Adviser reasonably determines that departure from a pro rata allocation is advisable. While these aggregation and allocation policies could have a detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the benefits from the Adviser's organization outweigh any disadvantage that may arise from exposure to simultaneous transactions.
TAXES
The following discussion of federal income tax matters is based on the advice of Kirkpatrick & Lockhart Preston Gates Ellis LLP, counsel to the Fund. The Fund intends to elect to be treated and to qualify each year as a regulated investment company ("RIC") under the Code.
Qualification as a RIC requires, among other things, that the Fund: (i) derive in each taxable year at least 90% of its gross income from: (a) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) net income derived from interests in certain publicly traded partnerships that are treated as partnerships for United States federal income tax purposes and that derive less than 90% of their gross income from the items described in (a) above (each a "Qualified Publicly Traded Partnership"); and (ii) diversify its holdings so that, at the end of each quarter of each taxable year: (a) at least 50% of the value of the Fund's total assets is represented by (I) cash and cash items, United States government securities, the securities of other regulated investment companies and (II) other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the value of the Fund's total assets is invested in the securities (other than United States government securities and the securities of other regulated investment companies) of (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or (III) any one or more Qualified Publicly Traded Partnerships.
As a RIC, the Fund generally will not be subject to United States federal income tax on its investment company taxable income (as that term is defined in the Code, but without regard to the deductions for dividend paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes in each taxable year to its shareholders, provided that it distributes at least 90% of its investment company taxable income for such taxable year. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain. In order to avoid incurring a nondeductible 4% federal excise tax obligation, the Code requires that the Fund distribute (or be deemed to have distributed) by December 31 of each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income for such year, (ii) 98% of its capital gain net income (which is the excess of its realized net long-term capital gain over its realized net short-term capital loss), generally computed on the basis of the one-year period ending on October 31 of such year, after reduction by any available capital loss carryforwards and (iii) 100% of any ordinary income and capital gain net income from the prior year (as previously computed) that were not paid out during such year and on which the Fund paid no United States federal income tax. Under current law, provided that the Fund qualifies as a RIC for United States federal income tax purposes, the Fund should not be liable for any income, corporate excise or franchise tax in The Commonwealth of Massachusetts.
If the Fund does not qualify as a RIC or fails to satisfy the 90% distribution requirement for any taxable year, the Fund's taxable income will be subject to corporate income taxes, and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to the shareholder as ordinary income. Such distributions generally would be eligible (i) to be treated as qualified dividend income in the case of individual and other noncorporate shareholders and (ii) for the dividends received deduction ("DRD") in the case of corporate shareholders. In addition, in order to requalify for taxation as a RIC, the Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
For United States federal income tax purposes, distributions paid out of the Fund's current or accumulated earnings and profits will, except in the case of distributions of qualified dividend income and capital gain dividends described below, be taxable as ordinary dividend income. Under the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Tax Act"), certain income distributions paid by the Fund (whether paid in cash or reinvested in additional Fund shares) to individual taxpayers are taxed at rates applicable to net long-term capital gains (15%, or 5% for individuals in the 10% or 15% tax brackets). This tax treatment applies only if certain holding period requirements and other requirements are satisfied by the shareholder and the dividends are attributable to qualified dividend income received by the Fund itself. For this purpose, "qualified dividend income" means dividends received by the Fund from United States corporations and "qualified foreign corporations," provided that the Fund satisfies certain holding period and other requirements in respect of the stock of such corporations. These special rules relating to the taxation of ordinary income dividends paid by RICs generally apply to taxable years beginning before January 1, 2011. Thereafter, the Fund's dividends, other than capital gain
dividends, will be fully taxable at ordinary income tax rates unless further Congressional action is taken. There can be no assurance as to what portion of the Fund's dividend distributions will qualify for favorable treatment under the Tax Act.
Shareholders receiving any distribution from the Fund in the form of additional shares pursuant to the dividend reinvestment plan will be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date.
Dividends of investment company taxable income designated by the Fund and received by corporate shareholders of the Fund will qualify for the DRD to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. A dividend received by the Fund will not be treated as a qualifying dividend (i) to the extent the stock on which the dividend is paid is considered to be "debt-financed" (generally, acquired with borrowed funds), (ii) if the Fund fails to meet certain holding period requirements for the stock on which the dividend is paid or (iii) to the extent that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Moreover, the DRD may be disallowed or reduced if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the Fund or by application of the Code.
Distributions of net capital gain, if any, designated as capital gains dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has held Fund shares. A distribution of an amount in excess of the Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's basis in his or her shares. To the extent that the amount of any such distribution exceeds the shareholder's basis in his or her shares, the excess will be treated by the shareholder as gain from a sale or exchange of the shares. Distributions of gains from the sale of investments that the Fund owned for one year or less will be taxable as ordinary income.
The Fund may elect to retain its net capital gain or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who will be treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will (i) be required to report his pro rata share of such gain on his tax return as long-term capital gain, (ii) receive a refundable tax credit for his pro rata share of tax paid by the Fund on the gain and (iii) increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit.
Selling shareholders will generally recognize gain or loss in an amount equal to the difference between the shareholder's adjusted tax basis in the shares sold and the sale proceeds. If the shares are held as a capital asset, the gain or loss will be a capital gain or loss. The maximum tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate for gains recognized on the sale of capital assets held for one year or less, or (ii) 15% for gains recognized on the sale of capital assets held for more than one year (as well as certain capital gain distributions) (5% for individuals in the 10% or 15% tax brackets) but only for taxable years beginning on or before December 31, 2010. Thereafter, the maximum rate will increase to 20%, unless Congress enacts legislation providing otherwise.
Any loss realized upon the sale or exchange of Fund shares with a holding period of six months or less will be treated as a long-term capital loss to the extent of any capital gain distributions received (or amounts designated as undistributed capital gains) with respect to such shares. In addition, all or a portion of a loss realized on a sale or other disposition of Fund shares may be disallowed under "wash sale" rules to the extent the shareholder acquires other shares of the same Fund (whether through the reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the common shares. Any disallowed loss will result in an adjustment to the shareholder's tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares cannot be taken into account for purposes of determining gain or loss on a sale of the shares before the 91st day after their purchase to the extent a sales charge is reduced or eliminated in a subsequent acquisition of shares of the Fund (or of another fund) pursuant to the reinvestment or exchange privilege. Any disregarded amounts will result in an adjustment to the shareholder's tax basis in some or all of any other shares acquired.
Dividends and distributions on the Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Certain distributions declared in October, November or December to
Shareholders of record of such month and paid in the following January will be taxed to shareholders as if received on December 31 of the year in which they were declared. In addition, certain other distributions made after the close of a taxable year of the Fund may be "spilled back" and treated as paid by the Fund (except for purposes of the non-deductible 4% federal excise tax) during such taxable year. In such case, shareholders will be treated as having received such dividends in the taxable year in which the distributions were actually made.
The Fund will inform shareholders of the source and tax status of all distributions promptly after the close of each calendar year.
The benefits of the reduced tax rates applicable to long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual shareholders.
For the Fund's index call options that qualify as "section 1256 contracts," Code Section 1256 generally will require any gain or loss arising from the lapse, closing out or exercise of such positions to be treated as 60% long-term and 40% short-term capital gain or loss. In addition, the Fund generally will be required to "mark-to-market" (I.E., treat as sold for fair market value) each outstanding index option position which it holds at the close of each taxable year (and on October 31 of each year for excise tax purposes). If a "section 1256 contract" held by the Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on such sale will be adjusted to reflect the gain or loss previously taken into account under the "mark-to-market" rules. In addition to most index call options, "section 1256 contracts" include certain other options contracts, certain regulated futures contracts, and certain other financial contracts.
The Fund's index call options that do not qualify as "section 1256 contracts" generally will be treated as equity options governed by Code Section 1234. Pursuant to Code Section 1234, if a written option expires unexercised, the premium received is short-term capital gain to the Fund. If the Fund enters into a closing transaction, the difference between the amount paid to close out its position and the premium received for writing the option is generally short-term capital gain or loss. If a call option written by the Fund that is not a "section 1256 contract" is cash settled, any resulting gain or loss will be short-term capital gain or loss.
The Code contains special rules that apply to "straddles," defined generally as the holding of "offsetting positions with respect to personal property." For example, the straddle rules normally apply when a taxpayer holds stock and an offsetting option with respect to such stock or substantially identical stock or securities. In general, investment positions will be offsetting if there is a substantial diminution in the risk of loss from holding one position by reason of holding one or more other positions. The Fund expects that the index call options it writes will not be considered straddles for this purpose because the Fund's portfolio of common stocks will be sufficiently dissimilar from the components of the indices on which it has outstanding options positions under applicable guidance established by the Internal Revenue Service (the "Service"). Under certain circumstances, however, the Fund may enter into options transactions or certain other investments that may constitute positions in a straddle. If two or more positions constitute a straddle, recognition of a realized loss from one position must generally be deferred to the extent of unrecognized gain in an offsetting position. In addition, long-term capital gain may be recharacterized as short-term capital gain, or short-term capital loss as long-term capital loss. Interest and other carrying charges allocable to personal property that is part of a straddle are not currently deductible but must instead be capitalized. Similarly, "wash sale" rules apply to prevent the recognition of loss by the Fund from the disposition of stock or securities at a loss in a case in which identical or substantially identical stock or securities (or an option to acquire such property) is or has been acquired within a prescribed period.
The Code allows a taxpayer to elect to offset gains and losses from positions that are part of a "mixed straddle." A "mixed straddle" is any straddle in which one or more but not all positions are "section 1256 contracts." The Fund may be eligible to elect to establish one or more mixed straddle accounts for certain of its mixed straddle trading positions. The mixed straddle account rules require a daily "marking to market" of all open positions in the account and a daily netting of gains and losses from all positions in the account. At the end of a taxable year, the annual net gains or losses from the mixed straddle account are recognized for tax purposes. The net capital gain or loss is treated as 60% long-term and 40% short-term capital gain or loss if attributable to the "section 1256 contract" positions, or all short-term capital gain or loss if attributable to the non-"section 1256 contract" positions.
The Fund may recognize gain (but not loss) from a constructive sale of certain "appreciated financial positions" if the Fund enters into a short sale, offsetting notional principal contract, or forward contract transaction with respect to the appreciated position or substantially identical property. Appreciated financial positions subject to this constructive sale treatment include interests (including options and forward contracts and short sales) in stock and certain other instruments. Constructive sale treatment does not apply if the transaction is closed out not later than thirty days after the end of the taxable year in which the transaction was initiated, and the underlying appreciated securities position is held unhedged for at least the next sixty days after the hedging transaction is closed.
Gain or loss from a short sale of property is generally considered as capital gain or loss to the extent the property used to close the short sale constitutes a capital asset in the Fund's hands. Except with respect to certain situations where the property used to close a short sale has a long-term holding period on the date the short sale is entered into, gains on short sales generally are short-term capital gains. A loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, "substantially identical property" has been held by the Fund for more than one year. In addition, entering into a short sale may result in suspension of the holding period of "substantially identical property" held by the Fund.
Gain or loss on a short sale will generally not be realized until such time as the short sale is closed. However, as described above in the discussion of constructive sales, if the Fund holds a short sale position with respect to securities that have appreciated in value, and it then acquires property that is the same as or substantially identical to the property sold short, the Fund generally will recognize gain on the date it acquires such property as if the short sale were closed on such date with such property. Similarly, if the Fund holds an appreciated financial position with respect to securities and then enters into a short sale with respect to the same or substantially identical property, the Fund generally will recognize gain as if the appreciated financial position were sold at its fair market value on the date it enters into the short sale. The subsequent holding period for any appreciated financial position that is subject to these constructive sale rules will be determined as if such position were acquired on the date of the constructive sale.
The Fund's transactions in futures contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (I.E., may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Fund and may defer Fund losses. These rules could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio (I.E., treat them as if they were closed out), and (b) may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the 90% distribution requirement for qualifying to be taxed as a RIC and the 98% distribution requirement for avoiding excise taxes. The Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any futures contract, option or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund from being taxed as a regulated investment company.
Further, certain of the Fund's investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) convert dividends that would otherwise constitute qualified dividend income into short-term capital gain or ordinary income taxed at the higher rate applicable to ordinary income, (ii) treat dividends that would otherwise be eligible for the corporate DRD as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gain into short-term capital gain or ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited), (vi) cause the Fund to recognize income or gain without a corresponding receipt of cash, (vii) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (viii) adversely alter the characterization of certain complex financial transactions, and (ix) produce income that will not qualify as good income for purposes of the 90% annual gross income requirement described above. While it may not always be successful in doing so, the Fund will seek to avoid or minimize any adverse tax consequences of its investment practices.
Dividends and interest received, and gains realized, by the Fund on foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and United States possessions (collectively "foreign taxes") that would reduce the return on its securities. Tax conventions between certain countries and the United States, however, may reduce or eliminate foreign taxes, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors. Shareholders will generally not be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund.
The Fund may invest in the stock of "passive foreign investment companies" ("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, the Fund will be subject to United States federal income tax on a portion of any "excess distribution" received on the stock of a PFIC or of any gain from disposition of that stock (collectively "PFIC income"), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in the Fund's investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing fund" ("QEF"), then in lieu of the foregoing tax and interest obligation, the Fund will be required to include in income each year its pro rata share of the QEF's annual ordinary earnings and net capital gain -- which it may have to distribute to satisfy the distribution requirement and avoid imposition of the excise tax -- even if the QEF does not distribute those earnings and gain to the Fund. In most instances it will be very difficult, if not impossible, to make this election because of certain of its requirements.
The Fund may elect to "mark-to-market" its stock in any PFIC. "Marking-to-market," in this context, means including in ordinary income each taxable year the excess, if any, of the fair market value of a PFIC's stock over the Fund's adjusted basis therein as of the end of that year. Pursuant to the election, the Fund also would be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains (reduced by any prior deductions) with respect to that stock included by the Fund for prior taxable years under the election. The Fund's adjusted basis in each PFIC's stock with respect to which it has made this election will be adjusted to reflect the amounts of income included and deductions taken thereunder.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such income or receivables or pays such liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt securities denominated in a foreign currency, to the extent attributable to fluctuations in exchange rate between the acquisition and disposition dates, are also treated as ordinary income or loss.
Amounts paid by the Fund to individuals and certain other shareholders who have not provided the Fund with their correct taxpayer identification number ("TIN") and certain certifications required by the Service as well as shareholders with respect to whom the Fund has received certain information from the Service or a broker may be subject to "backup" withholding of federal income tax arising from the Fund's taxable dividends and other distributions as well as the gross proceeds of sales of shares, at a rate of 28% for amounts paid during 2007. An individual's TIN is generally his or her social security number. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to a shareholder may be refunded or credited against such shareholder's United States federal income tax liability, if any, provided that the required information is furnished to the Service.
The foregoing briefly summarizes some of the important federal income tax consequences to common shareholders of investing in common shares, reflects the United States federal tax law as of the date of this Statement of Additional Information, and does not address special tax rules applicable to certain types of investors, such as corporate and foreign investors. Unless otherwise noted, this discussion assumes that an investor is a United States person and holds Common Shares as a capital asset. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change or differing interpretations by the courts or the Service retroactively or prospectively. Investors should consult their tax advisors regarding other federal, state or local tax considerations that may be applicable to their particular circumstances, as well as any proposed tax law changes.
OTHER INFORMATION
The Fund is an organization of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust may, in certain circumstances, be held personally liable as partners for the obligations of the trust. The Declaration of Trust contains an express disclaimer of shareholder liability in connection with Fund property or the acts, obligations or affairs of the Fund. The Declaration of Trust, together with the Fund's By-laws, also provides for indemnification out of Fund property of any shareholder held personally liable for the claims and liabilities to which a shareholder may become subject by sole 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 Fund itself is unable to meet its obligations. The Fund has been advised by its counsel that the risk of any shareholder incurring any liability for the obligations of the Fund is remote.
The Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law; but nothing in the Declaration of Trust protects a Trustee against any liability to the Fund or its shareholders to which he or she 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 or her office. Voting rights are not cumulative, which means that the holders of more than 50% of the shares voting for the election of Trustees can elect 100% of the Trustees and, in such event, the holders of the remaining less than 50% of the shares voting on the matter will not be able to elect any Trustees. The Declaration of Trust provides that no person shall serve as a Trustee if shareholders holding two-thirds of the outstanding shares have removed him from that office either by a written declaration filed with the Fund's custodian or by votes cast at a meeting called for that purpose. The Declaration of Trust further provides that the Trustees of the Fund shall promptly call a meeting of the shareholders for the purpose of voting upon a question of removal of any such Trustee or Trustees when requested in writing to do so by the record holders of not less than 10% of the outstanding shares.
The Fund's Prospectus and this SAI do not contain all of the information set forth in the Registration Statement that the Fund has filed with the SEC. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its Rules and Regulations.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ], is the independent registered public accounting firm for the Fund, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation of filings with the SEC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[TO BE ADDED BY AMENDMENT]
EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AS OF [ ], 2007
ASSETS
Cash........................................................................
Offering costs..............................................................
Receivable from Adviser.....................................................
Total assets................................................................
LIABILITIES
Accrued offering costs......................................................
Accrued organizational costs................................................
Total liabilities...........................................................
Net assets applicable to 5,000 common shares of beneficial interest
issued and outstanding.............................
NET ASSET VALUE AND OFFERING PRICE PER SHARE.................................
STATEMENT OF OPERATIONS
PERIOD FROM APRIL 4, 2007 (DATE OF ORGANIZATION) THROUGH [ ], 2007
INVESTMENT INCOME............................................................
EXPENSES
Organization costs..........................................................
Expense reimbursement.......................................................
Net expenses...............................................................
NET INVESTMENT INCOME........................................................
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION
The Eaton Vance Risk-Managed Diversified Equity Income Fund (the "Fund") was organized as a Massachusetts business trust on April 4, 2007, and has been inactive since that date except for matters relating to its organization and registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and the sale of 5,000 common shares to Eaton Vance Management, the Fund's investment adviser (the "Adviser").
Eaton Vance Management, or an affiliate, has agreed to reimburse all organizational costs, estimated at approximately $[ ]. Eaton Vance Management, or an affiliate, directly provided certain organizational services to the Fund at no expense.
Eaton Vance Management, or an affiliate, has agreed to pay all offering costs (other than sales loads) that exceed $0.04 per common share. The total estimated fund offering costs are $[ ], of which the Fund would pay $[ ] and Eaton Vance Management would pay $[ ] based on such estimate.
The Fund is a newly organized, diversified, closed-end management investment company. The Fund's primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. Relative to other equity income funds, the Fund seeks to provide less volatile returns and reduced exposure to loss of value during stock market declines. In pursuing its investment objectives, the Fund will evaluate returns on an after-tax basis, seeking to minimize and defer shareholder federal income taxes. Under normal market conditions, the Fund will invest at least 80% of its total assets in a combination of (1) dividend-paying common stocks, (2) stocks and other liquid assets the value of which is subject to written put options on individual stocks, and (3) common stocks the value of which is subject to written index call options. In addition, under normal market conditions, the Fund will purchase index put options with respect to at least 80% of the value of its investments in common stocks. The Fund will invest primarily in common stocks of United States issuers, but may invest up to 40% of its assets in common stocks of foreign issuers, including up to 5% of its total assets in securities of issuers located in emerging markets.
The Fund will seek to generate current earnings in part by employing an option strategy of writing (selling) index call options on a portion of the value of the Fund's total assets under normal market conditions. Writing index call options is a specialized investment practice that involves certain related risks and tax consequences. Upon the writing of a call option, an amount equal to the premium received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the option written in accordance with the Fund's policies on investment valuation. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. When a call option is exercised, the Fund will be required to deliver an amount of cash determined by the excess of the value of the applicable index at contract termination over the exercise price of the option. Thus, the exercise of index call options sold by the Fund may require the Fund to sell portfolio securities to generate cash at inopportune times or for unattractive prices.
Although, the Fund has no current intention to do so, the Fund is authorized and reserves the flexibility to use leverage through the issuance of preferred shares and/or borrowings, including the issuance of debt securities. The costs of issuing preferred shares and/or a borrowing program would be borne by Common Shareholders and consequently would result in a reduction of net asset value of Common Shares. In addition, the fee paid to Eaton Vance will be calculated on the basis of the Fund's average daily gross assets, including proceeds from the issuance of preferred shares and/or borrowings, so the fees will be higher when leverage is utilized.
NOTE 2: ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates. Actual results may differ from those estimates.
The Fund's share of offering costs will be recorded within paid in capital as
a reduction of the proceeds from the sale of common shares upon the commencement
of Fund operations. The offering costs reflected above assume the sale of
[12,500,000] common shares or $[238,750,000] after taking account of the Fund's
sales load.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment advisory agreement between the Adviser and the Fund, the Fund has agreed to pay an investment advisory fee, payable on a monthly basis, at an annual rate of [1.00]% of the average daily gross assets of the Fund. Gross assets of the Fund shall be calculated by deducting accrued liabilities of the Fund not including the amount of any preferred shares outstanding or the principal amount of any indebtedness for money borrowed.
Pursuant to a sub-advisory agreement between the Adviser and Rampart Investment Management Company, Inc. ("Rampart"), the Adviser has agreed to pay a sub-advisory fee to Rampart, in an annual amount equal to [ ]% of the value of the Fund's average daily gross assets that is subject to written call options.
NOTE 4: FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investments. If the Fund's total quarterly distributions in any year exceed the amount of its net investment income for the year, any such excess would be characterized as a return of capital for federal income tax purposes to the extent not designated as a capital gain dividend. Distributions in any year may include a substantial return of capital component. Under the Investment Company Act of 1940, as amended, for any distribution that includes amounts from sources other than net income, the Fund is required to notify Common Shareholders regarding the components of such distribution. Such notification will be provided at the time of any payment believed to include any such amounts.
APPENDIX A
EATON VANCE FUNDS
PROXY VOTING POLICY AND PROCEDURES
I. OVERVIEW
The Boards of Trustees (the "Boards") of the Eaton Vance Funds (the "Funds") recognize that it is their fiduciary responsibility to actively monitor the Funds' operations. The Boards have always placed paramount importance on their oversight of the implementation of the Funds' investment strategies and the overall management of the Funds' investments. A critical aspect of the investment management of the Funds continues to be the effective assessment and voting of proxies relating to the Funds' portfolio securities. While the Boards will continue to delegate the day-to-day responsibilities relating to the management of the proxy-voting process to the relevant investment adviser or sub-adviser, if applicable, of the Fund (or its underlying portfolio in the case of a master-feeder arrangement), the Boards have determined that it is in the interests of the Funds' shareholders to adopt these written proxy voting policy and procedures (the "Policy"). For purposes of this Policy the term "Fund" shall include a Fund's underlying portfolio in the case of a master-feeder arrangement and the term "Adviser" shall mean the adviser to a Fund or its sub-adviser if a sub-advisory relationship exists.
II. DELEGATION OF PROXY VOTING RESPONSIBILITIES
Pursuant to investment advisory agreements between each Fund and its Adviser, the Adviser has long been responsible for reviewing proxy statements relating to Fund investments and, if the Adviser deems it appropriate to do so, to vote proxies on behalf of the Funds. The Boards hereby formally delegate this responsibility to the Adviser, except as otherwise described in this Policy. In so doing, the Boards hereby adopt on behalf of each Fund the proxy voting policies and procedures of the Adviser(s) to each Fund as the proxy voting policies and procedures of the Fund. The Boards recognize that the Advisers may from time to time amend their policies and procedures. The Advisers will report material changes to the Boards in the manner set forth in Section IV below. In addition, the Boards will annually review and approve the Advisers' proxy voting policies and procedures.
III. DELEGATION OF PROXY VOTING DISCLOSURE RESPONSIBILITIES
The Securities and Exchange Commission (the "Commission") recently enacted certain new reporting requirements for registered investment companies. The Commission's new regulations require that funds (other than those which invest exclusively in non-voting securities) make certain disclosures regarding their proxy voting activities. The most significant disclosure requirement for the Funds is the duty pursuant to Rule 30b1-4 promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"), to file Form N-PX no later than August 31st of each year beginning in 2004. Under Form N-PX, each Fund will be required to disclose, among other things, information concerning proxies relating to the Fund's portfolio investments, whether or not the Fund (or its Adviser) voted the proxies relating to securities held by the Fund and how it voted in the matter and whether it voted for or against management.
The Boards hereby delegate to each Adviser the responsibility for recording, compiling and transmitting in a timely manner all data required to be filed on Form N-PX to Eaton Vance Management, which acts as administrator to each of the Funds (the "Administrator"), for each Fund that such Adviser manages. The Boards hereby delegate the responsibility to file Form N-PX on behalf of each Fund to the Administrator.
IV. CONFLICTS OF INTEREST
The Boards expect each Adviser, as a fiduciary to the Fund(s) it manages, to put the interests of each Fund and its shareholders above those of the Adviser. In the event that in connection with its proxy voting responsibilities a material conflict of interest arises between a Fund's shareholders and the Fund's Adviser or the Administrator (or any of their affiliates) or any affiliated person of the Fund and the Proxy Administrator intends to vote the proxy in a manner inconsistent with the guidelines approved by the Board, the Adviser, to the extent it is aware or reasonably should have been aware of the material conflict, will refrain from voting any proxies related to companies giving rise to such material conflict until it notifies and consults with the appropriate Board(s), or a committee or sub-committee of such Board, concerning the material conflict.
Once the Adviser notifies the relevant Board(s), committee or sub-committee of the Board, of the material conflict, the Board(s), committee or sub-committee, shall convene a meeting to review and consider all relevant materials related to the proxies involved. In considering such proxies, the Adviser shall make available all materials requested by the Board, committee or sub-committee and make reasonably available appropriate personnel to discuss the matter upon request. The Board, committee or sub-committee will instruct the Adviser on the appropriate course of action. If the Board, committee or sub-committee is unable to meet and the failure to vote a proxy would have a material adverse impact on the Fund(s) involved, each Adviser will have the right to vote such proxy, provided that it discloses the existence of the material conflict to the Board, committee or sub-committee at its next meeting. Any determination regarding the voting of proxies of each Fund that is made by the committee or sub-committee shall be deemed to be a good faith determination regarding the voting of proxies by the full Board.
V. REPORTS
The Administrator shall make copies of each Form N-PX filed on behalf of the Funds available for the Boards' review upon the Boards' request. The Administrator (with input from the Adviser for the relevant Fund(s)) shall also provide any reports reasonably requested by the Boards regarding the proxy voting records of the Funds.
Each Adviser shall annually report any material changes to such Adviser's proxy voting policies and procedures to the relevant Board(s) and the relevant Board(s) will annually review and approve the Adviser's proxy voting policies and procedures. Each Adviser shall report any changes to such Adviser's proxy voting policies and procedures to the Administrator prior to implementing such changes in order to enable the Administrator to effectively coordinate the Funds' disclosure relating to such policies and procedures.
EATON VANCE MANAGEMENT
BOSTON MANAGEMENT AND RESEARCH
PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
Eaton Vance Management, Boston Management and Research and Eaton Vance Investment Counsel (each an "Adviser" and collectively the "Advisers") have each adopted and implemented policies and procedures that each Adviser believes are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with its fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended. The Advisers' authority to vote the proxies of their clients is established by their advisory contracts or similar documentation, such as the Eaton Vance Funds Proxy Voting Policy and Procedures. These proxy policies and procedures reflect the U.S. Securities and Exchange Commission ("SEC") requirements governing advisers and the long-standing fiduciary standards and responsibilities for ERISA accounts set out in the Department of Labor Bulletin 94-2 C.F.R. 2509.94-2 (July 29, 1994).
II. OVERVIEW
Each Adviser manages its clients' assets with the overriding goal of seeking to provide the greatest possible return to such clients consistent with governing laws and the investment policies of each client. In pursuing that goal, each Adviser seeks to exercise its clients' rights as shareholders of voting securities to support sound corporate governance of the companies issuing those securities with the principle aim of maintaining or enhancing the companies' economic value.
The exercise of shareholder rights is generally done by casting votes by proxy at shareholder meetings on matters submitted to shareholders for approval (for example, the election of directors or the approval of a company's stock option plans for directors, officers or employees). Each Adviser is adopting the formal written Guidelines described in detail below and will utilize such Guidelines in voting proxies on behalf of its clients. These Guidelines are designed to promote accountability of a company's management and board of directors to its shareholders and to align the interests of management with those of shareholders.
Each Adviser will vote any proxies received by a client for which it has sole investment discretion through a third-party proxy voting service ("Agent") in accordance with customized policies, as approved by the Boards of Trustees of the Eaton Vance Funds and, with respect to proxies referred back to the Adviser by the Agent pursuant to the Guidelines, in a manner that is reasonably designed to eliminate any potential conflicts of interest, as described more fully below. The Agent is currently Institutional Shareholder Services Inc. Proxies will be voted in accordance with client-specific guidelines and an Eaton Vance Fund's sub-adviser's proxy voting policies and procedures, if applicable.
No set of Guidelines can anticipate all situations that may arise. In special cases, the Proxy Administrator (the person specifically charged with the responsibility to oversee the Agent and coordinate the voting of proxies referred back to the Adviser by the Agent) may seek insight from the Proxy Group established by the Advisers. The Proxy Group will assist in the review of the Agent's recommendation when a proxy voting issue is referred to the Proxy Group through the Proxy Administrator. The members of the Proxy Group, which may include employees of the Advisers' affiliates, may change at the Advisers' discretion.
III. ROLES AND RESPONSIBILITIES
A. PROXY ADMINISTRATOR
The Proxy Administrator will assist in the coordination of the voting of each client's proxy in accordance with the Guidelines below and the Funds' Proxy Voting Policy and Procedures. The Proxy Administrator is authorized to direct the Agent to vote a proxy in accordance with the Guidelines. Responsibilities assigned herein to the Proxy Administrator, or activities in support thereof, may be performed by such members of the Proxy Group or employees of the Advisers' affiliates as are deemed appropriate by the Proxy Group.
B. AGENT
An independent proxy voting service (the "Agent"), as approved by the Board of each Fund, shall be engaged to assist in the voting of proxies. The Agent is currently Institutional Shareholder Services Inc. The Agent is responsible for coordinating with the clients' custodians and the Advisers to ensure that all proxy materials received by the custodians relating to the portfolio securities are processed in a timely fashion. The Agent is required to vote and/or refer all proxies in accordance with the Guidelines below. The Agent shall retain a record of all proxy votes handled by the Agent. Such record must reflect all of the information required to be disclosed in a Fund's Form N-PX pursuant to Rule 30b1-4 under the Investment Company Act of 1940, as amended. In addition, the Agent is responsible for maintaining copies of all proxy statements received by issuers and to promptly provide such materials to an Adviser upon request.
Subject to the oversight of the Advisers, the Agent shall establish and maintain adequate internal controls and policies in connection with the provision of proxy voting services to the Advisers, including methods to reasonably ensure that its analysis and recommendations are not influenced by a conflict of interest, and shall disclose such controls and policies to the Advisers when and as provided for herein. Unless otherwise specified, references herein to recommendations of the Agent shall refer to those in which no conflict of interest has been identified.
C. PROXY GROUP
The Adviser shall establish a Proxy Group which shall assist in the review of the Agent's recommendations when a proxy voting issue has been referred to the Proxy Administrator by the Agent. The members of the Proxy Group, which may include employees of the Advisers' affiliates, may be amended from time to time at the Advisers' discretion.
For each proposal referred to the Proxy Group, the Proxy Group will review the (i) Guidelines, (ii) recommendations of the Agent, and (iii) any other resources that any member of the Proxy Group deems appropriate to aid in a determination of the recommendation.
If the Proxy Group recommends a vote in accordance with the Guidelines, or the recommendation of the Agent, where applicable, it shall instruct the Proxy Administrator to so advise the Agent.
If the Proxy Group recommends a vote contrary to the Guidelines, or the recommendation of the Agent, where applicable, or if the proxy statement relates to a conflicted company of the Agent, as determined by the Advisers, it shall follow the procedures for such voting outlined below.
The Proxy Administrator shall use best efforts to convene the Proxy Group with respect to all matters requiring its consideration. In the event the Proxy Group cannot meet in a timely manner in connection with a voting deadline, the Proxy Administrator shall follow the procedures for such voting outlined below.
IV. PROXY VOTING GUIDELINES ("GUIDELINES")
A. GENERAL POLICIES
It shall generally be the policy of the Advisers to take no action on a proxy for which no client holds a position or otherwise maintains an economic interest in the relevant security at the time the vote is to be cast.
In all cases except those highlighted below, it shall generally be the policy of the Advisers to vote in accordance with the recommendation by the Agent, Institutional Shareholder Services Inc.
When a fund client participates in the lending of its securities and the securities are on loan at the record date, proxies related to such securities generally will not be forwarded to the relevant Adviser by the fund's custodian and therefore will not be voted. In the event that the Adviser determines that the matters involved would have a material effect on the applicable fund's investment in the loaned securities, the fund will exercise its best efforts to terminate the loan in time to be able to cast such vote or exercise such consent.
Interpretation and application of these Guidelines is not intended to supersede any law, regulation, binding agreement or other legal requirement to which an issuer may be or become subject. The Guidelines relate to the types of proposals that are most frequently presented in proxy statements to shareholders. Absent unusual circumstances, each Adviser will utilize these Guidelines when voting proxies on behalf of its clients. The Guidelines may be revised at any time, provided such revisions are reported to the Boards of Trustees of the Eaton Vance Funds.
B. PROPOSALS REGARDING MERGERS AND CORPORATE RESTRUCTURINGS
The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Administrator for all proposals relating to Mergers and Corporate Restructurings.
C. PROPOSALS REGARDING MUTUAL FUND PROXIES -- DISPOSITION OF ASSETS/TERMINATION /LIQUIDATION AND MERGERS
The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Administrator for all proposals relating to the Disposition of Assets/Termination/Liquidation and Mergers contained in mutual fund proxies.
D. CORPORATE STRUCTURE MATTERS/ANTI-TAKEOVER DEFENSES
As a general matter, the Advisers will normally vote against anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions (except in the case of closed-end management investment companies).
E. SOCIAL AND ENVIRONMENTAL ISSUES
The Advisers generally support management on social and environmental proposals.
F. VOTING PROCEDURES
Upon receipt of a referral from the Agent or upon advice from an Eaton Vance investment professional, the Proxy Administrator may solicit additional research from the Agent, as well as from any other source or service.
1. WITHIN-GUIDELINES VOTES: Votes in Accordance with the Guidelines and/or, where applicable, Agent Recommendation
In the event the Proxy Administrator recommends a vote within the Guidelines and/or, where applicable, in accordance with the Agent's recommendation, the Proxy Administrator will instruct the Agent to vote in this manner.
2. NON-VOTES: Votes in Which No Action is Taken
The Proxy Administrator may recommend that a client refrain from voting under the following circumstances: (i) if the economic effect on shareholders' interests or the value of the portfolio holding is indeterminable or insignificant, e.g., proxies in connection with securities no longer held in the
portfolio of a client or proxies being considered on behalf of a client that is no longer in existence; or (ii) if the cost of voting a proxy outweighs the benefits, e.g., certain international proxies, particularly in cases in which share blocking practices may impose trading restrictions on the relevant portfolio security. In such instances, the Proxy Administrator may instruct the Agent not to vote such proxy.
Reasonable efforts shall be made to secure and vote all other proxies for the clients, but, particularly in markets in which shareholders' rights are limited, Non-Votes may also occur in connection with a client's related inability to timely access ballots or other proxy information in connection with its portfolio securities.
Non-Votes may also result in certain cases in which the Agent's recommendation has been deemed to be conflicted, as provided for herein.
3. OUT-OF-GUIDELINES VOTES: Votes Contrary to the Guidelines, or Agent Recommendation, where applicable, Where No Recommendation is Provided by Agent, or Where Agent's Recommendation is Conflicted
If the Proxy Administrator recommends that a client vote contrary to the Guidelines, or the recommendation of the Agent, where applicable, if the Agent has made no recommendation on a matter requiring case-by-case consideration and the Guidelines are silent, or the Agent's recommendation on a matter requiring case-by-case consideration is deemed to be conflicted, the Proxy Administrator will forward the Agent's analysis and recommendation and any research obtained from the Agent or any other source to the Proxy Group. The Proxy Group may consult with the Agent as it deems necessary. The Proxy Administrator will instruct the Agent to vote the proxy as recommended by the Proxy Group. The Adviser will provide a report to the Boards of Trustees of the Eaton Vance Funds reflecting any votes cast contrary to the Guidelines or Agent Recommendation, as applicable, and shall do so no less than annually.
The Proxy Administrator will maintain a record of all proxy questions that have been referred by the Agent, all applicable recommendations, analysis and research received and any resolution of the matter.
V. RECORDKEEPING
The Advisers will maintain records relating to the proxies they vote on behalf of their clients in accordance with Section 204-2 of the Investment Advisers Act of 1940, as amended. Those records will include:
o A copy of the Advisers' proxy voting policies and procedures;
o Proxy statements received regarding client securities. Such proxy statements received from issuers are either in the SEC's EDGAR database or are kept by the Agent and are available upon request;
o A record of each vote cast;
o A copy of any document created by the Advisers that was material to making a decision on how to vote a proxy for a client or that memorializes the basis for such a decision; and
o Each written client request for proxy voting records and the Advisers' written response to any client request (whether written or oral) for such records.
All records described above will be maintained in an easily accessible place for five years and will be maintained in the offices of the Advisers or their Agent for two years after they are created.
VI. ASSESSMENT OF AGENT AND IDENTIFICATION AND RESOLUTION OF CONFLICTS WITH CLIENTS
A. ASSESSMENT OF AGENT
The Advisers shall establish that the Agent (i) is independent from the Advisers, (ii) has resources that indicate it can competently provide analysis of proxy issues, and (iii) can make recommendations in an impartial manner and in the best interests of the clients and, where applicable, their beneficial owners. The Advisers shall utilize, and the Agent shall comply with, such methods for establishing the foregoing as the Advisers may deem reasonably appropriate and shall do so not less than annually as well as prior to engaging the services of any new proxy voting service. The Agent shall also notify the Advisers in writing within fifteen (15) calendar days of any material change to information previously provided to an Adviser in connection with establishing the Agent's independence, competence or impartiality.
B. CONFLICTS OF INTEREST
As fiduciaries to their clients, each Adviser puts the interests of its clients ahead of its own. In order to ensure that relevant personnel of the Advisers are able to identify potential material conflicts of interest, each Adviser will take the following steps:
o Quarterly, the Eaton Vance Legal and Compliance Department will seek information from the department heads of each department of the Advisers and of Eaton Vance Distributors, Inc. ("EVD") (an affiliate of the Advisers and principal underwriter of certain Eaton Vance Funds). Each department head will be asked to provide a list of significant clients or prospective clients of the Advisers or EVD.
o A representative of the Legal and Compliance Department will compile a list of the companies identified (the "Conflicted Companies") and provide that list to the Proxy Administrator.
o The Proxy Administrator will compare the list of Conflicted Companies with the names of companies for which he or she has been referred a proxy statement (the "Proxy Companies"). If a Conflicted Company is also a Proxy Company, the Proxy Administrator will report that fact to the Proxy Group.
o If the Proxy Administrator expects to instruct the Agent to vote the proxy of the Conflicted Company strictly according to the Guidelines contained in these Proxy Voting Policies and Procedures (the "Policies") or the recommendation of the Agent, as applicable, he or she will (i) inform the Proxy Group of that fact, (ii) instruct the Agent to vote the proxies and (iii) record the existence of the material conflict and the resolution of the matter.
o If the Proxy Administrator intends to instruct the Agent to vote in a manner inconsistent with the Guidelines contained herein or, the recommendation of the Agent, as applicable, the Proxy Group, in consultation with Eaton Vance senior management, will then determine if a material conflict of interest exists between the relevant Adviser and its clients. If the Proxy Group, in consultation with Eaton Vance senior management, determines that a material conflict exists, prior to instructing the Agent to vote any proxies relating to these Conflicted Companies the Adviser will seek instruction on how the proxy should be voted from:
o The client, in the case of an individual or corporate client;
o In the case of a Fund its board of directors, or any committee or sub-committee identified by the board; or
o The adviser, in situations where the Adviser acts as a sub-adviser to such adviser.
The Adviser will provide all reasonable assistance to each party to enable such party to make an informed decision.
If the client, Fund board or adviser, as the case may be, fails to instruct the Adviser on how to vote the proxy, the Adviser will generally instruct the Agent, through the Proxy Administrator, to abstain from voting in order to avoid the appearance of impropriety. If however, the failure of the Adviser to vote its clients' proxies would have a material adverse economic impact on the Advisers' clients' securities holdings in the Conflicted Company, the Adviser may instruct the Agent, through the Proxy Administrator, to vote such proxies in order to protect its clients' interests. In either case, the Proxy Administrator will record the existence of the material conflict and the resolution of the matter.
The Advisers shall also identify and address conflicts that may arise from time to time concerning the Agent. Upon the Advisers' request, which shall be not less than annually, and within fifteen (15) calendar days of any material change to such information previously provided to an Adviser, the Agent shall provide the Advisers with such information as the Advisers deem reasonable and appropriate for use in determining material relationships of the Agent that may pose a conflict of interest with respect to the Agent's proxy analysis or recommendations. Such information shall include, but is not limited to, a monthly report from the Agent detailing the Agent's Corporate Securities Division clients and related revenue data. The Advisers shall review such information on a monthly basis. The Proxy Administrator shall instruct the Agent to refer any proxies for which a material conflict of the Agent is deemed to be present to the Proxy Administrator. Any such proxy referred by the Agent shall be referred to the Proxy Group for consideration accompanied by the Agent's written analysis and voting recommendation. The Proxy Administrator will instruct the Agent to vote the proxy as recommended by the Proxy Group.
EATON VANCE RISK-MANAGED DIVERSIFIED EQUITY INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
, 2007
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
255 State Street
Boston, MA 02109
SUB-ADVISER
Rampart Investment Management Company, Inc. One International Place Boston, MA 02110
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ]
PART C
OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Included in Part A:
Not applicable.
Included in Part B:
Report of Independent Registered Public Accounting Firm*
Statement of Assets and Liabilities*
Notes to Financial Statement*
(2) EXHIBITS:
(a) Agreement and Declaration of Trust dated April 4, 2007 filed herewith.
(b) By-Laws filed herewith.
(c) Not applicable.
(d) Form of Specimen Certificate for Common Shares of Beneficial Interest to be filed by amendment.
(e) Form of Dividend Reinvestment Plan to be filed by amendment.
(f) Not applicable.
(g) (1) Form of Investment Advisory Agreement dated ________, 2007, to be filed by amendment.
(2) Form of Sub-Advisory Agreement with Rampart Investment Management Company, Inc. dated ____________, 2007, to be filed by amendment.
(h) (1) Form of Underwriting Agreement to be filed by amendment.
(2) Form of Master Agreement Among Underwriters to be filed by amendment.
(3) Form of Master Selected Dealers Agreement to be filed by amendment.
(i) The Securities and Exchange Commission has granted the Registrant an exemptive order that permits the Registrant to enter into deferred compensation arrangements with its independent Trustees. See in the matter of Capital Exchange Fund, Inc., Release No. IC- 20671 (November 1, 1994).
(j) (1) Master Custodian Agreement with Investors Bank & Trust Company dated ______________, 2007 to be filed by amendment.
(2) Extension Agreement dated August 31, 2005 to Master Custodian
Agreement with Investors Bank & Trust Company filed as Exhibit
(j)(2) to the Pre-Effective Amendment No. 2 of Eaton Vance
Tax-Managed Global Buy-Write Opportunities Fund (File Nos.
333-123961, 811-21745) filed with the Commission on September 26,
2005 (Accession No. 0000950135-05-005528) and incorporated herein
by reference.
(3) Delegation Agreement dated December 11, 2000, with Investors Bank & Trust Company filed as Exhibit (j)(e) to the Eaton Vance Prime Rate Reserves N-2, Amendment No. 5 (File Nos. 333-32267, 811-05808) filed April 3, 2001 (Accession No. 0000940394-01-500126) and incorporated herein by reference.
(k) (1) Transfer Agency and Services Agreement dated ___________, 2007 to be filed by amendment.
(2) Form of Administration Agreement dated _______________, 2007 to be filed by amendment.
(3) Organizational and Expense Reimbursement Agreement to be filed by amendment.
(4) Form of Structuring Fee Agreement to be filed by amendment.
(l) Opinion and Consent of Kirkpatrick & Lockhart Preston Gates Ellis LLP as to Registrant's Common Shares to be filed by amendment.
(m) Not applicable.
(n) Consent of Independent Registered Public Accounting Firm to be filed by amendment.
(o) Not applicable.
(p) Letter Agreement with Eaton Vance Management to be filed by amendment.
(q) Not applicable.
(r) (1) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance Management Boston Management and Research, Eaton Vance Distributors, Inc. and the Eaton Vance Funds effective September 1, 2000, as revised February 1, 2005 filed as Exhibit (r)(1) to the Registration Statement on Form N-2 of Eaton Vance Global
Enhanced Equity Income Fund (File Nos. 33-122540, 811-21711) filed February 4, 2005 (Accession No. 0000898432-05- 000098) and incorporated herein by reference.
(2) Code of Ethics for Rampart Investment Management Company, Inc. effective September 1, 2004, as modified February 1, 2005, filed as Exhibit (r)(2) to Pre-Effective Amendment No. 2 of Eaton Vance Tax- Managed Global Buy-Write Opportunities Fund (File Nos. 333-123961, 811-21745) filed September 26, 2005 (Accession No. 0000950135-05- 005528) and incorporated herein by reference.
(s) Power of Attorney dated ____________, 2007 to be filed by amendment.
ITEM 26. MARKETING ARRANGEMENTS
See Form of Underwriting Agreement to be filed by amendment.
ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The approximate expenses in connection with the offering are as follows:
Registration and Filing Fees $_________________
National Association of Securities Dealers, Inc. Fees
New York Stock Exchange Fees
Costs of Printing and Engraving
Accounting Fees and Expenses
Legal Fees and Expenses
===============
Total $_________________
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ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 29. NUMBER OF HOLDERS OF SECURITIES
Set forth below is the number of record holders as of April 9, 2007, of each class of securities of the Registrant:
Title of Class Number of Record Holders -------------- ------------------------ Common Shares of Beneficial interest, par value $0.01 per share 0 |
ITEM 30. INDEMNIFICATION
The Registrant's By-Laws filed herewith contain, and the form of Underwriting Agreement to be filed by amendment is expected to contain, provisions limiting the liability, and providing for indemnification, of the Trustees and officers under certain circumstances.
Registrant's Trustees and officers are insured under a standard investment company errors and omissions insurance policy covering loss incurred by reason of negligent errors and omissions committed in their official capacities as such. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in this Item 30, 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 Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the caption Investment advisory and other services" in the Statement of Additional Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange Act of 1934 (File No. 001-8100); and (iii) the Form ADV of Eaton Vance Management (File No. 801-15930) filed with the Commission, all of which are incorporated herein by reference.
ITEM 32. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by the Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are in the possession and custody of the Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street, 16th Floor, Boston, MA 02116, and its transfer agent, American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, New York 10038, with the exception of certain corporate documents and portfolio trading documents which are in the possession and custody of Eaton Vance Management, The Eaton Vance Building, 255 State Street, Boston, MA 02109. Registrant is informed that all applicable accounts, books and documents required to be maintained by registered investment advisers are in the custody and possession of Eaton Vance Management.
ITEM 33. MANAGEMENT SERVICES
Not applicable.
ITEM 34. UNDERTAKINGS
1. The Registrant undertakes to suspend offering of Common Shares until
the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of an oral or written request, its Statement of Additional Information.
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance Risk-Managed Diversified Equity Income Fund is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and that the obligations of or arising out of this instrument are not binding upon any of the Trustees, officers or shareholders individually, but are binding only upon the assets and property of the Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended and the Investment Company Act of 1940, as amended the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Boston and the Commonwealth of Massachusetts, on the 9th day of April 2007.
EATON VANCE RISK-MANAGED DIVERSIFIED
EQUITY INCOME FUND
By: /s/ Duncan W. Richardson
------------------------
Duncan W. Richardson
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, as amended this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date ------------------------- ---------------------------------- ------------ /s/ Duncan W. Richardson President and Chief Executive April 9, 2007 ------------------------ Officer Duncan W. Richardson /s/ Barbara E. Campbell Treasurer (and Principal Financial April 9, 2007 ----------------------- and Accounting Officer) Barbara E. Campbell /s/ Alan R. Dynner Trustee April 9, 2007 ------------------ Alan R. Dynner /s/ Frederick S. Marius Trustee April 9, 2007 ----------------------- Frederick S. Marius |
INDEX TO EXHIBITS
(a) Agreement and Declaration of Trust dated April 4, 2007
(b) By-Laws
EATON VANCE RISK-MANAGED EQUITY INCOME FUND
AGREEMENT AND DECLARATION OF TRUST
Dated April 4, 2007
TABLE OF CONTENTS
ARTICLE I - NAME AND DEFINITIONS...................................... 1
Section 1.1. Name..................................................... 1
Section 1.2. Definitions.............................................. 1
ARTICLE II - TRUSTEES................................................. 3
Section 2.1. Management of the Trust................................. 3
Section 2.2 Number of Trustees...................................... 3
Section 2.3 Terms of Office of Trustee.............................. 3
Section 2.4 Resignation and Appointment of Trustees................. 3
Section 2.5 Vacancies............................................... 4
Section 2.6 Delegation of Power to Other Trustees................... 4
Section 2.7 Removal of Trustees..................................... 4
Section 2.8. General Powers.......................................... 4
Section 2.9. Investments............................................. 5
Section 2.10. Legal Title............................................. 6
Section 2.11. By-Laws................................................. 7
Section 2.12. Distribution and Repurchase of Shares................... 7
Section 2.13. Delegation.............................................. 7
Section 2.14. Collection and Payment.................................. 7
Section 2.15. Expenses................................................ 7
Section 2.16. Committees.............................................. 7
Section 2.17. Miscellaneous Powers.................................... 8
Section 2.18. Litigation.............................................. 8
ARTICLE III - CONTRACTS............................................... 8
Section 3.1. Principal Underwriter................................... 8
Section 3.2. Investment Adviser...................................... 9
Section 3.3. Administrator........................................... 9
Section 3.4. Other Service Providers................................. 9
Section 3.5. Transfer Agents......................................... 9
Section 3.6. Custodian............................................... 9
Section 3.7. Affiliations............................................ 9
ARTICLE IV - LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND
OTHERS................................................................10
Section 4.1. No Personal Liability of Shareholders, Trustees,
Officers and Employees..............................................10
Section 4.2. Trustee's Good Faith Action; Advice to Others;
No Bond or Surety...................................................10
Section 4.3. Indemnification.........................................10
Section 4.4. No Duty of Investigation................................11
Section 4.5. Reliance on Records and Experts.........................11
i
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ARTICLE V - SHARES OF BENEFICIAL INTEREST.................................11
Section 5.1. Shares of Beneficial Interest................................11
Section 5.2. Voting Powers................................................12
Section 5.3. Rights of Shareholders.......................................12
Section 5.4. Trust Only...................................................12
Section 5.5. Issuance of Shares...........................................12
ARTICLE VI - REDEMPTIONS AND REPURCHASES..................................13
Section 6.1. Redemptions and Repurchases of Shares........................13
Section 6.2. Manner of Payment............................................13
Section 6.3. Involuntary Redemption.......................................13
ARTICLE VII - DETERMINATION OF NET ASSET VALUE, NET INCOME AND
DISTRIBUTIONS.............................................................14
Section 7.1. Net Asset Value..............................................14
Section 7.2. Dividends and Distributions..................................14
Section 7.3. Power to Modify Foregoing Procedures.........................15
ARTICLE VIII - DURATION; TERMINATION OF TRUST OR A CLASS OR SERIES;
MERGERS; AMENDMENTS.......................................................15
Section 8.1. Duration.....................................................15
Section 8.2. Merger or Termination of the Trust or a Series or a Class....15
Section 8.3. Amendments...................................................16
Section 8.4. Certain Transactions.........................................16
Section 8.5. Conversion...................................................18
ARTICLE IX - MISCELLANEOUS................................................18
Section 9.1. Use of the Words "Eaton Vance"...............................18
Section 9.2. Notices......................................................18
Section 9.3. Filing of Copies, References, Headings and Counterparts......18
Section 9.4. Applicable Law...............................................19
Section 9.5. Provisions in Conflict with Law or Regulations...............19
ii
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AGREEMENT AND DECLARATION OF TRUST, made April 4, 2007 by the Trustees hereunder and by the holders of beneficial interest to be issued hereunder as hereinafter provided and |
WITNESSETH:
WHEREAS, the Trust has been formed to carry on the business of an investment
company; and
WHEREAS, the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts voluntary association with transferable
shares in accordance with the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees declare that all money and property contributed to
the trust established hereunder shall be held and managed under this Agreement
and Declaration of Trust for the benefit of the holders, from time to time, of
the shares of beneficial interest to be issued hereunder and subject to the
provisions set forth below.
ARTICLE I
NAME AND DEFINITIONS
SECTION 1.1. NAME. The name of the trust created hereby is Eaton Vance
Risk-Managed Equity Income Fund.
SECTION 1.2. DEFINITIONS. Wherever they are used herein, the following terms
have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to a contract
described in Section 3.3 hereof.
(b) "By-Laws" means the By-Laws referred to in Section 2.11 hereof, as from
time to time amended.
(c) "Class" means any class of Shares designated by the Trustees as such
following any division of Shares of the Trust into two or more Classes as
provided in Section 5.1 hereof.
(d) The term "Commission" has the meaning given the term in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody of any
Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time to time.
(g) "His" shall include the feminine and neuter, as well as the masculine,
genders.
(h) The term "Interested Person" has the meaning specified in the 1940 Act
subject, however, to such exceptions and exemptions as may be granted by the
Commission in any rule, regulation or order.
(i) "Investment Adviser" means the party, other than the Trust, to an agreement
described in Section 3.2 hereof.
(j) The "1940 Act" means the Investment Company Act of 1940 and the Rules and
Regulations thereunder, as amended from time to time.
(k) "Outstanding Shares" means those Shares shown from time to time on the
books of the Trust or its Transfer Agent as then issued and outstanding.
(l) "Person" means and includes individuals, corporations, limited liability
companies, partnerships, trusts, associations, firms, joint ventures and other
entities, whether or not legal entities, as well as governments,
instrumentalities, and agencies and political subdivisions thereof, and
quasi-governmental agencies and instrumentalities.
(m) "Principal Underwriter" means a party, other than the Trust, to a contract
described in Section 3.1 hereof.
(n) "Prospectus" means the Prospectus and Statement of Additional Information,
if any, included in the Registration Statement of the Trust under the
Securities Act of 1933 as such Prospectus and Statement of Additional
Information, if any, may be amended or supplemented and filed with the
Commission from time to time.
(o) "Registration Statement" means the Registration Statement of the Trust
under the Securities Act of 1933 as such Registration Statement may be amended
and filed with the Commission from time to time.
(p) "Series" means any series of Shares designated by the Trustees as such
following the division of Shares of any Class into two or more Series as
provided in Section 5.1 hereof.
(q) "Shareholder" means a record owner of Outstanding Shares.
(r) "Shares" means the equal proportionate transferable units of interest into
which the beneficial interest in the Trust shall be divided from time to time,
or, if more than one Class or Series is authorized by the Trustees, the equal
proportionate transferable units into which each Class or Series shall be
divided from time to time.
(s) "Transfer Agent" means any Person other than the Trust who maintains the
Shareholder records of the Trust, such as the list of Shareholders, the number
of Shares credited to each account, and the like.
(t) "Trust" means the Trust named in Section 1.1.
(u) The "Trustees" means the persons who have signed this Declaration, so long
as they shall continue in office in accordance with the terms hereof, and all
other persons who now serve or may from time to time be duly elected, qualified
and serving as Trustees in accordance with the provisions of Article II hereof
and the By-Laws of the Trust, and reference herein to a Trustee or the Trustees
shall refer to such person or persons in his capacity or their capacities as
trustees hereunder.
(v) "Trust Property" means any and all property, real or personal, tangible or
intangible, which is owned or held by or for the account of the Trust or the
Trustees, including any and all assets of or allocated to any Class or Series,
as the context may require.
(w) Except as such term may be otherwise defined by the Trustees in connection
with any meeting or other action of Shareholders or in conjunction with the
establishment of any Class or Series, the term "vote" when used in connection
with an action of Shareholders shall include a vote taken at a meeting of
Shareholders or the consent or consents of Shareholders taken without such a
meeting.
ARTICLE II
TRUSTEES
SECTION 2.1. MANAGEMENT OF THE TRUST. The business and affairs of the Trust
shall be managed by the Trustees and they shall have all powers and authority
necessary, appropriate or desirable to perform that function.
SECTION 2.2. NUMBER OF TRUSTEES. The number of Trustees shall be such number as
shall be fixed from time to time by a written instrument signed by a majority
of the Trustees, provided, however, that the number of Trustees shall in no
event be less than two (2) nor more than fifteen (15). No reduction in the
number of Trustees shall have the effect of removing any Trustee from office
prior to the expiration of his term unless the Trustee is specifically removed
pursuant to Section 2.3 or Section 2.7 of this Article II at the time of
decrease.
SECTION 2.3. TERM OF OFFICE OF TRUSTEES. The Board of Trustees shall be divided
into three classes. Within the limits above specified, the number of the
Trustees in each class and the class which each Trustee is assigned shall be
determined by resolution of the Board of Trustees. The term of office of the
first class shall expire on the date of the first annual meeting of
Shareholders or special meeting in lieu thereof following the effective date of
the Registration Statement. The term of office of the second class shall expire
on the date of the second annual meeting of Shareholders or special meeting in
lieu thereof following the effective date of the Registration Statement. The
term of office of the third class shall expire on the date of the third annual
meeting of Shareholders or special meeting in lieu thereof following the
effective date of the Registration Statement. Upon expiration of the term of
office of each class as set forth above, the number of Trustees in such class,
as determined by the Board of Trustees, shall be elected for a term expiring on
the date of the third annual meeting of Shareholders or special meeting in lieu
thereof following such expiration to succeed the Trustees whose terms of office
expire. The Trustees shall be elected at an annual meeting of the Shareholders
or special meeting in lieu thereof called for that purpose, except as provided
in Section 2.3 of this Article and each Trustee elected shall hold office until
his successor shall have been elected and shall have qualified; except (a) that
any Trustee may resign his trust (without need for prior or subsequent
accounting) by an instrument in writing signed by him and delivered to the
other Trustees, which shall take effect upon such delivery or upon such later
date as is specified therein; (b) that any Trustee may be removed (provided the
aggregate number of Trustees after such removal shall not be less than the
number required by Section 2.2 hereof) for cause, at any time by written
instrument, signed by the remaining Trustees, specifying the date when such
removal shall become effective; and (c) that any Trustee who requests in
writing to be retired or who has become incapacitated by illness or injury may
be retired by written instrument signed by a majority of the other Trustees,
and he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Fund or the remaining Trustees any
Fund property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such document as the remaining Trustees shall require as
provided in the preceding sentence.
SECTION 2.4. RESIGNATION AND APPOINTMENT OF TRUSTEES. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of any increase in number, or
for any other reason, exist, the remaining Trustees or, prior to the public
offering of Shares of the Fund, if only one Trustee shall then remain in
office, the remaining Trustee, shall fill such vacancy by appointing such other
person as they, or anyone of them, in their discretion, shall see fit. Such
appointment shall be evidenced by a written instrument signed by a majority of
the remaining Trustees or by the remaining Trustee, as the case may be. Any
such appointment shall not become effective, however, until the person named in
the written instrument or appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
The Trustees shall notify Shareholders of such appointment in an appropriate
manner. An appointment of a Trustee
may be made by the Trustees then in office and notice thereof given to
Shareholders as aforesaid in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after
the effective date of said retirement, resignation or increase in number of
Trustees. The power of appointment is subject to the provisions of Section
16(a) of the 1940 Act.
SECTION 2.5. VACANCIES. The death, declination, resignation, retirement,
removal or incapacity of the Trustees, or any one of them, shall not operate to
annul the Fund or to remove any existing agency created pursuant to the terms
of this Declaration. Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in Section 2.3, the Trustees in
office, regardless of their number, shall have all the duties imposed upon the
Trustees by the Declaration and only such Trustees shall be counted for the
purposes of establishing the existence of a quorum or performing such duties or
exercising such powers of the Trustees as described in this Declaration. A
written instrument certifying the existence of such vacancy signed by a
majority of the Trustees shall be conclusive evidence of the existence of such
vacancy.
SECTION 2.6. DELEGATION OF POWER TO OTHER TRUSTEES. Subject to the provisions
of the 1940 Act, any Trustee may, by power of attorney, delegate his power for
a period not exceeding six (6) months at any one time to any other Trustee or
Trustees; provided that in no case shall less than two (2) Trustees personally
exercise the powers granted to the Trustees under the Declaration except as
herein otherwise expressly provided.
SECTION 2.7. REMOVAL OF TRUSTEES BY THE SHAREHOLDERS. The Fund shall comply
with the provisions of Section 16(c) of the 1940 Act as though applicable to
the Fund, and with interpretations hereof by the Commission staff, insofar as
such provisions and interpretations provide for the removal of trustees of
common-law trusts and the calling of Shareholder meetings for such purpose;
provided, however, that the Fund may at any time or from time to time apply to
the Commission for one or more exemptions from all or part of said Section
16(c) or a staff interpretation thereof and, if exemptive order(s) or
interpretation(s) are issued or provided by the Commission or its staff, such
order(s) or interpretation(s) shall be deemed part of Section 16(c) for the
purpose of applying this Section 2.7.
SECTION 2.8. GENERAL POWERS. The Trustees in all instances shall act as
principals for and on behalf of the Trust and their acts shall bind the Trust.
The business and affairs of the Trust shall be managed by the Trustees and they
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider necessary,
appropriate or desirable in connection with the management of the Trust. The
Trustees shall not be bound or limited in any way by present or future laws,
practices or customs in regard to trust investments or to other investments
which may be made by fiduciaries, but shall have full authority and power to
make any and all investments which they, in their uncontrolled discretion,
shall deem proper to promote, implement or accomplish the various objectives
and interests of the Trust and of its Classes and Series. The Trustees shall
have full power and authority to adopt such accounting and tax accounting
practices as they consider appropriate for the Trust and for any Class or
Series. The Trustees shall have exclusive and absolute control over the Trust
Property and over the business of the Trust to the same extent as if the
Trustees were the sole owners of the Trust Property and business in their own
right, and with such full powers of delegation as the Trustees may exercise
from time to time. The Trustees shall have power to conduct the business of the
Trust and carry on its operations in any and all of its branches and maintain
offices both within and without The Commonwealth of Massachusetts, in any and
all states of the United States of America, in the District of Columbia, and in
any and all commonwealths, territories, dependencies, colonies, possessions,
agencies, and instrumentalities of the United States of America and of foreign
governments, and to do all such other things as they deem necessary,
appropriate or desirable in order to promote or implement the interests of the
Trust or of any Class or Series although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust or of any Class or Series made by the Trustees in good faith shall be
conclusive and binding upon all Shareholders. In
construing the provisions of this Declaration, the presumption shall be in
favor of a grant of plenary power and authority to the Trustees.
The enumeration of any specific power in this Declaration shall not be
construed as limiting the aforesaid general and plenary powers.
SECTION 2.9. INVESTMENTS. The Trustees shall have full power and authority:
(a) To operate as and carry on the business of an investment company, and
exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To acquire or buy, and invest Trust Property in, own, hold for investment
or otherwise, and to sell or otherwise dispose of, all types and kinds of
securities and investments of any kind including, but not limited to, stocks,
profit-sharing interests or participations and all other contracts for or
evidences of equity interests, bonds, debentures, warrants and rights to
purchase securities, and interests in loans, certificates of beneficial
interest, bills, notes and all other contracts for or evidences of
indebtedness, money market instruments including bank certificates of deposit,
finance paper, commercial paper, bankers' acceptances and other obligations,
and all other negotiable and non-negotiable securities and instruments, however
named or described, issued by corporations, trusts, associations or any other
Persons, domestic or foreign, or issued or guaranteed by the United States of
America or any agency or instrumentality thereof, by the government of any
foreign country, by any State, territory or possession of the United States, by
any political subdivision or agency or instrumentality of any state or foreign
country, or by any other government or other governmental or quasi-governmental
agency or instrumentality, domestic or foreign; to acquire and dispose of
interests in domestic or foreign loans made by banks and other financial
institutions; to deposit any assets of the Trust in any bank, trust company or
banking institution or retain any such assets in domestic or foreign cash or
currency; to purchase and sell gold and silver bullion, precious or strategic
metals, and coins and currency of all countries; to engage in "when issued" and
delayed delivery transactions; to enter into repurchase agreements, reverse
repurchase agreements and firm commitment agreements; to employ all types and
kinds of hedging techniques and investment management strategies; and to change
the investments of the Trust and of each Class or Series.
(c) To acquire (by purchase, subscription or otherwise), to hold, to trade in
and deal in, to acquire any rights or options to purchase or sell, to sell or
otherwise dispose of, to lend and to pledge any Trust Property or any of the
foregoing securities, instruments or investments; to purchase and sell options
on securities, currency, precious metals and other commodities, indices,
futures contracts and other financial instruments and assets and enter into
closing and other transactions in connection therewith; to enter into all types
of commodities contracts, including, without limitation, the purchase and sale
of futures contracts on securities, currency, precious metals and other
commodities, indices and other financial instruments and assets; to enter into
forward foreign currency exchange contracts and other foreign exchange and
currency transactions of all types and kinds; to enter into interest rate,
currency and other swap transactions; and to engage in all types and kinds of
hedging and risk management transactions.
(d) To exercise all rights, powers and privileges of ownership or interest in
all securities and other assets included in the Trust Property, including,
without limitation, the right to vote thereon and otherwise act with respect
thereto; and to do all acts and things for the preservation, protection,
improvement and enhancement in value of all such securities and assets.
(e) To acquire (by purchase, lease or otherwise) and to hold, use, maintain,
lease, develop and dispose of (by sale or otherwise) any type or kind of
property, real or personal, including domestic or foreign currency, and any
right or interest therein.
(f) To borrow money and in this connection issue notes, commercial paper or
other evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security all or any part of the Trust Property; to
endorse, guarantee, or undertake the performance of any obligation or
engagement of any other Person; to lend all or any part of the Trust Property
to other Persons; and to issue general unsecured or other obligations of the
Trust, and enter into indentures or agreements relating thereto.
(g) To aid, support or assist by further investment or other action any Person,
any obligation of or interest which is included in the Trust Property or in the
affairs of which the Trust or any Class or Series has any direct or indirect
interest; to do all acts and things designed to protect, preserve, improve or
enhance the value of such obligation or interest; and to guarantee or become
surety on any or all of the contracts, securities and other obligations of any
such Person.
(h) To join other security holders in acting through a committee, depositary,
voting trustee or otherwise, and in that connection to deposit any security
with, or transfer any security to, any such committee, depositary or trustee,
and to delegate to them such power and authority with relation to any security
(whether or not so deposited or transferred) as the Trustees shall deem proper,
and to agree to pay, and to pay, such portion of the expenses and compensation
of such committee, depositary or trustee as the Trustees shall deem proper.
(i) To carry on any other business in connection with or incidental to any of
the foregoing powers referred to in this Declaration, to do everything
necessary, appropriate or desirable for the accomplishment of any purpose or
the attainment of any object or the furtherance of any power referred to in
this Declaration, either alone or in association with others, and to do every
other act or thing incidental or appurtenant to or arising out of or connected
with such business or purposes, objects or powers.
(j) To the extent necessary or appropriate to give effect to the preferences,
special or relative rights and privileges of any Class or Series, to allocate
assets, liabilities, income and expenses of the Trust to particular Classes or
Series or to apportion the same among two or more Classes or Series.
The foregoing clauses shall be construed both as objects and powers, and shall
not be held to limit or restrict in any manner the general and plenary powers
of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have full power
in their discretion, without any requirement of approval by Shareholders, to
invest part or all of the Trust Property (or part or all of the assets of any
Class or Series), or to dispose of part or all of the Trust Property (or part
or all of the assets of any Class or Series) and invest the proceeds of such
disposition, in securities issued by one or more other investment companies
registered under the 1940 Act. Any such other investment company may (but need
not) be a trust (formed under the laws of the State of New York or of any other
state) which is classified as a partnership for federal income tax purposes.
SECTION 2.10. LEGAL TITLE. Legal title to all the Trust Property shall be
vested in the Trustees who from time to time shall be in office. The Trustees
may hold any security or other Trust Property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, and may cause
legal title to any security or other Trust Property to be held by or in the
name of one or more of the Trustees, or in the name of the Trust or any Class
or Series, or in the name of a custodian, subcustodian, agent, securities
depository, clearing agency, system for the central handling of securities or
other book-entry system, or in the name of a nominee or nominees of the Trust
or a Class or Series, or in the name of a nominee or nominees of a custodian,
subcustodian, agent, securities depository, clearing agent, system for the
central handling of securities or other book-entry system, or in the name of
any other Person as nominee. The
right, title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee
he shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees.
SECTION 2.11. BY- LAWS. The Trustees shall have full power and authority to
adopt By-Laws providing for the conduct of the business of the Trust and
containing such other provisions as they deem necessary, appropriate or
desirable, and, subject to the voting powers of one or more Classes or Series,
to amend and repeal such By-Laws. Unless the By-Laws specifically require that
Shareholders authorize or approve the amendment or repeal of a particular
provision of the By-Laws, any provision of the By-Laws may be amended or
repealed by the Trustees without Shareholder authorization or approval.
SECTION 2.12. DISTRIBUTION AND REPURCHASE OF SHARES. The Trustees shall have
full power and authority to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in
Shares. Shares may be sold for cash or property or other consideration whenever
and in such amounts and manner as the Trustees deem desirable. The Trustees
shall have full power to provide for the distribution of Shares either through
one or more principal underwriters or by the Trust itself, or both.
SECTION 2.13. DELEGATION. The Trustees shall have full power and authority to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust or to other Persons the doing of such things and execution
of such agreements or other instruments either in the name of the Trust or any
Class or Series of the Trust or the names of the Trustees or otherwise as the
Trustees may deem desirable or expedient.
SECTION 2.14. COLLECTION AND PAYMENT. The Trustees shall have full power and
authority to collect all property due to the Trust; to pay all claims,
including taxes, against the Trust or Trust Property; to prosecute, defend,
compromise, settle or abandon any claims relating to the Trust or Trust
Property; to foreclose any security interest securing any obligations, by
virtue of which any property is owed to the Trust; and to enter into releases,
agreements and other instruments.
SECTION 2.15. EXPENSES. The Trustees shall have full power and authority to
incur on behalf of the Trust or any Class or Series and pay any costs or
expenses which the Trustees deem necessary, appropriate, desirable or
incidental to carry out, implement or enhance the business or operations of the
Trust or any Class or Series thereof, and to pay compensation from the funds of
the Trust to themselves as Trustees. The Trustees shall determine the
compensation of all officers, employees and Trustees of the Trust. The Trustees
shall have full power and authority to cause the Trust to charge all or any
part of any cost, expense or expenditure (including without limitation any
expense of selling or distributing Shares) or tax against the principal or
capital of the Trust or any Class or Series, and to credit all or any part of
the profit, income or receipt to the principal or capital of the Trust or any
Class or Series.
SECTION 2.16. COMMITTEES. The Trustees may appoint from their own number, and
terminate, any one or more committees consisting of two or more Trustees,
including an executive committee which may, when the Trustees are not in
session, exercise some or all of the power and authority of the Trustees as the
Trustees may determine.
SECTION 2.17. MISCELLANEOUS POWERS. The Trustees shall have full power and
authority to: (a) distribute to Shareholders all or any part of the earnings or
profits, surplus (including paid-in surplus), capital (including paid-in
capital) or assets of the Trust or of any Class or Series, the amount of such
distributions and the manner of payment thereof to be solely at the discretion
of the Trustees; (b) employ, engage or contract with such Persons as the
Trustees may deem desirable for the transaction of the business or operations
of the Trust or any Class or Series thereof; (c) enter into or cause the Trust
or any Class or Series thereof to enter into joint ventures, partnerships
(whether as general partner, limited partner or otherwise) and any other
combinations or associations; (d) purchase and pay for entirely out of Trust
property such insurance as they may deem necessary or appropriate for the
conduct of the business, including, without limitation, insurance policies
insuring the assets of the Trust and payment of distributions and principal on
its portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers or managers,
principal underwriters, or independent contractors of the Trust individually
against all claims and liabilities of every nature arising by reason of
holding, being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such person as Shareholder,
Trustee, officer, employee, agent, investment adviser or manager, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such person against such liability; (e) establish
pension, profit-sharing, share purchase, and other retirement, incentive and
benefit plans for any Trustees, officers, employees and agents of the Trust;
(f) indemnify or reimburse any Person with whom the Trust or any Class or
Series thereof has dealings, including without limitation the Investment
Adviser, Administrator, Principal Underwriter, Transfer Agent, financial
service firms and other agents, to such extent as the Trustees shall determine;
(g) guarantee the indebtedness or contractual obligations of other Persons; (h)
determine and change the fiscal year of the Trust and the methods by which its
books, accounts and records shall be kept; and (i) adopt a seal for the Trust,
but the absence of such seal shall not impair the validity of any instrument
executed on behalf of the Trust.
SECTION 2.18. LITIGATION. The Trustees shall have full power and authority, in
the name and on behalf of the Trust, to engage in and to prosecute, defend,
compromise, settle, abandon, or adjust by arbitration or otherwise, any
actions, suits, proceedings, disputes, claims and demands relating to the
Trust, and out of the assets of the Trust or any Class or Series thereof to pay
or to satisfy any liabilities, losses, debts, claims or expenses (including
without limitation attorneys' fees) incurred in connection therewith, including
those of litigation, and such power shall include without limitation the power
of the Trustees or any committee thereof, in the exercise of their or its good
faith business judgment, to dismiss or terminate any action, suit, proceeding,
dispute, claim or demand, derivative or otherwise, brought by any Person,
including a Shareholder in his own name or in the name of the Trust or any
Class or Series thereof, whether or not the Trust or any Class or Series
thereof or any of the Trustees may be named individually therein or the subject
matter arises by reason of business for or on behalf of the Trust or any Class
or Series thereof.
ARTICLE III
CONTRACTS
SECTION 3.1. PRINCIPAL UNDERWRITER. The Trustees may in their discretion from
time to time authorize the Trust to enter into one or more contracts providing
for the sale of the Shares. Pursuant to any such contract the Trust may either
agree to sell the Shares to the other party to the contract or appoint such
other party its sales agent for such Shares. In either case, any such contract
shall be on such terms and conditions as the Trustees may in their discretion
determine; and any such contract may also provide for the sale of Shares by
such other party as principal or as agent of the Trust.
SECTION 3.2. INVESTMENT ADVISER. The Trustees may, subject to any approvals by
Shareholders required by applicable law, in their discretion from time to time
authorize the Trust to enter into one or more investment advisory agreements
whereby the other party or parties to any such agreements shall undertake to
furnish the Trust investment advisory and research facilities and services and
such other facilities and services, if any, as the Trustees shall consider
desirable and all upon such terms and conditions as the Trustees may in their
discretion determine. Notwithstanding any provisions of this Declaration, the
Trustees may authorize the Investment Adviser, in its discretion and without
any prior consultation with the Trust, to buy, sell, lend and otherwise trade
and deal in any and all securities, commodity contracts and other investments
and assets of the Trust and to engage in and employ all types of transactions
and strategies in connection therewith. Any such action taken pursuant to such
agreement shall be deemed to have been authorized by all of the Trustees.
The Trustees may also authorize the Trust to employ, or authorize the
Investment Adviser to employ, one or more sub-investment advisers from time to
time to perform such of the acts and services of the Investment Adviser and
upon such terms and conditions as may be agreed upon between the Investment
Adviser and such sub-investment adviser and approved by the Trustees.
SECTION 3.3. ADMINISTRATOR. The Trustees may in their discretion from time to
time authorize the Trust to enter into one or more administration agreements,
whereby the other party to such agreement shall undertake to furnish to the
Trust or a Series or a Class thereof such administrative facilities and
services and such other facilities and services, if any, as the Trustees
consider desirable and all upon such terms and conditions as the Trustees may
in their discretion determine.
The Trustees may also authorize the Trust to employ or authorize the
Administrator to employ one or more sub-administrators from time to time to
perform such of the acts and services of the Administrator and upon such terms
and conditions as may be agreed upon between the Administrator and such
sub-administrator and approved by the Trustees.
SECTION 3.4. OTHER SERVICE PROVIDERS. The Trustees may in their discretion from
time to time authorize the Trust to enter into one or more agreements whereby
the other party or parties to any such agreements will undertake to provide to
the Trust or any Class or Series or Shareholders or beneficial owners of Shares
such services as the Trustees consider desirable and all upon such terms and
conditions as the Trustees in their discretion may determine.
SECTION 3.5. TRANSFER AGENTS. The Trustees may in their discretion from time to
time appoint one or more transfer agents for the Trust or any Class or Series
thereof. Any contract with a transfer agent shall be on such terms and
conditions as the Trustees may in their discretion determine.
SECTION 3.6. CUSTODIAN. The Trustees may appoint a bank or trust company having
an aggregate capital, surplus and undivided profits (as shown in its last
published report) of at least $2,000,000 as a custodian of the Trust or any
Class or Series with authority as its agent to hold cash and securities owned
by the Trust or the Class or Series and to release and deliver the same and
otherwise to perform such duties as the Trustees may specify, all upon such
terms and conditions as may be agreed upon between the Trust and the Custodian.
SECTION 3.7. AFFILIATIONS. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, creditor, director, officer, partner, trustee or employee of or
has any interest in any Person or any parent or affiliate of any such Person,
with which a contract or agreement of the character described in this Article
III has been or will be made, or that any such Person, or any parent or
affiliate thereof, is a Shareholder of or has an interest in the Trust, or that
(ii) any such Person also has similar contracts, agreements or plans with other
investment companies (including, without limitation, the investment companies
referred to in the last paragraph of Section 2.9) or Persons, or has other
business activities or interests, shall not affect in any way the validity of
any such contract, agreement or plan or disqualify any Shareholder, Trustee or
officer of the Trust from authorizing, voting upon or executing the same or
create any liability or accountability to the Trust or its Shareholders.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 4.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS AND
EMPLOYEES. No Shareholder shall be subject to any personal liability whatsoever
to any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust or any Class or Series thereof. All Persons dealing or
contracting with the Trustees as such or with the Trust or any Class or Series
thereof or having any claim against the Trust or any Class or Series thereof
shall have recourse only to the Trust or such Class or Series for the payment
of their claims or for the payment or satisfaction of claims, obligations or
liabilities arising out of such dealings or contracts. No Trustee, officer or
employee of the Trust, whether past, present or future, shall be subject to any
personal liability whatsoever to any such Person, and all such Persons shall
look solely to the Trust Property, or to the assets of one or more specific
Class or Series of the Trust if the claim arises from the act, omission or
other conduct of such Trustee, officer or employee with respect to only such
Class or Series, for satisfaction of claims of any nature arising in connection
with the affairs of the Trust or such Class or Series. If any Shareholder,
Trustee, officer or employee, as such, of the Trust is made a party to any suit
or proceeding to enforce any such liability of the Trust or any Class or Series
thereof, he shall not, on account thereof, be held to any personal liability.
SECTION 4.2. TRUSTEE'S GOOD FAITH ACTION; ADVICE TO OTHERS; NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon all Interested Parties. A Trustee shall not be liable for errors
of judgment or mistakes of fact or law. The Trustees shall not be responsible
or liable in any event for any neglect or wrongdoing of them or of any officer,
agent, employee, consultant, investment adviser or other adviser,
administrator, distributor or principal underwriter, custodian or transfer,
dividend disbursing, shareholder servicing or accounting agent of the Trust,
nor shall any Trustee be responsible for the act or omission of any other
Trustee. The Trustees may take advice of counsel or other experts with respect
to the meaning and operation of this Declaration and their duties as Trustees,
and shall be under no liability for any act or omission in accordance with such
advice or for failing to follow such advice. In discharging their duties, the
Trustees, when acting in good faith, shall be entitled to rely upon the
records, books and accounts of the Trust and upon reports made to the Trustees
by any officer, employee, agent, consultant, accountant, attorney, investment
adviser or other adviser, principal underwriter, expert, professional firm or
independent contractor. The Trustees as such shall not be required to give any
bond or surety or any other security for the performance of their duties. No
provision of this Declaration shall protect any Trustee or officer of the Trust
against any liability to the Trust or its Shareholders to which he would
otherwise be subject by reason of his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
SECTION 4.3. INDEMNIFICATION. The Trustees may provide, whether in the By-Laws
or by contract, vote or other action, for the indemnification by the Trust or
by any Class or Series thereof of the Shareholders, Trustees, officers and
employees of the Trust and of such other Persons as the Trustees in the
exercise of their discretion may deem appropriate or desirable. Any such
indemnification may be mandatory or permissive, and may be insured against by
policies maintained by the Trust.
SECTION 4.4. NO DUTY OF INVESTIGATION. No purchaser, lender or other Person
dealing with the Trustees or any officer, employee or agent of the Trust or a
Class or Series thereof shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of money or
property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security or undertaking of the Trust or a Class or
Series, and every other act or thing whatsoever executed in connection with the
Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or
in their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security or
undertaking of the Trust or a Class or Series made or issued by the Trustees
may recite that the same is executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations of the Trust or a
Class or Series thereof under any such instrument are not binding upon any of
the Trustees or Shareholders individually, but bind only the Trust Property or
the Trust Property of the applicable Class or Series, and may contain any
further recital which they may deem appropriate, but the omission of any such
recital shall not operate to bind the Trustees or Shareholders individually.
SECTION 4.5. RELIANCE ON RECORDS AND EXPERTS. Each Trustee, officer or employee
of the Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the records, books and accounts of the Trust
or a Class or Series thereof, upon an opinion or other advice of legal counsel,
or upon reports made or advice given to the Trust or a Class or Series thereof
by any Trustee or any of the Trust's officers or employees or by the Investment
Adviser, the Administrator, the Custodian, a Principal Underwriter, Transfer
Agent, accountants, appraisers or other experts, advisers, consultants or
professionals selected with reasonable care by the Trustees or officers of the
Trust, regardless of whether the person rendering such report or advice may
also be a Trustee, officer or employee of the Trust.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
SECTION 5.1. SHARES OF BENEFICIAL INTEREST. The interest of the beneficiaries
of the Trust initially shall be divided into common shares of beneficial
interest of $.01 par value. The number of common shares authorized hereunder is
unlimited. All shares issued, including, without limitation, those issued in
connection with a dividend or distribution or a share split, shall be fully
paid and nonassessable. The Trustees may, without Shareholder approval,
authorize one or more Classes of Shares (which Classes may without Shareholder
approval be divided by the Trustees into two or more Series), Shares of each
such Class or Series having such preferences, voting powers and special or
relative rights or privileges (including conversion rights, if any) as the
Trustees may determine and as shall be set forth in a resolution adopted in
accordance with the By-Laws. The number of Shares of each Class or Series
authorized shall be unlimited except as the By-Laws may otherwise provide. The
Trustees may from time to time divide or combine the Shares of any Class or
Series into a greater or lesser number without thereby changing the
proportionate beneficial interest in the Class or Series.
The ownership of Shares shall be recorded on the books of the Trust or a
transfer or similar agent. No certificates certifying the ownership of Shares
shall be issued except as the Trustees may otherwise determine from time to
time. The Trustees may make such rules as they consider appropriate for the
issuance of Share certificates, the transfer of Shares and similar matters. The
record books of the Trust as kept by the Trust or any transfer or similar
agent, as the case may be, shall be conclusive as to who are the Shareholders
of each Class or Series and as to the number of Shares of each Class or Series
held from time to time by each Shareholder. The Trustees may at any time
discontinue the issuance of Share certificates and may, by written notice to
each Shareholder, require the surrender of Share certificates to
the Trust for cancellation. Such surrender and cancellation shall not affect
the ownership of Shares in the Trust.
SECTION 5.2. VOTING POWERS. Subject to the voting powers of one or more Classes
or Series, the Shareholders shall have power to vote only (i) with respect to
the election of Trustees, (ii) for the removal of Trustees as provided for
herein, (iii) with respect to any Investment Adviser as required by applicable
law, (iv) with respect to any termination or amendment of this Trust, or with
respect to certain transactions, to the extent and as provided in Article VIII,
(v) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or the Shareholders, and (vi) with respect to such additional
matters relating to the Trust as may be required by law, this Declaration, the
By-Laws or any registration of the Trust with the Securities and Exchange
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote. Notwithstanding any other
provision of this Declaration, on any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall, except as
otherwise provided in the By-Laws or required by applicable law, be voted in
the aggregate as a single Class without regard to Classes or Series. There
shall be no cumulative voting in the election of Trustees.
SECTION 5.3. RIGHTS OF SHAREHOLDERS. The ownership of the Trust Property of
every description and the right to conduct any business of the Trust are vested
exclusively in the Trustees, and the Shareholders shall have no interest
therein other than the beneficial interest conferred by their Shares, and they
shall have no right to call for any partition or division of any property,
profits, rights or interests of the Trust or of any Class or Series nor can
they be called upon to share or assume any losses of the Trust or of any Class
or Series or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights
specifically set forth in this Declaration. The Shares shall not entitle the
holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may specifically determine with respect to any Class or
Series.
Every Shareholder by virtue of having become a Shareholder shall be held to
have expressly assented and agreed to the terms of this Declaration and the
Bylaws and to have become a party hereto and thereto. The death of a
Shareholder during the continuance of the Trust shall not operate to terminate
the same nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the Trust or the
Trustees, but only to the rights of said decedent under this Trust.
SECTION 5.4. TRUST ONLY. It is the intention of the Trustees to create only the
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, limited liability company, bailment or any form of legal
relationship other than a Massachusetts business trust. Nothing in this
Declaration shall be construed to make the Shareholders, either by themselves
or with the Trustees, partners or members of a joint stock association.
SECTION 5.5. ISSUANCE OF SHARES. The Trustees in their discretion may, from
time to time and without any authorization or vote of the Shareholders, issue
Shares of any Class or Series, in addition to the then issued and Outstanding
Shares, to such party or parties and for such amount and type of consideration,
including cash or property, at such time or times and on such terms as the
Trustees may deem appropriate or desirable, and may in such manner acquire
other assets (including the acquisition of assets subject to, and in connection
with the assumption of, liabilities) and businesses. In connection with any
issuance of Shares, the Trustees may issue fractional Shares and reissue and
resell full and fractional Shares held in the treasury. The Trustees may
authorize the issuance of certificates of beneficial interest to evidence the
ownership of Shares. Shares held in the treasury shall not be voted nor shall
such Shares
be entitled to any dividends or other distributions declared with respect
thereto. The Trustees in their discretion may also, from time to time and
without any authorization or vote of the Shareholders, issue to the extent
consistent with applicable law securities of the Trust convertible into Shares
of the Trust and warrants to purchase securities of the Trust, in each case
pursuant to such terms and under such conditions as the Trustees may specify in
their discretion. Shares of any Class or Series, in addition to the then issued
and outstanding Shares, and such warrants or convertible securities, may be
issued to such party or parties and for such amount and type of consideration,
including cash or property, at such time or times and on such terms as the
Trustees may deem appropriate or desirable, and may in such manner acquire
other assets (including the acquisition of assets subject to, and in connection
with the assumption of, liabilities) and businesses. The officers of the Trust
are severally authorized to take all such actions as may be necessary or
desirable to carry out this Section 5.5.
ARTICLE VI
REDEMPTIONS AND REPURCHASES
SECTION 6.1. REDEMPTIONS AND REPURCHASES OF SHARES. From time to time the Trust
may redeem or repurchase its Shares, all upon such terms and conditions as may
be determined by the Trustees and subject to any applicable provisions of the
1940 Act. The Trust may require Shareholders to pay a withdrawal charge, a
sales charge, or any other form of charge to the Trust, to the underwriter or
to any other person designated by the Trustees upon redemption or repurchase of
Trust Shares in such amount as shall be determined from time to time by the
Trustees. The Trust may also charge a redemption or repurchase fee in such
amount as may be determined from time to time by the Trustees.
SECTION 6.2. MANNER OF PAYMENT. Payment of Shares redeemed or repurchased may
at the option of the Trustees or such officer or officers as they may duly
authorize for the purpose, in their complete discretion, be made in cash, or in
kind, or partially in cash and partially in kind. In case of payment in kind
the Trustees, or their delegate, shall have absolute discretion as to what
security or securities shall be distributed in kind and the amount of the same,
and the securities shall be valued for purposes of distribution at the figure
at which they were appraised in computing the net asset value of the Shares,
provided that any Shareholder who cannot legally acquire securities so
distributed in kind by reason of the prohibitions of the 1940 Act shall receive
cash.
SECTION 6.3. INVOLUNTARY REDEMPTION. If the Trustees shall, at any time and in
good faith, be of the opinion that direct or indirect ownership of Shares of
any Class or Series or other securities of the Trust has or may become
concentrated in any person to an extent which would disqualify the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption by any such person a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the direct or
indirect ownership of Shares or other securities of the Trust into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any person whose acquisition
of the Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected upon such terms and
conditions as shall be determined by the Trustees.
The holders of Shares or other securities of the Trust shall upon demand
disclose to the Trustees in writing such information with respect to direct and
indirect ownership of Shares or other securities of the Trust as the Trustees
deem necessary to comply with the provisions of the Internal Revenue Code, or
to comply with the requirements of any other taxing authority.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
SECTION 7.1. NET ASSET VALUE. The net asset value of each outstanding Share of
the Trust or of any Class or Series thereof shall be determined on such days
and at or as of such time or times as the Trustees may determine. Any reference
in this Declaration to the time at which a determination of net asset value is
made shall mean the time as of which the determination is made. The power and
duty to determine and method of determination of net asset value may be
delegated by the Trustees from time to time to the Investment Adviser, the
Administrator, the Custodian, the Transfer Agent or such other Person or
Persons as the Trustees may determine. The value of the assets of the Trust or
any Class or Series thereof shall be determined in a manner authorized by the
Trustees. From the total value of said assets, there shall be deducted all
indebtedness, interest, taxes, payable or accrued, including estimated taxes on
unrealized book profits, expenses and management charges accrued to the
appraisal date, and all other items in the nature of liabilities which shall be
deemed appropriate by the Trustees, as incurred by or allocated to the Trust or
any Class or Series thereof. The resulting amount, which shall represent the
total net assets of the Trust or Class or Series thereof, shall be divided by
the number of Outstanding Shares of the Trust or Class or Series thereof at
that time and the quotient so obtained shall be deemed to be the net asset
value of the Shares of the Trust or Class or Series thereof. The Trust may
declare a suspension of the determination of net asset value to the extent
permitted by the 1940 Act. It shall not be a violation of any provision of this
Declaration if Shares are sold, redeemed or repurchased by the Trust at a price
other than one based on net asset value if the net asset value is affected by
one or more errors inadvertently made in the pricing of portfolio securities or
other investments or in accruing or allocating income, expenses, reserves or
liabilities. No provision of this Declaration shall be construed to restrict or
affect the right or ability of the Trust to employ or authorize the use of
pricing services, appraisers or any other means, methods, procedures, or
techniques in valuing the assets or calculating the liabilities of the Trust or
any Class or Series thereof.
SECTION 7.2. DIVIDENDS AND DISTRIBUTIONS. (a) The Trustees may from time to
time distribute ratably among the Shareholders of the Trust or of a Class or
Series thereof such portion of the net earnings or profits, surplus (including
paid-in surplus), capital (including paid-in capital), or assets of the Trust
or such Class or Series held by the Trustees as they may deem appropriate or
desirable. Such distributions may be made in cash, additional Shares or
property (including without limitation any type of obligations of the Trust or
Class or Series or any assets thereof), and the Trustees may distribute ratably
among the Shareholders of the Trust or Class or Series thereof additional
Shares of the Trust or Class or Series thereof issuable hereunder in such
manner, at such times, and on such terms as the Trustees may deem appropriate
or desirable. Such distributions may be among the Shareholders of the Trust or
Class or Series thereof at the time of declaring a distribution or among the
Shareholders of the Trust or Class or Series thereof at such other date or time
or dates or times as the Trustees shall determine. The Trustees may always
retain from the earnings or profits such amounts as they may deem appropriate
or desirable to pay the expenses and liabilities of the Trust or a Class or
Series thereof or to meet obligations of the Trust or a Class or Series
thereof, together with such amounts as they may deem desirable to use in the
conduct of its affairs or to retain for future requirements or extensions of
the business or operations of the Trust or such Class or Series. The Trust may
adopt and offer to Shareholders such dividend reinvestment plans, cash dividend
payout plans or other distribution plans as the Trustees may deem appropriate
or desirable. The Trustees may in their discretion determine that an account
administration fee or other similar charge may be deducted directly from the
income and other distributions paid on Shares to a Shareholder's account in any
Class or Series.
(b) The Trustees may prescribe, in their absolute discretion, such bases and
times for determining the amounts for the declaration and payment of dividends
and distributions as they may deem necessary, appropriate or desirable.
(c) Inasmuch as the computation of net income and gains for federal income tax
purposes may vary from the computation thereof on the books of account, the
above provisions shall be interpreted to give the Trustees full power and
authority in their absolute discretion to distribute for any fiscal year as
dividends and as capital gains distributions, respectively, additional amounts
sufficient to enable the Trust or a Class or Series thereof to avoid or reduce
liability for taxes.
SECTION 7.3. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
provision contained in this Declaration, the Trustees may prescribe, in their
absolute discretion, such other means, methods, procedures or techniques for
determining the per Share net asset value of a Class or Series thereof or the
income of the Class or Series thereof, or for the declaration and payment of
dividends and distributions on any Class or Series.
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A
CLASS OR SERIES; MERGERS; AMENDMENTS
SECTION 8.1. DURATION. The Trust shall continue without limitation of time but
subject to the provisions of this Article VIII. The death, declination,
resignation, retirement, removal or incapacity of the Trustees, or any one of
them, shall not operate to terminate or annul the Trust or to revoke any
existing agency or delegation or authority pursuant to the terms of this
Declaration or of the By-Laws.
SECTION 8.2. MERGER OR TERMINATION OF THE TRUST OR A SERIES OR A CLASS. The
Trust may merge or consolidate with any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all
of the Trust property, including its good will, upon such terms and conditions
and for such consideration when and as authorized at a meeting of Shareholders
called for the purpose by the affirmative vote of the holders of two-thirds of
each Class and Series of Shares outstanding and entitled to vote (with each
such class and series separately voting thereon as a separate Class or Series),
or by an instrument or instruments in writing without a meeting, consented to
by the holders of two-thirds of each Class and Series of Shares (with each such
Class and Series separately consenting thereto as a separate Class or Series);
provided, however, that if such merger, consolidation, sale, lease or exchange
is recommended by the Trustees, the vote or written consent of the holders of a
majority of the Shares outstanding and entitled to vote shall be sufficient
authorization; and any such merger, consolidation, sale, lease or exchange
shall be deemed for all purposes to have been accomplished under and pursuant
to the statutes of The Commonwealth of Massachusetts. Upon making provision for
the payment of all outstanding obligations, taxes and other liabilities,
(whether accrued or contingent) of the Trust, the Trustees shall distribute the
remaining assets of the Trust ratably among the holders of the outstanding
Shares, except as may be otherwise provided by the Trustees with respect to any
Class or Series of Shares thereof.
Subject to authorization by the Shareholders as indicated below in this
paragraph, the Trust may at any time sell and convert into money all of the
assets of the Trust, and, upon making provision for the payment of all
outstanding obligations, taxes and other liabilities (whether accrued or
contingent) of the Trust, the Trustees shall distribute the remaining assets of
the Trust ratably among the holders of the outstanding Shares, except as may be
otherwise provided by the Trustees with respect to any Class or Series of
Shares. Such action shall first have been authorized at a meeting of
Shareholders called for the purpose by the affirmative vote of the holders of
two-thirds of each Class and Series of Shares outstanding and entitled to vote
(with each such Class and Series separately voting thereon as a separate Class
or Series), or by an instrument or instruments in writing without a meeting,
consented to by the holders of two-thirds of each Class and Series of Shares
(with each such Class and Series separately consenting thereto as a separate
Class or Series); provided, however, that if such action is recommended
by the Trustees, the vote or written consent of the holders of a majority of
the Shares outstanding and entitled to vote shall be sufficient authorization.
Upon completion of the distribution of the remaining proceeds or the remaining
assets as provided in this section, the Trust shall terminate and the Trustees
shall be discharged of any and all further liabilities and duties hereunder and
the right, title and interest of all parties shall be cancelled and discharged.
SECTION 8.3. AMENDMENTS. The execution of an instrument setting forth the
establishment and designation and the relative rights of any Class or Series of
Shares in accordance with Section 5.1 hereof shall, without any authorization,
consent or vote of the Shareholders, effect an amendment of this Declaration.
Except as otherwise provided in this Section, if authorized by a majority of
the Trustees and by vote of a majority of the outstanding voting securities of
the Trust affected by the amendment (which voting securities shall, unless
otherwise provided by the Trustees, vote together on such amendment as a single
class), or by any larger vote which may be required by applicable law or this
Declaration of Trust in any particular case, the Trustees may amend or
otherwise supplement this Declaration. The Trustees may also amend this
Declaration without the vote or consent of Shareholders to change the name of
the Trust or to make such other changes as do not have a materially adverse
effect on the rights or interests of Shareholders hereunder or if they deem it
necessary to conform this Declaration to the requirements of applicable Federal
laws or regulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall not be liable
for failing so to do.
No amendment may be made under this Section which shall amend, alter, change or
repeal any of the provisions of Article VIII unless the amendment effecting
such amendment, alteration, change or repeal shall receive the affirmative vote
or consent of the holders of two-thirds of each Class and Series of Shares
outstanding and entitled to vote (with each such Class and Series separately
voting thereon on consenting thereto as a separate Class or Series). Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of Shares otherwise required by law or by any agreement between the
Trust and any national securities exchange.
Nothing contained in this Declaration shall permit the amendment of this
Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.
Notwithstanding any other provision hereof, until such time as a Registration
Statement under the Securities Act of 1933, as amended, covering the first
public offering of securities of the Trust shall have become effective, this
Declaration may be terminated or amended in any respect by the affirmative vote
of a majority of the Trustees or by an instrument signed by a majority of the
Trustees.
SECTION 8.4. CERTAIN TRANSACTIONS. (a) Notwithstanding any other provision of
this Declaration and subject to the exceptions provided in sub-section (d) of
this Section 8.4, the types of transactions described in sub-section (c) of
this Section 8.4 shall require the affirmative vote or consent of the holders
of seventy-five percent (75%) of each Class of Shares outstanding (with each
such Class voting separately thereon), when a Principal Shareholder (as defined
in sub-section (b) of this Section 8.4) is determined by the Trustees to be a
party to the transaction. Such affirmative vote or consent shall be in addition
to the vote or consent of the holders of Shares otherwise required by law or by
the terms of any Class or Series, whether now or hereafter authorized, or by
any agreement between the Trust and any national securities exchange.
(b) The term "Principal Shareholder" shall mean any Person which is the
beneficial owner, directly or indirectly, of more than five percent (5%) of the
Outstanding Shares of the Trust or of any Class and shall include any
"affiliate" or "associate", as such terms are defined in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934. For
the purpose of this
Section 8.4, in addition to the Shares which a Person beneficially owns
directly, (a) a Person shall be deemed to be the beneficial owner of any Shares
(i) which the Trustees determine it has the right to acquire pursuant to any
agreement or upon exercise of conversion rights or warrants, or otherwise (but
excluding Share options granted by the Trust) or (ii) which the Trustees
determine are beneficially owned, directly or indirectly (including Shares
deemed owned through application of clause (i) above), by any other Person with
which it or its "affiliate" or "associate" (as defined above) has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of Shares, or which is its affiliate or associate, and (b)
the outstanding Shares shall include Shares deemed owned through application of
clauses (i) and (ii) above but shall not include any other Shares which are not
at the time issued and outstanding but may be issuable pursuant to any
agreement, or upon exercise of conversion rights or warrants, or otherwise.
(c) This Section 8.4 shall apply to the following transactions:
(i) The merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder.
(ii) The issuance of any securities of the Trust to any Principal Shareholder
for cash.
(iii) The sale, lease or exchange of all or any substantial part of the assets
of the Trust to any Principal Shareholder (except assets determined by the
Trustees to have an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period or
assets sold in the ordinary course of business).
(iv) The sale, lease or exchange to or with the Trust or any subsidiary
thereof, in exchange for securities of the Trust, of any assets of any
Principal Shareholder (except assets determined by the Trustees to have an
aggregate fair market value of less than $1,000,000 aggregating for the purpose
of such computation all assets sold, leased or exchanged in any series of
similar transactions within a twelve-month period).
For purposes of this sub-section 8.4(c), the term "Principal Shareholder" shall
include all subsidiaries, affiliates, associates, or other persons acting in
concert with any Principal Shareholder.
(d) The provisions of this Section 8.4 shall not be applicable to (i) any of
the transactions described in sub-section (c) of this Section 8.4 if the
Trustees shall by resolution have approved a memorandum of understanding with
such Principal Shareholder with respect to and substantially consistent with
such transaction, or (ii) any such transaction with any Person of which a
majority of the outstanding shares of all classes of stock normally entitled to
vote in the election of directors is owned of record or beneficially by the
Trust and its subsidiaries.
(e) The Trustees shall have the power to determine for the purposes of this
Section 8.4 on the basis of information known to the Trust, whether (i) a
Person beneficially owns more than five percent (5%) of the outstanding Shares
or is otherwise a Principal Shareholder, (ii) a Person is an "affiliate" or
"associate" (as defined above) of another, (iii) the assets being acquired or
leased to or by the Trust or any subsidiary thereof constitute a substantial
part or the assets of the Trust and have an aggregate fair market value of less
than $1,000,000, (iv) the memorandum of understanding referred to in
sub-section (d) hereof is substantially consistent with the transaction covered
thereby, and (v) the provisions of the Section 8.5 otherwise apply to any
Person or transaction. Any such determination shall be conclusive and binding
for all purposes of this Section 8.4.
SECTION 8.5. CONVERSION. Notwithstanding any other provisions of this
Declaration, the conversion of the Trust from a "closed-end company" to an
"open-end company," as those terms are defined in Section 5(a)(2) and 5(a)(1),
respectively, of the 1940 Act shall require the affirmative vote or consent of
the holders of two-thirds of each Class outstanding (with each Class separately
voting thereon or consenting thereto as a separate Class). Such affirmative
vote or consent shall be in addition to the vote or consent of the holders of
the Shares otherwise required by law or by the terms of any Class or Series,
whether now or hereafter authorized, or by any agreement between the Trust and
any national securities exchange. However, if such conversion is recommended by
at least 75% of the Trustees then in office, the vote or written consent of the
holders of a majority of the outstanding voting securities of the Trust (which
voting securities shall vote separately on the matter by class) shall be
sufficient to authorize such conversion.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. USE OF THE WORDS "EATON VANCE". Eaton Vance Corp. (hereinafter
referred to as "EVC"), which owns (either directly or through subsidiaries) all
of the capital shares of the Investment Adviser of the Trust (or of the
investment adviser of each of the investment companies referred to in the last
paragraph of Section 2.9), has consented to the use by the Trust of the
identifying words "Eaton Vance" in the name of the Trust. Such consent is
conditioned upon the continued employment of EVC or a subsidiary or affiliate
of EVC as Investment Adviser of the Trust or as the investment adviser of each
of the investment companies referred to in the last paragraph of Section 2.9.
As between the Trust and itself, EVC shall control the use of the name of the
Trust insofar as such name contains the identifying words "Eaton Vance". EVC
may from time to time use the identifying words "Eaton Vance" in other
connections and for other purposes, including, without limitation, the names of
other investment companies, trusts, corporations or businesses which it may
manage, advise, sponsor or own or in which it may have a financial interest.
EVC may require the Trust to cease using the identifying words "Eaton Vance" in
the name of the Trust if EVC or a subsidiary or affiliate of EVC ceases to act
as investment adviser of the Trust or as the investment adviser of each of the
investment companies referred to in the last paragraph of Section 2.9.
SECTION 9.2. NOTICES. Notwithstanding any other provision of this Declaration,
any and all notices to which any Shareholder may be entitled and any and all
communications shall be deemed duly served or given if mailed, postage prepaid,
addressed to any Shareholder of record at his last known address as recorded on
the register of the Trust. If and to the extent consistent with applicable law,
a notice of a meeting, an annual report, and any other communication to
Shareholders need not be sent to a Shareholder (i) if an annual report and a
proxy statement for two consecutive shareholder meetings have been mailed to
such Shareholder's address and have been returned as undeliverable, (ii) if
all, and at least two, checks (if sent by first class mail) in payment of
distributions on Shares during a twelve-month period have been mailed to such
Shareholder's address and have been returned as undeliverable or (iii) in any
other case in which a proxy statement concerning a meeting of security holders
is not required to be given pursuant to the Commission's proxy rules as from
time to time in effect under the Securities Exchange Act of 1934, as amended.
However, delivery of such proxy statements, annual reports and other
communications shall resume if and when such Shareholder delivers or causes to
be delivered to the Trust written notice setting forth such Shareholder's then
current address.
SECTION 9.3. FILING OF COPIES, REFERENCES, HEADINGS AND COUNTERPARTS. The
original or a copy of this instrument, of any amendment hereto and of each
declaration of trust supplemental hereto, shall be kept at the office of the
Trust. Anyone dealing with the Trust may rely on a certificate by a Trustee or
an officer of the Trust as to whether or not any such amendments or
supplemental declarations of trust have been made and as to any matters in
connection with the Trust hereunder, and, with the same effect as if it
were the original, may rely on a copy certified by a Trustee or an officer of
the Trust to be a copy of this instrument or of any such amendment hereto or
supplemental declaration of trust.
In this instrument or in any such amendment or supplemental declaration of
trust, references to this instrument, and all expressions such as "herein",
"hereof", and "hereunder", shall be deemed to refer to this instrument as
amended or affected by any such supplemental declaration of trust. Headings are
placed herein for convenience of reference only and in case of any conflict,
the text of this instrument, rather than the headings, shall control. This
instrument may be executed in any number of counterparts each of which shall be
deemed an original, but such counterparts shall constitute one instrument. A
restated Declaration, integrating into a single instrument all of the
provisions of the Declaration which are then in effect and operative, may be
executed from time to time by a majority of the Trustees then in office and
filed with the Massachusetts Secretary of State. A restated Declaration shall,
upon execution, be conclusive evidence of all amendments and supplemental
declarations contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments and supplements thereto.
SECTION 9.4. APPLICABLE LAW. The Trust set forth in this instrument is made in
The Commonwealth of Massachusetts, and it is created under and is to be
governed by and construed and administered according to the laws of said
Commonwealth. The Trust shall be of the type commonly called a Massachusetts
business trust, and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust.
SECTION 9.5. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The provisions
of this Declaration are severable, and if the Trustees shall determine, with
the advice of legal counsel, that any of such provisions is in conflict with
the 1940 Act, the Internal Revenue Code of 1986 or with other applicable laws
and regulations, the conflicting provision shall be construed in such a manner
consistent with such law as may most closely reflect the intention of the
offending provision; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall attach only to
such provision in such jurisdiction and shall not in any manner affect such
provision in any other jurisdiction or any other provision of this Declaration
in any jurisdiction.
IN WITNESS WHEREOF, the undersigned, being all of the current Trustees of the
Trust, have executed this instrument this 4th day of April, 2007.
/s/ Alan R. Dynner ------------------------------- |
Alan R. Dynner, as Trustee
and not Individually
/s/ Frederick S. Marius ------------------------------- |
Frederick S. Marius, as Trustee
and not Individually
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. Boston, Massachusetts
Boston, Massachusetts
On this 4th day of April, 2007, before me, the undersigned notary public,
personally appeared the above named Alan R. Dynner and Frederick S. Marius,
proved to me through satisfactory evidence of identification, which consisted
of personal knowledge, to be the persons whose names are signed on the
preceding document in my presence and who swore or affirmed to me that the
contents of the document are truthful and accurate to the best of their
knowledge and belief.
Before me,
/s/ Lynn M. Hetu ---------------- |
My commission expires: 7/6/12
The names and addresses of all the Trustees of the Trust are as follows:
Alan R. Dynner
227 Beacon Street
Boston, MA 02116
Frederick S. Marius
41 Myrtle Terrace
Winchester, MA 01890
Trust Address:
The Eaton Vance Building
255 State Street
Boston, MA 02109
BY-LAWS
OF
EATON VANCE RISK-MANAGED EQUITY INCOME FUND
ARTICLE I
The Trustees
SECTION 1. NUMBER OF TRUSTEES. The number of Trustees shall be fixed by the
Trustees, provided, however, that such number shall at no time be less than two
or exceed fifteen.
ARTICLE II
Officers and Their Election
SECTION 1. OFFICERS. The officers of the Trust shall be a President, a
Treasurer, a Secretary, and such other officers or agents as the Trustees may
from time to time elect. It shall not be necessary for any Trustee or other
officer to be a holder of shares in the Trust.
SECTION 2. ELECTION OF OFFICERS. The Treasurer and Secretary shall be chosen
annually by the Trustees. The President shall be chosen annually by and from
the Trustees. Except for the offices of the President and Secretary, two or
more offices may be held by a single person. The officers shall hold office
until their successors are chosen and qualified.
SECTION 3. RESIGNATIONS AND REMOVALS. Any officer of the Trust may resign by
filing a written resignation with the President or with the Trustees or with
the Secretary, which shall take effect on being so filed or at such time as may
otherwise be specified therein. The Trustees may at any meeting remove an
officer.
ARTICLE III
Powers and Duties of Trustees and Officers
SECTION 1. TRUSTEES. The business and affairs of the Trust shall be managed by
the Trustees, and they shall have all powers necessary and desirable to carry
out that responsibility, so far as such powers are not inconsistent with the
laws of the Commonwealth of Massachusetts, the Declaration of Trust, or these
By-Laws.
SECTION 2. EXECUTIVE AND OTHER COMMITTEES. The Trustees may elect from their
own number an executive committee to consist of not less than three nor more
than five members, which shall have the power and duty to conduct the current
and ordinary business of the Trust while the Trustees are not in session, and
such other powers and duties as the Trustees may from time to time delegate to
such committee. The Trustees may also elect from their own number other
committees from time to time, the number composing such committees and the
powers conferred upon the same to be determined by the Trustees. Without
limiting the generality of the foregoing, the Trustees may appoint a committee
consisting of less than the whole number of Trustees then in office, which
committee may be empowered to act for and bind the Trustees and the Trust, as
if the acts of such committee were the acts of all the
Trustees then in office, with respect to the institution, prosecution,
dismissal, settlement, review, investigation or other disposition of any
dispute, claim, action, suit or proceeding which shall be pending or threatened
to be brought before any court, administrative agency or other adjudicatory
body.
SECTION 3. CHAIRMAN OF THE TRUSTEES. The Trustees shall appoint from among
their number a Chairman. The Chairman shall preside at the meetings of the
Trustees and may call meetings of the Trustees and of any committee thereof
whenever he deems it necessary or desirable to do so. The Chairman may in his
discretion preside at any meeting of the shareholders, and may delegate such
authority to another Trustee or officer of the Trust. The Chairman shall
exercise and perform such additional powers and duties as from time to time may
be assigned to him by the Trustees, and shall have the resources and authority
appropriate to discharge the responsibilities of the office.
SECTION 4. PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the Trustees to the Chairman of the Trustees, the President shall be
the chief executive officer of the Trust and subject to the control of the
Trustees, he shall have general supervision, direction and control of the
business of the Trust and of its employees and shall exercise such general
powers of management as are usually vested in the office of President of a
corporation. In the event that the Chairman does not preside at a meeting of
shareholders or delegate such power and authority to another Trustee or officer
of the Fund, the President or his designee shall preside at such meeting. He
shall have the power to employ attorneys and counsel for the Trust and to
employ such subordinate officers, agents, clerks and employees as he may find
necessary to transact the business of the Trust. He shall also have the power
to grant, issue, execute or sign such powers of attorney, proxies, contracts,
agreements or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as, from time to time, may be conferred upon or assigned to
him by the Trustees.
SECTION 4. TREASURER. The Treasurer shall be the principal financial and
accounting officer of the Trust. He shall deliver all funds and securities of
the Trust which may come into his hands to such bank or trust company as the
Trustees shall employ as custodian in accordance with Article III of the
Declaration of Trust. He shall make annual reports in writing of the business
conditions of the Trust, which reports shall be preserved upon its records, and
he shall furnish such other reports regarding the business and condition as the
Trustees may from time to time require. The Treasurer shall perform such duties
additional to foregoing as the Trustees may from time to time designate.
SECTION 5. SECRETARY. The Secretary shall record in books kept for the purpose
all votes and proceedings of the Trustees and the shareholders at their
respective meetings. He shall have custody of the seal, if any, of the Trust
and shall perform such duties additional to the foregoing as the Trustees may
from time to time designate.
SECTION 6. OTHER OFFICERS. Other officers elected by the Trustees shall perform
such duties as the Trustees may from time to time designate, including
executing or signing such powers of attorney, proxies, contracts, agreements or
other documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust.
SECTION 7. COMPENSATION. The Trustees and officers of the Trust may receive
such reasonable compensation from the Trust for the performance of their duties
as the Trustees may from time to time determine.
ARTICLE IV
Meetings of Shareholders
SECTION 1. MEETINGS. Meetings of shareholders, at which the shareholders shall
elect Trustees and transact such other business as may properly come before the
meeting, shall be held annually so long as required by the American Stock
Exchange, New York Stock Exchange or such other exchange or trading system on
which shares are principally traded. Meetings of the shareholders (or any class
or series) may be called at any time by the President, and shall be called by
the President or the Secretary at the request, in writing or by resolution, of
a majority of the Trustees, or at the written request of the holder or holders
of twenty-five percent (25%) or more of the total number of the then issued and
outstanding shares of the Trust entitled to vote at such meeting. Any such
request shall state the purposes of the proposed meeting.
SECTION 2. PLACE OF MEETINGS. Meetings of the shareholders shall be held at the
principal place of business of the Trust in Boston, Massachusetts, unless a
different place within the United States is designated by the Trustees and
stated as specified in the respective notices or waivers of notice with respect
thereto.
SECTION 3. NOTICE OF MEETINGS. Notice of all meetings of the shareholders,
stating the time, place and the purposes for which the meetings are called,
shall be given by the Secretary to each shareholder entitled to vote thereat,
and to each shareholder who under the By-Laws is entitled to such notice, by
delivering (by electronic, telephonic, computerized or other alternative means
as may be approved by resolutions adopted by the trustees, which authorization
is received not more than six months before delivery of such notice) or
mailing, postage paid, addressed to such address as it appears upon the books
of the Trust, at least ten days no more than ninety days before the time fixed
for the meeting, and the person given such notice shall make an affidavit with
respect thereto. If any shareholder shall have failed to inform the Trust of
his address, no notice need be sent to him. No notice need be given to any
shareholder if a written waiver of notice, executed before or after the meeting
by the shareholder or his attorney thereunto authorized, is filed with the
records of the meeting.
SECTION 4. QUORUM. Except as otherwise provided by law, to constitute a quorum
for the transaction of any business at any meeting of shareholders, there must
be present, in person or by proxy, holders of a majority of the total number of
shares of the then issued and outstanding shares of the Trust entitled to vote
at such meeting; provided that if a class (or series) of shares is entitled to
vote as a separate class (or series) on any matter, then in the case of that
matter a quorum shall consist of the holders of a majority of the total number
of shares of the then issued and outstanding shares of that class (or series)
entitled to vote at the meeting. Shares owned directly or indirectly by the
Trust, if any, shall not be deemed outstanding for this purpose.
If a quorum, as above defined, shall not be present for the purpose of any vote
that may properly come before any meeting of shareholders at the time and place
of any meeting, the shareholders present in person or by proxy and entitled to
vote at such meeting on such matter holding a majority of the shares present
and entitled to vote on such matter may by vote adjourn the meeting from time
to time to be held at the same place without further notice than by
announcement to be given at the meeting until a quorum, as above defined,
entitled to vote on such matter, shall be present, whereupon any such matter
may be voted upon at the meeting as though held when originally convened.
SECTION 5. VOTING. At each meeting of the shareholders every shareholder of the
Trust shall be entitled to one vote in person or by proxy for each of the then
issued and outstanding shares of the Trust then having voting power in respect
of the matter upon which the vote is to be taken, standing in his name on the
books of the Trust at the time of the closing of the transfer books for the
meeting, or, if the books be not closed for any meeting, on the record date
fixed as provided in Section 4 of Article VI of these ByLaws for determining
the shareholders entitled to vote at such meeting, or if the books be not
closed and no record date be fixed, at the time of the meeting. The record
holder of a fraction of a share shall be entitled in like manner to
corresponding fraction of a vote. Notwithstanding the foregoing, the Trustees
may, in connection with the establishment of any class (or series) of shares or
in proxy materials for any meeting of shareholders or in other solicitation
materials or by vote or other action duly taken by them, establish conditions
under which the several classes (or series) shall have separate voting rights
or no voting rights.
All elections of Trustees shall be conducted in any manner approved at the
meeting of the shareholders at which said election is held, and shall be by
ballot if so requested by any shareholder entitled to vote thereon. The persons
receiving the greatest number of votes shall be deemed and declared elected.
Except as otherwise required by law or by the Declaration of Trust or by these
By-Laws, all matters shall be decided by a majority of the votes cast, as
hereinabove provided, by persons entitled to vote thereon.
SECTION 6. PROXIES. Any shareholder entitled to vote upon any matter at any
meeting of the shareholders may so vote by proxy, provided that such proxy to
act is authorized to act by (i) a written instrument, dated not more than six
months before the meeting and executed either by the shareholder or by his or
her duly authorized attorney in fact (who may be so authorized by a writing or
by any non-written means permitted by the laws of The Commonwealth of
Massachusetts) or (ii) such electronic, telephonic, computerized or other
alternative means as may be approved by a resolution adopted by the Trustees,
which authorization is received not more than six months before the initial
session of the meeting. Proxies shall be delivered to the Secretary of the
Trust or other person responsible for recording the proceedings before being
voted. A proxy with respect to shares held in the name of two or more persons
shall be valid if executed by one of them unless at or prior to exercise of
such proxy the Trust receives a specific written notice to the contrary from
any one of them. Unless otherwise specifically limited by their terms, proxies
shall entitle the holder thereof to vote at any adjournment of a meeting. A
proxy purporting to be exercised by or on behalf of a shareholder shall be
deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. At all meetings of the
shareholders, unless the voting is conducted by inspectors, all questions
relating to the qualifications of voters, the validity of proxies, and the
acceptance or rejection of votes shall be decided by the chairman of the
meeting.
SECTION 7. CONSENTS. Any action which may be taken by shareholders may be taken
without a meeting if a majority of shareholders entitled to vote on the matter
(or such larger proportion thereof as shall be required by law, the Declaration
or these By-Laws for approval of such matter) consent to the action in writing
and the written consents are filed with the records of the meetings of
shareholders. Such consents shall be treated for all purposes as a vote taken
at a meeting of shareholders.
SECTION 8. NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS
(A) ANNUAL MEETINGS OF SHAREHOLDERS. (1) Nominations of persons for election of
the Board of Trustees and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (a) pursuant to
the notice of meeting described in Section 3 of this Article of these By-Laws;
(b) by or at the direction of the Board of Trustees; or (c) by any shareholder
of the Trust who was a shareholder of record at the time of giving of notice
provided for in Section 3 of this Article of these By-Laws, who is entitled to
vote at the meeting and who complied with the notice provisions set forth in
this Section 8.
(2) For nominations or other business properly to be brought before an annual
meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of this
Section 8, the shareholder must have given timely notice thereof in writing to
the Secretary of the Trust and such other business must be a proper matter for
shareholder action. To be timely, a shareholder's notice shall be delivered to
the Secretary at the principal executive offices of the Trust not later than
the close of business on the ninetieth day nor earlier than the close of
business on the one hundred-twentieth day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than thirty days before or more than sixty
days after such anniversary date, notice by the shareholder to be timely must
be so delivered not earlier than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such meeting is first made. In no
event, shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a shareholder's notice as
described above. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or reelection as
a Trustee all information relating to such person that is required to be
disclosed in solicitations of proxies for election of trustees/directors in an
election contest, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and Rule 14a-11 thereunder (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a Trustee if
elected); (b) as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
shareholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such
shareholder, as they appear on the Trust's books, and of such beneficial owner
and (ii) the class/series and number of shares of the Trust which are owned
beneficially and of record by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this
Section 8 to the contrary, in the event that the number of Trustees to be
elected to the Board of Trustees is increased and there is no public
announcement naming all of the nominees for Trustee or specifying the size of
the increased Board of Trustees made by the Trust at least one hundred days
prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Section 8 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Trust not later than the close of business on the tenth day
following the day on which such public announcement is first made by the Trust.
(B) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be conducted by
a special meeting of shareholders as shall have been brought before the meeting
pursuant to the Trust's notice of meeting. Nominations of persons for election
to the Board of Trustees may be made at a special meeting of shareholders at
which Trustees are to be elected pursuant to the Trust's notice of meeting (1)
by or at the direction of the Board of Trustees or (2) by any shareholder of
the Trust who is a shareholder of record at the time of giving of notice
provided for in this Section 8, who shall be entitled to vote at the meeting
and who complies with the notice procedures set forth in this Section 8. In the
event the Trust calls a special meeting of shareholders for the purpose of
electing one or more Trustees to the Board of Trustees, any such shareholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Trust's notice of meeting, if the shareholder's
notice required by paragraph (A)(2) of this Section 8 shall be delivered to the
Secretary at the principal executive offices of the Trust not earlier than the
close of business on the one hundred-twentieth day prior to such special
meeting and not later than the close of business on the later of the ninetieth
day prior to such special meeting or the tenth day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Trustees to be elected at such meeting. In no
event, shall the public announcement or adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as
described above.
(C) GENERAL. (1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 8 shall be eligible to serve as Trustees
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set
forth in this Section 8. Except as otherwise provided by law, the Declaration
of Trust or these ByLaws, the Chairman (or such other officer presiding at the
meeting) shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as
the case may be, in accordance with the procedures set forth in this Section 8
and, if any proposed nomination or business is not in compliance with this
Section 8, to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Section 8, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the Trust
with the Securities and Exchange Commission (the "Commission") pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 8, a shareholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Section 8. Nothing in this Section 8 shall be deemed to affect any rights of
(a) shareholders to request inclusion of proposals in the Trust's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (b) the holders of
any class of preferred shares of beneficial interest to elect Trustees under
specified circumstances.
ARTICLE V
Trustees Meetings
SECTION 1. MEETINGS. The Trustees may in their discretion provide for regular
or stated meetings of the Trustees. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairman, President or
by any other Trustee at the time being in office. Any or all of the Trustees
may participate in a meeting by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time, and participation by such means
shall constitute presence in person at a meeting.
SECTION 2. NOTICES. Notice of regular or stated meetings need not be given.
Notice of the time and place of each meeting other than regular or stated
meeting shall be given by the Secretary or by the Trustee calling the meeting
and shall be mailed to each Trustee at least two days before the meeting, or
shall be telegraphed, cabled, or wirelessed to each Trustee at his business
address or personally delivered to him at least one day before the meeting.
Such notice may, however, be waived by all the Trustees. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to
any Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. A notice or waiver of notice need not
specify the purpose of any special meeting.
SECTION 3. CONSENTS. Any action required or permitted to be taken at any
meeting of the Trustees may be taken by the Trustees without a meeting if a
written consent thereto is signed by all the Trustees and filed with the
records of the Trustees' meetings. A Trustee may deliver his consent to the
Trust by facsimile machine or other graphic communication equipment. Such
consent shall be treated as a vote at a meeting for all purposes.
SECTION 4. PLACE OF MEETINGS. The Trustees may hold their meetings within or
without The Commonwealth of Massachusetts.
SECTION 5. QUORUM AND MANNER OF ACTING. A majority of the Trustees in office
shall be present in person at any regular stated or special meeting of the
Trustees in order to constitute a quorum for the transaction of business at
such meeting and (except as otherwise required by the Declaration of Trust, by
these By-Laws or by statute) the act of a majority of the Trustees present at
any such meeting, at which a quorum is present, shall be the act of the
Trustees. In the event that action is to be taken with respect to the death,
declination, resignation, retirement, removal or incapacity of one or more
Trustees, a quorum for the transaction of such business and any other business
conducted at such meeting and (except as otherwise required by the Declaration
of Trust, by these By-Laws or by statute) shall be a majority of the remaining
Trustees then in office. In the absence of quorum, a majority of the Trustees
present may adjourn the meeting from time to time until a quorum shall be
present. Notice of any adjourned meeting need not be given.
ARTICLE VI
Shares of Beneficial Interest
SECTION 1. CERTIFICATES FOR SHARES OF BENEFICIAL INTEREST. Certificates for
shares of beneficial interest of any class of shares of the Trust, if issued,
shall be in such form as shall be approved by the Trustees. They shall be
signed by, or in the name of, the Trust by the President and by the Treasurer
and may, but need not be, sealed with seal of the Trust; provided, however,
that where such certificate is signed by a transfer agent or a transfer clerk
acting on behalf of the Trust or a registrar other than a Trustee, officer or
employee of the Trust, the signature of the President or Treasurer and the seal
may be facsimile. In case any officer or officers who shall have signed, or
whose facsimile signature or signatures shall have been used on any such
certificate or certificates, shall cease to be such officer or officers of the
Trust whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Trust, such
certificate or certificates may nevertheless be adopted by the Trust and be
issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signatures shall have been used
thereon had not ceased to be such officer or officers of the Trust.
SECTION 2. TRANSFER OF SHARES. Transfers of shares of beneficial interest of
any shares of the Trust shall be made only on the books of the Trust by the
owner thereof or by his attorney thereunto authorized by a power of attorney
duly executed and filed with the Secretary or a transfer agent, and only upon
the surrender of any certificate or certificates for such shares. The Trust
shall not impose any restrictions upon the transfer of the shares of the Trust,
but this requirement shall not prevent the charging of customary transfer agent
fees.
SECTION 3. TRANSFER AGENT AND REGISTRAR; REGULATIONS. The Trust shall, if and
whenever the Trustees shall so determine, maintain one or more transfer offices
or agencies, each in the charge of a transfer agent designated by the Trustees,
where the shares of beneficial interest of the Trust shall be directly
transferable. The Trust shall, if and whenever the Trustees shall so determine,
maintain one or more registry offices, each in the charge of a registrar
designated by the Trustees, where such shares shall be registered, and no
certificate for shares of the Trust in respect of which a transfer agent and/or
registrar shall have been designated shall be valid unless countersigned by
such transfer agent and/or registered by such registrar. The principal transfer
agent may be located within or without the Commonwealth of Massachusetts and
shall have charge of the stock transfer books, lists and records, which shall
be kept within or without Massachusetts in an office which shall be deemed to
be the stock transfer office of the Trust. The Trustees may also make such
additional rules and regulations as it may deem expedient concerning the issue,
transfer and registration of certificates for shares of the Trust.
SECTION 4. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. The Trustees may
fix in advance a time which shall be not more than seventy-five days before the
date of any meeting of shareholders, or the date for the payment of any
dividend or the making or any distribution to shareholders or the last day on
which the consent or dissent of shareholders may be effectively expressed for
any purpose, as the record date for determining the shareholders having the
right to notice of and to vote at such meeting, and any adjournment thereof, or
the right to receive such dividend or distribution or the right to give such
consent or dissent, and in such case only shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date. The Trustees may, without fixing such
record date, close the transfer books for all or any part of such period for
any of the foregoing purposes.
SECTION 5. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of any shares
of the Trust shall immediately notify the Trust of any loss, destruction or
mutilation of the certificate therefor, and the Trustees may, in their
discretion, cause a new certificate or certificates to be issued to him, in
case of mutilation of the certificate, upon the surrender of the mutilated
certificate, or, in case of loss or destruction of the certificate, upon
satisfactory proof of such loss or destruction and, in any case, if the
Trustees shall so determine, upon the delivery of a bond in such form and in
such sum and with such surety or sureties as the Trustees may direct, to
indemnify the Trust against any claim that may be made against it on account of
the alleged loss or destruction of any such certificate.
SECTION 6. RECORD OWNER OF SHARES. The Trust shall be entitled to treat the
person in whose name any share of the Trust is registered on the books of the
Trust as the owner thereof, and shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person.
ARTICLE VII
Fiscal Year
SECTION 1. FISCAL YEAR. The fiscal year of the Trust shall end on such date as
the Trustees may, from time to time, determine.
ARTICLE VIII
Seal
SECTION 1. SEAL. The Trustees may adopt a seal of the Trust which shall be in
such form and shall have such inscription thereon as the Trustees may from time
to time prescribe.
ARTICLE IX
Inspection of Books
SECTION 1. INSPECTION OF BOOKS. The Trustees shall from time to time determine
whether and to what extent, and at what times and places, and under what
conditions and regulations the accounts and books of the Trust or any of them
shall be open to the inspection of the shareholders; and no shareholder shall
have any right to inspect any account or book or document of the Trust except
as conferred by law or authorized by the Trustees or by resolution of the
shareholders.
ARTICLE X
Principal Custodian and Sub-custodians
SECTION 1. PRINCIPAL CUSTODIAN. The following provisions shall apply to the
employment of the principal Custodian pursuant to the Declaration of Trust:
(A) The Trust may employ the principal Custodian:
(1) To hold securities owned by the Trust and deliver the same upon written
order or oral order, if confirmed in writing, or by such electromechanical or
electronic devices as are agreed to by the Trust and such Custodian;
(2) To receive and receipt for any moneys due to the Trust and deposit the same
in its own banking department or, as the Trustees may direct, in any bank,
trust company or banking institution approved by such Custodian, provided that
all such deposits shall be subject only to the draft or order of such
Custodian; and
(3) To disburse such funds upon orders or vouchers.
(B) The Trust may also employ such Custodian as its agent:
(1) To keep the books and accounts of the Trust and furnish clerical and
accounting services; and
(2) To compute the net asset value per share in the manner approved by the
Trust.
(C) All of the foregoing services shall be performed upon such basis of
compensation as may be agreed upon between the Trust and the principal
Custodian. If so directed by vote of the holders of a majority of the
outstanding shares of Trust, the principal Custodian shall deliver and pay over
all property of the Trust held by it as specified in such vote.
(D) In case of the resignation, removal or inability to serve of any such
Custodian, the Trustees shall promptly appoint another bank or trust company
meeting the requirements of the Declaration of Trust as successor principal
Custodian. The agreement with the principal Custodian shall provide that the
retiring principal Custodian shall, upon receipt of notice of such appointment,
deliver the funds and property of the Trust in its possession to and only to
such successor, and that pending appointment of a successor principal
Custodian, or a vote of the shareholders to function without a principal
Custodian, the principal Custodian shall not deliver funds and property of the
Trust to the Trustees, but may deliver them to a bank or trust company doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus and undivided profits, as shown by its last published report,
of not less than $2,000,000, as the property of
the Trust to be held under terms similar to those on which they were held by
the retiring principal Custodian.
SECTION 2. SUB-CUSTODIAN. The Trust may also authorize the principal Custodian
to employ one or more sub-custodians from time to time to perform such of the
acts and services of the Custodian and upon such terms and conditions as may be
agreed upon between the Custodian and sub-custodian.
SECTION 3. SECURITIES DEPOSITORIES, ETC. Subject to such rules, regulations and
orders as the Commission may adopt, the Trust may authorize or direct the
principal Custodian or any sub-custodian to deposit all or any part of the
securities in or with one or more depositories or clearing agencies or systems
for the central handling of securities or other book-entry systems approved by
the Trust, or in or with such other persons or systems as may be permitted by
the Commission, or otherwise in accordance with the Act, pursuant to which all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust or the
principal Custodian or the sub-custodian. The Trust may also authorize the
deposit in or with one or more eligible foreign custodians (or in or with one
or more foreign depositories, clearing agencies or systems for the central
handling of securities) of all or part of the Trust's foreign assets,
securities, cash and cash equivalents in amounts reasonably necessary to effect
the Trust's foreign investment transactions, in accordance with such rules,
regulations and orders as the Commission may adopt.
ARTICLE XI
Limitation of Liability and Indemnification
SECTION 1. LIMITATION OF LIABILITY. Provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Trust, the Trustees shall not be responsible for or liable
in any event for neglect or wrongdoing of them or any officer, agent, employee
or investment adviser of the Trust, but nothing contained in the Declaration of
Trust or herein shall protect any Trustee against any liability to which he
would otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
SECTION 2. INDEMNIFICATION OF TRUSTEES AND OFFICERS. The Trust shall indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
has been a Trustee, officer, employee or agent of the Trust, or is or has been
serving at the request of the Trust as a Trustee, director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, provided that:
(a) such person acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Trust,
(b) with respect to any criminal action or proceeding, he had no reasonable
cause to believe his conduct was unlawful,
(c) unless ordered by a court, indemnification shall be made only as authorized
in the specific case upon a determination that indemnification of the Trustee,
officer, employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in subparagraphs (a) and (b) above
and (e) below, such determination to be made based upon a review of readily
available facts (as opposed to a full trial-type inquiry) by (i) vote of a
majority of the Disinterested Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in office act on the matter) or
(ii) by independent legal counsel in a written opinion,
(d) in the case of an action or suit by or in the right of the Trust to procure
a judgment in its favor, no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the Trust
unless and only to the extent that the court in which such action or suit is
brought, or a court of equity in the county in which the Trust has its
principal office, shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, he
is fairly and reasonably entitled to indemnify for such expenses which such
court shall deem proper, and
(e) no indemnification or other protection shall be made or given to any
Trustee or officer of the Trust against any liability to the Trust or to its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Expenses (including attorneys' fees) incurred with respect to any claim,
action, suit or proceeding of the character described in the preceding
paragraph shall be paid by the Trust in advance of the final disposition
thereof upon receipt of an undertaking by or on behalf of such person to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Trust as authorized by this Article, provided that either:
(1) such undertaking is secured by a surety bond or some other appropriate
security provided by the recipient, or the Trust shall be insured against
losses arising out of any such advances; or
(2) a majority of the Disinterested Trustees acting on the matter (provided
that a majority of the Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 2, a "Disinterested Trustee" is one who is not (i) an
"Interested Person," as defined in the Act, of the Trust (including anyone who
has been exempted from being an "Interested Person" by any rule, regulation, or
order of the Commission), or (ii) involved in the claim, action, suit or
proceeding.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Trust, or with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 3. INDEMNIFICATION OF SHAREHOLDERS. In case any shareholder or former
shareholder shall be held to be personally liable solely by reason of his being
or having been a shareholder and not because of his acts or omissions or for
some other reason, the shareholder or former shareholder (or his heirs,
executors, administrators or other legal representatives, or in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the Trust estate to be held harmless from and indemnified
against all loss and expense arising from such liability. The Trust shall, upon
request by the shareholder, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. A holder of shares of a series shall be entitled to indemnification
hereunder only out of assets allocated to that series.
ARTICLE XII
Report to Shareholders
SECTION 1. REPORTS TO SHAREHOLDERS. The Trustees shall at least semi-annually
transmit by written, electronic, computerized or other alternative means to the
shareholders a written financial report of the transactions of the Trust
including financial statements which shall at least annually be certified by
independent public accountants.
ARTICLE XIII
Amendments
SECTION 1. AMENDMENTS. These By-Laws may be amended at any meeting of the
Trustees by a vote of a majority of the Trustees then in office; provided,
however, that any provision of Article XI may be amended only by a two-thirds
vote.
Dated: April 4, 2007