AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 2001
SECURITIES ACT REGISTRATION NO. 333-71836
INVESTMENT COMPANY REGISTRATION NO. 811-10543
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
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BLACKROCK CORE BOND TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
100 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(888) 825-2257
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
RALPH L. SCHLOSSTEIN, PRESIDENT
BLACKROCK CORE BOND TRUST
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
MICHAEL K. HOFFMAN, ESQ. LEONARD B. MACKEY, JR. ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CLIFFORD CHANCE ROGERS & WELLS LLP
FOUR TIMES SQUARE 200 PARK AVENUE
NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10166
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED PROPOSED
AMOUNT BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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Common Shares, $.001 par value 4,000,000 shares $15.00 $60,000,000 $15,000(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $15,000 previously paid.
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 THAT THE 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.
[BLACKROCK Logo]
BLACKROCK CORE BOND TRUST
INVESTMENT OBJECTIVE. BlackRock Core Bond Trust (the "Trust") is a newly-organized, diversified, closed-end management investment company. The Trust's investment objective is to provide current income and capital appreciation.
PORTFOLIO CONTENTS. The Trust seeks to achieve its investment objective by
investing primarily in a diversified portfolio of investment grade bonds. The
Trust's fixed income investments will include a broad range of bonds, including
corporate bonds, U.S. government and agency securities and mortgage-related
securities. The Trust will invest in bonds that, in the opinion of the Trust's
investment advisor and sub-advisor, can provide current income and have the
potential for above average total return. Under normal market conditions, the
Trust expects to be fully invested in bonds. The Trust will invest at least 75%
of its total managed assets in bonds that at the time of investment are
investment grade quality. Investment grade quality bonds are bonds rated within
the four highest grades (Baa or BBB or better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poors Ratings Group ("S&P"), Fitch IBCA, Inc. ("Fitch"))
or another nationally recognized rating agency, or bonds that are unrated but
judged to be of comparable quality by the Trust's investment advisor and/or
sub-advisor. The Trust may invest its remaining assets in high yield bonds that
at the time of investment are rated Ba/BB or below by Moody's, S&P or Fitch or
bonds that are unrated but judged to be of comparable quality by the Trust's
investment advisor and sub-advisor. Bonds of below investment grade quality are
regarded as having predominately speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal, and are commonly referred
to as "junk bonds." The Trust may invest up to 10% of its total managed assets
in bonds issued in foreign currencies. The Trust cannot ensure that it will
achieve its investment objective.
NO PRIOR HISTORY. Because the Trust is newly organized, its shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. The Trust's common shares are expected to be listed on the New York Stock Exchange under the symbol "BHK".
BORROWING. The Trust currently anticipates borrowing funds and/or issuing preferred shares in an aggregate amount of approximately 331/3% of its total managed assets to buy additional securities. This practice is known as "leverage." The Trust may borrow from banks or other financial institutions. The Trust may also borrow through reverse repurchase agreements, dollar rolls and through the issuance of preferred shares. The use of preferred shares and other borrowing techniques to leverage the common shares can create risks.
This prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.
INVESTING IN THE COMMON SHARES INVOLVES CERTAIN RISKS. SEE "RISKS" ON PAGE 18 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE SEE PAGE 39 OF THIS PROSPECTUS FOR IMPORTANT PRIVACY POLICY INFORMATION.
PRICE TO SALES PROCEEDS
PUBLIC LOAD TO TRUST
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Per Share $15.000 $0.675 $14.325
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Total $ $ $
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UBS WARBURG
DEUTSCHE BANC ALEX. BROWN PRUDENTIAL SECURITIES
GRUNTAL & CO., L.L.C. J.J.B. HILLIARD, W.L. LYONS, INC.
A PNC COMPANY
WACHOVIA SECURITIES WELLS FARGO VAN KASPER, LLC
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OF SALE IS NOT PERMITTED.
(CONTINUED FROM PREVIOUS PAGE)
The underwriters named in this prospectus may purchase up to additional common shares at the public offering price within 45 days from the date of this prospectus to cover over-allotments.
The underwriters expect to deliver the common shares to purchasers on or about , 2001.
You should read the prospectus, which contains important information about the Trust, before deciding whether to invest in the common shares and retain it for future reference. A Statement of Additional Information, dated , 2001, containing additional information about the Trust, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this prospectus. You may request a free copy of the Statement of Additional Information, the table of contents of which is on page 39 of this prospectus, by calling (888) 825-2257 or by writing to the Trust, or obtain a copy (and other information regarding the Trust) from the Securities and Exchange Commission's web site (http://www.sec.gov).
The Trust's common 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.
You should rely only on the information contained or incorporated by reference in this prospectus. We have 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. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, and prospects may have changed since that date.
Until , 2001 (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 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 ........................................................ 1 Summary of Trust expenses ................................................. 7 The Trust ................................................................. 8 Use of proceeds ........................................................... 8 The Trust's investments ................................................... 8 Borrowings and preferred shares ........................................... 15 Risks ..................................................................... 18 How the Trust manages risk ................................................ 22 Management of the Trust ................................................... 23 Net asset value ........................................................... 27 Distributions ............................................................. 27 Dividend reinvestment plan ................................................ 28 Description of shares ..................................................... 29 Certain provisions in the Agreement and Declaration of Trust ................................................... 32 Closed-end trust structure ................................................ 33 Repurchase of shares ...................................................... 34 Tax matters ............................................................... 34 Underwriting .............................................................. 37 Custodian and transfer agent .............................................. 38 Legal opinions ............................................................ 38 |
Table of contents for the Statement of
Additional Information ................................................. 39
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON SHARES. YOU SHOULD REVIEW THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
THE TRUST
BlackRock Core Bond Trust is a newly organized, diversified, closed-end management investment company. Throughout the prospectus, we refer to BlackRock Core Bond Trust simply as the "Trust" or as "we," "us" or "our." See "The Trust."
THE OFFERING
The Trust is offering _____ common shares of beneficial interest at $15.00 per share through a group of underwriters (the "Underwriters") led by UBS Warburg LLC. The common shares of beneficial interest are called "common shares" in the rest of this prospectus. You must purchase at least 100 common shares ($1,500) in order to participate in this offering. The Trust has given the Underwriters an option to purchase up to ______ additional common shares to cover orders in excess ______ of common shares. BlackRock Advisors, Inc. has agreed to pay organizational expenses and offering costs (other than sales load) that exceed $0.03 per share. See "Underwriting."
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide current income and capital appreciation. No assurance can be given that the Trust will achieve its investment objective.
INVESTMENT POLICIES
The Trust seeks to achieve its investment objective by investing primarily in a diversified portfolio of investment grade bonds. The Trust's fixed income investments will include a broad range of bonds, including corporate bonds, U.S. government and agency securities and mortgage-related securities. The Trust will invest primarily in bonds that, in the opinion of BlackRock Advisors, Inc. ("BlackRock Advisors" or the "Advisor") and BlackRock Financial Management, Inc. ("BlackRock Financial Management" or the "Sub-Advisor") may provide current income and have the potential for above-average total return. Under normal market conditions, the Trust expects to be fully invested in bonds. The Trust will invest at least 75% of its total managed assets in bonds that at the time of investment are investment grade quality. Investment grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's, S&P, Fitch or another nationally recognized rating agency) or bonds that are unrated but judged to be of comparable quality by the Advisor and the Sub-Advisor. The Trust may invest up to 25% of its total managed assets in bonds that at the time of investment are rated Ba/BB or below by Moody's, S&P, Fitch or another nationally recognized rating agency or bonds that are unrated but judged to be of comparable quality by the Advisor and the Sub-Advisor. Bonds of below investment grade quality are regarded as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and are commonly referred to as "junk bonds." The Trust may invest up to 10% of its total managed assets in bonds issued in foreign currencies. See "The Trust's investments."
BORROWINGS AND PREFERRED SHARES
The Trust currently anticipates borrowing funds and/or issuing preferred shares in an aggregate amount of up to 331/3% of its total managed assets to buy additional securities. This practice is known as
"leverage." The Trust may borrow from banks and other financial institutions. The Trust may also borrow additional funds through reverse repurchase agreements and dollar rolls and through the issuance of preferred shares of beneficial interest ("Preferred Shares"). The Trust is authorized to incur leverage up to 38% of its total managed assets. Leverage involves greater risks. The Trust's leveraging strategy may not be successful. See "Risks--Leverage Risk."
The money the Trust obtains through leverage is expected to be invested in intermediate and long-term bonds that will generally pay fixed rates of interest over the life of the bonds.
Money borrowed for investment purposes generally will pay interest or dividends based on shorter-term interest rates. If the rate of return, after the payment of applicable expenses of the Trust, on the intermediate and long-term bonds purchased by the Trust is greater than the interest or dividends paid by the Trust on borrowed money, the Trust will generate more income from such investments than it will need to pay interest or dividends on the borrowed money. If so, the excess income may be used to pay higher dividends to holders of common shares. However, the Trust cannot assure you that the use of leverage will result in a higher yield on the common shares. When leverage is employed, the net asset value and market price of the common shares and the yield to holders of common shares will be more volatile. See "Borrowings and preferred shares" and "Description of shares--Preferred Shares."
INVESTMENT ADVISOR
BlackRock Advisors will be the Trust's investment advisor and BlackRock Advisors' affiliate, BlackRock Financial Management, as sub-advisor, will provide certain day-to-day investment management services to the Trust. BlackRock Advisors and BlackRock Financial Management both are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest publicly traded investment management firms in the United States with $225 billion of assets under management as of September 30, 2001. BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300 institutions and 200,000 individuals worldwide, including nine of the 10 largest companies in the U.S. as determined by FORTUNE MAGAZINE, through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, including the company's flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset management firm according to PENSIONS & INVESTMENTS, May 14, 2001. Throughout the prospectus, we sometimes refer to BlackRock Advisors and BlackRock Financial Management collectively as "BlackRock." BlackRock Advisors will receive an annual fee, payable monthly, in a maximum amount equal to 0.55% of the average weekly value of the Trust's managed assets. "Managed assets" means the total assets of the Trust (including any assets attributable to leverage) minus the sum of accrued liabilities (other than debt representing financial leverage). The liquidation preference of any Preferred Shares issued by the Trust is not a liability. UBS Warburg LLC has been retained by the Advisor to act as the shareholder servicing agent. See "Management of the Trust."
INVESTMENT PHILOSOPHY
BlackRock applies the same controlled-duration, active relative value sector rotation style to the management of all its fixed income mandates. BlackRock has in-depth expertise in all sectors of the fixed income market. BlackRock specializes in managing fixed income portfolios against both published and customized benchmarks and has been doing this since the inception of its fixed income products in 1988.
BlackRock's style is designed with the objective of generating excess returns with lower risk than its benchmarks and competitors. The use of advanced analytics provides real-time analysis of a vast array of risk measures designed to measure the potential impact of various sector and security strategies on total return. As a result, consistent value is added and performance volatility is controlled.
BlackRock's disciplined investment process seeks to add value through: (i)
controlling portfolio duration within a narrow band relative to a benchmark
index, (ii) relative value sector/sub-sector rotation and security selection,
(iii) rigorous quantitative analysis of the valuation of each security and of
the portfolio as a whole, (iv) intense credit analysis and review, and (v) the
judgment of experienced portfolio managers.
The technology that enables BlackRock to implement its investment strategies is constantly improving. BlackRock's commitment to maintaining its state-of-the-art analytics in the most cost efficient way is manifest in (i) the development of proprietary tools, (ii) the purchase of tools such as RiskMetrics(TM), and (iii) the integration of all of these tools into a unique portfolio level risk management system. By continually updating analytics and systems, BlackRock is able to better quantify and evaluate the risk of each investment decision.
BlackRock's approach to credit risk incorporates a combination of sector-based, top-down macro-analysis of industry sectors to determine relative weightings with a name-specific (issuer-specific), bottom-up detailed credit analysis of issuers and structures. The sector-based approach focuses on rotating into sectors that are undervalued and exiting sectors when fundamentals or technicals become unattractive. The name-specific approach focuses on identifying special opportunities where the market undervalues a credit, and devoting concentrated resources to research the credit and monitor the position. BlackRock's analytical process focuses on anticipating change in credit trends before market recognition. Credit research is a critical, independent element of BlackRock's process.
DISTRIBUTIONS
The Trust intends to distribute monthly all or a portion of its net investment income to holders of common shares. We expect to declare the initial monthly dividend on the Trust's common shares within approximately 45 days after completion of this offering and to pay that initial monthly dividend approximately 60 to 90 days after completion of this offering. Unless an election is made to receive dividends in cash, shareholders will automatically have all dividends and distributions reinvested in common shares through the Trust's Dividend Reinvestment Plan. See "Dividend reinvestment plan."
The Trust will distribute to holders of its common shares monthly dividends of all or a portion of its net income after the payment of interest and dividends in connection with leverage. If the Trust realizes a long-term capital gain, it will be required to allocate such gain between the common shares and any Preferred Shares issued by the Trust in proportion to the total dividends paid to each class for the year in which the income is realized. See "Distributions" and "Borrowings and preferred shares."
LISTING
The common shares are expected to be listed on the New York Stock Exchange, subject to notice of issuance, under the trading or "ticker" symbol "BHK". See "Description of shares--Common Shares."
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company will serve as the Trust's Custodian and EquiServe Trust Company, N.A. will serve as the Trust's Transfer Agent. See "Custodian and transfer agent."
MARKET PRICE OF SHARES
Common shares of closed-end investment companies frequently trade at prices lower than their net asset value. Common shares of closed-end investment companies like the Trust that invest predominately in investment grade bonds have during some periods traded at prices higher than their net asset value and during other periods traded at prices lower than their net asset value. The Trust cannot assure you that its common shares will trade at a price higher than or equal to net asset value. The Trust's net asset value
will be reduced immediately following this offering by the sales load and the amount of the organization and offering expenses paid by the Trust. See "Use of proceeds." In addition to net asset value, the market price of the Trust's common shares may be affected by such factors as the Trust's use of leverage, dividend stability, portfolio credit quality, liquidity, market supply and demand and the Trust's dividend level, which is, in turn, affected by expenses and call protection for portfolio securities. See "Borrowings and preferred shares," "Risks," "Description of shares" and the section of the Statement of Additional Information with the heading "Repurchase of Common Shares." The common shares are designed primarily for long-term investors and you should not purchase common shares of the Trust if you intend to sell them shortly after purchase.
SPECIAL RISK CONSIDERATIONS
NO OPERATING HISTORY
The Trust is a newly organized closed-end management investment company with no operating history.
MARKET DISCOUNT RISK
Shares of closed-end management investment companies frequently trade at a discount from their net asset value.
INTEREST RATE RISK
Generally, when market interest rates fall, debt security prices rise, and vice versa. Interest rate risk is the risk that the bonds in the Trust's portfolio will decline in value because of increases in market interest rates. The prices of longer-term bonds fluctuate more than prices of shorter-term bonds as interest rates change. Because the Trust will invest primarily in intermediate-term and intermediate and long-term bonds, net asset value and market price per share of the common shares will fluctuate more in response to changes in market interest rates than if the Trust invested primarily in shorter-term bonds. The Trust's use of leverage, as described below, will tend to increase common share interest rate risk.
CREDIT RISK
Credit risk is the risk that one or more bonds in the Trust's portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the bond experiences a decline in its financial status. Under normal market conditions, the Trust will invest at least 75% of its total managed assets in bonds rated Baa/BBB or higher at the time of the investment. The Trust may invest up to 25% (measured at the time of investment) of its total managed assets in bonds that are rated Ba/BB or below or that are unrated but judged to be of comparable quality by BlackRock.
Lower grade bonds are commonly referred to as "junk bonds." The value of lower grade bonds is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. Issuers of high-yield bonds are not perceived to be as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments. These issuers are generally more vulnerable to financial setbacks and recession than more creditworthy issuers which may impair their ability to make interest and principal payments. Lower grade bonds tend to be less liquid than investment grade bonds. Investments in lower grade bonds will expose the Trust to greater risks than if the Trust owned only higher grade securities. Some of the additional risks you should consider in relation to lower grade securities are market risk and interest rate risk.
LEVERAGE RISK
The use of leverage through reverse repurchase agreements, dollar roll transactions, borrowing of money and the issuance of Preferred Shares to purchase additional securities creates an opportunity for increased common share net investment income dividends, but also creates risks for the holders of common shares.
Leverage is a speculative technique that may expose the Trust to greater risk and increased costs. Increases and decreases in the value of the Trust's portfolio will be magnified when the Trust uses leverage. As a result, leverage may cause greater changes in the Trust's net asset value. The Trust will also have to pay interest and dividends on its borrowings, which may reduce the Trust's return. This interest expense may be greater than the Trust's return on the underlying investment. The Trust's leveraging strategy may not be successful.
Reverse repurchase agreements involve the risks that the interest income earned on the investment of the proceeds will be less than the interest expense and fund expenses, that the market value of the securities sold by the Trust may decline below the price of the securities the Trust is obligated to repurchase, and that the securities may not be returned to the Trust. There is no assurance that reverse repurchase agreements can be successfully employed.
Dollar roll transactions involve the risk that the market value of the securities the Trust is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Trust sells securities becomes insolvent, the Trust's right to purchase or repurchase securities may be restricted. Successful use of dollar rolls may depend upon BlackRock's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
We anticipate that the money borrowed for investment purposes will pay interest or dividends based on shorter-term interest rates that would be periodically reset. The Trust intends to invest the proceeds of the money borrowed for investment purposes in intermediate and long-term, typically fixed rate, bonds. So long as the Trust's bond portfolio provides a higher rate of return, net of Trust expenses, than interest and dividend rates on borrowed money, as reset periodically, the leverage may cause the holders of common shares to receive a higher current rate of return than if the Trust were not leveraged. If, however, long- and/or short-term rates rise, the interest and dividend rates on borrowed money could exceed the rate of return on intermediate and long-term bonds held by the Trust that were acquired during periods of generally lower interest rates, reducing return to the holders of common shares. Leverage creates two major types of risks for the holders of common shares:
o the likelihood of greater volatility of net asset value and market price of the common shares because changes in the value of the Trust's bond portfolio, including bonds bought with the proceeds from leverage are borne entirely by the holders of common shares; and
o the possibility either that common share net investment income will fall if the interest and dividend rates on leverage rises or that common share net investment income will fluctuate because the interest and dividend rates on leverage varies.
PREPAYMENT RISK
If interest rates fall, the principal on debt securities held by the Trust may be paid earlier than expected. If this happens, the proceeds from a prepaid security would likely be reinvested by the Trust in securities bearing lower interest rates, resulting in a possible decline in the Trust's income and distributions to shareholders. The Trust may invest in pools of mortgages issued or guaranteed by private issuers or U.S. government agencies. These mortgage-related securities are especially sensitive to prepayment risk because borrowers often refinance their mortgages when interest rates drop.
MORTGAGE-RELATED SECURITIES RISK
The yield and maturity characteristics of mortgage-related and other asset-backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of the Trust, the maturity of mortgage-related and
other asset-backed securities held by the Trust will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. Like other fixed-income securities, when interest rates rise the value of an asset-backed security generally will decline; however, when interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities.
The relationship between prepayments and interest rates may give some high-yielding mortgage-related and asset-backed securities less potential for growth in value than conventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Trust will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, mortgage-related and asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that the Trust purchases mortgage related and asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Trust's principal investment to the extent of premium paid.
The Trust may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. ("PNC Mortgage") or Midland Loan Services, Inc. ("Midland") (or Sears Mortgage if PNC Mortgage succeeded to rights and duties of Sears Mortgage) or mortgage-related securities containing loans or mortgages originated by PNC Bank or its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or their affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates.
FOREIGN RISKS
Because the Trust may own securities of foreign issuers, it may be subject to risks not usually associated with owning securities of U.S. issuers. These risks can include fluctuations in foreign currencies, foreign currency exchange controls, political and economic instability, differences in financial reporting, differences in securities regulation and trading, and foreign taxation issues. Investing in securities of issuers based in emerging markets entails all of the risks of investing in securities of foreign issuers to a heightened degree.
ANTI-TAKEOVER PROVISIONS
The Trust's Agreement and Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Trust or convert the Trust to open-end status. These provisions could deprive the holders of common shares of opportunities to sell their common shares at a premium over the then current market price of the common shares or at net asset value.
SUMMARY OF TRUST EXPENSES
The following tables show Trust expenses as a percentage of net assets attributable to common shares.
Shareholder Transaction Expenses
------ Sales Load Paid by You (as a percentage of offering price).... 4.50%
------ Dividend Reinvestment Plan Fees............................... None*
PERCENTAGE OF NET
ASSETS ATTRIBUTABLE
TO COMMON SHARES**
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Annual Expenses
Management Fees .......................................... 0.83%
Interest Expense ......................................... 1.50%
Other Expenses ........................................... 0.18%
-----
Total Net Annual Expenses ................................ 2.51%***
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* You will be charged a $2.50 service charge and pay brokerage charges if you direct the Plan Agent (as defined below) to sell your common shares held in a dividend reinvestment account.
** Stated as a percentage of the Trust's total managed assets assuming the leverage in an amount equal to 331U3% of the Trust's total managed assets (after incurring leverage), the Trust's expenses would be estimated as set out in the table below. OManaged AssetsO means the total assets of the Trust (including any assets attributable to any leverage that may be outstanding) minus the sum of accrued liabilities (other than debt representing financial leverage). The liquidation preference of the Preferred Shares is not a liability.
Annual Expenses
Management Fees .......................................... 0.55%
Interest Expense ......................................... 1.00%
Other Expenses ........................................... 0.12%
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Total Net Annual Expenses ................................ 1.67%***
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*** Total annual expenses (before interest payments on borrowings) are estimated to be 1.01% as a percentage of net assets attributable to common shares and 0.67% as a percentage of total managed assets.
The purpose of the table above and the example below is to help you understand all fees and expenses that you, as a holder of common shares, would bear directly or indirectly. The expenses shown in the table under "Other Expenses" and "Total Net Annual Expenses" are based on estimated amounts for the Trust's first year of operations and assume that the Trust issues 13,333,333 common shares. If the Trust issues fewer common shares, all other things being equal, these expenses would increase. See "Management of the Trust" and "Dividend reinvestment plan."
The following example illustrates the expenses (including the sales load of $45) that you would pay on a $1,000 investment in common shares, assuming (1) total net annual expenses of 2.51% of net assets attributable to common shares and (2) a 5% annual return:(1)
(1) The example should not be considered a representation of future expenses. The example assumes that the estimated OOther ExpensesO 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 Trust's actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
THE TRUST
The Trust is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Trust was organized as a Delaware business trust on October 12, 2001, pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware. As a newly organized entity, the Trust has no operating history. The Trust's principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (888) 825-2257.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be approximately $ ($ if the Underwriters exercise the over-allotment option in full) after payment of the estimated organization and offering costs. The Trust will invest the net proceeds of the offering in accordance with the Trust's investment objective and policies as stated below. We currently anticipate that the Trust will be able to invest substantially all of the net proceeds in bonds that meet the Trust's investment objective and policies within approximately three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities.
THE TRUST'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide current income and capital appreciation. No assurance can be given that the Trust will achieve its investment objective.
The Trust will invest primarily in investment grade bonds. Bonds held by the Trust may take the form of bonds, notes, bills, debentures, convertible securities, warrants attached to debt securities, bank debt obligations, loan participations and assignments, trust preferred securities and securities issued by entities organized and operated for the purpose of restructuring the investment characteristics of securities. Under current market conditions, the Trust intends to invest primarily in corporate bonds, mortgage-related securities and U.S. government and agency debt securities.
Under normal market conditions, the Trust will invest at least 75% of its total managed assets in investment grade quality bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moody's, S&P, Fitch or another nationally recognized rating agency) by one nationally recognized rating agency or are unrated but judged to be of comparable quality by BlackRock. Bonds that are rated by two or more nationally recognized rating agencies will be considered to have the higher credit rating. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for higher rated
bonds. The Trust may invest up to 25% of its total managed assets in bonds that are rated, at the time of investment, Ba/BB or below by Moody's, S&P, Fitch or another nationally recognized rating agency or that are unrated but judged to be of comparable quality by BlackRock. Bonds of below investment grade quality are commonly referred to as "junk bonds." Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. The lowest rated bonds in which the Trust may invest are securities rated in the category "C" or determined by BlackRock to be of comparable quality. Securities rated "C" are considered highly speculative and may be used to cover a situation where the issuer has filed a bankruptcy petition but debt service payments are continued. While such debt will likely have some quality and protective characteristics, those are outweighed by large uncertainties or major risk exposure to adverse conditions. These credit quality policies apply only at the time a security is purchased, and the Trust is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, BlackRock may consider such factors as BlackRock's assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix A to the Statement of Additional Information contains a general description of Moody's, S&P's and Fitch's ratings of debt securities.
The Trust may invest up to 10% of its total managed assets in bonds denominated in currencies other than the U.S. dollar. The Trust may also invest in securities of other open- or closed-end investment companies that invest |
primarily in bonds of the types in which the Trust may invest directly.
The Trust will also invest in bonds that, in BlackRock's opinion, are underrated or undervalued or have the potential for above-average current income and capital appreciation. Underrated bonds are those whose ratings do not, in BlackRock's opinion, reflect their true creditworthiness. Undervalued bonds are bonds that, in the opinion of BlackRock, are worth more than the value assigned to them in the marketplace. BlackRock may at times believe that bonds associated with a particular market sector (for example, mortgage-related securities), or issued by a particular issuer, are undervalued. BlackRock may purchase those bonds for the Trust's portfolio because they represent a market sector or issuer that BlackRock considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Bonds of particular issuers (for example, the Federal Home Loan Mortgage Association) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of bonds of the market sector for reasons that do not apply to the particular bonds that are considered undervalued. The Trust's investment in underrated or undervalued bonds will be based on BlackRock's belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Initially, the Trust expects its portfolio to have an average credit quality of "A". The Trust may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies.
As part of the management of the Trust, BlackRock manages the effective duration of the Trust's portfolio. Under current market conditions, the duration of the portfolio is expected to be within +/- 20% of the duration of the ten year Treasury note. Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities. Each year of duration represents an expected 1% change in the price of a bond for every 1% change in interest rates. For example, if a bond has an average duration of four years, its price will fall about 4% when interest rates rise by 1%. Conversely, the bond's price will rise about 4% when interest rates fall by 1%. The target duration of the Trust's portfolio may change from time to time. For further information on duration, See "Duration Management and Other Management Techniques" in the Statement of Additional Information.
The Trust can borrow money to buy additional securities. This practice is known as "leverage." The Trust may borrow from banks or other financial institutions or through reverse repurchase agreements, dollar rolls and other investment techniques. The Trust currently anticipates borrowing funds and/or issuing preferred shares in an aggregate amount of approximately 331/3% of its total managed assets.
The Trust may lend some of its securities in order to earn income. The Trust will receive collateral in cash or high quality securities equal to the current value of the loaned securities. The Trust earns interest on the securities it lends and income when it invests the collateral for the loaned securities. These loans will be limited to 331/3% of the value of the Trust's total managed assets.
BlackRock may, but is not required to, when consistent with the Trust's investment objective, use various strategic investment transactions described below to earn income, facilitate portfolio management and mitigate risks, including currency risk. See "--Strategic Transactions."
During temporary defensive periods, including the period during which the net proceeds of this offering are being invested, and in order to keep the Trust fully invested, the Trust may invest up to 100% of its total managed assets in short-term investments. The Trust may not achieve its investment objective under these circumstances.
The Trust cannot change its investment objective without the approval of the holders of a majority of the outstanding common shares and, if any Preferred Shares are issued, the Preferred Shares voting together as a single class, and of the holders of a majority of the outstanding Preferred Shares voting as a separate class. Under the Investment Company Act, a "majority of the outstanding" means (1) 67% or more of the outstanding shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See "Description of shares--Preferred Shares--Voting Rights" and the Statement of Additional Information under "Description of Shares--Preferred Shares" for additional information with respect to the voting rights of holders of Preferred Shares.
CORPORATE BONDS
The Trust will invest in corporate bonds. The investment return of corporate bonds reflects interest on the security and changes in the market value of the security. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of a corporate bond also may be affected by the credit rating of the corporation, the corporation's performance and perceptions of the corporation in the market place. There is a risk that the issuers of the securities may not be able to meet their obligations on interest or principal payments at the time called for by an instrument.
U.S. GOVERNMENT SECURITIES
The Trust may invest in debt securities issued or guaranteed by the U.S. government, its agencies or instrumentalities including: (1) U.S. Treasury obligations, which differ in their interest rates, maturities and times of issuance, such as U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years), and U.S. Treasury bonds (generally maturities of greater than ten years), including the principal components or the interest components issued by the U.S. government under the Separate Trading of Registered Interest and Principal Securities program (i.e., "STRIPS"), all of which are backed by the full faith and credit of the United States; and (2) obligations issued or guaranteed by U.S. government agencies or instrumentalities, including government guaranteed mortgage-related securities, some of which are backed by the full faith and credit of the U.S. Treasury, some of which are supported by the right of the issuer to borrow from the U.S. government and some of which are backed only by the credit of the issuer itself.
MORTGAGE-RELATED SECURITIES
The Trust will invest in mortgage-related securities. Mortgage-related securities are a form of security collateralized by pools of commercial or residential mortgages. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private issuers. These securities may include complex instruments such as collateralized mortgage obligations, stripped mortgage-backed securities, mortgage pass-through securities, interests in real estate mortgage investment conduits, adjustable rate mortgages, real estate investment trusts ("REITs"), including debt and preferred stock issued by REITs, as well as other real estate-related securities. The mortgage-related securities in which the Trust may invest include those with fixed interest rates, those with interest rates that change based on multiples of changes in a specified index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest.
Interests in pools of mortgage-related securities differ from other forms of bonds, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the "Government National Mortgage Association," or "GNMA") are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. To the extent that unanticipated rates of prepayment on underlying mortgages increase in the effective maturity of a mortgage-related security, the volatility of such security can be expected to increase.
The yield and maturity characteristics of mortgage-related securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. The relationship between prepayments and interest rates may give some mortgage-related securities less potential for growth in value than conventional fixed-income securities with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Trust will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, a mortgage-related security's total return and maturity may be difficult to predict precisely. To the extent that the Trust purchases mortgage-related securities at a premium, prepayments (which may be made without penalty) may result in loss of the Trust's principal investment to the extent of premium paid.
Mortgage-related securities come in different classes that have different risks. The Trust may invest in lower, or junior, classes of mortgage-related securities which may have a rating below investment grade and therefore are riskier investments than higher rated securities. Junior classes of mortgage-related securities protect the senior class investors against losses on the underlying mortgage loans by taking the first loss if there are liquidations among the underlying loans. Junior classes generally receive principal and interest payments only after all required payments have been made to more senior classes. Because the Trust may invest in junior classes of mortgage-related securities, it may not be able to recover all of
its investment in the securities it purchases. In addition, if the underlying mortgage portfolio has been overvalued, or if mortgage values subsequently decline, the Trust may suffer significant losses.
Investments in mortgage-related securities, especially lower rated securities, involve the risks of interruptions in the payment of interest and principal (delinquency) and the potential for loss of principal if the property underlying the security is sold as a result of foreclosure on the mortgage (default). These risks include the risks associated with direct ownership of real estate, such as the effects of general and local economic conditions on real estate values, the conditions of specific industry segments, the ability of tenants to make lease payments and the ability of a property to attract and retain tenants, which in turn may be affected by local market conditions such as oversupply of space or a reduction of available space, the ability of the owner to provide adequate maintenance and insurance, energy costs, government regulations with respect to environmental, zoning, rent control and other matters, and real estate and other taxes. The risks associated with the real estate industry will be more significant for the Trust to the extent that it invests in mortgage-related securities. These risks are heightened in the case of mortgage-related securities related to a relatively small pool of mortgage loans. If the underlying borrowers cannot pay their mortgage loans, they may default and the lenders may foreclose on the property. Finally, the ability of borrowers to repay mortgage loans underlying mortgage-related securities will typically depend upon the future availability of financing and the stability of real estate values.
For mortgage loans not guaranteed by a government agency or other party, the only remedy of the lender in the event of a default is to foreclose upon the property. If borrowers are not able or willing to pay the principal balance on the loans, there is a good chance that payments on the related mortgage-related securities will not be made. Certain borrowers on underlying mortgages may become subject to bankruptcy proceedings, in which case the value of the mortgage-related securities may be hurt.
LOWER GRADE SECURITIES
The Trust may invest up to 25% of its total managed assets in bonds rated below investment grade such as those rated Ba or lower by Moody's and BB or lower by S&P or securities comparably rated by other rating agencies or in unrated securities determined by BlackRock to be of comparable quality. These lower grade securities are commonly known as "junk bonds." Securities rated below investment grade are judged to have speculative characteristics with respect to the interest and principal payments.
The values of lower grade securities often reflect individual corporate developments and have a high sensitivity to economic changes to a greater extent than do higher rated securities. Issuers of lower grade securities are often in the growth stage of their development and/or involved in a reorganization or takeover. The companies are often highly leveraged (have a significant amount of debt relative to shareholders' equity) and may not have available to them more traditional financing methods, thereby increasing the risk associated with acquiring these types of securities. In some cases, obligations with respect to lower grade securities are subordinated to the prior repayment of senior indebtedness, which will potentially limit the Trust's ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in lower grade securities have a lower degree of protection with respect to principal and interest payments than do investors in higher rated securities.
During an economic downturn, a substantial period of rising interest rates or a recession, issuers of lower grade securities may experience financial distress possibly resulting in insufficient revenues to meet their principal and interest payment obligations, to meet projected business goals and to obtain additional financing. An economic downturn could also disrupt the market for lower-rated securities and adversely affect the ability of the issuers to repay principal and interest. If the issuer of a security held generally by the Trust defaults, the Trust may not receive full interest and principal payments due to it and could incur additional expenses if it chose to seek recovery of its investment.
The secondary markets for lower grade securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for lower grade securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for lower grade securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse change in the condition of a particular issuer. Under certain economic and/or market conditions, the Trust may have difficulty disposing of certain lower grade securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely affect the market price of the lower grade securities, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing the Trust's assets. Market quotations on lower grade securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale.
The high yield markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for lower grade securities may be affected by legislative and regulatory developments. These developments could adversely affect the Trust's net asset value and investment practices, the secondary market for lower grade securities, the financial condition of issuers of these securities and the value and liquidity of outstanding lower grade securities, especially in a thinly traded market. For example, federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in lower grade securities and limiting the deductibility of interest by certain corporate issuers of lower grade securities adversely affected the lower grade securities market in the past.
When the secondary market for lower grade securities becomes more illiquid, or in the absence of readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value the Trust's securities, and judgment plays a more important role in determining such valuations. Increased illiquidity in the junk bond market, in combination with the relative youth and growth of the market for such securities, also may affect the ability of the Trust to dispose of such securities at a desirable price. Additionally, if the secondary markets for lower grade securities contract due to adverse economic conditions or for other reasons, certain of the Trust's liquid securities may become illiquid and the proportion of the Trust's assets invested in illiquid securities may significantly increase.
FOREIGN SECURITIES
The Trust may invest up to 10% of its total managed assets in bonds issued in foreign currencies. Although the Trust intends to invest primarily in securities of governments or established companies based in developed countries, the value of the Trust's investments may be adversely affected by changes in political or social conditions, diplomatic relations, confiscatory taxation, expropriation, nationalization, limitation on the removal of funds or assets, or imposition of (or change in) exchange control or tax regulations in those foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of Trust securities and could favorably or unfavorably affect the Trust's operations. Furthermore, the economies of individual foreign nations may differ from the U.S. economy, whether favorably or unfavorably, in areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. It may also be more difficult to obtain and enforce a judgment against a foreign issuer. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. Any foreign investments made by the Trust must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, and the Trust may hold various foreign currencies from time to time, the value of the net assets of the Trust as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally, the Trust's currency exchange transactions will be conducted on a spot (i.e., cash) basis at the spot rate prevailing in the currency exchange market. The cost of the Trust's currency exchange transactions will generally be the difference between the bid and offer spot rate of the currency being purchased or sold. In order to protect against uncertainty in the level of future foreign currency exchange, the Trust is authorized to enter into certain foreign currency exchange transactions.
The Trust may also invest in issuers located in emerging market countries. Investment in securities of issuers based in underdeveloped emerging markets entails all of the risks of investing in securities of foreign issuers outlined in the above section to a heightened degree. In addition to brokerage commissions, custodial services and other costs relating to investment in emerging markets are generally more expensive than in the United States. Such markets have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The inability of the Trust to make intended securities purchases due to settlement problems could cause the Trust to miss attractive investment opportunities. An inability to dispose of a security due to settlement problems could result in losses to the Trust due to subsequent declines in the value of the security.
STRATEGIC TRANSACTIONS
The Trust may, but is not required to, use various strategic transactions described below to earn income, facilitate portfolio management and mitigate risks. Such strategic transactions are generally accepted under modern portfolio management and are regularly used by many mutual funds and other institutional investors. Although BlackRock seeks to use the practices to further the Trust's investment objective, no assurance can be given that these practices will achieve this result.
The Trust may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on securities, financial futures, equity, fixed-income and interest rate indices, and other financial instruments, purchase and sell financial futures contracts and options thereon, enter into various interest rate transactions such as swaps, caps, floors or collars and enter into various currency transactions such as currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures or credit transactions and credit default swaps. The Trust also may purchase derivative instruments that combine features of these instruments. Collectively, all of the above are referred to as "Strategic Transactions." The Trust generally seeks to use Strategic Transactions as a portfolio management or hedging technique to seek to protect against possible adverse changes in the market value of securities held in or to be purchased for the Trust's portfolio, protect the value of the Trust's portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate exposure of the Trust, protect against changes in currency exchange rates, manage the effective maturity or duration of the Trust's portfolio, or establish positions in the derivatives markets as a temporary substitute for purchasing or selling particular securities. The Trust may use Strategic Transactions to enhance potential gain, although no more than 5% of the Trust's total managed assets will be committed to variation margin for Strategic Transactions for non-hedging purposes.
Strategic Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction or illiquidity of the derivative instruments. Furthermore, the ability to successfully use Strategic Transactions depends on BlackRock's ability to predict pertinent market movements, which cannot be assured. Thus, the use of Strategic Transactions may result in losses greater than if they had not been used, may require the Trust to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Trust can realize on an investment, or may cause
the Trust to hold a security that it might otherwise sell. The use of currency transactions can result in the Trust incurring losses as a result of the imposition of exchange controls, suspension of settlements or the inability of the Trust to deliver or receive a specified currency. Additionally, amounts paid by the Trust as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Trust for investment purposes.
A more complete discussion of Strategic Transactions and their risks is contained in the Trust's Statement of Additional Information.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Trust may buy and sell bonds on a when-issued basis and may purchase or sell bonds on a "forward commitment" basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, because bonds are subject to market fluctuations, the value of the bonds at the time of delivery may be less or more than cost. Cash and liquid securities, having a market value at all times at least equal to the amount of the commitment, will be segregated by the Trust's custodian.
OTHER INVESTMENT COMPANIES
The Trust may invest up to 10% of its total managed assets in securities of other open- or closed-end investment companies that invest primarily in bonds of the types in which the Trust may invest directly. The Trust generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Trust receives the proceeds of the offering of its common shares, or during periods when there is a shortage of attractive opportunities in the fixed-income market. As a shareholder in an investment company, the Trust would bear its ratable share of that investment company's expenses, and would remain subject to payment of the Trust's advisory and other fees and expenses with respect to assets so invested. Holders of common shares would therefore be subject to duplicative expenses to the extent the Trust invests in other investment companies. BlackRock will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available bond investments. The securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks to which the Trust is subject. As described in this prospectus in the sections entitled "Risks" and "Borrowings and preferred shares," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of the Trust. In addition, to the extent the Trust invests in other investment companies, the Trust will be dependent upon the investment and research abilities of persons other than BlackRock. The Trust treats its investments in such open- or closed-end investment companies as investments in bonds.
BORROWINGS AND PREFERRED SHARES
The Trust currently anticipates borrowing funds and/or issuing Preferred Shares in an aggregate amount of approximately 331/3% of its total managed assets to purchase additional securities. This practice is known as "leverage." The Trust may borrow from banks and other financial institutions and may also borrow additional funds using such investment techniques and in such amounts as BlackRock may from time to time determine. Of these investment techniques, the Trust expects primarily to use reverse repurchase agreements and dollar roll transactions. Changes in the value of the Trust's bond portfolio, including bonds bought with the proceeds of the leverage, will be borne entirely by the holders of common shares. If there is a net decrease, or increase, in the value of the Trust's investment portfolio, the leverage
will decrease, or increase (as the case may be), the net asset value per common share to a greater extent than if the Trust were not leveraged. During periods in which the Trust is using leverage, the fees paid to BlackRock for advisory and sub-advisory services will be higher than if the Trust did not use leverage because the fees paid will be calculated on the basis of the Trust's total managed assets, including the proceeds from the issuance of Preferred Shares and other leverage. The Trust is authorized to incur leverage up to 38% of its total managed assets. Leverage involves greater risks. The Trust's leveraging strategy may not be successful.
REVERSE REPURCHASE AGREEMENTS
Borrowings may be made by the Trust through reverse repurchase agreements under which the Trust sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. Such agreements are considered to be borrowings under the Investment Company Act. The Trust may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
DOLLAR ROLL TRANSACTIONS
Borrowings may be made by the Trust through dollar roll transactions. A dollar roll transaction involves a sale by the Trust of a mortgage-backed or other security concurrently with an agreement by the Trust to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period between the sale and repurchase, the Trust will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional instruments for the Trust, and the income from these investments will generate income for the Trust. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have been without the use of dollar rolls.
PREFERRED SHARES
Although the Trust is authorized, under the Investment Company Act, to issue Preferred Shares in an amount up to 50% of its total assets less its liabilities and indebtedness, the Trust anticipates that under current market conditions it will offer Preferred Shares representing no more than 10% of the Trust's total managed assets immediately after the issuance of the Preferred Shares. If as a result of market conditions, or any other reason, the Trust does not issue Preferred Shares, the Trust will limit its borrowing to 331/3% of the Trust's total managed assets. The Preferred Shares would have complete priority upon distribution of assets over the common shares. The issuance of Preferred Shares will leverage the common shares. Although the timing and other terms of the offering of Preferred Shares and the terms of the Preferred Shares would be determined by the Trust's board of trustees, the Trust expects to invest the proceeds of any Preferred Shares offering in intermediate and long-term bonds. The Preferred Shares will pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by an auction process. The adjustment period for Preferred Share dividends could be as short as one day or as long as a year or more. So long as the Trust's portfolio is invested in securities that provide a higher rate of return than the dividend rate of the Preferred Shares, after taking expenses into consideration, the leverage will cause you to receive a higher rate of income than if the Trust were not leveraged.
Under the Investment Company Act, the Trust is not permitted to issue Preferred Shares unless immediately after such issuance the value of the Trust's total assets, less all liabilities and indebtedness of the Trust, is at least 200% of the liquidation value of the outstanding Preferred Shares (I.E., the liquidation value may not exceed 50% of the Trust's total assets less all liabilities and indebtedness of the Trust). In
addition, the Trust is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Trust's total assets is at least 200% of the liquidation value of its outstanding Preferred Shares plus its outstanding liabilities and indebtedness. If Preferred Shares are issued, the Trust intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary in order to maintain coverage of any Preferred Shares of at least 200%. In addition, as a condition to obtaining ratings on the Preferred Shares, the terms of any Preferred Shares issued are expected to include asset coverage maintenance provisions which will require a reduction of indebtedness or the redemption of the Preferred Shares in the event of non-compliance by the Trust and may also prohibit dividends and other distributions on the common shares in such circumstances. In order to meet redemption requirements, the Trust may have to liquidate portfolio securities. Such liquidations and redemptions, or reductions in indebtedness, would cause the Trust to incur related transaction costs and could result in capital losses to the Trust. Prohibitions on dividends and other distributions on the common shares could impair the Trust's ability to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). If the Trust has Preferred Shares outstanding, two of the Trust's trustees will be elected by the holders of Preferred Shares voting separately as a class. The remaining trustees of the Trust will be elected by holders of common shares and Preferred Shares voting together as a single class. In the event the Trust failed to pay dividends on Preferred Shares for two years, holders of Preferred Shares would be entitled to elect a majority of the trustees of the Trust.
The Trust will be subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Trust. These guidelines are expected to impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Trust by the Investment Company Act and may limit the ability of the Trust to borrow money through the use of reverse repurchase agreements and dollar rolls and may limit the ability of the Trust to engage in Strategic Transactions. It is not anticipated that these covenants or guidelines will impede BlackRock from managing the Trust's portfolio in accordance with the Trust's investment objective and policies.
The Trust may also borrow money in an amount equal to 5% of its total assets 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 Trust securities.
Assuming that the leverage will represent approximately 331/3% of the Trust's total managed assets and that the Trust does not issue any Preferred Shares, the interest paid on the leverage is a blended annual average rate of 3.00%, the income generated by the Trust's portfolio (net of estimated expenses) must exceed 1.14% in order to cover the interest payments related to the leverage. Of course, these numbers are merely estimates used for illustration. Actual interest rates on leverage will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of income and changes in the value of bonds held in the Trust's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Trust. See "Risks." The table further reflects leverage representing 331/3% of the Trust's total managed assets, a 5.15% yield on the Trust's investment portfolio, net of expenses, and the Trust's currently projected blended average annual leverage interest rate of 3.00%.
Assumed Portfolio Total Return
(Net of Expenses) ............. (10)% (5)% 0 % 5% 10%
Common Share Total Return ........ (16.50)% (9.00)% (1.50)% 6.00% 13.50%
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Assuming that the leverage will represent approximately 38% of the Trust's total managed assets and that the Trust issues Preferred Shares equal to approximately 10% of the Trust's total managed assets, the interest and dividends paid on the leverage is a blended annual average rate of 3.07%, the income generated by the Trust's portfolio (net of estimated expenses) must exceed 1.17% in order to cover the interest and dividend payments related to the leverage. Of course, these numbers are merely estimates used for illustration. Actual interest rates on leverage will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of income and changes in the value of bonds held in the Trust's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Trust. See "Risks." The table further reflects leverage using debt and Preferred Shares representing, in the aggregate, 38% of the Trust's total managed assets, a 5.25% yield on the Trust's investment portfolio, net of expenses, and the Trust's currently projected blended average annual leverage dividend and interest rate of 3.07%.
Assumed Portfolio Total Return (Net of Expenses) ............. (10)% (5)% 0% 5% 10% Common Share Total Return ........ (18.01)% (9.95)% (1.88)% 6.18% 14.25% |
Common share total return is composed of two elements--the common share dividends paid by the Trust (the amount of which is largely determined by the net investment income of the Trust after paying dividends and interest on its leverage) and gains or losses on the value of the securities the Trust owns. As required by Securities and Exchange Commission rules, the tables above assume that the Trust is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Trust must assume that the interest it receives on its debt security investments is entirely offset by losses in the value of those bonds.
RISKS
The net asset value of the common shares will fluctuate with and be affected by, among other things, interest rate risk, credit risk, prepayment risk, extension risk, leverage risk, currency risk, high yield risk and an investment in common shares will be subject to market discount risk, inflation risk and market risk, each of which is more fully described below.
NEWLY ORGANIZED
The Trust is a newly organized, diversified, closed-end management investment company and has no operating history.
MARKET DISCOUNT RISK
As with any stock, the price of the Trust's shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Net asset value will be reduced immediately following the initial offering by a 4.5% sales load charge and organizational and selling expenses paid by the Trust. Common shares are designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The Trust's shares may trade at a price that is less than the initial offering price. This risk may be greater for investors who sell their shares in a relatively short period of time after completion of the initial offering.
INTEREST RATE RISK
Interest rate risk is the risk that debt securities, and the Trust's net assets, will decline in value because of changes in interest rates. Generally, debt securities will decrease in value when interest rates rise and increase in value when interest rates decline. This means that the net asset value of the common shares will fluctuate with interest rate changes and the corresponding changes in the value of the Trust's debt security holdings. The value of longer-term debt securities fluctuates more in response to changes in interest rates than does the value of shorter-term debt securities. Because the Trust will initially invest primarily in intermediate and long-term debt securities, the net asset value and market price per share of the common shares will fluctuate more in response to changes in market interest rates than if the Trust invested primarily in shorter-term debt securities. The Trust's use of leverage, as described below, will tend to increase common share interest rate risk.
CREDIT RISK
Credit risk is the risk that an issuer of a bond will become unable to meet its obligation to make interest and principal payments. In general, lower rated bonds carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a negative impact on the Trust's net asset value or dividends. The Trust may invest up to 25% of its total managed assets in bonds that are rated Ba/BB or below by Moody's, S&P, Fitch or another nationally recognized rating agency or that are unrated but judged to be of comparable quality by BlackRock. Bonds rated Ba/BB or below are regarded as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and these bonds are commonly referred to as "junk bonds". These lower grade securities are subject to a greater risk of default. The value of lower grade bonds is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. Issuers of high-yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments. These issuers are more vulnerable to financial setbacks and recession than more creditworthy issuers which may impair their ability to make interest and principal payments. Lower grade securities tend to be less liquid than investment grade securities. Investments in lower grade securities will expose the Trust to greater risks than if the Trust owned only higher grade securities. Some of the additional risks you should consider in relation to lower grade securities are market discount risk, interest rate risk and pre-payment risk.
PREPAYMENT RISK
If interest rates fall, the principal on bonds held by the Trust may be paid earlier than expected. If this happens, the proceeds from a prepaid security may be reinvested by the Trust in securities bearing lower interest rates, resulting in a possible decline in the Trust's income and distributions to shareholders. The Trust may invest in pools of mortgages issued or guaranteed by private issuers or U.S. government agencies and instrumentalities. These mortgage-related securities are especially sensitive to prepayment risk because borrowers often refinance their mortgages when interest rates drop.
EXTENSION RISK
The prices of bonds tend to fall as interest rates rise. For mortgage-related securities, if interest rates rise, borrowers may prepay mortgages more slowly than originally expected. This may further reduce the market value of the securities and lengthen their durations.
LEVERAGE RISK
Leverage risk is the risk associated with the borrowing of funds and other investment techniques, including the issuance of the Preferred Shares by the Trust, to leverage the common shares.
Leverage is a speculative technique which may expose the Trust to greater risk and increase its costs. Increases and decreases in the value of the Trust's portfolio will be magnified when the Trust uses leverage. For example, leverage may cause greater swings in the Trust's net asset value or cause the Trust to lose more than it invested. The Trust will also have to pay interest on its borrowings, reducing the Trust's return. This interest expense may be greater than the Trust's return on the underlying investment. There is no assurance that the Trust's leveraging strategy will be successful.
Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by the Trust may decline below the price of the securities the Trust is obligated to repurchase and that the securities may not be returned to the Trust.
Dollar roll transactions involve the risk that the market value of the securities the Trust is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Trust sells securities becomes insolvent, the Trust's right to purchase or repurchase securities may be restricted. Successful use of dollar rolls may depend upon BlackRock's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
If leverage is employed, the net asset value and market value of the common shares will be more volatile, and the yield to the holders of common shares will tend to fluctuate with changes in the shorter-term interest rates on the leverage. If the interest rate on the leverage approaches the net rate of return on the Trust's investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the interest rate on the leverage exceeds the net rate of return on the Trust's portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Trust were not leveraged. Because the intermediate and long-term bonds included in the Trust's portfolio will typically pay fixed rates of interest while the interest rates on the leverage vary from time to time, this could occur even when both long-term and short-term rates rise. In addition, the Trust will pay (and the holders of common shares will bear) any costs and expenses relating to any leverage. Accordingly, the Trust cannot assure you that the use of leverage would result in a higher yield or return to the holders of the common shares.
Any decline in the net asset value of the Trust's investments will be borne entirely by the holders of common shares. Therefore, if the market value of the Trust's portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Trust were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. In extreme cases, the Trust might be in danger of failing to maintain the required 200% asset coverage, of losing its ratings on any Preferred Shares issued or the Trust's current investment income might not be sufficient to meet the interest payments on indebtedness or the dividend requirements on any Preferred Shares. In order to counteract such an event, the Trust might need to reduce its indebtedness and to liquidate investments in order to fund a redemption of some or all of the Preferred Shares. Liquidation at times of low bond prices may result in capital losses and may reduce returns to the holders of common shares.
While the Trust may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Trust will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the holders of common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Trust were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely reduce the income and/or total returns to holders of
common shares relative to the circumstance where the Trust had not reduced leverage. The Trust may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
The Trust may invest in the securities of other investment companies. Such securities may also be leveraged and will therefore be subject to the leverage risks described above. This additional leverage may, in certain market conditions, reduce the net asset value of the Trust's common shares and the returns to the holders of common shares.
CURRENCY RISK
Since the Trust may invest in securities denominated in currencies other than the U.S. dollar, the Trust will be affected by changes in foreign currency exchange rates (and exchange control regulations) which affect the value of investments in the Trust and the accrued income and unrealized appreciation or depreciation of the investments. Changes in foreign currency exchange ratios relative to the U.S. dollar will affect the U.S. dollar value of the Trust's assets denominated in that currency and the Trust's yield on such assets. In addition, the Trust will incur costs in connection with conversions between various currencies.
COUNTERPARTY RISK
The Trust will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Trust. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a forward contract due to financial difficulties, the Trust may experience significant delays in obtaining any recovery under the forward contract in bankruptcy or other reorganization proceeding. The Trust may obtain only a limited recovery or may obtain no recovery in such circumstances.
INFLATION RISK
Inflation risk is the risk that the value 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 on those shares may decline. In addition, during any periods of rising inflation, leverage costs would likely increase, which would tend to further reduce returns to the holders of common shares.
FOREIGN RISKS
Because the Trust may own securities of foreign issuers, it may be subject to risks not usually associated with owning securities of U.S. issuers. These risks can include fluctuations in foreign currencies, foreign currency exchange controls, political and economic instability, differences in financial reporting, differences in securities regulation and trading, and foreign taxation issues.
EMERGING MARKETS RISK
Investing in securities of issuers based in underdeveloped emerging markets entails all of the risks of investing in securities of foreign issuers to a heightened degree. These heightened risks include: (i) greater risks of expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the smaller size of the market for such securities and a lower volume of trading, resulting in lack of liquidity and in price volatility; and (iii) certain national policies which may restrict the Trust's investment opportunities including restrictions on investing in issuers or industries deemed sensitive to relevant national interests.
RISKS OF USING DERIVATIVE INSTRUMENTS
In general terms, a derivative instrument is one whose value depends on (or is derived from) the value of an underlying asset, interest rate or index. Options, futures, options on futures, credit default swaps,
Risks ------------------------------------------------------------------------------- interest rate swaps or other interest rate-related transactions are examples of derivative instruments. Derivative instruments involve risks different from |
direct investments in underlying securities. These risks include imperfect correlation between the value of the instruments and the underlying assets; risks of default by the other party to certain transactions; risks that the transactions may result in losses that partially or completely offset gains in portfolio positions; and risks that the instruments may not be liquid.
RECENT DEVELOPMENTS
As a result of the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, many of the U.S. securities markets were closed for all or a portion of a four-day period. These terrorist attacks and related events have led to increased short-term market volatility and may have long-term effects on U.S. and world economies and markets. A similar disruption of the financial markets could impact interest rates, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the securities.
HOW THE TRUST MANAGES RISK
INVESTMENT LIMITATIONS
The Trust has adopted certain investment limitations designed to limit investment risk. These limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding common shares and, if issued, Preferred Shares voting together as a single class, and the approval of the holders of a majority of the Preferred Shares voting as a separate class. Among other restrictions, the Trust may not invest more than 25% of its total managed assets in securities of issuers in any one industry. In addition, with respect to 75% of its total managed assets, the Trust may not invest more than 5% of the value of its total managed assets in the securities of any single issuer or purchase more than 10% of the outstanding voting securities of any one issuer (excluding the U.S. government, its agencies or instrumentalities).
The Trust may become subject to guidelines which are more limiting than its investment restrictions in order to obtain and maintain ratings from Moody's or S&P on the Preferred Shares that it may issue, including restrictions on its ability to incur leverage through the use of reverse repurchase agreements or dollar rolls and the Trust's ability to use Strategic Transactions. The Trust does not anticipate that such guidelines would have a material adverse effect on the Trust's common shareholders or the Trust's ability to achieve its investment objective. See "Investment Objective and Policies" in the Statement of Additional Information for a complete list of the fundamental and non-fundamental investment policies of the Trust.
QUALITY OF INVESTMENTS
The Trust will invest at least 75% of its total managed assets in bonds of investment grade quality at the time of investment. Investment grade quality means that such bonds are rated by national rating agencies within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by BlackRock.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Trust may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Trust anticipates such an increase or change) and the Trust's leverage begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of leverage on common shareholders, the Trust may shorten the average maturity of its investment portfolio (by investing in short-term securities) or may reduce its indebtedness or extend the maturity of outstanding
Preferred Shares. The Trust may also attempt to reduce the leverage by redeeming or otherwise purchasing Preferred Shares. As explained above under "Risks--Leverage Risk," the success of any such attempt to limit leverage risk depends on BlackRock's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Trust may never attempt to manage its capital structure in the manner described in this paragraph.
If market conditions suggest that additional leverage would be beneficial, the Trust may sell previously unissued Preferred Shares or Preferred Shares that the Trust previously issued but later repurchased.
HEDGING STRATEGIES
The Trust may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. These hedging strategies include using swaps, financial futures contracts, options on financial futures or options based on either an index of long-term securities or on taxable debt securities whose prices, in the opinion of BlackRock, correlate with the prices of the Trust's investments.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The board of trustees is responsible for the overall management of the Trust, including supervision of the duties performed by BlackRock. There are eight trustees of the Trust. Two of the trustees are "interested persons" (as defined in the Investment Company Act). The name and business address of the trustees and officers of the Trust and their principal occupations and other affiliations during the past five years are set forth under "Management of the Trust" in the Statement of Additional Information.
INVESTMENT ADVISOR AND SUB-ADVISOR
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock Financial Management, Inc. acts as the Trust's sub-advisor. BlackRock Advisors and BlackRock Financial Management both are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest publicly traded investment management firms in the United States with $225 billion of assets under management as of September 30, 2001. BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300 institutions and 200,000 individuals worldwide, including nine of the 10 largest companies in the U.S. as determined by Fortune Magazine, through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, including the company's flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset management firm according to Pensions & Investments, May 14, 2001.
The BlackRock organization has over 13 years of experience managing closed-end products and currently advises a closed-end family of 25 funds with approximately $6.7 billion in assets as of September 30, 2001. As of September 30, 2001, BlackRock manages more than $132 billion in fixed-income assets alone and employs more than 180 global professionals solely dedicated to fixed-income. Clients are served from the company's headquarters in New York City, as well as offices in Wilmington, Delaware, San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified financial services organizations in the United States, and is majority-owned by PNC and by BlackRock employees.
INVESTMENT PHILOSOPHY
BlackRock applies the same controlled-duration, active relative value sector rotation style to the management of all its fixed income mandates. BlackRock has in-depth expertise in all sectors of the fixed
income market. BlackRock specializes in managing fixed income portfolios against both published and customized benchmarks and has been doing this since the inception of its fixed income products in 1988.
BlackRock's style is designed with the objective of generating excess returns with lower risk than its benchmarks and competitors. The use of advanced analytics provides real-time analysis of a vast array of risk measures designed to measure the potential impact of various sector and security strategies on total return. As a result, consistent value is added and performance volatility is controlled.
BlackRock's disciplined investment process seeks to add value through: (i)
controlling portfolio duration within a narrow band relative to a benchmark
index, (ii) relative value sector/sub-sector rotation and security selection,
(iii) rigorous quantitative analysis of the valuation of each security and of
the portfolio as a whole, (iv) intense credit analysis and review, and (v) the
judgment of experienced portfolio managers.
The technology that enables BlackRock to implement its investment strategies is constantly improving. BlackRock's commitment to maintaining its state-of-the-art analytics in the most cost efficient way is manifest in (i) the development of proprietary tools, (ii) the purchase of tools such as RiskMetrics(TM), and (iii) the integration of all of these tools into a unique portfolio level risk management system. By continually updating analytics and systems, BlackRock is able to better quantify and evaluate the risk of each investment decision.
BlackRock's approach to credit risk incorporates a combination of sector-based, top-down macro-analysis of industry sectors to determine relative weightings with a name-specific (issuer-specific), bottom-up detailed credit analysis of issuers and structures. The sector-based approach focuses on rotating into sectors that are undervalued and exiting sectors when fundamentals or technicals become unattractive. The name-specific approach focuses on identifying special opportunities where the market undervalues a credit, and devoting concentrated resources to research the credit and monitor the position. BlackRock's analytical process focuses on anticipating change in credit trends before market recognition. Credit research is a critical, independent element of BlackRock's process.
BLACKROCK'S PORTFOLIO MANAGEMENT TEAM
BlackRock uses a team approach to managing its portfolios. BlackRock believes that this approach offers substantial benefits over one that is dependent on the market wisdom or investment expertise of only a few individuals. The investment manager's portfolio management team includes the following individuals who have an average of 17 years of experience:
KEITH ANDERSON, Managing Director and Chief Investment Officer, Fixed Income of BlackRock, Inc., is co-head of the Fixed Income Operating Committee, Chairman of the Investment Strategy Group and a member of BlackRock's Management Committee.
Mr. Anderson is responsible for global fixed income strategy, asset allocation and the overall management of client portfolios. In this capacity he coordinates a team of thirty-one portfolio managers and more than twenty-five credit and quantitative analysts who specialize in the government, agency, corporate and mortgage sectors and sub-sectors, worldwide.
Mr. Anderson is a member of the Treasury Borrowing Advisory Committee, which meets quarterly in Washington, D.C. with the Secretary and Staff of the U.S. Treasury to advise them on the financing and management of the Federal debt.
Prior to founding BlackRock in 1988, Mr. Anderson was a Vice President in Fixed Income Research at The First Boston Corporation. Mr. Anderson joined First Boston in 1987 as a mortgage securities and
derivative products strategist working with institutional money managers. From 1983 to 1987, Mr. Anderson was a Vice President and portfolio manager at Criterion Investment Management Company where he had primary responsibility for a $2.8 billion fixed income portfolio.
Mr. Anderson has authored numerous articles on fixed income strategies, including two articles in THE HANDBOOK OF FIXED INCOME OPTIONS: "Scenario Analysis and the Use of Options in Total Return Portfolio Management" and "Measuring, Interpreting, and Applying Volatility within the Fixed Income Market."
ROBERT S. KAPITO, Vice Chairman of BlackRock, Inc., is co-head of the Equity Operating Committee, Head of the Portfolio Management Group, a member of the Management Committee, the Investment Strategy Group, and BlackRock International's Management Committee. Mr. Kapito is responsible for the portfolio management of the Fixed Income, Domestic Equity and International Equity, Liquidity, and Alternative Investment Groups of BlackRock.
In addition, Mr. Kapito plays a key role in coordinating the efforts of the analytical and administrative groups with the Portfolio Management Group. He is also involved in marketing and managing several of BlackRock's funds. Mr. Kapito serves as a Vice President for BlackRock's family of closed-end mutual funds and for the Smith Barney Adjustable Rate Government Income Fund.
Prior to founding BlackRock in 1988, Mr. Kapito was a Vice President in the Mortgage Products Group at The First Boston Corporation. Mr. Kapito joined First Boston in 1979 in the Public Finance Department. Mr. Kapito left First Boston to complete his MBA degree and returned to the firm in 1983 in the Mortgage Products Group. While with this Group, Mr. Kapito initially traded mortgage securities and then became the head trader of collateralized mortgage obligations. Ultimately, Mr. Kapito became head of Mortgage Capital Markets with responsibility for marketing and pricing all of the mortgage-backed and asset-backed securities underwritten by First Boston. In 1982, Mr. Kapito worked as a strategic consultant with Bain & Co. and with two other private companies in Europe.
MICHAEL P. LUSTIG, Managing Director and portfolio manager, is a member of the Investment Strategy Group. Mr. Lustig is responsible for managing the firm's taxable closed-end funds and structured products effort. Previously, Mr. Lustig developed analytical models for security and portfolio analysis, assisted in the structuring of BlackRock's mutual funds and analyzed the asset/liability structure of client portfolios.
Prior to joining BlackRock in 1989, Mr. Lustig was an associate in the Financial Strategies and Investment Analysis Division of Security Pacific Merchant Bank. Mr. Lustig joined Security Pacific in 1986 and was responsible for developing models to trade derivative products including caps, floors, swaps, callable/putable bonds, futures and options.
DENNIS M. SCHANEY, Managing Director, is a member of the Investment Strategy Group. Mr. Schaney has primary responsibility for BlackRock's high yield business and is co-head of taxable credit research.
Prior to joining BlackRock in 1998, Mr. Schaney spent nine years with Merrill Lynch where he was a Managing Director in the firm's Global Fixed Income Research and Economics Department. During the time that Mr. Schaney managed Merrill's Corporate and Municipal Bond Research Departments, the group became the top-ranked Fixed Income Research Department according to industry polls. Mr. Schaney's specific sector specialties included the media, entertainment, and cable sectors for both the high yield and investment grade markets for which he was named to Institutional Investor's All American Fixed Income Team for five of the last six years. In addition, throughout his career, Mr. Schaney has covered the auto, transportation, technology and aerospace industries. Mr. Schaney began his investment career with Standard and Poor's, followed by four years with The First Boston Corporation; two years as an analyst
in the firm's Fixed Income and Research Department and two years as a Vice President in the firm's Investment Banking Department.
BRUCE W. REPASY, Director and portfolio manager, is a member of BlackRock's Investment Strategy Group. Mr. Repasy is primarily responsible for managing BlackRock Specialized Asset Management portfolios.
Before joining BlackRock in 1999, Mr. Repasy spent seven years as an Assistant Vice President and portfolio manager for institutional assets at PNC. He assumed his role at PNC in 1994 and was involved in the management of fixed rate securities including corporate bond, government bond, asset backed, and mortgage backed securities. Previously, he was a compliance Examiner for the United States Securities and Exchange Commission specializing in mutual fund and investment advisor oversight. Mr. Repasy began his investment career in 1985 as an operations assistant at Prudential Insurance Company.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between BlackRock Advisors and the Trust, the Trust has agreed to pay for the investment advisory services and facilities provided by BlackRock Advisors a fee payable monthly in arrears at an annual rate equal to 0.55% of the average weekly value of the Trust's managed assets (the "management fee"). The Trust will also reimburse BlackRock Advisors for certain expenses BlackRock Advisors incurs in connection with performing administrative services for the Trust. In addition, with the approval of the board of trustees, a pro rata portion of the salaries, bonuses, health insurance, retirement benefits and similar employment costs for the time spent on Trust operations (other than the provision of services required under the investment management agreement) of all personnel employed by BlackRock Advisors who devote substantial time to Trust operations may be reimbursed to BlackRock Advisors. Managed assets are the total assets of the Trust, which includes any proceeds from the Preferred Shares, minus the sum of accrued liabilities (other than indebtedness attributable to leverage). This means that during periods in which the Trust is using leverage, the fee paid to BlackRock Advisors will be higher than if the Trust did not use leverage because the fee is calculated as a percentage of the Trust's managed assets, which include those assets purchased with leverage.
Pursuant to a Shareholder Servicing Agreement between UBS Warburg LLC (the
"Shareholder Servicing Agent") and BlackRock, the Shareholder Servicing Agent
will undertake to make public information pertaining to the Trust on an ongoing
basis and to communicate to investors and prospective investors the Trust's
features and benefits (including periodic seminars or conference calls,
responses to questions from current or prospective shareholders and specific
shareholder contact where appropriate). The Shareholder Servicing Agent also
will make available to investors and prospective investors market price, net
asset value, yield and other information regarding the Trust, if reasonably
obtainable, for the purpose of maintaining the visibility of the Trust in the
investor community. At the request of BlackRock, the Shareholder Servicing Agent
will provide certain economic research and statistical information and reports,
if reasonably obtainable, on behalf of the Trust, and consult with
representatives and Trustees of the Trust in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Trust's market performance and (b) comparative
information regarding the Trust and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Trust and such other companies and
(3) other relevant performance indicators. At the request of BlackRock, the
Shareholder Servicing Agent also will provide information to and consult with
the Board of Trustees with respect to applicable modifications to dividend
policies or capital structure, repositioning or restructuring of the Trust,
conversion of the Trust to an open-end investment company, liquidation or
merger; provided, however, that under the terms of the Shareholder Servicing
Agreement, the Shareholder Servicing Agent is not obligated to render any
opinions, valuations or recommendations of any kind or to perform any such
similar services.
For these services, BlackRock will pay the Shareholder Servicing Agent a fee equal on an annual basis to 0.10% of the average weekly value of the Trust's total managed assets, payable in arrears at the end of each calendar month.
Under the terms of the Shareholder Servicing Agreement, the Shareholder Servicing Agent is relieved from liability to BlackRock for any act or omission in the course of its performances under the Shareholder Servicing Agreement in the absence of gross negligence or willful misconduct by the Shareholder Servicing Agent.
The Shareholder Servicing Agreement will continue for an initial term of two years and thereafter for successive one-year periods unless terminated by either party upon 60 days written notice.
In addition to the management fee of BlackRock Advisors, the Trust pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with BlackRock Advisors), custodian, transfer and dividend disbursing agent expenses, legal fees, leverage expenses, rating agency fees listing fees and expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
NET ASSET VALUE
The net asset value of the common shares of the Trust will be computed based upon the value of the Trust's portfolio securities and other assets. Net asset value per common share will be determined as of the close of the regular trading session on the New York Stock Exchange no less frequently than on the Thursday of each week and on the last business day of each month. In the event that any Thursday is not a business day or it is not practicable to calculate the Trust's net asset value on any business day for which a calculation is required, the net asset value will be calculated on a date determined by BlackRock Advisors. The Trust calculates net asset value per common share by subtracting the Trust's liabilities (including accrued expenses, dividends payable and any borrowings of the Trust), the liquidation value of any outstanding Preferred Shares and the amount of outstanding debt of the Trust from the Trust's total managed assets (the value of the securities the Trust holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Trust outstanding.
The Trust values its fixed income securities by using market quotations, prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics in accordance with procedures established by the board of trustees of the Trust. A portion of the Trust's fixed income investments will be valued utilizing one or more pricing services approved by the Trust's board of trustees. Bonds having a remaining maturity of 60 days or less when purchased and bonds originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less may be valued at amortized cost. Any securities or other assets for which current market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by and under the general supervision and responsibility of the Trust's board of trustees.
DISTRIBUTIONS
The Trust intends to distribute to holders of its common shares monthly dividends of all or a portion of its net income after payment of dividends and interest in connection with leverage used by the Trust. It is expected that the initial monthly dividend on shares of the Trust's common shares will be declared within approximately 45 days and paid approximately 60 to 90 days after completion of this offering. The Trust expects that all or a portion of any capital gain will be distributed at least annually.
Various factors will affect the level of the Trust's income, including the asset mix, the average maturity of the Trust's portfolio, the amount of leverage utilized by the Trust and the Trust's use of hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of income earned in a particular period. The undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of income actually earned by the Trust during that period. Undistributed income will add to the Trust's net asset value and, correspondingly, distributions from undistributed income will deduct from the Trust's net asset value. Shareholders will automatically have all dividends and distributions reinvested in common shares of the Trust issued by the Trust or purchased in the open market in accordance with the Trust's Dividend Reinvestment Plan unless an election is made to receive cash. See "Dividend reinvestment plan."
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of common shares elects to receive cash by contacting the Plan Agent, all dividends declared for your common shares of the Trust will be automatically reinvested by EquiServe Trust Company, N.A. (the "Plan Agent"), agent for shareholders in administering the Trust's Dividend Reinvestment Plan (the "Plan"), in additional common shares of the Trust. If a registered owner of common shares elects not to participate in the Plan, you will receive all dividends in cash paid by check mailed directly to you (or, if the shares are held in street or other nominee name, then to such nominee) by EquiServe Trust Company, N.A., as dividend disbursing agent. You may elect not to participate in the Plan and to receive all dividends in cash by sending written instructions or by contacting EquiServe Trust Company, N.A., as dividend disbursing agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by contacting the Plan Agent before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Some brokers may automatically elect to receive cash on your behalf and may re-invest that cash in additional common shares of the Trust for you. If you wish for all dividends declared on your common shares of the Trust to be automatically reinvested pursuant to the Plan, please contact your broker.
The Plan Agent will open an account for each common shareholder under the Plan
in the same name in which such common shareholder's common shares are
registered. Whenever the Trust declares a dividend or other distribution
(together, a "dividend") payable in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the equivalent in common
shares. The common shares will be acquired by the Plan Agent for the
participants' accounts, depending upon the circumstances described below, either
(i) through receipt of additional unissued but authorized common shares from the
Trust ("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 any dividend, the net asset
value per common share is equal to or less than the market price per common
share, the Plan Agent will invest the dividend 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 dividend by the net asset value per common share on the
date the common shares are issued. If, on the payment date for any dividend, the
net asset value per common share is greater than the market value, the Plan
Agent will invest the dividend amount in common shares acquired on behalf of the
participants in open-market purchases. In the event of a market discount on the
payment date for any dividend, the Plan Agent will have until the last business
day before the next date on which the common shares trade on an "ex-dividend"
basis or 30 days after the payment date for such dividend, whichever is sooner
(the "last purchase date"), to invest the dividend amount in common shares
acquired in open-market purchases. It is contemplated that the Trust will pay
monthly
income dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of each dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price per common share exceeds the net asset value per common share, the average per common share purchase price paid by the Plan Agent may exceed the net asset value of the common shares, resulting in the acquisition of fewer common shares than if the dividend had been paid in newly issued common shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend 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 may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued common shares at the net asset value per common share at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by 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 shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold 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 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 Trust. However, each participant will pay a pro rata share of brokerage commissions incurred in connection with open-market purchases. The automatic reinvestment of dividends will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such dividends. See "Tax matters."
The Trust reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Trust reserves the right to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at 150 Royall Street, Canton, Massachusetts 02021.
DESCRIPTION OF SHARES
COMMON SHARES
The Trust is an unincorporated business trust organized under the laws of Delaware pursuant to an Agreement and Declaration of Trust dated as of October 12, 2001. The Trust is authorized to issue an unlimited number of common shares of beneficial interest, par value $.001 per share. Each common share has one vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and non-assessable, except that the trustees shall have the power to cause shareholders to pay expenses of the Trust by setting off charges due from shareholders from declared but unpaid dividends or distributions owed the shareholders and/or by reducing the number of common shares owned by each respective shareholder. The holders of common shares will not be entitled to receive any distributions from the Trust unless all accrued dividends and interest and dividend payments with respect to the Trust's
leverage have been paid, unless certain asset coverage (as defined in the Investment Company Act) tests with respect to the leverage employed by the Trust are satisfied after giving effect to the distributions and unless certain other requirements imposed by any rating agencies rating any Preferred Shares issued by the Trust have been met. See "--Preferred Shares" below. All common shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights. The Trust will send annual and semi-annual reports, including financial statements, to all holders of its shares.
The Trust has no present intention of offering any additional shares other than possible issuance of Preferred Shares. Any additional offerings of shares will require approval by the Trust's board of trustees. Any additional offering of common shares will be subject to the requirements of the Investment Company Act, which provides that shares may not be issued at a price below the then current net asset value, exclusive of sales load, except in connection with an offering to existing holders of common shares or with the consent of a majority of the Trust's outstanding voting securities.
The Trust's common shares are expected to be listed on the New York Stock Exchange under the symbol "BHK".
The Trust's net asset value per share generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater because the Trust intends to have a leveraged capital structure. Net asset value will be reduced immediately following the offering of common shares by the amount of the sales load and organization and offering expenses paid by the Trust. See "Use of proceeds."
Unlike open-end funds, closed-end funds like the Trust do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional common shares or sell shares already held, the shareholder may do so by trading through a broker on the New York Stock Exchange or otherwise. Shares of closed-end investment companies frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Trust that invest predominantly in investment grade bonds have, during some periods, traded at prices higher than net asset value and, during other periods, have traded at prices lower than net asset value. Because the market value of the common shares may be influenced by such factors as dividend levels (which are in turn affected by expenses) call protection on its portfolio securities, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions and other factors beyond the control of the Trust, the Trust cannot assure you that common shares will trade at a price equal to or higher than net asset value in the future. The common shares are designed primarily for long-term investors and you should not purchase the common shares if you intend to sell them soon after purchase. See "Borrowings and preferred shares" and the Statement of Additional Information under "Repurchase of Common Shares."
PREFERRED SHARES
The Agreement and Declaration of Trust provides that the Trust's board of trustees may authorize and issue Preferred Shares with rights as determined by the board of trustees, by action of the board of trustees without the approval of the holders of the common shares. Holders of common shares have no preemptive right to purchase any Preferred Shares that might be issued.
The Trust may elect to issue Preferred Shares as part of its leverage strategy. If Preferred Shares are issued, the Trust currently intends to issue Preferred Shares representing approximately 10% of the Trust's total managed assets immediately after the Preferred Shares are issued. The board of trustees also reserves the right to change the foregoing percentage limitation and may issue Preferred Shares to the extent permitted by the Investment Company Act, which currently limits the aggregate liquidation preference of all outstanding Preferred Shares to 50% of the value of the Trust's total assets less liabilities and indebtedness of the Trust. We cannot assure you, however, that any Preferred Shares will be issued. Although the terms
of any Preferred Shares, including dividend rate, liquidation preference and redemption provisions, will be determined by the board of trustees, subject to applicable law and the Agreement and Declaration of Trust, it is likely that the Preferred Shares will be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term bonds, by providing for the periodic redetermination of the dividend rate at relatively short intervals through an auction, remarketing or other procedure. The Trust also believes that it is likely that the liquidation preference, voting rights and redemption provisions of the Preferred Shares will be similar to those stated below.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust, the holders of Preferred Shares will be entitled to receive a preferential liquidating distribution, which is expected to equal the original purchase price per Preferred Share plus accrued and unpaid dividends, whether or not declared, before any distribution of assets is made to holders of common shares. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Preferred Shares will not be entitled to any further participation in any distribution of assets by the Trust.
VOTING RIGHTS
The Investment Company Act requires that the holders of any Preferred Shares,
voting separately as a single class, have the right to elect at least two
trustees at all times. The remaining trustees will be elected by holders of
common shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Trust at any time two years'
dividends on any Preferred Shares are unpaid. The Investment Company Act also
requires that, in addition to any approval by shareholders that might otherwise
be required, the approval of the holders of a majority of any outstanding
Preferred Shares, voting separately as a class, would be required to (1) adopt
any plan of reorganization that would adversely affect the Preferred Shares, and
(2) take any action requiring a vote of security holders under Section 13(a) of
the Investment Company Act, including, among other things, changes in the
Trust's subclassification as a closed-end investment company or changes in its
fundamental investment restrictions. See "Certain provisions in the Agreement
and Declaration of Trust." As a result of these voting rights, the Trust's
ability to take any such actions may be impeded to the extent that there are any
Preferred Shares outstanding. The board of trustees presently intends that,
except as otherwise indicated in this prospectus and except as otherwise
required by applicable law, holders of Preferred Shares will have equal voting
rights with holders of common shares (one vote per share, unless otherwise
required by the Investment Company Act) and will vote together with holders of
common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding Preferred Shares, voting as a separate class, will be required to amend, alter or repeal any of the preferences, rights or powers of holders of Preferred Shares so as to affect materially and adversely such preferences, rights or powers, or to increase or decrease the authorized number of Preferred Shares. The class vote of holders of Preferred Shares described above will in each case be in addition to any other vote required to authorize the action in question.
REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES BY THE TRUST
The terms of the Preferred Shares are expected to provide that (1) they are redeemable by the Trust in whole or in part at the original purchase price per share plus accrued dividends per share, (2) the Trust may tender for or purchase Preferred Shares and (3) the Trust may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of Preferred Shares by the Trust will reduce the leverage applicable to the common shares, while any resale of shares by the Trust will increase that leverage.
The discussion above describes the possible offering of Preferred Shares by the Trust. If the board of trustees determines to proceed with such an offering, the terms of the Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Trust's Agreement and Declaration of Trust. The board of trustees, without the approval of the holders of common shares, may authorize an offering of Preferred Shares or may determine not to authorize such an offering, and may fix the terms of the Preferred Shares to be offered.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Trust or to change the composition of its board of trustees. This could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control over the Trust. Such attempts could have the effect of increasing the expenses of the Trust and disrupting the normal operation of the Trust. The board of trustees is divided into three classes, with the terms 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 of trustees. A trustee may be removed from office by the action of a majority of the remaining trustees followed by a vote of the holders of at least 75% of the shares then entitled to vote for the election of the respective trustee.
In addition, the Trust's Agreement and Declaration of Trust requires the favorable vote of a majority of the Trust's board of trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, to approve, adopt or authorize certain transactions with 5% or greater holders of a class or series of shares and their associates, unless the transaction has been approved by at least 80% of the trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required. For purposes of these provisions, a 5% or greater holder of a class or series 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 or series of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements are:
o the merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder;
o the issuance of any securities of the Trust to any Principal Shareholder for cash;
o the sale, lease or exchange of all or any substantial part of the assets of the Trust 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
o the sale, lease or exchange to the Trust or any subsidiary of the Trust, in exchange for securities of the Trust, of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period.
To convert the Trust to an open-end investment company, the Trust's Agreement and Declaration of Trust requires the favorable vote of a majority of the board of the trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of shares of the Trust, voting separately as a class or series, unless such amendment has been approved by at least 80% of the trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required. The foregoing vote would satisfy a separate requirement in the Investment Company Act that any conversion of the Trust to an open-end investment company be approved by the shareholders. If approved in the foregoing manner, conversion of the Trust to an open-end investment company 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 Trust to an open-end investment company would require the redemption of any outstanding Preferred Shares, which could eliminate or alter the leveraged capital structure of the Trust with respect to the common shares. Following any such conversion, it is also possible that certain of the Trust's investment policies and strategies would have to be modified to assure sufficient portfolio liquidity. In the event of conversion, the common shares would cease to be listed on the New York Stock Exchange or other national securities exchanges or market systems. Shareholders of an open-end investment company may require the company to redeem their shares at any time, except in certain circumstances as authorized by or under the Investment Company Act, at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. The Trust expects to pay all such redemption requests in cash, but reserves 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 Trust were converted to an open-end fund, it is likely that new shares would be sold at net asset value plus a sales load. The board of trustees believes, however, that the closed-end structure is desirable in light of the Trust's investment objective and policies. Therefore, you should assume that it is not likely that the board of trustees would vote to convert the Trust to an open-end fund.
To liquidate the Trust, the Trust's Agreement and Declaration of Trust, requires the favorable vote of a majority of the board of trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, unless such amendment has been approved by at least 80% of trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding voting securities" under the Trust's Agreement and Declaration of Trust, each class and series of the Trust shall vote together as a single class, except to the extent required by the Investment Company Act or the Trust's Agreement and Declaration of Trust with respect to any class or series of shares. If a separate vote is required, the applicable proportion of shares of the class or series, voting as a separate class or series, also will be required.
The board of trustees has determined that provisions with respect to the board of trustees and the shareholder voting requirements described above, which voting requirements are greater than the minimum requirements under Delaware law or the Investment Company Act, are in the best interest of shareholders generally. Reference should be made to the Agreement and Declaration of Trust on file with the Securities and Exchange Commission for the full text of these provisions.
CLOSED-END TRUST STRUCTURE
The Trust is a newly organized, diversified, closed-end management investment company (commonly referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally
referred to as mutual funds) in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. This means that if you wish to sell your shares of a closed-end fund you must trade them on the market like any other stock at the prevailing market price at that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the mutual fund will redeem or buy back the shares at "net asset value." Also, mutual funds generally offer new shares on a continuous basis to new investors, and closed-end funds generally do not. The continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the fund's investments. By comparison, closed-end funds are generally able to stay more fully invested in securities that are consistent with their investment objectives, and also have greater flexibility to make certain types of investments, and to use certain investment strategies, such as financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their net asset value. Because of this possibility and the recognition that any such discount may not be in the interest of shareholders, the Trust's board of trustees might consider from time to time engaging in open-market repurchases, tender offers for shares or other programs intended to reduce the discount. We cannot guarantee or assure, however, that the Trust's board of trustees will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to net asset value per share. The board of trustees might also consider converting the Trust to an open-end mutual fund, which would also require a vote of the shareholders of the Trust.
REPURCHASE OF SHARES
Shares of closed-end investment companies often trade at a discount to their net asset values, and the Trust's common shares may also trade at a discount to their net asset value, although it is possible that they may trade at a premium above net asset value. The market price of the Trust's common shares will be determined by such factors as relative demand for and supply of such common shares in the market, the Trust's net asset value, general market and economic conditions and other factors beyond the control of the Trust. See "Net asset value." Although the Trust's common shareholders will not have the right to redeem their common shares, the Trust may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have the effect of reducing any market discount from net asset value.
There is no assurance that, if action is undertaken to repurchase or tender for common shares, such action will result in the common shares' trading at a price which approximates their net asset value. Although share repurchases and tenders could have a favorable effect on the market price of the Trust's common shares, you should be aware that the acquisition of common shares by the Trust will decrease the total net assets of the Trust and, therefore, may have the effect of increasing the Trust's expense ratio and decreasing the asset coverage with respect to any Preferred Shares outstanding. Any share repurchases or tender offers will be made in accordance with requirements of the Securities Exchange Act of 1934, the Investment Company Act and the principal stock exchange on which the common shares are traded.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following is a description of certain U.S. federal income tax consequences to a shareholder of acquiring, holding and disposing of common shares of the Trust. The discussion reflects applicable tax
laws of the United States as of the date of this prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service (the "IRS") retroactively or prospectively. No attempt is made to present a detailed explanation of all U.S. federal, state, local and foreign tax concerns affecting the Trust and its shareholders, and the discussion set forth herein does not constitute tax advice. Investors are urged to consult their own tax advisers to determine the tax consequences to them of investing in the Trust.
The Trust intends to elect and to qualify for special tax treatment afforded to a regulated investment company under subchapter M of the Code. As long as it so qualifies, in any taxable year in which it distributes at least 90% of its net investment income (which includes, among other items, dividends, interest, the excess of any net short-term capital gains over net long-term capital losses and other taxable income other than net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss) reduced by deductible expenses) determined without regard to the deduction for dividends paid and its net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions) the Trust (but not its shareholders) will not be subject to U.S. federal income tax to the extent that it distributes its net investment income and net realized capital gains. The Trust intends to distribute substantially all of such income.
Dividends paid by the Trust from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income to the extent of the Trust's earning and profits. Distributions made from an excess of net long-term capital gains over net short-term capital losses ("capital gain dividends"), including capital gain dividends credited to a shareholder but retained by the Trust, are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Trust shares. Distributions in excess of the Trust's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Generally, not later than 60 days after the close of its taxable year, the Trust will provide its shareholders with a written notice designating the amount of any ordinary income dividends or capital gain dividends and other distributions.
The sale or other disposition of common shares of the Trust will normally result in capital gain or loss to shareholders. Any loss upon the sale or exchange of Trust shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by the shareholder. A loss realized on a sale or exchange of shares of the Trust will be disallowed if other Trust shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however, short-term capital gains and ordinary income will currently be taxed at a maximum rate of 38.6% while long-term capital gains generally will be taxed at a maximum rate of 20%.1
Dividends and other taxable distributions are taxable to shareholders even though they are reinvested in additional shares of the Trust. Due to the Trust's expected investments, in general, distributions will not be eligible for a dividends received deduction allowed to corporations under the Code. If the Trust pays a dividend in January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Trust and received by its shareholders on December 31 of the year in which the dividend was declared.
The Trust is required in certain circumstances to backup withhold on taxable dividends and certain other payments paid to non-corporate holders of the Trust's shares who do not furnish the Trust with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to a shareholder may be refunded or credited against such shareholder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE PROVISIONS OF THE CODE AND THE TREASURY REGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THE TAXATION OF THE TRUST AND ITS SHAREHOLDERS. THESE PROVISIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE OR ADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BE RETROACTIVE. A MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE TRUST CAN BE FOUND IN THE STATEMENT OF ADDITIONAL INFORMATION WHICH IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING SPECIFIC QUESTIONS AS TO FEDERAL, FOREIGN, STATE, LOCAL INCOME OR OTHER TAXES.
The underwriters named below (the "Underwriters"), acting through UBS Warburg LLC, 299 Park Avenue, New York, New York, as lead manager, and Deutsche Banc Alex. Brown Inc., Prudential Securities Incorporated, First Union Securities, Inc., Gruntal & Co., L.L.C., J.J.B. Hilliard, W.L. Lyons, Inc., and Wells Fargo Van Kasper, LLC as their representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement with the Trust and BlackRock, to purchase from the Trust the number of common shares set forth opposite their respective names. The Underwriters are committed to purchase and pay for all of such common shares (other than those covered by the over-allotment option described below) if any are purchased.
NUMBER OF
NAME COMMON SHARES
--------------------------------------------------------------------------------
UBS Warburg LLC........................................
Deutsche Banc Alex. Brown Inc..........................
Prudential Securities Incorporated.....................
First Union Securities, Inc............................
Gruntal &Co., L.L.C....................................
J.J.B. Hilliard, W.L. Lyons, Inc.......................
Wells Fargo Van Kasper, LLC............................
Total
The Trust has granted to the Underwriters an option, exercisable for 45 days
|
from the date of this Prospectus, to purchase up to an additional common shares to cover over-allotments, if any, at the initial offering price. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the common shares offered hereby. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase an additional number of common shares proportionate to such Underwriter's initial commitment. The Trust has agreed to pay a commission to the Underwriters in the amount of up to $ per common share (4.5% of the public offering price per common share). The Representatives have advised the Trust that the Underwriters may pay up to $ per common share from such commission to selected dealers who sell the common shares and that such dealers may reallow a concession of up to $ per common share to certain other dealers who sell shares. Investors must pay for any common shares purchased on or before , 2001.
Prior to this offering, there has been no public or private market for the common shares or any other securities of the Trust. Consequently, the offering price for the common shares was determined by negotiation among the Trust, BlackRock and the Representatives. There can be no assurance, however, that the price at which common shares sell after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the common shares will develop and continue after this offering. The minimum investment requirement is 100 common shares.
The Trust and BlackRock have agreed to indemnify the several Underwriters, for or to contribute to the losses arising out of, certain liabilities, including liabilities under the Securities Act of 1933, as amended.
The expenses of the offering are estimated at and are payable by the Trust. BlackRock Advisors has agreed to pay organizational expenses and offering costs (other than sales load) that exceed $0.03 per share.
The Trust has agreed not to offer, sell or register with the Securities and Exchange Commission any equity securities of the Trust, other than issuances of common shares, including pursuant to the Trust's Dividend Reinvestment Plan, and issuances in connection with any offering of Preferred Shares, each as
contemplated in this Prospectus, for a period of 180 days after the date of the Underwriting Agreement without the prior written consent of the Representatives.
The Representatives have informed the Trust that the Underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.
In connection with this offering, the Underwriters may purchase and sell common shares in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with this offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the common shares and syndicate short positions involve the sale by the Underwriters of a greater number of common shares than they are required to purchase from the Trust in this offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the common shares sold in this offering for their account, may be reclaimed by the syndicate if such common shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the common shares, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time without notice. These transactions may be effected on the New York Stock Exchange or otherwise.
First Union Securities, Inc., a subsidiary of Wachovia Corporation, conducts its investment banking, institutional, and capital markets businesses under the trade name of Wachovia Securities. Any references to "Wachovia Securities" in this prospectus, however, do not include Wachovia Securities, Inc., a separate broker-dealer subsidiary of Wachovia Corporation and sister affiliate of First Union Securities, Inc., which may or may not be participating as a separate selling dealer in the distribution of the common shares.
The Trust anticipates that the Representatives and certain other Underwriters may from time to time act as brokers and dealers in connection with the execution of its portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as such brokers while they are Underwriters.
J.J.B. Hilliard, W.L. Lyons, Inc. one of the Underwriters, is an affiliate of BlackRock Advisors and BlackRock Financial Management.
CUSTODIAN AND TRANSFER AGENT
The Custodian of the assets of the Trust is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The Custodian performs custodial, fund accounting and portfolio accounting services. EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, will serve as the Trust's Transfer Agent with respect to the common shares.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and for the Underwriters by Clifford Chance Rogers & Wells, LLP, New York, New York. Clifford Chance Rogers & Wells, LLP may rely as to certain matters of Delaware law on the opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds ........................................................ B-2 Investment Objectives and Policies ..................................... B-2 Investment Policies and Techniques ..................................... B-4 Other Investment Policies and Techniques ............................... B-16 Management of the Trust ................................................ B-21 Portfolio Transactions and Brokerage ................................... B-27 Description of Shares .................................................. B-28 Repurchase of Common Shares ............................................ B-29 Tax Matters ............................................................ B-30 Performance Related and Comparative Information ........................ B-34 Experts ................................................................ B-36 Additional Information ................................................. B-36 Report of Independent Auditors ......................................... F-1 Financial Statements ................................................... F-2 APPENDIX A Ratings of Investments ..................................... A-1 APPENDIX B General Characteristics and Risks of Hedging Strategies .... B-1 |
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Trust collects, how the Trust protects that information and why, in certain cases, the Trust may share information with select other parties.
Generally, the Trust does not receive any non-public personal information relating to its shareholders, although certain non-public personal information of its shareholders may become available to the Trust. The Trust does not disclose any non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts (for example, to a transfer agent or third party administrator).
The Trust restricts access to non-public personal information about its shareholders to employees of the Trust's investment advisor and its affiliates with a legitimate business need for the information. The Trust maintains physical, electronic and procedural safeguards designed to protect the non-public personal information of its shareholders.
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THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION 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, DATED OCTOBER 24, 2001
BlackRock Core Bond Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Core Bond Trust (the "Trust") is a newly organized, diversified,
closed-end management investment company. This Statement of Additional
Information relating to common shares does not constitute a prospectus, but
should be read in conjunction with the prospectus relating thereto dated October
, 2001. This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing common
shares, and investors should obtain and read the prospectus prior to purchasing
such shares. A copy of the prospectus may be obtained without charge by calling
(888) 825-2257. You may also obtain a copy of the prospectus on the Securities
and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used
but not defined in this Statement of Additional Information have the meanings
ascribed to them in the prospectus.
Use of Proceeds ........................................................ B-2 Investment Objectives and Policies ..................................... B-2 Investment Policies and Techniques ..................................... B-4 Other Investment Policies and Techniques ............................... B-16 Management of the Trust ................................................ B-21 Portfolio Transactions and Brokerage ................................... B-27 Description of Shares .................................................. B-28 Repurchase of Common Shares ............................................ B-29 Tax Matters ............................................................ B-30 Performance Related and Comparative Information ........................ B-34 Experts ................................................................ B-36 Additional Information ................................................. B-36 Report of Independent Auditors ......................................... F-1 Financial Statements ................................................... F-2 APPENDIX A Ratings of Investments ..................................... A-1 APPENDIX B General Characteristics and Risks of Hedging Strategies .... B-1 |
This Statement of Additional Information is dated October , 2001.
USE OF PROCEEDS
Pending investment in bonds that meet the Trust's investment objective and policies, the net proceeds of the offering will be invested in, short-term money market securities with relatively low volatility (such as U.S. government securities and intermediate-term bonds), to the extent such securities are available. If necessary, the Trust may also purchase, as temporary investments, securities of other open- or closed-end investment companies that invest primarily in bonds of the type in which the Trust may invest directly.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT RESTRICTIONS
Except as described below, the Trust, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding common shares and any Preferred Shares voting together as a single class, and of the holders of a majority of any outstanding Preferred Shares voting as a separate class:
(1) invest 25% or more of the value of its total managed assets in any one industry.
(2) With respect to 75% of its total managed assets, invest more than 5% of the value of its total managed assets in the securities of any single issuer or purchase more than 10% of the outstanding voting securities of any one issuer.
(3) issue senior securities or borrow money other than as permitted by the Investment Company Act or pledge its assets other than to secure such issuances or in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies;
(4) make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed-income securities consistent with the Trust's investment objective and policies or the entry into repurchase agreements;
(5) underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own securities the Trust may be deemed to be an underwriter;
(6) purchase or sell real estate or interests therein other than bonds secured by real estate or interests therein, provided that the Trust may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
(7) purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the Trust becoming subject to registration with the Commodity Futures Trading Commission (the "CFTC") as a commodity pool.
When used with respect to particular shares of the Trust, "majority of the outstanding" means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1) and
(2) above, securities of the U.S. government, its agencies, or
instrumentalities, and securities backed by the credit of a governmental entity
are not considered to represent industries. However, obligations backed only by
the assets and revenues of non-governmental issuers may for this purpose be
deemed to be issued by such non-governmental issuers.
Under the Investment Company Act, the Trust may invest up to 10% of its total managed assets in the aggregate in shares of other investment companies and up to 5% of its total managed assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a shareholder in any investment company, the Trust will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Trust's advisory fees and other expenses with respect to assets so invested. Holders of
common shares would therefore be subject to duplicative expenses to the extent the Trust invests in other investment companies. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein and in the prospectus. As described in the prospectus in the section entitled "Risks," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Trust is also subject to the following non-fundamental restrictions and policies, which may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with applicable laws, rules and regulations and unless after giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Trust's total managed assets and the Trust's aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that class. The Trust may also make short sales "against the box" without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security;
(2) purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act or any exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of exercising control.
Under normal market conditions, the Trust will invest at least 80% of its assets in bonds. Bonds held by the Trust may take the form of bonds, notes, bills, debentures, convertible securities, warrants attached to bonds, bank debt obligations, loan participations and assignments, trust preferred securities and securities issued by entities organized and operated for the purpose of restructuring the investment characteristics of securities. The Trust has adopted a policy to provide shareholders of the Trust at least 60 days prior notice of any change in this investment policy.
The restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
In addition, to comply with Federal tax requirements for qualification as a "regulated investment company," the Trust's investments will be limited in a manner such that at the close of each quarter of each tax year, (a) no more than 25% of the value of the Trust's total managed assets are invested in the securities (other than United States government securities or securities of other regulated investment companies) of a single issuer or two or more issuers controlled by the Trust and engaged in the same, similar or related trades or businesses and (b) with regard to at least 50% of the Trust's total managed assets, no more than 5% of its total managed assets are invested in the securities (other than United States government securities or securities of other regulated investment companies) of a single issuer. These tax-related limitations may be changed by the Trustees to the extent appropriate in light of changes to applicable tax requirements.
The Trust intends to apply for ratings for any Preferred Shares issued by the Trust from Moody's and/or S&P. In order to obtain and maintain the required ratings, the Trust will be required to comply with investment quality, diversification and other guidelines established by Moody's or S&P. Such guidelines will likely be more restrictive than the restrictions set forth above. The Trust does not anticipate that such guidelines would have a material adverse effect on the Trust's holders of common shares or its ability to achieve its investment objective. The Trust presently anticipates that any Preferred Shares that it issues would be initially given the highest ratings by Moody's (Aaa) or by S&P (AAA), but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of Preferred Shares by the Trust. Moody's and S&P receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trust's investment objective, policies and techniques that are described in the prospectus.
PORTFOLIO INVESTMENTS
The Trust will invest primarily in a portfolio of investment grade dollar denominated bonds.
Bonds rated Baa or BBB or above are considered "investment grade" securities; bonds rated Baa are considered medium grade obligations which lack outstanding investment characteristics and have speculative characteristics, while bonds rated BBB are regarded as having adequate capacity to pay principal and interest. Bonds rated below investment grade quality are obligations of issuers that are considered predominantly speculative with respect to the issuer's capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Bonds rated below investment grade tend to be less marketable than higher-quality bonds because the market for them is less broad. The market for unrated bonds is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Trust may have greater difficulty selling its portfolio securities. The Trust will be more dependent on BlackRock's research and analysis when investing in these securities.
The lower rated bonds in which the Trust may invest are securities rated in the category "C" or determined by BlackRock to be of comparable quality. Securities rated "C" are considered highly speculative and may be used to cover a situation where the issuer has filed a bankruptcy petition but debt service payments are continued. While such debt will likely have some quality and protective characteristics, those are outweighed by large uncertainties or major risk exposure to adverse conditions.
A general description of Moody's, S&P's and Fitch's ratings of bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the bonds they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, bonds with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield.
MORTGAGE RELATED AND ASSET-BACKED SECURITIES
The Trust may make significant investments in residential and commercial mortgage-related securities issued by governmental entities and private issuers. The Trust currently intends to invest a smaller portion of its assets in asset-backed securities.
The yield and maturity characteristics of mortgage-related and other asset-backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of the Trust, the maturity of mortgage-related and other asset-backed securities held by the Trust will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. Like other fixed-income securities, when interest rates rise the value of an asset-backed security generally will decline; however, when interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities.
The relationship between prepayments and interest rates may give some high-yielding mortgage-related and asset-backed securities less potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Trust will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, mortgage-related and asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that the Trust purchases mortgage-related and asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Trust's principal investment to the extent of premium paid.
The Trust may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. ("PNC Mortgage") or Midland Loan Services, Inc. ("Midland") (or Sears Mortgage if PNC Mortgage succeeded to rights and duties of Sears Mortgage) or mortgage-related securities containing loans or mortgages originated by PNC Bank or its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or their affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related securities differ from other forms of bonds, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the "Government National Mortgage Association," or "GNMA") are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. To the extent that unanticipated rates of prepayment on underlying mortgages increase the effective maturity of a mortgage-related security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is GNMA. GNMA is a wholly owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and credit of the United States Government) include the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PCs") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Trust's investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. The Trust may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers, the Advisor determines that the securities meet the Trust's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Trust's industry concentration restrictions, set forth above under "Investment Objectives and Policies," by virtue of the exclusion from that test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Trust takes the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the FHA or the VA. In the case of privately issued mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
CMOS AND REMICS. The Trust may invest in multiple class pass-through securities, including collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduit ("REMIC") pass-through or participation certificates ("REMIC Certificates"). These multiple class securities may be issued by U.S. Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs and REMICs are debt obligations of a legal entity that are collateralized by, and multiple class pass-through securities represent direct ownership interests in, a pool of residential or commercial mortgage loans or mortgage pass-through securities (the "Mortgage Assets"), the payments on which are used to make payments on the CMOs or multiple pass-through securities. Investors may purchase beneficial interests in CMOs and REMICs, which are known as "regular" interests or "residual" interests. The residual in a CMO or REMIC structure generally represents the interest in any excess cash flow remaining after making required payments of principal of and interest on the CMOs or REMICs, as well as the related administrative expenses of the issuer. Residual interests generally are junior to, and may be significantly more volatile than, "regular" CMO and REMIC interests. The Trust does not currently intend to purchase residual interests. The markets for CMOs and REMICs may be more illiquid than those of other securities.
Each class of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Principal prepayments on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially earlier than their final distribution dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among the several classes of CMOs or REMIC Certificates in various ways. In certain structures (known as "sequential pay" CMOs or REMIC Certificates), payments of principal, including any principal prepayments, on the Mortgage Assets generally are applied to the classes of CMOs or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class of sequential pay CMOs or REMIC Certificates until all other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC Certificates are those which are structured to apply principal payments and prepayments of the Mortgage Assets to two or more classes concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or sequential pay structures. These securities include accrual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until all other certificates having an earlier final distribution date have been retired and are converted thereafter to an interest-paying security, and planned amortization class ("PAC") certificates, which are parallel pay REMIC Certificates which generally require that specified amounts of principal be applied on each payment date to one or more classes of REMIC Certificates (the "PAC Certificates"), even though all other principal payments and prepayments of the Mortgage Assets are then required to be applied to one or more other classes of the Certificates. The scheduled principal payments for the PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls, if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be created that absorb most of the volatility in the underlying Mortgage Assets. These tranches tend to have market prices and yields that are much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. In addition, FNMA will be obligated to distribute on a timely basis to holders of FNMA REMIC Certificates required installments of principal and interest and to distribute the principal balance of each class of REMIC Certificates in full, whether or not sufficient funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the ultimate payment of principal as payments are required to be made on the underlying PCs. Pcs represent undivided interests in specified level payment, residential mortgages or participations therein purchased by FHLMC and placed in a PC pool. With respect to principal payments on PCs, FHLMC generally guarantees ultimate collection of all principal of the related mortgage loans without offset or deduction. FHLMC also guarantees timely payment of principal on certain PCs, referred to as "Gold PCs."
COMMERCIAL MORTGAGE-BACKED SECURITIES. Commercial mortgage-backed securities include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for commercial mortgage-backed securities developed more recently and in terms of total outstanding principal amount of issues is relatively small compared to the market for residential single-family mortgage-backed securities. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS"). Other mortgage-related securities may be equity or bonds issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-backed securities. See "Mortgage-Related Securities--Stripped Mortgage-Backed Securities." In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances the Trust may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets.
STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the "IO" class), while the other class will receive all of the principal (the principal- only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Trust's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Trust may fail to recoup some or all of its initial investment in these securities even if the security has received the highest rating from one or more nationally recognized statistical ratings organizations.
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties.
Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the benefit of the same security interest in the underlying collateral. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and
Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.
U.S. GOVERNMENT OBLIGATIONS
The Trust may purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and still others are supported only by the credit of the agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury Income Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury certificates ("CATs")). The Trust may purchase these certificates, as well as Treasury receipts and other stripped securities, which represent beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These instruments are issued at a discount to their "face value" and may (particularly in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors.
Examples of the types of U.S. Government obligations which the Trust may hold include U.S. Treasury bills, Treasury notes and Treasury bonds and the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank of the United States, the Small Business Administration, FNMA, GNMA, the General Services Administration, the Student Loan Marketing Association, the Central Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the Maritime Administration, the International Bank for Reconstruction and Development (the "World Bank"), the Asian-American Development Bank and the Inter-American Development Bank.
The Trust may purchase (i) debt securities issued by the U.S. Treasury which are direct obligations of the U.S. Government, including bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S. Government-sponsored instrumentalities and federal agencies, including FNMA, Federal Home Loan Bank and the Federal Housing Administration.
NON-INVESTMENT GRADE SECURITIES
The Trust may invest in non-investment grade or "high yield" fixed income or convertible securities commonly known to investors as "junk bonds."
High yield securities are bonds that are issued by a company whose credit rating (based on rating agencies' evaluation of the likelihood of repayment) necessitates offering a higher coupon and yield on its issues when selling them to investors who may otherwise be hesitant in purchasing the debt of such a company. While generally providing greater income and opportunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a higher risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated "Ba" or lower by Moody's or "BB" or lower by S&P) or will be non-rated. The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuer's financial
condition. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The rating assigned by a rating agency evaluates the safety of a non-investment grade security's principal and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, BlackRock performs its own analysis of the issuers whose non-investment grade securities the Trust holds. Because of this, the Trust's performance may depend more on BlackRock's own credit analysis than in the case of mutual funds investing in higher-rated securities. For a description of these ratings, see Appendix A.
In selecting non-investment grade securities, BlackRock considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the Trust. BlackRock continuously monitors the issuers of non-investment grade securities held by the Trust for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Trust so that it can make distributions. If a security's rating is reduced below the minimum credit rating that is permitted for the Trust, BlackRock will consider whether the Trust should continue to hold the security.
The costs attributable to investing in the high yield markets are usually higher for several reasons, such as higher investment research costs and higher commission and transaction costs.
The lowest rated bonds in which the Trust may invest are securities rated in the category "C" or determined by BlackRock to be of comparable quality. Securities rated "C" are considered highly speculative and may be used to cover a situation where the issuer has filed a bankruptcy petition but debt service payments are continued. While such debt will likely have some quality and protective characteristics, those are outweighed by large uncertainties or major risk exposure to adverse conditions.
SHORT-TERM FIXED-INCOME SECURITIES
For temporary defensive purposes or to keep cash on hand fully invested, the Trust may invest up to 100% of its total managed assets in cash equivalents and short-term fixed-income securities. Short-term fixed income investments are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by the Trust may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Trust purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Trust during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Trust to invest temporarily available cash. The Trust may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers' acceptances in which the Trust may invest or other securities. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Trust is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Trust is entitled to sell or take possession of the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Trust could incur a loss of both principal and interest. BlackRock monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. BlackRock does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Trust. If the seller were to be subject to a Federal bankruptcy proceeding, the ability of the Trust to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Trust and a corporation. There is no secondary market for such notes. However, they are redeemable by the Trust at any time. BlackRock will consider the financial condition of the corporation (E.G., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Trust's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Trust may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Trust may invest up to 5% of their total managed assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of interest to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for the Trust. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for the Trust to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Trust is not entitled to exercise its demand rights.
With respect to purchasable variable and floating rate instruments, BlackRock will consider the earning power, cash flows and liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to a demand feature, will monitor their financial status to meet payment on demand. Such instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for the Trust to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that the Trust is not entitled to exercise its demand rights, and the Trust could, for these or other reasons, suffer a loss with
respect to such instruments. In determining average-weighted portfolio maturity, an instrument will be deemed to have a maturity equal to either the period remaining until the next interest rate adjustment or the time the Trust involved can recover payment of principal as specified in the instrument, depending on the type of instrument involved.
DURATION MANAGEMENT AND OTHER MANAGEMENT TECHNIQUES
The Trust may use a variety of other investment management techniques and instruments. The Trust may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, "Additional Investment Management Techniques"). These Additional Investment Management Techniques may be used for duration management and other risk management techniques in an attempt to protect against possible changes in the market value of the Trust's portfolio resulting from trends in the bonds markets and changes in interest rates, to protect the Trust's unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Additional Investment Management Techniques are described below. The ability of the Trust to use them successfully will depend on BlackRock's ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of the Trust that arise from the use of Additional Investment Management Techniques will be covered by segregated liquid assets or offsetting transactions, the Trust and BlackRock believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Commodity options and futures contracts regulated by the CFTC have specific margin requirements described below and are not treated as senior securities. The use of certain Additional Investment Management Techniques may give rise to taxable income and have certain other tax consequences. See "Tax matters."
INTEREST RATE TRANSACTIONS. The Trust may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Trust expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Trust anticipates purchasing at a later date. The Trust will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. Interest rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest, E.G., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and into interest rate swaps on a net basis, I.E., the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. The Trust will accrue the net amount of the excess, if any, of the Trust's obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid securities having an aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, the Trust will have contractual remedies pursuant to the agreements related to the transaction.
The Trust will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of entering into such transaction or the parties
have entered into a collateral arrangement that in the opinion of BlackRock adequately limits the Trust's potential credit exposure on interest rate swap, cap or floor transactions to the other party.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Trust may also enter into contracts for the purchase or sale for future delivery ("futures contracts") of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. The Trust will ordinarily engage in such transactions only for BONA FIDE hedging, risk management (including duration management) and other portfolio management purposes. However, the Trust is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of the Trust's net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
CALLS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Trust may sell or purchase call options ("calls") on bonds and indices based upon the prices of futures contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and simultaneously obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by the Trust must be "covered" as long as the call is outstanding (I.E., the Trust must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by the Trust exposes the Trust during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require the Trust to hold a security, or futures contract, which it might otherwise have sold. The purchase of a call gives the Trust the right to buy a security, futures contract or index at a fixed price. Calls on futures on bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy the Trust's obligations pursuant to such instruments.
PUTS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Trust may purchase put options ("puts") that relate to bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. The Trust may also sell puts on bonds, indices or futures contracts on such securities if the Trust's contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. The Trust will not sell puts if, as a result, more than 50% of the Trust's assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the Trust may be required to buy the underlying security at a price higher than the current market price.
Appendix B contains further information about the characteristics, risks and possible benefits of Additional Investment Management Techniques and the Trust's other policies and limitations (which are not fundamental policies) relating to investment in futures contracts and options. The principal risks relating to the use of futures contracts and other Additional Investment Management Techniques are: (a) less than perfect correlation between the prices of the instrument and the market value of the securities in the Trust's portfolio; (b) possible lack of a liquid secondary market for closing out a position in such instruments; (c) losses resulting from interest rate or other market movements not anticipated by BlackRock; and (d) the obligation to meet additional variation margin or other payment requirements, all of which could result in the Trust being in a worse position than if such techniques had not been used.
To maintain greater flexibility, the Trust may invest in instruments which have the characteristics of futures contracts. These instruments may take a variety of forms, such as bonds with interest or principal payments determined by reference to the value of a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.
Certain provisions of the Code may restrict or affect the ability of the Trust to engage in Additional Investment Management Techniques. See "Tax matters."
FORWARD CURRENCY CONTRACTS
The Trust may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
(term) from the date of the forward currency contract agreed upon by the
parties, at a price set at the time the forward currency contract is entered
into. Forward currency contracts are traded directly between currency traders
(usually large commercial banks) and their customers.
The Trust may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Trust intends to acquire. The Trust may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Trust may also use forward currency contracts to shift the Trust's exposure to foreign currency exchange rate changes from one currency to another. For example, if the Trust owns securities denominated in a foreign currency and BlackRock believes that currency will decline relative to another currency, it might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Trust may also purchase forward currency contracts to enhance income when BlackRock anticipates that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities.
The Trust may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in a foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Trust could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Trust's existing investments are denominated. This type of hedge could offer advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple hedge into U.S. dollars. This type of hedge may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
The Trust may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in the value of securities denominated in a different currency if BlackRock anticipates that there will be a correlation between the two currencies.
The cost to the Trust of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Trust enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of some or all of any expected benefit of the transaction.
Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Trust will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Trust might be unable to close out a forward currency contract. In either event, the Trust would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or liquid assets in a segregated account.
The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Trust might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short term currency market movements is extremely difficult, and the successful execution of a short term hedging strategy is highly uncertain.
SHORT SALES
The Trust may make short sales of bonds. A short sale is a transaction in which the Trust sells a security it does not own in anticipation that the market price of that security will decline. The Trust may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trust may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. The Trust will also be required to segregate similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by the Trust on such security, the Trust may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time the Trust replaces the borrowed security, the Trust will incur a loss; conversely, if the price declines, the Trust will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Trust's gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
The Trust will not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its total managed assets or the Trust's aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. The Trust may also make short sales "against the box" without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
BORROWING
The Trust reserves the right to borrow funds to the extent permitted as described under the caption "Investment Objective and Policies--Investment Restrictions." The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of the Trust. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
REVERSE REPURCHASE AGREEMENTS
The Trust may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Trust with an agreement by the Trust to repurchase the securities at an agreed upon price, date and interest payment. At the time the Trust enters into a reverse repurchase agreement, it may segregate liquid instruments having a value not less than the repurchase price (including accrued interest). The use by the Trust of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Trust has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Trust in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the
Trust's obligation to repurchase the securities, and the Trust's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
DOLLAR ROLL TRANSACTIONS
To take advantage of attractive opportunities in the bond market and to enhance current income, the Trust may enter into dollar roll transactions. A dollar roll transaction involves a sale by the Trust of a mortgage-backed or other security concurrently with an agreement by the Trust to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period between the sale and repurchase, the Trust will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional instruments for the Trust, and the income from these investments will generate income for the Trust. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have been without the use of dollar rolls. At the time the Trust enters into a dollar roll transaction, it will place in a segregated account maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is maintained. The Trust's dollar rolls, together with its reverse repurchase agreements, the issuance of Preferred Shares and other borrowings, will not exceed, in the aggregate, 38% of the value of its total managed assets.
Dollar roll transactions involve the risk that the market value of the securities the Trust is required to purchase may decline below the agreed upon repurchase price of those securities. The Trust's right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investment manager's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
OTHER INVESTMENT POLICIES AND TECHNIQUES
RESTRICTED AND ILLIQUID SECURITIES
Certain of the Trust's investments may be illiquid. Illiquid securities may be subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Trust may purchase bonds on a "when-issued" basis and may purchase or sell bonds on a "forward commitment" basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but the Trust will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If the Trust disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the time the Trust entered into a transaction on a when-issued or forward commitment basis, it may segregate with its custodian cash or other liquid securities with a value not less than the value of the when-issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of the Trust. There is always a risk that the securities may not be delivered and that the Trust may incur a loss. Settlements in the ordinary course are not treated by the Trust as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
PAY-IN-KIND BONDS
The Trust may invest in Pay-in-kind, or "PIK," bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities. Similar to zero coupon obligations, PIK bonds also carry additional risk as holders of these types of securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, the Trust may obtain no return at all on its investment. The market price of PIK bonds is affected by interest rate changes to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current federal tax law requires the holder of certain PIK bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, the Trust may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
BRADY BONDS
The Trust's emerging market debt securities may include emerging market governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds are debt securities, generally denominated in U.S. dollars, issued under the framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations (primarily emerging market countries) to restructure their outstanding external indebtedness (generally, commercial bank debt). Brady Bonds are created through the exchange of existing commercial bank loans to foreign entities for new obligations in connection with debt restructuring. A significant amount of the Brady Bonds that the Trust may purchase have no or limited collateralization, and the Trust will be relying for payment of interest and (except in the case of principal collateralized Brady Bonds) principal primarily on the willingness and ability of the foreign government to make payment in accordance with the terms of the Brady Bonds. A substantial portion of the Brady Bonds and other sovereign debt securities in which the Trust may invest are likely to be acquired at a discount.
THE EURO
On January 1, 1999, 11 European countries implemented a new currency unit, the Euro, which is expected to replace the existing national currencies of these countries by December 31, 2001, and to reshape financial markets, banking systems and monetary policies in Europe and other parts of the world. The countries that initially converted or tied their currencies to the Euro are Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland, Finland, Italy, Portugal and Spain. Implementation of this plan means that financial transactions and market information, including share quotations and company accounts, in participating countries will be denominated in Euros. Participating governments will issue their bonds in Euros, and monetary policy for participating countries will be uniformly managed by a new central bank, the European Central Bank.
Although it is not possible to predict the impact of the Euro implementation plan on the Trust, the transition to the Euro may change the economic environments and behavior of investors, particularly in European markets. For example, investors may begin to view those countries using the Euro as a single entity, and BlackRock may need to adapt its investment strategy accordingly. The process of implementing the Euro also may adversely affect financial markets world-wide and may result in changes in the relative strength and value of the U.S. dollar or other major currencies, as well as possible adverse tax consequences. The transition to the Euro is likely to have a significant impact on fiscal and monetary policy in the participating countries and may produce unpredictable effects on trade and commerce generally. These resulting uncertainties could create increased volatility in financial markets world-wide.
COLLATERALIZED BOND OBLIGATIONS
The Trust may invest in collateralized bond obligations ("CBOs"), which are structured products backed by a diversified pool of high yield public or private fixed income securities. The pool of high yield securities is typically separated into tranches representing different degrees of credit quality. The top tranche of CBOs, which represents the highest credit quality in the pool, has the greatest collateralization and pays the lowest interest rate. Lower CBO tranches represent lower degrees of credit quality and pay higher interest rates to compensate for the attendant risks. The bottom tranche specifically receives the residual interest payments (i.e., money that is left over after the higher tiers have been paid) rather than a fixed interest rate. The return on the bottom tranche of CBOs is especially sensitive to the rate of defaults in the collateral pool.
MEZZANINE INVESTMENTS
The Trust may invest in certain high yield securities known as mezzanine investments, which are subordinated debt securities which are generally issued in private placements in connection with an equity security (e.g., with attached warrants). Such mezzanine investments may be issued with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected average life is significantly shorter at three to five years. Mezzanine investments are usually unsecured and subordinate to other obligations of the issuer.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Trust may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a corporation or foreign government and one
or more financial institutions ("Lenders"). The Trust's investments in Loans are
expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. Participations typically will result in the Trust having a
contractual relationship only with the Lender not the borrower. The Trust will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participation and the Trust and
only upon receipt by the Lender of the payments by the borrower. In connection
with purchasing Participations, the Trust generally has no direct right to
enforce compliance by the borrower with the terms of the loan agreement relating
to the Loan ("Loan Agreement"), nor any rights of set-off against the borrower,
and the Trust may not directly benefit from any collateral supporting the Loan
in which is has purchased the Participation. As a result the Trust will assume
the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Trust may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Trust
will acquire Participations only if the Lender interpositioned between the Trust
and the borrower is determined by BlackRock to be creditworthy. When the Trust
purchases Assignments from Lenders, the Trust will acquire direct rights against
the borrower on the Loan. However, since Assignments are arranged through
private negotiations between potential assignees and assignors, the rights and
obligations acquired by the Trust as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Trust may have difficulty disposing of Assignments and Participations. Because there is no liquid market for such securities, the Trust anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market will have an adverse impact on the value of such securities and on the Trust's ability to dispose of particular Assignments or Participations when necessary to meet the Trust's liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for Assignments and Participations also may make it more difficult for the Trust to assign a value to those securities for purposes of valuing the Trust's portfolio and calculating its net asset value.
STRUCTURED INVESTMENTS
The Trust may invest a portion of its assets in interests in entities organized and operated solely for the purpose of restructuring the investment characteristics of securities. This type of restructuring involves the
deposit with or purchase by an entity, such as a corporation or a trust, of specified instruments and the issuance by that entity of one or more classes of securities ("Structures Investments") backed by, or representing interests in the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Investments to create securities with different investment characteristics such as varying maturities, payment priorities and interest rate provisions, and the extent of the payments made with respect to Structured Investments is dependent on the extent of the cash flow on the underlying instruments. Because Structured Investments of the type in which the Trust anticipates it will invest typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments,
The Trust is permitted to invest in a class of Structured Investments that is either subordinated or not subordinated to the right of payment of another class. Subordinated Structured Investments typically have higher yields and present greater risks than unsubordinated Structured Investments,
Certain issuers of Structured Investments may be deemed to be "investment companies" as defined in the Investment Company Act. As a result, the Trust's investment in these Structured Investments may be limited by the restrictions contained in the Investment Company Act. Structured Investments are typically sold in private placement transaction, and there currently is no active trading market for Structured Investments.
CONVERTIBLE SECURITIES
The Trust may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible fixed-income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. Convertible securities rank senior to common stock in a corporation's capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. The Trust will treat investments in convertible debt securities as debt securities for purposes of its investment policies.
WARRANTS
The Trust may acquire warrants for equity securities and debt securities that are acquired as units with debt securities. Warrants are securities permitting, but not obligating, their holder to subscribe fo other securities. Warrants do not carry with them the right to dividends or voting rights with respect to the securities that they entitle their holder to purchase, and they do not represent any rights in the assets of the issuer. As a result, warrants may be considered more speculative than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date. The Trust does not intend to retain in it portfolio any common stock received upon the exercise of a warrant and will sell the common stock as promptly as practicable and in the manner that it believes will reduce its risk of a loss in connection with the sale.
PROJECT LOANS
The Trust may invest in project loans, which are fixed income securities of issuers whose revenues are primarily derived from mortgage loans to multi-family, nursing home and other real estate development projects. The principal payments on these mortgage loans will be insured by agencies and authorities of the U.S. Government.
REPURCHASE AGREEMENTS
As temporary investments, the Trust may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Trust's holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The Trust will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of BlackRock, present minimal credit risk. The risk to the Trust is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Trust might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Trust may be delayed or limited. BlackRock will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, BlackRock will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
STRIPPED, ZERO COUPONS AND DEFERRED PAYMENT OBLIGATIONS
To the extent consistent with its investment objectives, the Trust may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obligations. These participants, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, particularly SMBS, may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors, and they are often illiquid.
SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mortgage-backed obligations. A common type of SMBS will have one class receiving all of the interest ("IO" or interest only), while the other class receives all of the principal ("PO" or principal only). However, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, the Trust may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that receives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also more volatile and there is a greater risk that the initial investment will not be fully recouped.
The Trust may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments. Additionally, current federal tax law requires the holder of certain zero-coupon bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and to potentially avoid liability for federal income and excise taxes, the Trust may be required to distribute income accrued with respect to these securities and may have to dispose of Trust securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. See "Tax matters."
The Trust may invest in Deferred Payment Securities. Deferred Payment Securities are securities that remain Zero-Coupon Securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. Deferred Payment Securities are subject to greater fluctuations in value and may have lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods.
LENDING OF SECURITIES
The Trust may lend its portfolio securities to brokers, dealers and other financial institutions which meet the creditworthiness standards established by the board of trustees of the Trust ("Qualified Institutions"). By lending its portfolio securities, the Trust attempts to increase its income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Trust. The Trust may lend its portfolio securities so long as the terms and the structure of such loans are not inconsistent with the requirements of the Investment Company Act, which currently require that (a) the borrower pledge and maintain with the Trust collateral consisting of cash, a letter of credit issued by a U.S. bank, or securities issued or guaranteed by the U.S. government having a value at all times not less than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the securities loaned rises (I.E., the value of the loan is "marked to the market" on a daily basis), (c) the loan be made subject to termination by the Trust at any time and (d) the Trust receive reasonable interest on the loan (which may include the Trust's investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. The Trust will not lend portfolio securities if, as a result, the aggregate value of such loans exceeds 331/3% of the value of the Trust's total managed assets (including such loans). Loan arrangements made by the Trust will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange. All relevant facts and circumstances, including the creditworthiness of the qualified institution, will be monitored by BlackRock and will be considered in making decisions with respect to lending of securities, subject to review by the Trust's board of trustees.
The Trust may pay reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the Trust's board of trustees. In addition, voting rights may pass with the loaned securities, but if a material event were to occur affecting such a loan, the loan must be called and the securities voted.
MANAGEMENT OF THE TRUST
INVESTMENT MANAGEMENT AGREEMENT
Although BlackRock Advisors intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of BlackRock Advisors are not exclusive and BlackRock Advisors provides similar services to other investment companies and other clients and may engage in other activities.
The investment management agreement also provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, BlackRock Advisors is not liable to the Trust or any of the Trust's shareholders for any act or omission by BlackRock Advisors in the supervision or management of its respective investment activities or for any loss sustained by the Trust or the Trust's shareholders and provides for indemnification by the Trust of BlackRock Advisors, its directors, officers, employees, agents and control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations and conditions.
The investment management agreement was approved by the Trust's board of trustees on October 15, 2001, including a majority of the trustees who are not parties to the agreement or interested persons of any such party (as such term is defined in the Investment Company Act). This agreement provides for the Trust to pay a management fee at an annual rate equal to 0.55% of the average weekly value of the Trust's Managed Assets.
The investment management agreement was approved by the sole common shareholder of the Trust as of , 2001. The investment management agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated, will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Trust's board of trustees or the vote of a majority of the outstanding voting securities of the Trust (as such term is defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to the investment management agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The investment management agreement may be terminated as a whole at any time by the Trust, without the payment of any penalty, upon the vote of a majority of the Trust's board of trustees or a majority of the outstanding voting securities of the Trust or by BlackRock Advisors, on 60 days' written notice by either party to the other. The investment management agreement will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
SUB-INVESTMENT ADVISORY AGREEMENT
BlackRock Financial Management, the Sub-Advisor, is a wholly owned subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory agreement, BlackRock Advisors has appointed BlackRock Financial Management, one of its affiliates, to perform certain of the day-to-day investment management of the Trust. BlackRock Financial Management will receive a portion of the management fee paid by the Trust to BlackRock Advisors. From the management fees, BlackRock Advisors will pay BlackRock Financial Management, for serving as Sub-Advisor, a fee equal to 38% of the monthly management fees received by BlackRock Advisors.
The sub-investment advisory agreement also provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Trust will indemnify BlackRock Financial Management, its directors, officers, employees, agents, associates and control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations.
Although BlackRock Financial Management intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of BlackRock Financial Management are not exclusive and BlackRock Financial Management provides similar services to other investment companies and other clients and may engage in other activities.
The sub-investment advisory agreement was approved by the Trust's board of trustees on October 15, 2001, including a majority of the trustees who are not parties to the agreement or interested persons of any such party (as such term is defined in the Investment Company Act). The sub-investment advisory agreement was approved by the sole common shareholder of the Trust as of October , 2001. The sub-investment advisory agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated, will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Trust's board of trustees or the vote of a majority of the outstanding voting securities of the Trust (as defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to such agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The sub-investment advisory agreement may be terminated as a whole at any time by the Trust, without the payment of any penalty, upon the vote of a majority of the Trust's board of trustees or a majority of the outstanding voting securities of the Trust, or by BlackRock Advisors or BlackRock Financial Management, on 60 days' written notice by either party to the other. The sub-investment advisory agreement will also terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
TRUSTEES AND OFFICERS
The officers of the Trust manage its day-to-day operations. The officers are directly responsible to the Trust's board of trustees which sets broad policies for the Trust and chooses its officers. The following is a list
of the trustees and officers of the Trust and a brief statement of their present positions and principal occupations during the past five years. Trustees who are interested persons of the Trust (as defined in the Investment Company Act) are denoted by an asterisk (*). Trustees who are independent trustees (as defined in the Investment Company Act) (the "Independent Trustees") are denoted without an asterisk. The business address of the Trust, BlackRock Advisors and their board members and officers is 100 Bellevue Parkway, Wilmington, Delaware 19809, unless specified otherwise below. The trustees listed below are either trustees or directors of other closed-end funds in which BlackRock Advisors acts as investment advisor.
PRINCIPAL OCCUPATION DURING THE
NAME AND ADDRESS TITLE PAST FIVE YEARS AND OTHER AFFILIATIONS
------------- ---- ---------------------------
Andrew F. Brimmer Trustee President of Brimmer & Company, Inc., a Washington, D.C.- based
4400 MacArthur Blvd., N.W. economic and financial consulting firm. Director of CarrAmerica
Suite 302 Realty Corporation and Borg-Warner Automotive. Formerly member of
Washington, DC 20007 the Board of Governors of the Federal Reserve System. Formerly
Age: 75 Director of AirBorne Express, BankAmerica Corporation (Bank of
America), Bell South Corporation, College Retirement Equities
Fund (Trustee), Commodity Exchange, Inc. (Public Governor),
Connecticut Mutual Life Insurance Company, E.I. Dupont de Nemours
& Company, Equitable Life Assurance Society of the United States,
Gannett Company, Mercedes-Benz of North America, MNC Financial
Corporation (American Security Bank), NMC Capital Management,
Navistar International Corporation, PHH Corp. and UAL Corporation
(United Airlines).
Richard E. Cavanagh Trustee President and Chief Executive Officer of The Conference Board,
845 Third Avenue Inc., a leading global business membership organization, from
New York, NY 10022 1995-present. Former Executive Dean of the John F. Kennedy School
Age: 55 of Government at Harvard University from 1988-1995. Acting
Director, Harvard Center for Business and Government (1991-1993).
Formerly Partner (principal) of McKinsey & Company, Inc.
(1980-1988). Former Executive Director of Federal Cash
Management, White House Office of Management and Budget
(1977-1979). Co-author, THE WINNING PERFORMANCE (best selling
management book published in 13 national editions). Trustee
Emeritus, Wesleyan University. Trustee, Drucker Foundation,
Airplanes Group, Aircraft Finance Trust (AFT) and Educational
Testing Service (ETS). Director, Arch Chemicals, Fremont Group
and The Guardian Life Insurance Company of America.
Kent Dixon Trustee Consultant/Investor. Former President and Chief Executive Officer
430 Sandy Hook Road of Empire Federal Savings Bank of America and Banc PLUS Savings
St. Petersburg, FL 33706 Association, former Chairman of the Board, President and Chief
Age: 64 Executive Officer of Northeast Savings. Former Director of ISFA
(the owner of INVEST, a national securities brokerage service
designed for banks and thrift institutions).
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PRINCIPAL OCCUPATION DURING THE
NAME AND ADDRESS TITLE PAST FIVE YEARS AND OTHER AFFILIATIONS
------------- ---- ---------------------------
Frank J. Fabozzi Trustee Consultant. Editor of The Journal of Portfolio Management and
858 Tower View Circle Adjunct Professor of Finance at the School of Management at Yale
New Hope, PA 18938 University. Director, Guardian Mutual Funds Group. Author and
Age: 53 editor of several books on fixed income portfolio management.
Visiting Professor of Finance and Accounting at the Sloan School
of Management, Massachusetts Institute of Technology from 1986 to
August 1992.
Laurence D. Fink* Trustee Director, Chairman and Chief Executive Officer of BlackRock, Inc.
Age: 48 since its formation in 1998 and of BlackRock, Inc.'s predecessor
entities since 1988. Chairman of the Management Committee of
BlackRock, Inc. Formerly, Managing Director of the First Boston
Corporation, Member of its Management Committee, Co-head of its
Taxable Fixed Income Division and Head of its Mortgage and Real
Estate Products Group. Currently, Chairman of the Board of each
of the closed-end Trusts in which BlackRock Advisors, Inc. acts
as investment advisor, President, Treasurer and a Trustee of the
BlackRock Funds, Chairman of the Board and Director of Anthracite
Capital, Inc., a Director of BlackRock's offshore funds and
alternative products and Chairman of the Board of Nomura
BlackRock Asset Management Co., Ltd. Currently, Vice Chairman of
the Board of Trustees of Mount Sinai-New York University Medical
Center and Health System and a Member of the Board of Phoenix
House.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John E. Anderson Graduate School of
P.O. Box 1595 Management, University of California since July 1, 1993.
Pauma Valley, CA 92061 Director, Jacobs Engineering Group, Inc., Payden & Rygel
Age: 72 Investment Trust, Provident Investment Counsel Funds, Timken
Company, Motor Cargo Industries and Trust for Investment
Managers. Acting Dean of The School of Business, Hong Kong
University of Science and Technology 1990-1993. From 1978 to
September 1993, Dean of The John E. Anderson Graduate School of
Management, University of California.
Walter F. Mondale Trustee Partner, Dorsey & Whitney, a law firm (December 1996-present,
220 South Sixth Street September 1987-August 1993). Formerly, U.S. Ambassador to Japan
Minneapolis, MN 55402 (1993-1996). Formerly Vice President of the United States, U.S.
Age: 73 Senator and Attorney General of the State of Minnesota. 1984
Democratic Nominee for President of the United States. Director,
Northwest Airlines Corporation, NWA Inc., Northwest Airlines,
Inc. and UnitedHealth Group Corporation.
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PRINCIPAL OCCUPATION DURING THE
NAME AND ADDRESS TITLE PAST FIVE YEARS AND OTHER AFFILIATIONS
------------- ---- ---------------------------
Ralph L. Schlosstein* Trustee and Director since 1999 and President of BlackRock, Inc. since its
Age: 50 President formation in 1998 and of BlackRock, Inc.'s predecessor entities
since 1988. Member of the Management Committee and Investment
Strategy Group of BlackRock, Inc. Formerly, Managing Director of
Lehman Brothers, Inc. and Co-head of its Mortgage and Savings
Institutions Group. Currently, President of each of the
closed-end Trusts in which BlackRock Advisors, Inc. acts as
investment advisor and a Director and Officer of BlackRock's
alternative products. Currently, a Member of the Visiting Board
of Overseers of the John F. Kennedy School of Government at
Harvard University, the Financial Institutions Center Board of
the Wharton School of the University of Pennsylvania, and a
Trustee of New Visions for Public Education in New York City.
Formerly, a Director of Pulte Corporation and a Member of Fannie
Mae's Advisory Council.
Anne F. Ackerley Secretary Managing Director of BlackRock, Inc. since 2000. Formerly First
Age: 39 Vice President and Chief Operating Officer, Mergers and
Acquisitions Group at Merrill Lynch & Co. from 1997 to 2000;
First Vice President and Chief Operating Officer, Public Finance
Group at Merrill Lynch & Co. from 1995 to 1997; First Vice
President, Emerging Markets Fixed Income Research at Merrill
Lynch & Co. prior thereto.
Henry Gabbay Treasurer Managing Director of BlackRock, Inc. and its predecessor
Age: 54 entities.
Robert S. Kapito Vice Vice Chairman of BlackRock, Inc. and its predecessor entities.
Age: 44 President
James Kong Assistant Managing Director of BlackRock, Inc. and its predecessor
Age: 41 Treasurer entities.
Richard Shea, Esq. Vice Managing Director of BlackRock, Inc. since 2000; Chief
Age: 41 President/ Operating Officer and Chief Financial Officer of Anthracite
Tax Capital, Inc. since 1998. Formerly, Director of BlackRock, Inc.
and its predecessor entities.
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Prior to this offering, all of the outstanding shares of the Trust were owned by BlackRock Advisors.
The fees and expenses of the Independent Trustees of the Trust are paid by the Trust. The trustees who are members of the BlackRock organization receive no compensation from the Trust. During the year ended December 31, 2000, the Independent Trustees/Directors earned the compensation set forth below in their capacities as trustees/directors of the funds in the BlackRock Family of Funds. It is estimated that the Independent Trustees will receive from the Trust the amounts set forth below for the Trust's calendar year ending December 31, 2001, assuming the Trust had been in existence for the full calendar year.
TOTAL COMPENSATION FROM
ESTIMATED THE TRUST AND FUND
COMPENSATION COMPLEX PAID TO
NAME OF BOARD MEMBER FROM TRUST BOARD MEMBER(1)
--------------------- ------------
Andrew F. Brimmer .................. $ 6,000(2)(3) $160,000(4)
Richard E. Cavanagh ................ $ 6,000(2) $160,000(4)
Kent Dixon ......................... $ 6,000 $160,000
Frank J. Fabozzi ................... $ 6,000 $160,000
James Clayburn La Force, Jr ........ $ 6,000(2) $160,000(4)
Walter F. Mondale .................. $ 6,000(2) $160,000(4)
---------------
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(1) Represents the total compensation earned by such persons during the calendar year ended December 31, 2000 from the twenty-two closed-end funds advised by the Advisor (the "Fund Complex"). Two of these funds, BlackRock Target Term Trust and the BlackRock 2001 Term Trust, were terminated on December 29, 2000 and June 30, 2001, respectively. On July 31, 2001, five additional closed-end funds advised by the Advisor were added to the Fund Complex.
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La Force and Mondale may defer $1,500, $1,500, $3,750 and $1,500, respectively, pursuant to the Fund Complex's deferred compensation plan.
(3) At a meeting of the boards of directors/trustees of the Fund Complex held on August 24, 2000, Andrew F. Brimmer was appointed Olead directorO for each board of trustees/directors in the Fund Complex. For his services as lead trustee/director, Andrew F. Brimmer will be compensated in the amount of $40,000 per annum by the Fund Complex to be allocated among the funds in the Fund Complex based on each fund's relative net assets.
(4) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale deferred $12,000, $12,000, $77,500 and $31,000, respectively, pursuant to the Fund Complex's deferred compensation plan .
Each Independent Trustee/Director receives an annual fee calculated as follows: (i) $6,000 from each fund/trust in the Fund Complex and (ii) $1,500 for each meeting of each board in the Fund Complex attended by such Independent Trustee/Director. The total annual aggregate compensation for each Independent Trustee/Director is capped at $160,000 per annum, except that Dr. Brimmer receives an additional $40,000 from the Fund Complex for acting as the lead trustee/director for each board of trustees/directors in the Fund Complex. In the event that the $160,000 cap is met with respect to an Independent Trustee/Director, the amount of the Independent Trustee/Director's fee borne by each fund in the Fund Complex is reduced by reference to the net assets of the Trust relative to the other funds in the Fund Complex. In addition, the attendance fees of each Independent Trustee/Director of the funds/trusts are reduced proportionately, based on each respective fund's/trust's net assets, so that the aggregate per meeting fee for all meetings of the boards of trustees/directors of the funds/trusts held on a single day does not exceed $20,000 for any Independent Trustee/Director.
CODES OF ETHICS
The Trust, the Advisor, the Sub-Advisor and the Trust's principal underwriters have adopted codes of ethics under Rule 17j-1 of the Investment Company Act. These codes permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Trust.
INVESTMENT ADVISOR AND SUB-ADVISOR
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock Financial Management acts as the Trust's sub-advisor. BlackRock Advisors and BlackRock Financial Management are both wholly owned subsidiaries of BlackRock, Inc., which is one of the largest publicly traded investment management firms in the United States with $225 billion of assets under management as of September 30, 2001. BlackRock Advisors is one of the nation's leading fixed income managers with over $203 billion of fixed income and liquidity assets under management with over 180 professionals dedicated solely to fixed income. BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300 institutions and 200,000 individuals worldwide, including
nine of the ten largest companies in the U.S. as determined by FORTUNE MAGAZINE, through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, including the company's flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset management firm according to PENSIONS & INVESTMENTS, May 14, 2001.
The BlackRock organization has over 13 years of experience managing closed-end products and currently advises a closed-end family of 25 funds. As of September 30, 2001, BlackRock managed over $6.7 billion in closed-end products. In March 2001, a FORTUNE MAGAZINE article entitled "The Hidden Beauty of Bonds" by Andy Serwer called BlackRock "perhaps the greatest success story on Wall Street in the past half-decade." In addition, BlackRock provides risk management and investment system services to a growing number of institutional investors under the BlackRock Solutions name advising over $1.3 trillion in outside assets. Clients are served from the company's headquarters in New York City, as well as offices in Wilmington, Delaware, San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified financial services organizations in the United States, and is majority-owned by PNC and by BlackRock employees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to buy and sell securities for the Trust, the selection of brokers and dealers to effect the transactions and the negotiation of prices and any brokerage commissions. The securities in which the Trust invests are traded principally in the over-the-counter market. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of such securities usually includes a mark-up to the dealer. Securities purchased in underwritten offerings generally include, in the price, a fixed amount of compensation for the manager(s), underwriter(s) and dealer(s). The Trust may also purchase certain money market instruments directly from an issuer, in which case no commissions or discounts are paid. Purchases and sales of bonds on a stock exchange are effected through brokers who charge a commission for their services.
The Advisor and the Sub-Advisor are responsible for effecting securities transactions of the Trust and will do so in a manner deemed fair and reasonable to shareholders of the Trust and not according to any formula. The Advisor's and the Sub-Advisor's primary considerations in selecting the manner of executing securities transactions for the Trust will be prompt execution of orders, the size and breadth of the market for the security, the reliability, integrity and financial condition and execution capability of the firm, the difficulty in executing the order, and the best net price. There are many instances when, in the judgment of the Advisor or the Sub-Advisor, more than one firm can offer comparable execution services. In selecting among such firms, consideration is given to those firms which supply research and other services in addition to execution services. Consideration may also be given to the sale of shares of the Trust. However, it is not the policy of BlackRock, absent special circumstances, to pay higher commissions to a firm because it has supplied such research or other services.
The Advisor and the Sub-Advisor are able to fulfill their obligation to furnish a continuous investment program to the Trust without receiving research or other information from brokers; however, each considers access to such information to be an important element of financial management. Although such information is considered useful, its value is not determinable, as it must be reviewed and assimilated by the Advisor and/or the Sub-Advisor, and does not reduce the Advisor's and/or the Sub-Advisor's normal research activities in rendering investment advice under the investment management agreement or the sub-investment advisory agreement. It is possible that the Advisor's and/or the Sub-Advisor's expenses could be materially increased if it attempted to purchase this type of information or generate it through its own staff.
One or more of the other investment companies or accounts which the Advisor and/or the Sub-Advisor manages may own from time to time some of the same investments as the Trust. Investment decisions for the Trust are made independently from those of such other investment companies or accounts; however, from time
to time, the same investment decision may be made for more than one company or account. When two or more companies or accounts seek to purchase or sell the same securities, the securities actually purchased or sold will be allocated among the companies and accounts on a good faith equitable basis by the Advisor and/or the Sub-Advisor in their discretion in accordance with the accounts' various investment objectives. In some cases, this system may adversely affect the price or size of the position obtainable for the Trust. In other cases, however, the ability of the Trust to participate in volume transactions may produce better execution for the Trust. It is the opinion of the Trust's board of trustees that this advantage, when combined with the other benefits available due to the Advisor's or the Sub-Advisor's organization, outweighs any disadvantages that may be said to exist from exposure to simultaneous transactions.
It is not the Trust's policy to engage in transactions with the objective of seeking profits from short-term trading. It is expected that the annual portfolio turnover rate of the Trust will be approximately 100% excluding securities having a maturity of one year or less. Because it is difficult to predict accurately portfolio turnover rates, actual turnover may be higher or lower. Higher portfolio turnover results in increased Trust costs, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of securities and on the reinvestment in other securities.
DESCRIPTION OF SHARES
COMMON SHARES
The Trust intends to hold annual meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
PREFERRED SHARES
Although the terms of any Preferred Share issued by the Trust, including their dividend rate, voting rights, liquidation preference and redemption provisions, will be determined by the board of trustees (subject to applicable law and the Trust's Agreement and Declaration of Trust) when it authorizes a Preferred Shares offering, the Trust currently expects that the preference on distributions, liquidation preference, voting rights and redemption provisions of any such Preferred Shares will likely be as stated in the prospectus.
If the board of trustees determines to proceed with an offering of Preferred Shares, the terms of the Preferred Shares may be the same as, or different from, the terms described in the prospectus, subject to applicable law and the Trust's Agreement and Declaration of Trust. The board of trustees, without the approval of the holders of common shares, may authorize an offering of Preferred Shares or may determine not to authorize such an offering, and may fix the terms of the Preferred Shares to be offered.
The board of trustees (subject to applicable law and the Trust's Agreement and Declaration of Trust) may authorize an offering, without the approval of the holders of either common shares or Preferred Shares, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the board of trustees see fit. The Trust currently does not expect to issue any other classes of shares, or series of shares, except for the common shares and the Preferred Shares.
OTHER SHARES
The board of trustees (subject to applicable law and the Trust's Agreement and Declaration of Trust) may authorize an offering, without the approval of the holders of either common shares or Preferred Shares, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the board of trustees see fit. The Trust currently does not expect to issue any other classes of shares, or series of shares, except for the common shares and the Preferred Shares.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its shareholders will not have the right to cause the Trust to redeem their shares. Instead, the Trust's common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than net asset value, the Trust's board of trustees may consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of common shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Trust to an open-end investment company. The board of trustees may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred Shares are outstanding, the Trust may not purchase, redeem or otherwise acquire any of its common shares unless (1) all accrued Preferred Shares dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Trust's portfolio (determined after deducting the acquisition price of the common shares) is at least 200% of the liquidation value of the outstanding Preferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees incurred in connection with any tender offer made by the Trust will be borne by the Trust and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Trust in anticipation of share repurchases or tenders will reduce the Trust's net income. Any share repurchase, tender offer or borrowing that might be approved by the Trust's board of trustees would have to comply with the Securities Exchange Act of 1934, as amended, the Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net asset value will be made by the board of trustees at the time it considers such issue, it is the board's present policy, which may be changed by the board of trustees, not to authorize repurchases of common shares or a tender offer for such shares if: (1) such transactions, if consummated, would (a) result in the delisting of the common shares from the New York Stock Exchange, or (b) impair the Trust's status as a regulated investment company under the Code, (which would make the Trust a taxable entity, causing the Trust's income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Trust) or as a registered closed-end investment company under the Investment Company Act; (2) the Trust would not be able to liquidate portfolio securities in an orderly manner and consistent with the Trust's investment objective and policies in order to repurchase shares; or (3) there is, in the board's judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) general suspension of or limitation on prices for trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or New York banks, (d) material limitation affecting the Trust or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if shares were repurchased. The board of trustees may in the future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tender offers at or below net asset value will result in the Trust's shares trading at a price equal to their net asset value. Nevertheless, the fact that the Trust's shares may be the subject of repurchase or tender offers from
time to time, or that the Trust may be converted to an open-end investment company, may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Trust of its common shares will decrease the Trust's total managed assets which would likely have the effect of increasing the Trust's expense ratio. Any purchase by the Trust of its common shares at a time when Preferred Shares are outstanding will increase the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below net asset value, the Trust's board of trustees would likely consider all relevant factors, including the extent and duration of the discount, the liquidity of the Trust's portfolio, the impact of any action that might be taken on the Trust or its shareholders and market considerations. Based on these considerations, even if the Trust's shares should trade at a discount, the board of trustees may determine that, in the interest of the Trust and its shareholders, no action should be taken.
TAX MATTERS
U.S. FEDERAL INCOME TAX MATTERS
The following is a description of certain U.S. federal income tax consequences to a shareholder of acquiring, holding and disposing of common shares of the Trust. The discussion reflects applicable tax laws of the United States as of the date of this prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service (the "IRS") retroactively or prospectively. No attempt is made to present a detailed explanation of all U.S. federal, state, local and foreign tax concerns affecting the Trust and its shareholders, and the discussion set forth herein does not constitute tax advice. Investors are urged to consult their own tax advisers to determine the tax consequences to them of investing in the Trust.
The Trust intends to elect and to qualify for special tax treatment afforded to a regulated investment company under subchapter M of the Code. As long as it so qualifies, in any taxable year in which it distributes at least 90% of its net investment income (as defined below), the Trust (but not its shareholders) will not be subject to U.S. federal income tax to the extent that it distributes its net investment income and net realized capital gains. The Trust intends to distribute substantially all of such income.
In order to qualify to be taxed as a regulated investment company, the Trust must, among other things: (a) derive at least 90% of its net investment income which is its annual gross income (including tax-exempt interest) from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or 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 currencies, and (b) diversify its holdings so that, at the end of each fiscal quarter of the Trust (i) at least 50% of the market value of the Trust's assets is represented by cash, cash items, U.S. government securities and securities of other regulated investment companies, and other securities, with these other securities limited, with respect to any one issuer, to an amount not greater in value than 5% of the Trust's total managed assets, and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the market value of the Trust's assets is invested in the securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies) or two or more issuers controlled by the Trust and engaged in the same, similar or related trades or businesses.
As mentioned above, as a regulated investment company, the Trust generally is not subject to U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of its (i) investment company taxable income (which includes, among other items, dividends, interest, the excess of any net short-term capital gains over net long-term capital losses and other taxable income other than net capital gain (as defined below) reduced by deductible expenses) determined without regard to the deduction for dividends paid and (ii) its net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions). For purposes of satisfying the 90% distribution
requirement, a distribution will not qualify if it is a "preferential" dividend (i.e., a distribution which is not fully pro rata among shares of the same class or where there is preference to one class of stock as compared with another class except to the extent that such preference exists by reason of the issuance of such shares.). The Trust may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Trust retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to U.S. federal income tax on long-term capital gains (i) will be required to include in income their share of such undistributed long-term capital gain and (ii) will be entitled to credit their proportionate share of the tax paid by the Trust against their U.S. federal tax liability, if any, and to claim refunds to the extent the credit exceeds such liability. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder of the Trust will be increased by the amount of undistributed capital gain included in the gross income of such shareholder less the tax deemed paid by such shareholder under clause (ii) of the preceding sentence.
Dividends paid by the Trust from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income to the extent of the Trust's earning and profits. Distributions made from an excess of net long-term capital gains over net short-term capital losses ("capital gain dividends") including capital gain dividends credited to shareholders but retained by the Trust (as described above) are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Trust shares. Distributions in excess of the Trust's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Generally, not later than 60 days after the close of its taxable ear, the Trust will provide its shareholders with a written notice designating the amount of any ordinary income dividends or capital gain dividends.
The sale or other disposition of common shares of the Trust (except in the case of a redemption where a shareholder's percentage stock interest is not meaningfully reduced) will normally result in capital gain or loss to shareholders. Any loss upon the sale or exchange of Trust shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain) by the shareholder. A loss realized on a sale or exchange of shares of the Trust will be disallowed if other Trust shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however, short-term capital gains and ordinary income will currently be taxed at a maximum rate of 38.6% while long-term capital gains generally will be taxed at a maximum rate of 20%.1
Dividends are taxable to shareholders even though they are reinvested in additional shares of the Trust. Due to the Trust's expected investments, in general, distributions will not be eligible for a dividends received deduction allowed to corporations under the Code. If the Trust pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Trust and received by its shareholders on December 31 of the year in which the dividend was declared.
The IRS has taken the position in a revenue ruling that if a regulated investment company has two classes of shares, it may designate distributions made to each class in any year as consisting of no more than such class's proportionate share of particular types of income, including net long-term capital gains. A class's proportionate share of a particular type of income is determined according to the percentage of total dividends paid by the regulated investment company during such year that was paid to such class. Consequently, if both common shares and Preferred Shares are outstanding, the Trust intends to designate distributions made to the classes as consisting of particular types of income in accordance with the classes' proportionate shares of such income. Thus, capital gain dividends will be allocated between the holders of common shares and Preferred Shares in proportion to the total dividends paid to each class during the taxable year.
If the Trust utilizes leverage through borrowings, it may be restricted by loan covenants with respect to the declaration and payment of dividends in certain circumstances. Additionally, if at any time when shares of Preferred Shares are outstanding, the Trust does not meet the asset coverage requirements of the Investment Company Act, the Trust will be required to suspend distributions to holders of common shares until the asset coverage is restored. Limits on the Trust's payment of dividends may prevent the Trust from distributing at least 90% of its net income and may therefore jeopardize the Trust's qualification for taxation as a regulated investment company and/or may subject the Trust to the 4% excise tax described below. Upon any failure to meet the asset coverage requirements of the Investment Company Act, the Trust may, in its sole discretion, redeem shares of Preferred Shares in order to maintain or restore the requisite asset coverage and avoid the adverse consequences to the Trust and its shareholders of failing to qualify as a regulated investment company. There can be no assurance, however, that any such action would achieve these objectives. The Trust will endeavor to avoid restrictions on its ability to make dividend payments.
A shareholder that is a nonresident alien individuals or a foreign corporations (a "foreign investor") generally may be subject to U.S. withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 or more days during a taxable year and certain other conditions are met.
The Trust is required in certain circumstances to backup withhold on taxable dividends and certain other payments paid to non-corporate holders of the Trust's shares who do not furnish the Trust with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to a shareholder may be refunded or credited against such shareholder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS.
If in any year the Trust should fail to qualify under Subchapter M for tax treatment as a regulated investment company, the Trust would incur a regular corporate federal income tax upon its income for the year and all distributions to its shareholders would be taxable to shareholders as ordinary dividend income to the extent of the Trust's earning as and profits. The Code requires a regulated investment company to pay a nondeductible 4% excise tax to the extent the regulated investment company does not distribute, during each calendar year, 98% of its taxable income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amount from previous years, on which the Trust paid no U.S. federal income tax. While the Trust intends to distribute its income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Trust's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Trust will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.
The Trust will invest in securities rated in the lower rating categories of nationally recognized rating organizations ("junk bonds" or "high yield bonds"). Some of these junk bonds or high-yield bonds may be purchased at a discount and may therefore cause the Trust to accrue and distribute income before amounts due under the obligations are paid. In addition, a portion of the interest payments on such junk bonds and high-yield bonds may be treated as dividends for U.S. federal income tax purposes. In such cases, if the issuer of the junk
bonds or high-yield bonds is a domestic corporation, dividend payments by the Trust will be eligible for the dividends received deduction to the extent of the deemed dividend portion of such interest payments.
The Trust may write (i.e., sell) covered call and covered put options on
its portfolio securities, purchase call and put options on securities and engage
in transactions in financial futures and related options on such futures. Such
options and futures contracts that are "Section 1256 contracts" will be "marked
to market" for U.S. federal income tax purposes at the end of each taxable year,
i.e., each such option or futures contract will be treated as sold for its fair
market value on the last day of the taxable year. Unless such contact is a
forward foreign exchange contract, or is a non-equity option or a regulated
futures contract for a non-U.S. currency for which the Trust elects to have gain
or loss treated as ordinary gain or loss under Code section 988 (as described
below), gain or loss from Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Trust may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Trust solely to reduce the
risk of changes in price or interest or currency exchange rate with respect to
its investments.
The federal income tax rules governing the taxation of interest rate swaps are not entirely clear and may require the Trust to treat payment received under such arrangements as ordinary income and to amortize such payment under certain circumstances. The Trust does not anticipate that its activity in this regard will affect its qualification as a regulated investment company.
Code Section 1092, which applies to certain "straddles," may affect the taxation of the Trust's sales of securities and transactions in options and futures. Under Section 1092, the Trust may, for U.S. federal income tax purposes, be required to postpone recognition of losses incurred in certain sales of securities and certain closing transactions in options and futures.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (generally
currencies other than the U.S. dollar). In general, foreign currency gains and
losses in connection with certain debt instruments, from certain forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Trust may elect capital gain or loss
treatment for such transactions. In general, however Code Section 988 gains or
losses will increase or decrease the amount of the Trust's investment company
taxable income available to be distributed to shareholders as ordinary income.
If section 988 losses exceed other investment company taxable income during a
taxable year, the Trust would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his Trust shares. These
rules, however, will not apply to certain transactions entered into by the Trust
solely to reduce the risk of currency fluctuations with respect to its
investments.
The foregoing is a general, summary of the provisions of the Code and the Treasury Regulations in effect as they directly govern the taxation of the Trust and its shareholders. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by regulated investment companies which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific questions as to federal, foreign, state, local income or other taxes.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
10/93-9/94 10/98-12/99
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Mortgages(1) -1.14% 2.67%
Asset Backed Securities(2) 0.81% 2.22%
U.S. Corporates(3) -4.49% -1.35%
U.S. Agencies(4) -3.97% -0.77%
U.S. Governments(5) -4.04% -2.33%
High Yield(6) 3.03% 4.57%
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The chart above displays the performance of different fixed-income sectors
during the two most recent rising interest rate periods. This shows that during
rising rate environments sector performance can differ significantly -- creating
new opportunities as well.
Source: Lehman Brothers / BlackRock Advisors, Inc.
(1) LEHMAN FIXED RATE MBS INDEX
The MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The MBS Index is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. These aggregates are defined according to the following parameters:
Agency (GNMA, FNMA, FHLMC)
Program (30-year, 15-year, balloon, GPM) Pass-through coupon (6.0%, 6.5%, . . ., etc.) Origination year (1987, 1988, . . ., etc.)
In other words, each aggregate is a proxy for the outstanding pools for a given agency, program, issue year, and coupon. The index maturity and liquidity criteria are then applied to these aggregates to determine which qualify for inclusion in the index. About 600 of these generic aggregates meet the criteria.
The aggregates included in the index are priced daily using a matrix pricing routine based on trader price quotations by agency, program, coupon, and degree of seasoning.
(2) LEHMAN ASSET-BACKED SECURITIES INDEX
The Asset-Backed Securities (ABS) Index has five subsectors:
Credit and charge cards
Autos
Home equity loans
Utility
Manufactured Housing
The index includes pass-through, bullet, and controlled amortization
structures. The ABS Index includes only the senior class of each ABS issue;
subordinated tranches are not included.
(3) LEHMAN U.S. CREDIT INDEX
Publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered.
Sectors
The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations. The non-corporate sectors are Sovereign, Supranational, Foreign Agency, and Foreign Local Government.
(4) LEHMAN U.S. AGENCY INDEX
Publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government (such as USAID securities). The largest issues are Fannie Mae, the Resolution Trust Funding Corporation (REFCORP), and the Federal Home Loan Bank System (FHLB). The index includes both callable and noncallable agency securities.
(5) LEHMAN U.S. GOVERNMENT INDEX
Securities issued by the U.S. Government (i.e., securities in the Treasury
and Agency Indices).
Inclusions
Public obligations of the U.S. Treasury with a remaining maturity of
one year or more. Publicly issued debt of U.S. Government agencies,
quasi-federal corporations, and corporate or foreign debt.
(6) LEHMAN HIGH YIELD INDEX
The Lehman Brothers High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazi, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included.
Sectors
The index includes both corporate and non-corporate sectors. The corporate
sectors are Industrial, Utility, and Finance, which include both U.S. and
non-U.S. corporations. The Yankee sector has been discontinued as of 7/1/00. The
bonds in the former Yankee sector have not been removed from the index, but have
been reclassified into other sectors.
POTENTIAL TO REDUCE OVERALL INVESTMENT PORTFOLIO RISK
Historically, diversification between stocks and bonds has protected a portfolio from some of the more significant declines that an all-stock portfolio may have experienced. Consider the following illustration showing the benefit of a diversified investor's portfolio (65% stock / 35% bonds) over a 100% stock portfolio during four memorable declines over the last 20 years.*
Diversification cushions the impact of a market downturn.
100% Equity Portfolio Diversified Portfolio
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Technology Meltdown (2/29/00 - 9/30/01) -22.3% -9.8%
Russian Crisis (6/30/98 - 8/31/98) -15.3% -9.9%
Gulf War (12/31/89 - 10/31/90) -11.4% -7.2%
October 1987 Crash (8/31/87 - 11/30/87) -29.5% -18.9%
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INTERMEDIATE-TERM BONDS REMAIN ATTRACTIVE
January 31, 2001 September 28, 2001 DIFFERENCE
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4.99% 2.37% - 2.62%
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INTERMEDIATE-TERM YIELDS
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January 31, 2001 September 28, 2001 DIFFERENCE
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5.11% 4.59% - 0.52%
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The BlackRock Core Bond Trust is designed to invest in the intermediate-term portion of the yield curve. While recent interest rate reductions by the Federal Reserve have affected short-term yields - the affect on the intermediate-term has been minimal and those yields remain attractive. Source: Bloomberg / BlackRock Advisors, Inc.
Yields of three-month and ten year Treasury bonds. Past performance is no guarantee of future results.
EXPERTS
The Statement of Net Assets of the Trust as of appearing in this Statement
of Additional Information has been audited by , independent auditors, as set
forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. ,
located at , provides accounting and auditing services to
the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares offered hereby, has been filed by the Trust with the Securities and Exchange Commission (the "Commission"), Washington, D.C. The prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Trust and the shares offered hereby, reference is made to the Registration Statement. Statements contained in the prospectus and this Statement of Additional Information as to the contents of any contract or other document 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, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission.
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of BlackRock Core Bond Trust
We have audited the accompanying statement of assets and liabilities of BlackRock Core Bond Trust (the "Trust") as of , 2001 and the related statement of operations and changes in net assets for the period , 2001 (date of inception) to , 2001. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements presents fairly, in all material respects, the financial position of the Trust at , 2001 and the results of its operations and changes in its net assets for the period then ended, in conformity with accounting principles generally accepted in the United States of America.
BLACKROCK CORE BOND TRUST
STATEMENT OF ASSETS AND LIABILITIES
[TO BE PROVIDED]
APPENDIX A
Ratings of Investments
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. The following summarizes the rating categories used by Standard and Poor's for commercial paper:
"A-1" Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics
are denoted "A-1+."
"A-2" Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated
"A-1."
"A-3" Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" Issue has only a speculative capacity for timely payment.
"C" Issue has a doubtful capacity for payment.
"D" Issue is in payment default.
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Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of 9 months. The following summarizes the rating categories used by Moody's for commercial paper:
Prime-1" Issuer or related supporting institutions are considered to have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earning coverage of fixed financial charges and high internal cash generation; and well established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2" Issuer or related supporting institutions are considered to have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3" Issuer or related supporting institutions have an acceptable capacity for repayment of short-term promissory obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.
Not Prime" Issuer does not fall within any of the Prime rating categories.
Fitch short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years. The following summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" Securities possess exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
"F-1" Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
"F-2" Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could
cause these securities to be rated below investment grade.
"F-S" Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" Securities are in actual or imminent payment default.
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Fitch may also use the symbol "LOC" with its short-term ratings to indicate that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely or incomplete payment of principal or interest of unsubordinated instruments having a maturity of one year or less which are issued by United States commercial banks, thrifts and non-bank banks; non-United States banks; and broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" This designation represents Thomson BankWatch's highest rating category and indicates a very high degree of likelihood that principal and interest will be paid on a timely basis.
"TBW-2" This designation indicates that while the degree of safety regarding timely payment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" This designation represents the lowest investment grade category and indicates that while the debt is more susceptible to adverse developments (both internal and external) than obligations with higher ratings, capacity to service principal and interest in a timely fashion is considered adequate.
"TBW-4" This designation indicates that the debt is regarded as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original maturity of less than one year which is issued by bank holding companies and their principal bank subsidiaries. The following summarizes the rating categories used by IBCA for short-term debt ratings:
"A1+" Obligations which posses a particularly strong credit feature are
supported by the highest capacity for timely repayment.
"A1" Obligations are supported by the highest capacity for timely
repayment.
"A2" Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" Obligations are supported by a satisfactory capacity for timely
repayment.
"B" Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
"C" Obligations for which there is a high risk of default or which are
currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for corporate and municipal debt:
"AAA" This designation represents the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity
to pay interest and repay principal.
"AA" Debt is considered to have a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
"A" Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than debt in higher-rated categories.
"BBB" Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
"BB," "B,"
"CCC," "CC"
and "C" Debt is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
"BB" Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The "BB"rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BBB-" rating.
"B" Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B-" rating.
"CC" This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.
"CI" This rating is reserved for income bonds on which no interest is being
paid.
"D" Debt is in payment default. This rating is used when interest payments
or principal payments are not made on the date due, even if the
applicable grace period has not
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expired, unless S & P believes that such payments will be made during such grace period. "D" rating is also used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR
MINUS (-) The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative
standing within the major rating categories.
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"r" This rating is attached to highlight derivative, hybrid, and certain other obligations that S & P believes may experience high volatility or high variability in expected returns due to non-credit risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities, or currencies; certain swaps and options; and interest only and principal only mortgage securities. The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and municipal long-term debt:
"Aaa" Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
"A" Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
"Baa" Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba," "B,"
"Caa," "Ca,"
and "C" Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor
standing; "Ca" represents obligations which are speculative in a high
degree; and "C" represents the lowest rated class of bonds). "Caa,"
"Ca" and "C" bonds may be in default.
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Con.(---) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P) When applied to forward delivery bonds, indicates that the rating is provisional pending delivery of the bonds. The rating may be revised prior to delivery if changes occur in the legal documents or the underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff & Phelps for corporate and municipal long-term debt:
"AAA" Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
"AA" Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary
slightly from time to time because of economic
conditions.
"A" Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and
greater in periods of economic stress.
"BBB" Debt possesses below average protection factors but
such protection factors are still considered sufficient
for prudent investment. Considerable variability in
risk is present during economic cycles.
"BB," "B,"
"CCC," "DD,"
and "DP" Debt that possesses one of these ratings is
considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to
meet obligations when due. Debt rated "B" possesses the
risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has
considerable uncertainty as to timely payment of
principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating
"DP" represents preferred stock with dividend
arrearages.
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To provide more detailed indications of credit quality, the "AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for corporate and municipal bonds:
"AAA" Bonds considered to be investment grade and of the
highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA" Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is
generally rated "F-1+."
"A" Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
"BBB" Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an
adverse impact on these bonds, and therefore, impair
timely payment. The
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likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
"BB," "B,"
"CCC," "CC,"
"C," "DDD,"
"DD," and "D" Bonds that possess one of these ratings are considered
by Fitch to be speculative investments. The ratings
"BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest
in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating
"DDD" to "D" is an assessment of the ultimate recovery
value through reorganization or liquidation.
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To provide more detailed indications of credit quality, the Fitch ratings from and including "AA" to "BBB" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major rating categories.
IBCA assesses the investment quality of unsecured debt with an original maturity of more than one year which is issued by bank holding companies and their principal bank subsidiaries. The following summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse
changes in business, economic or financial conditions
are unlikely to increase investment risk substantially.
"AA" Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of
principal and interest is substantial, such that
adverse changes in business, economic or financial
conditions may increase investment risk, albeit not
very significantly.
"A" Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of
principal and interest is strong, although adverse
changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" Obligations for which there is currently a low
expectation of investment risk. Capacity for timely
repayment of principal and interest is adequate,
although adverse changes in business, economic or
financial conditions are more likely to lead to
increased investment risk than for obligations in other
categories.
"BB," "B,"
"CCC," "CC,"
and "C" Obligations are assigned one of these ratings where
it is considered that speculative characteristics are
present. "BB" represents the lowest degree of
speculation and indicates a possibility of investment
risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are
currently in default.
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IBCA may append a rating of plus (+) or minus (-) to a rating to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of principal or interest over the term to maturity of long term debt and preferred stock which are issued by United States commercial banks, thrifts and non-bank banks; non-United States banks; and broker-dealers. The following summarizes the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and
indicates that the ability to repay principal and
interest on a timely basis is extremely high.
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"AA" This designation indicates a very strong ability to
repay principal and interest on a timely basis with
limited incremental risk compared to issues rated in
the highest category.
"A" This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A"
could be more vulnerable to adverse developments (both
internal and external) than obligations with higher
ratings.
"BBB" This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated
"BBB" are, however, more vulnerable to adverse
developments (both internal and external) than
obligations with higher ratings.
"BB," "B,"
"CCC," and "CC," These designations are assigned by Thomson BankWatch to
non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics
regarding the likelihood of timely payment of principal
and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" This designation indicates that the long-term debt is
in default.
PLUS (+) OR
MINUS (-) The ratings from "AAA" through "CC" may include a plus
or minus sign designation which indicates where within
the respective category the issue is placed.
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MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market access risks unique to notes due in three years or less. The following summarizes the ratings used by Standard & Poor's Ratings Group for municipal notes:
"SP-1" The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and
interest. Those issues determined to possess
overwhelming safety characteristics are given a plus
(+) designation.
"SP-2" The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
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Moody's ratings for state and municipal notes and other short-term loans are designated Moody's Investment Grade ("MIG") and variable rate demand obligations are designated Variable Moody's Investment Grade ("VMIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. The following summarizes the ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/
"VMIG-1" Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows,
superior liquidity support or demonstrated broad-based
access to the market for refinancing.
"MIG-2"/
"VMIG-2" Loans bearing this designation are of high quality,
with margins of protection ample although not so large
as in the preceding group.
"MIG-3"/
"VMIG-3" Loans bearing this designation are of favorable
quality, with all security elements accounted for but
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well established.
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"MIG-4"/
"VMIG-4" Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly
regarded as required of an investment security and not
distinctly or predominantly speculative.
"SG" Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal
notes.
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APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, or to enhance income or gain as described in the prospectus, the Trust will engage in Additional Investment Management Techniques. The Trust will engage in such activities in the Advisor's or Sub-Advisor's discretion, and may not necessarily be engaging in such activities when movements in interest rates that could affect the value of the assets of the Trust occur. The Trust's ability to pursue certain of these strategies may be limited by applicable regulations of the CFTC. Certain Additional Investment Management Techniques may give rise to taxable income.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Trust may purchase and sell put and call options on securities and indices. A put option gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Trust may also purchase and sell options on bond indices ("index options"). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the bond index upon which the option is based is greater, in the case of a call, or less, in the case of a put, than the exercise price of the option. The purchase of a put option on a debt security could protect the Trust's holdings in a security or a number of securities against a substantial decline in the market value. A call option gives the purchaser of the option the right to buy and the seller the obligation to sell the underlying security or index at the exercise price during the option period or for a specified period prior to a fixed date. The purchase of a call option on a security could protect the Trust against an increase in the price of a security that it intended to purchase in the future. In the case of either put or call options that it has purchased, if the option expires without being sold or exercised, the Trust will experience a loss in the amount of the option premium plus any related commissions. When the Trust sells put and call options, it receives a premium as the seller of the option. The premium that the Trust receives for selling the option will serve as a partial hedge, in the amount of the option premium, against changes in the value of the securities in its portfolio. During the term of the option, however, a covered call seller has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price of the option if the value of the underlying security increases, but has retained the risk of loss should the price of the underlying security decline. Conversely, a secured put seller retains the risk of loss should the market value of the underlying security decline be low the exercise price of the option, less the premium received on the sale of the option. The Trust is authorized to purchase and sell exchange-listed options and over-the-counter options ("OTC Options") which are privately negotiated with the counterparty. Listed options are issued by the Options Clearing Corporation ("OCC") which guarantees the performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. OTC Options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into direct agreements with the Trust. With OTC Options, such variables as expiration date, exercise price and premium will be agreed upon between the Trust and the counterparty, without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms of that option as written, the Trust would lose the premium paid for the option as well as any anticipated benefit of
the transaction. As the Trust must rely on the credit quality of the counterparty rather than the guarantee of the OCC, it will only enter into OTC Options with counterparties with the highest long-term credit ratings, and with primary United States government securities dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
CHARACTERISTICS. The Trust may sell financial futures contracts or purchase put and call options on such futures as a hedge against anticipated interest rate changes or other market movements. The sale of a futures contract creates an obligation by the Trust, as seller, to deliver the specific type of financial instrument called for in the contract at a specified future time for a specified price. Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
MARGIN REQUIREMENTS. At the time a futures contract is purchased or sold, the Trust must allocate cash or securities as a deposit payment ("initial margin"). It is expected that the initial margin that the Trust will pay may range from approximately 1% to approximately 5% of the value of the securities or commodities underlying the contract. In certain circumstances, however, such as periods of high volatility, the Trust may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. An outstanding futures contract is valued daily and the payment in case of "variation margin" may be required, a process known as "marking to the market." Transactions in listed options and futures are usually settled by entering into an offsetting transaction, and are subject to the risk that the position may not be able to be closed if no offsetting transaction can be arranged.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES. The Trust's use of futures and options on futures will in all cases be consistent with applicable regulatory requirements and in particular the rules and regulations of the CFTC. Under such regulations the Trust currently may enter into such transactions without limit for BONA FIDE hedging purposes, including risk management and duration management and other portfolio strategies. The Trust may also engage in transactions in futures contracts or related options for non-hedging purposes to enhance income or gain provided that the Trust will not enter into a futures contract or related option (except for closing transactions) for purposes other than BONA FIDE hedging, or risk management including duration management if, immediately thereafter, the sum of the amount of its initial deposits and premiums on open contracts and options would exceed 5% of the Trust's liquidation value, I.E., net assets (taken at current value); provided, however, that in the case of an option that is in-the-money at the time of the purchase, the in-the-money amount may be excluded in calculating the 5% limitation. Also, when required, a segregated account of cash equivalents will be maintained and marked to market on a daily basis in an amount equal to the market value of the contract. The Trust reserves the right to comply with such different standard as may be established from time to time by CFTC rules and regulations with respect to the purchase or sale of futures contracts or options thereon.
SEGREGATION AND COVER REQUIREMENTS. Futures contracts, interest rate swaps, caps, floors and collars, short sales, reverse repurchase agreements and dollar rolls, and listed or OTC options on securities, indices and futures contracts sold by the Trust are generally subject to segregation and coverage requirements of either the CFTC or the SEC, with the result that, if the Trust does not hold the security or futures contract underlying the instrument, the T rust will be required to segregate on an ongoing basis with its custodian, cash, U.S. government securities, or other liquid high grade debt obligations in an amount at least equal to the Trust's obligations with respect to such instruments. Such amounts fluctuate as the obligations increase or decrease. The segregation requirement
can result in the Trust maintaining securities positions it would otherwise liquidate, segregating assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks. With respect to hedging and risk management, the variable degree of correlation between price movements of hedging instruments and price movements in the position being hedged create the possibility that losses on the hedge may be greater than gains in the value of the Trust's position. The same is true for such instruments entered into for income or gain. In addition, certain instruments and markets may not be liquid in all circumstances. As a result, in volatile markets, the Trust may not be able to close out a transaction without incurring losses substantially greater than the initial deposit. Although the contemplated use of these instruments predominantly for hedging should tend to minimize the risk of loss due to a decline in the value of the position, at the same time they tend to limit any potential gain which might result from an increase in the value of such position. The ability of the Trust to successfully utilize Additional Investment Management Techniques will depend on the Advisor's and the Sub-Advisor's ability to predict pertinent market movements and sufficient correlations, which cannot be assured. Finally, the daily deposit requirements in futures contracts that the Trust has sold create an on going greater potential financial risk than do options transactions, where the exposure is limited to the cost of the initial premium. Losses due to the use of Additional Investment Management Techniques will reduce net asset value.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Part A--Report of Independent Accountants.(3)
Part B--Statement of Assets and Liabilities.(3)
(2) EXHIBITS
(a) Agreement and Declaration of Trust.(1)
(b) By-Laws.(1)
(c) Inapplicable.
(d) Form of Specimen Certificate.(3)
(e) Form of Dividend Reinvestment Plan.(2)
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.(2)
(g)(2) Form of Sub-Investment Advisory Agreement.(2)
(h) Form of Underwriting Agreement.(3)
(i) Form of Deferred Compensation Plan for Independent Trustees.(2)
(j) Form of Custodian Agreement.(3)
(k) Form of Transfer Agency Agreement.(3)
(l) Opinion and Consent of Counsel to the Trust.(3)
(m) Inapplicable.
(n) Consent of Independent Public Accountants.(3)
(o) Inapplicable.
(p) Form of Initial Subscription Agreement.(2)
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.(2)
(r)(2) Code of Ethics of Advisor and Sub-Advisor.(2)
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons, Inc.(2)
(s) Powers of Attorney1
2 Filed herewith.
3 To be filed by Amendment.
ITEM 25. MARKETING ARRANGEMENTS
Reference is made to the Form of Underwriting Agreement for the Registrant's shares of beneficial interest filed herewith.
Part C-1
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this registration statement:
Registration fees ........................................... $
New York Stock Exchange listing fee .........................
Printing (other than certificates) ..........................
Engraving and printing certificates .........................
Accounting fees and expenses ................................
Legal fees and expenses .....................................
NASD fee Miscellaneous ......................................
Total ..................................................... $
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SHARES
NUMBER OF
RECORD
TITLE OF CLASS HOLDERS
-------- -------
Shares of Beneficial Interest........................ 0
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ITEM 29. INDEMNIFICATION
Article V of the Registrant's Agreement and Declaration of Trust provides as follows:
5.1 NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No Shareholder of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation for profit incorporated under the Delaware General Corporation Law. No Trustee or officer of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception, he shall not, on account thereof, be held to any personal liability. Any repeal or modification of this Section 5.1 shall not adversely affect any right or protection of a Trustee or officer of the Trust existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
5.2 MANDATORY INDEMNIFICATION. (a) The Trust hereby agrees to indemnify each person who at any time serves as a Trustee or officer of the Trust (each such person being an "indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth in this Article V by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that
Part C-2
no indemnitee shall be indemnified hereunder against any liability to any person
or any expense of such indemnitee arising by reason of (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling conduct").
Notwithstanding the foregoing, with respect to any action, suit or other
proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action, suit
or other proceeding by such indemnitee (1) was authorized by a majority of the
Trustees or (2) was instituted by the indemnitee to enforce his or her rights to
indemnification hereunder in a case in which the indemnitee is found to be
entitled to such indemnification. The rights to indemnification set forth in
this Declaration shall continue as to a person who has ceased to be a Trustee or
officer of the Trust and shall inure to the benefit of his or her heirs,
executors and personal and legal representatives. No amendment or restatement of
this Declaration or repeal of any of its provisions shall limit or eliminate any
of the benefits provided to any person who at any time is or was a Trustee or
officer of the Trust or otherwise entitled to indemnification hereunder in
respect of any act or omission that occurred prior to such amendment,
restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (1) a majority vote of a quorum of those Trustees who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the Investment Company Act) nor parties to the proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in a written opinion concludes that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses
of defending any action with respect to which indemnification might be sought
hereunder if the Trust receives a written affirmation by the indemnitee of the
indemnitee's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Trust
unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the Trustees determine that the applicable
standards of conduct necessary for indemnification appear to have been met. In
addition, at least one of the following conditions must be met: (i) the
indemnitee shall provide adequate security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not exclude any other right which any person may have or hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of stockholders or Trustees who are "disinterested persons" (as defined in Section 2(a)(19) of the 1940 Act) or any other right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons, provided that such indemnification has been approved by a majority of the Trustees.
5.3 NO BOND REQUIRED OF TRUSTEES. No Trustee shall, as such, be obligated to give any bond or other security for the performance of any of his duties hereunder.
Part C-3
5.4 NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS, ETC. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust 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, undertaking, instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken 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. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.5 RELIANCE ON EXPERTS, ETC. Each Trustee and officer or employee of the Trust shall, in the performance of its 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 books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trust's officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
Insofar as indemnification for liabilities arising under the Act, may be terminated to Trustees, officers and controlling persons of the Trust, pursuant to the foregoing provisions or otherwise, the Trust 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 Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Reference is made to Article 8 of the underwriting agreement attached as Exhibit (h), which is incorporated herein by reference.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Not Applicable
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's accounts, books and other documents are currently located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100 Bellevue Parkway, Wilmington, Delaware 19809 and at the offices of State Street Bank and Trust Company, the Registrant's Custodian, and EquiServe Trust Company, N.A., the Registrant's Transfer Agent and Dividend Disbursing Agent.
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
(1) The Registrant hereby undertakes to suspend the offering of its units
until it amends its prospectus if (a) subsequent to the effective date of its
registration statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
Part C-4
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497 (h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act of 1933, 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 the 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 a written or oral request, any Statement of Additional Information.
Part C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 25th day of October, 2001.
/s/ RALPH L. SCHLOSSTEIN
-----------------------------
Ralph L. Schlosstein
Trustee, President, Chief Executive Officer and
Chief Financial Officer
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities set forth below on the 25th day of October, 2001.
NAME TITLE
---- ---
/s/ Ralph L. Schlosstein Trustee, President,
-----------------------------
Ralph L. Schlosstein Chief Executive Officer and
Chief Financial Officer
* Trustee
-----------------------------
Andrew F. Brimmer
* Trustee
-----------------------------
Richard E. Cavanagh
* Trustee
-----------------------------
Kent Dixon
* Trustee
-----------------------------
Frank J. Fabozzi
* Trustee
-----------------------------
Laurence D. Fink
* Trustee
-----------------------------
James Clayburn La Force, Jr.
Trustee
-----------------------------
Walter F. Mondale
* By: /s/ Ralph L. Schlosstein
----------------------
Ralph L. Schlosstein
Attorney-in-fact
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Part C-6
INDEX TO EXHIBITS
(e) Form of Dividend Reinvestment Plan
(g)(1) Form of Investment Management Agreement
(g)(2) Form of Sub-Investment Advisory Agreement
(i) Form of Deferred Compensation Plan for Independent Trustees
(p) Form of Initial Subscription Agreement
(r)(1) Code of Ethics of the Trust
(r)(2) Code of Ethics of Advisor and Sub-Advisor
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons, Inc.
Part C-7
EXHIBIT (e)
FORM OF
BLACKROCK CORE BOND TRUST
AUTOMATIC DIVIDEND REINVESTMENT PLAN
TERMS AND CONDITIONS
Pursuant to the Automatic Dividend Reinvestment Plan (the "Plan") of BlackRock Core Bond Trust (the "Trust"), unless a holder (each, a "Shareholder") of the Trust's common shares of beneficial interest (the "Common Shares") otherwise elects, all dividends and distributions on such Shareholder's Common Shares will be automatically reinvested by Equiserve Trust Company, N.A. ("Equiserve"), as agent for Shareholders in administering the Plan (the "Plan Agent"), in additional Common Shares of the Trust. Shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the Shareholder of record (or, if the Common Shares are held in street or other nominee name, then to such nominee) by Equiserve as the Dividend Disbursing Agent. Such participants may elect not to participate in the Plan and to receive all dividends and distributions in cash by sending written instructions to Equiserve, as the Dividend Disbursing Agent, at the address set forth below. 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 not less than ten days prior to any dividend or distribution payment date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or distribution.
The Plan Agent will open an account for each Shareholder under the Plan in the same name in which such Shareholder's Common Shares are registered. Whenever the Trust declares a dividend or a distribution (collectively referred to as "dividends") payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Agent for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares from the Trust ("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 (the "NYSE"), the primary national securities exchange on which the common shares are traded (the
"Exchange"), or elsewhere. If, on the payment date for any dividend, the net asset value per Common Share is equal to or less than the market price per Common Share (such condition being referred to herein as "market premium"), the Plan Agent will invest the dividend 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 dividend by the net asset value per Common Share on the date the Common Shares are issued. If, on the payment date for any dividend, the net asset value per Common Share is greater than the market value (such condition being referred to herein as "market discount"), the Plan Agent will invest the dividend amount in Common Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the payment date for any dividend, the Plan Agent will have until the last business day before the next date on which the Common Shares trade on an "ex-dividend" basis or 30 days after the payment date for such dividend, whichever is sooner (the "last purchase date"), to invest the dividend amount in Common Shares acquired in open-market purchases. It is contemplated that the Trust will pay monthly dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of each dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. 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 may exceed the net asset value of the Common Shares, resulting in the acquisition of fewer Common Shares than if the dividend had been paid in newly issued Common Shares on the dividend payment date. Because of the foregoing difficulty with respect to open market purchases, if the Plan Agent is unable to invest the full dividend 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 may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued Common Shares at the net asset value per Common Share at the close of business on the last purchase date.
The Plan Agent will maintain all Shareholders' accounts in the Plan and furnish written confirmation of all transactions in the accounts, including information needed by 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.
In the case of 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 Shareholder 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 Trust as a result of dividends or capital gains distributions payable either in Common Shares or in cash. However, each 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 dividends.
VOTING
Each Shareholder 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.
TAXATION
The automatic reinvestment of dividends will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such dividends.
AMENDMENT OF THE PLAN
The Plan may be amended or terminated by the Trust or the Plan Agent. There is no direct service charge to participants in the Plan; however, the Trust reserves the right to amend the Plan to include a service charge payable by the participants. Notice will be sent to Plan participants of any amendments as soon as practicable after such action by the Trust.
INQUIRIES REGARDING THE PLAN
All correspondence concerning the Plan should be directed to the Plan Agent at 150 Royall Street, Canton, MA 02021, 781-575-2149.
APPLICABLE LAW
These terms and conditions shall be governed by the laws of the State of New York without regard to its conflicts of laws provisions.
EXECUTION
To record the adoption of the Plan as of [_________], 2001, the Trust has caused this Plan to be executed in the name and on behalf of the Trust by a duly authorized officer.
BLACKROCK CORE BOND TRUST,
a Delaware business trust
Exhibit (g)(1)
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT, dated [___________________________], 2001, between BlackRock Core Bond Trust (the "Trust"), a Delaware business trust, and BlackRock Advisors, Inc. (the "Advisor"), a Delaware corporation.
WHEREAS, the Advisor has agreed to furnish investment advisory services to the Trust, a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, this Agreement has been approved in accordance with the provisions of the 1940 Act, and the Advisor is willing to furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. IN GENERAL. The Advisor agrees, all as more fully set forth herein, to act as investment advisor to the Trust with respect to the investment of the Trust's assets and to supervise and arrange for the day-to-day operations of the Trust and the purchase of securities for and the sale of securities held in the investment portfolio of the Trust.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO INVESTMENT OF ASSETS OF THE TRUST. Subject to the succeeding provisions of this section and subject to the direction and control of the Trust's Board of Trustees, the Advisor shall (i) act as investment advisor for and supervise and manage the investment and reinvestment of the Trust's assets and in connection therewith have complete discretion in purchasing and selling securities and other assets for the Trust and in voting, exercising consents and exercising all other rights appertaining to such securities and other assets on behalf of the Trust; (ii) supervise continuously the investment program of the Trust and the composition of its investment portfolio; (iii) arrange, subject to the provisions of paragraph 4 hereof, for the purchase and sale of securities and other assets held in the investment portfolio of the Trust; and (iv) provide investment research to the Trust.
3. DUTIES AND OBLIGATIONS OF ADVISOR WITH RESPECT TO THE ADMINISTRATION OF THE TRUST. The Advisor also agrees to furnish office facilities and equipment and clerical, bookkeeping and administrative services (other than such services, if any, provided by the Trust's Custodian, Transfer Agent and Dividend Disbursing Agent and other service providers) for the Trust. To the extent requested by the Trust, the Advisor agrees to provide the following administrative services:
(a) Oversee the determination and publication of the Trust's net asset value in accordance with the Trust's policy as adopted from time to time by the Board of Trustees;
(b) Oversee the maintenance of the Trust's Custodian and Transfer Agent and Dividend Disbursing Agent of certain books and records of the Trust as required under Rule 31a-1(b)(4) of the 1940 Act and maintain (or oversee maintenance by such other persons as approved by the Board of Trustees) such other books and records required by law or for the proper operation of the Trust;
(c) Oversee the preparation and filing of the Trust's federal, state and local income tax returns and any other required tax returns;
(d) Review the appropriateness of and arrange for payment of the Trust's expenses;
(e) Prepare for review and approval by officers of the Trust financial information for the Trust's semi-annual and annual reports, proxy statements and other communications with shareholders required or otherwise to be sent to Trust shareholders, and arrange for the printing and dissemination of such reports and communications to shareholders;
(f) Prepare for review by an officer of the Trust the Trust's periodic financial reports required to be filed with the Securities and Exchange Commission ("SEC") on Form N-SAR and such other reports, forms and filings, as may be mutually agreed upon;
(g) Prepare reports relating to the business and affairs of the Trust as may be mutually agreed upon and not otherwise appropriately prepared by the Trust's custodian, counsel or auditors;
(h) Prepare such information and reports as may be required by any stock exchange or exchanges on which the Trust's shares are listed;
(i) Make such reports and recommendations to the Board of Trustees concerning the performance of the independent accountants as the Board of Trustees may reasonably request or deems appropriate;
(j) Make such reports and recommendations to the Board of Trustees concerning the performance and fees of the Trust's Custodian and Transfer and Dividend disbursing agent as the Board of Trustees may reasonably request or deems appropriate;
(k) Oversee and review calculations of fees paid to the Trust's service providers;
(l) Oversee the Trust's portfolio and perform necessary calculations as required under Section 18 of the 1940 Act;
(m) Consult with the Trust's officers, independent accountants, legal counsel, custodian, accounting agent and transfer and dividend disbursing agent in establishing the accounting policies of the Trust and monitor financial and shareholder accounting services;
(n) Review implementation of any share purchase programs authorized by the Board of Trustees;
(o) Determine the amounts available for distribution as dividends and distributions to be paid by the Trust to its shareholders; prepare and arrange for the printing of dividend notices to shareholders; and provide the Trust's dividend disbursing agent and custodian with such information as is required for such parties to effect the payment of dividends and distributions and to implement the Trust's dividend reinvestment plan;
(p) Prepare such information and reports as may be required by any banks from which the Trust borrows funds;
(q) Provide such assistance to the Custodian and the Trust's counsel and auditors as generally may be required to properly carry on the business and operations of the Trust;
(r) Assist in the preparation and filing of Forms 3, 4, and
5 pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, and
Section 30(f) of the 1940 Act for the officers and trustees of the Trust, such
filings to be based on information provided by those persons;
(s) Respond to or refer to the Trust's officers or transfer agent, shareholder (including any potential shareholder) inquiries relating to the Trust.
(t) Supervise any other aspects of the Trust's administration as may be agreed to by the Trust and the Advisor.
All services are to be furnished through the medium of any directors, officers or employees of the Advisor or its affiliates as the Advisor deems appropriate in order to fulfill its obligations hereunder.
The Trust will reimburse the Advisor or its affiliates for all out-of-pocket expenses incurred by them in connection with the performance of the administrative services described in this paragraph 3.
4. COVENANTS. In the performance of its duties under this Agreement, the Advisor shall at all times conform to, and act in accordance with, any requirements imposed by:
(a) (i) the provisions of the 1940 Act and the Investment Advisers Act of 1940, as amended, and all applicable Rules and Regulations of the Securities and Exchange Commission (the "SEC"); (ii) any other applicable provision of law; (iii) the provisions of the Agreement and Declaration of Trust, as amended and restated, and By-Laws of the Trust, as such documents are amended from time to time; (iv) the investment objectives and policies of the Trust as set forth in its Registration Statement on Form N-2; and (v) any policies and determinations of the Board of Trustees of the Trust;
(b) will place orders either directly with the issuer or with any broker or dealer. Subject to the other provisions of this paragraph, in placing orders with brokers and dealers, the Advisor will attempt to obtain the best price and the most favorable execution of its orders. In placing orders, the Advisor will consider the experience and skill of the firm's securities traders as well as the firm's financial responsibility and administrative efficiency. Consistent with this obligation, the Advisor may select brokers on the basis of the research, statistical and pricing services they provide to the Trust and other clients of the Advisor. Information and
research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Advisor hereunder. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Advisor determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the Advisor to the Trust and its other clients and that the total commissions paid by the Trust will be reasonable in relation to the benefits to the Trust over the long-term. In addition, the Advisor is authorized to take into account the sale of shares of the Trust in allocating purchase and sale orders for portfolio securities to brokers or dealers (including brokers and dealers that are affiliated with the Advisor), provided that the Advisor believes that the quality of the transaction and the commission are comparable to what they would be with other qualified firms. In no instance, however, will the Trust's securities be purchased from or sold to the Advisor, or any affiliated person thereof, except to the extent permitted by the SEC or by applicable law;
(c) will maintain a policy and practice of conducting its in vestment advisory services hereunder independently of the commercial banking operations of its affiliates. When the Advisor makes investment recommendations for the Trust, its investment advisory personnel will not inquire or take into consideration whether the issuer of securities proposed for purchase or sale for the Trust's account are customers of the commercial department of its affiliates; and
(d) will treat confidentially and as proprietary information of the Trust all records and other information relative to the Trust, and the Trust's prior, current or potential shareholders, and will not use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Trust, which approval shall not be unreasonably withheld and may not be withheld where the Advisor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Trust.
5. SERVICES NOT EXCLUSIVE. Nothing in this Agreement shall prevent the Advisor or any officer, employee or other affiliate thereof from acting as investment advisor for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Advisor or any of its officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however, that the Advisor will undertake no activities which, in its
judgment, will adversely affect the performance of its obligations under this Agreement.
6. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Advisor hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trust's request. The Advisor further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
7. AGENCY CROSS TRANSACTIONS. From time to time, the Advisor or brokers or dealers affiliated with it may find themselves in a position to buy for certain of their brokerage clients (each an "Account") securities which the Advisor's investment advisory clients wish to sell, and to sell for certain of their brokerage clients securities which advisory clients wish to buy. Where one of the parties is an advisory client, the Advisor or the affiliated broker or dealer cannot participate in this type of transaction (known as a cross transaction) on behalf of an advisory client and retain commissions from one or both parties to the transaction without the advisory client's consent. This is because in a situation where the Advisor is making the investment decision (as opposed to a brokerage client who makes his own investment decisions), and the Advisor or an affiliate is receiving commissions from both sides of the transaction, there is a potential conflicting division of loyalties and responsibilities on the Advisor's part regarding the advisory client. The Securities and Ex change Commission has adopted a rule under the Investment Advisers Act of 1940, as amended, which permits the Advisor or its affiliates to participate on behalf of an Account in agency cross transactions if the advisory client has given written consent in advance. By execution of this Agreement, the Trust authorizes the Advisor or its affiliates to participate in agency cross transactions involving an Account. The Trust may revoke its consent at any time by written notice to the Advisor.
8. EXPENSES. During the term of this Agreement, the Advisor will bear all costs and expenses of its employees and any overhead incurred in connection with its duties hereunder and shall bear the costs of any salaries or trustees fees of any officers or trustees of the Trust who are affiliated persons (as defined in the 1940 Act) of the Advisor; provided that the Board of Trustees of the Trust may approve reimbursement to the Advisor of the pro rata portion of the salaries, bonuses, health insurance, retirement benefits and all similar employment costs for the time spent on Trust operations (other than the provision of investment advice and administrative services required to be provided hereunder) of all personnel employed by the Advisor
who devote substantial time to Trust operations or the operations of other investment companies advised by the Advisor.
9. COMPENSATION OF THE ADVISOR. (a) The Trust agrees to pay to the Advisor and the Advisor agrees to accept as full compensation for all services rendered by the Advisor as such, a monthly fee (the "Investment Advisory Fee") in arrears at an annual rate equal to 0.55% of the average weekly value of the Trust's Managed Assets. "Managed Assets" means the total assets of the Trust minus the sum of the accrued liabilities (other than the aggregate indebtedness constituting financial leverage). For any period less than a month during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(b) For purposes of this Agreement, the net assets of the Trust shall be calculated pursuant to the procedures adopted by resolutions of the Trustees of the Trust for calculating the value of the Trust's assets or delegating such calculations to third parties.
10. INDEMNITY. (a) The Trust hereby agrees to indemnify the Advisor, and each of the Advisor's directors, officers, employees, agents, associates and controlling persons and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Advisor's request as director, officer, partner, member, trustee or the like of another entity) (each such person being an "Indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnitee may be or may have been involved as a party or otherwise or with which such Indemnitee may be or may have been threatened, while acting in any capacity set forth herein or thereafter by reason of such Indemnitee having acted in any such capacity, except with respect to any matter as to which such Indemnitee shall have been adjudicated not to have acted in good faith in the reasonable belief that such Indemnitee's action was in the best interest of the Trust and furthermore, in the case of any criminal proceeding, so long as such Indemnitee had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no Indemnitee shall be indemnified hereunder against any liability to the Trust or its shareholders or any expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of such
Indemnitee's position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct"), (2) as to any matter disposed of by settlement or a compromise payment by such Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Trust and that such Indemnitee appears to have acted in good faith in the reasonable belief that such Indemnitee's action was in the best interest of the Trust and did not involve disabling conduct by such Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee was authorized by a majority of the full Board of Trustees of the Trust.
(b) The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Trust unless it is subsequently determined that such Indemnitee is entitled to such indemnification and if the trustees of the Trust determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (A) the Indemnitee shall provide a security for such Indemnitee-undertaking, (B) the Trust shall be insured against losses arising by reason of any lawful advance, or (C) a majority of a quorum consisting of trustees of the Trust who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested Non-Party Trustees") or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification.
(c) All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body before whom the proceeding was brought that such Indemnitee is not liable or is not liable by reason of disabling conduct, or (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Trustees of the Trust, or (ii) if such a quorum is not obtainable or, even if obtainable, if a majority vote of such quorum so directs, independent legal counsel in a written opinion. All determinations that advance payments in connection with the expense of defending any proceeding shall be authorized shall be made in accordance with the immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall not exclude any other right to which such Indemnitee may be lawfully entitled.
11. LIMITATION ON LIABILITY. (a) The Advisor will not be liable for any error of judgment or mistake of law or for any loss suffered by Advisor or by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties under this Agreement.
(b) Notwithstanding anything to the contrary contained in
this Agreement, the parties hereto acknowledge and agree that, as provided in
Section 5.1 of Article V of the Declaration of Trust, and amended and restated,
this Agreement is executed by the Trustees and/or officers of the Trust, not
individually but as such Trustees and/or officers of the Trust, and the
obligations hereunder are not binding upon any of the Trustees or Shareholders
individually but bind only the estate of the Trust.
12. DURATION AND TERMINATION. This Agreement shall become effective as of the date hereof and, unless sooner terminated with respect to the Trust as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust for successive periods of 12 months, provided such continuance is specifically approved at least annually by both (a) the vote of a majority of the Trust's Board of Trustees or the vote of a majority of the outstanding voting securities of the Trust at the time outstanding and entitled to vote, and (b) by the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. Notwithstanding the foregoing, this Agreement may be terminated by the Trust at any time, without the payment of any penalty, upon giving the Advisor 60 days' notice (which notice may be waived by the Advisor), provided that such termination by the Trust shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the vote of the holders of a majority of the voting securities of the Trust at the time outstanding and entitled to vote, or by the Advisor on 60 days' written notice (which notice may be waived by the Trust). This Agreement will also immediately terminate in the event of its assignment. (As used in this Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meanings of such terms in the 1940 Act.)
13. NOTICES. Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.
14. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. Any amendment of this Agreement shall be subject to the 1940 Act.
15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York for contracts to be per formed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act.
16. USE OF THE NAME BLACKROCK. The Advisor has consented to the use by the Trust of the name or identifying word "BlackRock" in the name of the Trust. Such consent is conditioned upon the employment of the Advisor as the in vestment advisor to the Trust. The name or identifying word "BlackRock" may be used from time to time in other connections and for other purposes by the Advisor and any of its affiliates. The Advisor may require the Trust to cease using "BlackRock" in the name of the Trust if the Trust ceases to employ, for any reason, the Advisor, any successor thereto or any affiliate thereof as investment advisor of the Trust.
17. MISCELLANEOUS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
18. COUNTERPARTS. This Agreement may be executed in counterparts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the day and the year first above written.
BLACKROCK CORE BOND TRUST
BLACKROCK ADVISORS, INC.
Exhibit (g)(2)
SUB-INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of [_____________], 2001, between BlackRock Core Bond Trust, a Delaware business trust (the "Trust"), BlackRock Advisors, Inc. a Delaware corporation (the "Advisor"), and BlackRock Financial Management, Inc., a Delaware corporation (the "Sub-Advisor").
WHEREAS, the Advisor has agreed to furnish investment advisory services to the Trust, a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Advisor wishes to retain the Sub-Advisor to provide it with certain sub-advisory services as described below in connection with Advisor's advisory activities on behalf of the Trust;
WHEREAS, the advisory agreement between the Advisor and the Trust dated [_____________], 2001 (such Agreement or the most recent successor agreement between such parties relating to advisory services to the Trust is referred to herein as the "Advisory Agreement") contemplates that the Advisor may sub-contract investment advisory services with respect to the Trust to a sub-advisor pursuant to a sub-advisory agreement agreeable to the Trust and approved in accordance with the provisions of the 1940 Act; and
WHEREAS, this Agreement has been approved in accordance with the provisions of the 1940 Act, and the Sub-Advisor is willing to furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. APPOINTMENT. The Advisor hereby appoints the Sub-Advisor to act as sub-advisor with respect to the Trust and the Sub-Advisor accepts such appointment and agrees to render the services herein set forth for the compensation herein provided.
2. SERVICES OF THE SUB-ADVISOR. Subject to the succeeding provisions of this section, the oversight and supervision of the Advisor and the direction and control of the Trust's Board of Trustees, the Sub-Advisor will perform certain of the day-to-day operations of the Trust which may include one or more of the following services at the request of the Advisor: (a) acting as investment advisor for and managing the investment and reinvestment of those assets of the Trust as the Advisor may from time to time request and in connection therewith have complete discretion in purchasing and selling such securities and other assets for the Trust and in voting, exercising consents and exercising all other rights appertaining to such securities and other assets on behalf of the Trust; (b) arranging, subject to the provisions of paragraph 3 hereof, for the purchase and sale of securities and other assets held in the investment portfolio of the Trust; (c) providing investment research and credit analysis concerning the Trust's investments, (d) assist the Advisor in determining what portion of the Trust's assets will be invested in cash, cash equivalents and money market instruments, (e) placing orders for all purchases and sales of such investments made for the Trust, and (f) maintaining the books and records as are required to support Trust investment operations. At the request of the Advisor, the Sub-Advisor will also, subject to the oversight and supervision of the Advisor and the direction and control of the Trust's Board of Trustees, provide to the Advisor or the Trust any of the facilities and equipment and perform any of the services described in Section 3 of the Advisory Agreement. In addition, the Sub-Advisor will keep the Trust and the Advisor informed of developments materially affecting the Trust and shall, on its own initiative, furnish to the Trust from time to time whatever information the Sub-Advisor believes appropriate for this purpose. The Sub-Advisor will periodically communicate to the Advisor, at such times as the Advisor may direct, information concerning the purchase and sale of securities for the Trust, including: (a) the name of the issuer, (b) the amount of the purchase or sale, (c) the name of the broker or dealer, if any, through which the purchase or sale is effected, (d) the CUSIP number of the instrument, if any, and (e) such other information as the Advisor may reasonably require for purposes of fulfilling its obligations to the Trust under the Advisory Agreement. The Sub-Advisor will provide the services rendered by it under this Agreement in accordance with the Trust's investment objectives, policies and restrictions (as currently in effect and as they may be amended or supplemented from time to time) as stated in the Trust's Prospectus and Statement of Additional Information and the resolutions of the Trust's Board of Trustees.
3. COVENANTS. In the performance of its duties under this Agreement, the Sub-Advisor shall at all times conform to, and act in accordance with, any requirements imposed by:
(a) (i) the provisions of the 1940 Act and the Investment Advisers Act of 1940, as amended (the "Advisers Act") and all applicable Rules and Regulations of the Securities and Exchange Commission (the "SEC"); (ii) any other applicable provision of law; (iii) the provisions of the Agreement and Declaration of Trust, as amended and restated, and By-Laws of the Trust, as such documents are amended from time to time; (iv) the investment objectives and policies of the Trust as set forth in its Registration Statement on Form N-2; and (v) any policies and determinations of the Board of Trustees of the Trust;
(b) will place orders either directly with the issuer or with any broker or dealer. Subject to the other provisions of this paragraph, in placing orders with brokers and dealers, the Sub-Advisor will attempt to obtain the best price and the most favorable execution of its orders. In placing orders, the Sub-Advisor will consider the experience and skill of the firm's securities traders as well as the firm's financial responsibility and administrative efficiency. Consistent with this obligation, the Sub-Advisor may select brokers on the basis of the research, statistical and pricing services they provide to the Trust and other clients of the Advisor or the Sub-Advisor. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Sub-Advisor hereunder. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Sub-Advisor determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the Advisor and the Sub-Advisor to the Trust's and their other clients and that the total commissions paid by the Trust will be reasonable in relation to the benefits to the Trust over the long-term. In addition, the Sub-Advisor is authorized to take into account the sale of shares of the Trust in allocating purchase and sale orders for portfolio securities to brokers or dealers (including brokers and dealers that are affiliated with the Advisor or the Sub-Advisor), provided that the Sub-Advisor believes that the quality of the transaction and the commission are comparable to what they would be with other qualified firms. In no instance, however, will the Trust's securities be purchased from or sold to the Advisor, the Sub-Advisor or any affiliated person thereof, except to the extent permitted by the SEC or by applicable law;
(c) will maintain books and records with respect to the Trust's securities transactions and will render to the Advisor and the Trust's Board of Trustees such periodic and special reports as they may request;
(d) will maintain a policy and practice of conducting its investment advisory services hereunder independently of the commercial banking operations of its affiliates. When the Sub-Advisor makes investment recommendations for the Trust, its investment advisory personnel will not inquire or take into consideration whether the issuer of securities proposed for purchase or sale for the Trust's account are customers of the commercial department of its affiliates; and
(e) will treat confidentially and as proprietary information of the Trust all records and other information relative to the Trust, and the Trust's prior, current or potential shareholders, and will not use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Trust, which approval shall not be unreasonably withheld and may not be withheld where the Sub-Advisor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Trust.
4. SERVICES NOT EXCLUSIVE. Nothing in this Agreement shall prevent the Sub-Advisor or any officer, employee or other affiliate thereof from acting as investment advisor for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Sub-Advisor or any of its officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however, that the Sub-Advisor will undertake no activities which, in its judgment, will adversely affect the performance of its obligations under this Agreement.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Advisor hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trust's request. The Sub-Advisor further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act (to the extent such books and records are not maintained by the Advisor).
6. AGENCY CROSS TRANSACTIONS. From time to time, the Sub-Advisor or brokers or dealers affiliated with it may find themselves in a position to buy for certain of their brokerage clients (each an "Account") securities which the Sub-Advisor's investment advisory clients wish to sell, and to sell for certain of their brokerage clients securities which advisory clients wish to buy. Where one of the parties is an advisory client, the Advisor or the affiliated broker or dealer cannot participate in this type of transaction (known as a cross transaction) on behalf of an advisory client and retain commissions from both parties to the transaction without the advisory client's consent. This is because in a situation where the Sub-Advisor is making the investment decision (as opposed to a brokerage client who makes his own investment decisions), and the Sub-Advisor or an affiliate is receiving commissions from one or both sides of the transaction, there is a potential conflicting division of loyalties and responsibilities on the Sub-Advisor's part regarding the advisory client. The Securities and Exchange Commission has adopted a rule under the Advisers Act which permits the Sub-Advisor or its affiliates to participate on behalf of an Account in agency cross transactions if the advisory client has given written consent in advance. By execution of this Agreement, the Trust authorizes the Sub-Advisor or its affiliates to participate in agency cross transactions involving an Account. The Trust may revoke its consent at any time by written notice to the Sub-Advisor.
7. EXPENSES. During the term of this Agreement, the Sub-Advisor will bear all costs and expenses of its employees and any overhead incurred by the Sub-Advisor in connection with its duties hereunder; provided that the Board of Trustees of the Trust may approve reimbursement to the Sub-Advisor of the pro-rata portion of the salaries, bonuses, health insurance, retirement benefits and all similar employment costs for the time spent on Trust operations (other than the provision of investment advice and administrative services required to be provided hereunder) of all personnel employed by the Sub-Advisor who devote substantial time to the Trust operations or the operations of other investment companies advised or sub-advised by the Sub-Advisor.
8. COMPENSATION.
(a) The Advisor agrees to pay to the Sub-Advisor and the Sub-Advisor agrees to accept as full compensation for all services rendered by the Sub-Advisor as such, a monthly fee in arrears at an annual rate equal to 38% of the monthly advisory fees received by the Advisor. For any period less than a month during which this Agreement is in effect, the fee shall be prorated according to the
proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.]
(b) For purposes of this Agreement, the Managed Assets of the Trust shall be defined as in the Investment Management Agreement.
9. INDEMNITY.
(a) The Trust hereby agrees to indemnify the Sub-Advisor and
each of the Sub-Advisor's directors, officers, employees, agents, associates and
controlling persons and the directors, partners, members, officers, employees
and agents thereof (including any individual who serves at the Sub-Advisor's
request as director, officer, partner, member, trustee or the like of another
entity) (each such person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and counsel fees (all as provided in accordance with
applicable state law) reasonably incurred by such Indemnitee in connection with
the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or investigative body in
which such Indemnitee may be or may have been involved as a party or otherwise
or with which such Indemnitee may be or may have been threatened, while acting
in any capacity set forth herein or thereafter by reason of such Indemnitee
having acted in any such capacity, except with respect to any matter as to which
such Indemnitee shall have been adjudicated not to have acted in good faith in
the reasonable belief that such Indemnitee's action was in the best interest of
the Trust and furthermore, in the case of any criminal proceeding, so long as
such Indemnitee had no reasonable cause to believe that the conduct was
unlawful; provided, however, that (1) no Indemnitee shall be indemnified
hereunder against any liability to the Trust or its shareholders or any expense
of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence or (iv) reckless disregard of the duties involved in the
conduct of such Indemnitee's position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling conduct"), (2)
as to any matter disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no indemnification either
for said payment or for any other expenses shall be provided unless there has
been a determination that such settlement or compromise is in the best interests
of the Trust and that such Indemnitee appears to have acted in good faith in the
reasonable belief that such Indemnitee's action was in the best interest of the
Trust and did not involve disabling conduct by such Indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily prosecuted by any
Indemnitee as plaintiff, indemnification shall be mandatory only if
the prosecution of such action, suit or other proceeding by such Indemnitee was authorized by a majority of the full Board of Trustees of the Trust.
(b) The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Trust unless it is subsequently determined that such Indemnitee is entitled to such indemnification and if the trustees of the Trust determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (A) the Indemnitee shall provide a security for such Indemnitee-undertaking, (B) the Trust shall be insured against losses arising by reason of any lawful advance, or (C) a majority of a quorum consisting of trustees of the Trust who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested Non-Party Trustees") or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification.
(c) All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body before whom the proceeding was brought that such Indemnitee is not liable by reason of disabling conduct, or (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Trustees of the Trust, or (ii) if such a quorum is not obtainable or even, if obtainable, if a majority vote of such quorum so directs, independent legal counsel in a written opinion. All determinations that advance payments in connection with the expense of defending any proceeding shall be authorized shall be made in accordance with the immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall not exclude any other right to which such Indemnitee may be lawfully entitled.
10. LIMITATION ON LIABILITY.
(a) The Sub-Advisor will not be liable for any error of judgment or mistake of law or for any loss suffered by the Advisor or by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties under this Agreement.
(b) Notwithstanding anything to the contrary contained in
this Agreement, the parties hereto acknowledge and agree that, as provided in
Section 5.1 of Article V of the Declaration of Trust, as amended and restated,
this Agreement is executed by the Trustees and/or officers of the Trust, not
individually but as such Trustees and/or officers of the Trust, and the
obligations hereunder are not binding upon any of the Trustees or Shareholders
individually but bind only the estate of the Trust.
11. DURATION AND TERMINATION. This Agreement shall become effective as of the date hereof and, unless sooner terminated with respect to the Trust as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust for successive periods of 12 months, provided such continuance is specifically approved at least annually by both (a) the vote of a majority of the Trust's Board of Trustees or a vote of a majority of the outstanding voting securities of the Trust at the time outstanding and entitled to vote and (b) by the vote of a majority of the Trustees, who are not parties to this Agreement or interested persons (as such term is defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. Notwithstanding the foregoing, this Agreement may be terminated by the Trust or the Advisor at any time, without the payment of any penalty, upon giving the Sub-Advisor 60 days' notice (which notice may be waived by the Sub-Advisor), provided that such termination by the Trust or the Advisor shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the vote of the holders of a majority of the voting securities of the Trust at the time outstanding and entitled to vote, or by the Sub-Advisor on 60 days' written notice (which notice may be waived by the Trust and the Advisor), and will terminate automatically upon any termination of the Advisory Agreement between the Trust and the Advisor. This Agreement will also immediately terminate in the event of its assignment. (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested person" and "assignment" shall have the same meanings of such terms in the 1940 Act.)
12. NOTICES. Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.
13. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. Any amendment of this Agreement shall be subject to the 1940 Act.
14. MISCELLANEOUS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or other wise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act.
16. COUNTERPARTS. This Agreement may be executed in counter parts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized officers designated below as of the day and year first above written.
BLACKROCK ADVISORS, INC.
BLACKROCK FINANCIAL MANAGEMENT, INC.
BLACKROCK CORE BOND TRUST
Exhibit (i)
ANNEX A
ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL
BLACKROCK FUNDS
DEFERRED COMPENSATION PLAN
The Board of Trustees of each of the participating management investment companies listed on Schedule A (as such schedule may be amended from time to time) attached hereto and made a part hereof (each a "Participating Fund" and collectively, the "Participating Funds"), hereby establishes this BlackRock Funds Deferred Compensation Plan, effective as of February 24, 2000 (the "Plan"). The purpose of the Plan is to provide eligible trustees of Participating Funds, the opportunity to defer the receipt of all or a portion of the amounts payable to them as compensation for services rendered as members of the Board of Trustees of the respective funds.
1. DEFINITIONS
1.1 Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in the Plan shall have the following meanings:
The term "Advisor" shall mean BlackRock Advisors, Inc. and its affiliates.
The term "Board" shall mean the Board of Trustees of each respective Participating Fund.
The term "Deferral Account" shall mean a book entry account maintained to reflect an Eligible Trustee's compensation deferred as provided in Section 2.4 of the Plan.
The term "Eligible Investment" shall mean a fund managed by the Advisor and designated by the Participating Funds from time to time as an investment medium that may be chosen by an Eligible Trustee in which such Trustee's Deferral Account may be deemed to be invested, provided that any Eligible
Investment that is a term trust and also the Participating Fund from which an Eligible Trustee's deferred compensation is paid, is not an Eligible Investment that may be chosen by such Trustee as an investment medium for such deferred compensation.
The term "Eligible Trustee" shall mean a member of the Board who is not an "interested person" of a Participating Fund or of BlackRock, as such term is defined under Section 2(a)(1) of the Investment Company Act of 1940, as amended (the "1940 Act").
The term "Exchange" shall mean the principal stock exchange on which common shares of an Eligible Investment trade.
The term "Fair Market Value" shall mean, with respect to a date, on a per share basis, the closing price of an Eligible Investment, as reported on the consolidated tape of the Exchange on such date or, if the Exchange is closed on such date, the next succeeding date on which it is open.
The term "Participating Funds" shall mean those registered investment management companies for which the Advisor serves or will serve in the future as investment manager, whether existing at the time of adoption of the Plan or established at a later date, designated by each respective Board as a fund from which compensation may be deferred by an Eligible Trustee. Participating Funds shall be listed on Schedule A to the Plan, provided that failure to list a Participating Fund on Schedule A shall not affect its status as a Participating Fund.
The term "Valuation Date" shall mean the last business day of each calendar quarter and any other day upon which the Participating Fund makes valuations of the Deferral Accounts.
1.2 Trustees and Directors. Where appearing in the Plan, "Trustee" shall also refer to "Director" and "Board of Trustees" shall also refer to "Board of Directors."
1.3 Separate Plan for each Participating Fund. The Plan is drafted, and shall be construed, as a separate Plan between each Eligible Trustee and each Participating Fund.
2. DEFERRALS
2.1 Deferral Elections.
(a) An Eligible Trustee participating in the Plan (a "Participant") may elect to defer receipt of all, or a specified dollar amount or percentage of the compensation (including fees for attending meetings) earned by such Eligible Trustee for serving as a member of the Board or as a member of any committee (or subcommittee of such committee) of the Board of which such Eligible Trustee from time to time may be a member (the "Deferred Compensation"). Expenses of attending meetings of the Board, committees of the Board or subcommittees of such committees or other reimbursable expenses may not be deferred.
(b) Deferrals shall be withheld from each payment of compensation by the Participating Fund to the Participant based upon the percentage or dollar amount elected by the Participant under Section 2.3 hereof.
(c) The Participant may cancel or modify the amount of such Participant's Deferred Compensation on a prospective basis by submitting to the Participating Fund a revised election to defer form. Such change will be effective as of the first day of the calendar year following the date such revision is submitted.
2.2 Manner of Election.
(a) An Eligible Trustee shall elect to participate in the Plan and defer compensation by completing, signing and filing with the Participating Fund an election to defer in such written form as may be prescribed (the "Election"). The Election shall include:
(i) The amount or percentage of compensation to be deferred;
(ii) The method of payment of Deferred Compensation (i.e., in a lump sum or the number of installments);
(iii) The time or times of payment of the Deferred
Compensation;
(iv) The Eligible Investments selected by the Trustee for the Deferred Compensation; and
(v) Any beneficiary(ies) designated by the Eligible Trustee pursuant to Section 3.2 of the Plan.
(b) Each Eligible Trustee's receipt of compensation shall be deferred until the first to occur of any of the following events:
(i) The date which such Eligible Trustee ceases to be a Trustee of the Participating Fund;
(ii) A date selected by such Eligible Trustee as specified on the Trustee's Election;
(iii) A date on which some future event occurs which is not within the Eligible Trustee's control, as specified on the Trustee's Election;
(iv) Upon the death of the Eligible Trustee;
(v) In the sole discretion of the Participating Fund, upon disability or financial hardship of the Eligible Trustee;
(vi) The effective date of the sale or liquidation of the Participating Fund or to comply with applicable law; or
(vii) Upon termination of the Plan in accordance with
Section 4.5 hereof.
2.3 Period of Deferrals.
(a) Any Election by an Eligible Trustee pursuant to the Plan shall be irrevocable from and after the date on which such Election is filed with the Participating Fund and shall be effective to defer compensation of an Eligible Trustee as follows:
(i) As to any Eligible Trustee in office on the effective date of the Plan who files an Election no later than thirty (30) days after such effective date, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or the effective date of the Plan, if later;
(ii) As to any individual who becomes an Eligible Trustee after the effective date of the Plan and who files an Election within thirty (30) days of becoming an Eligible Trustee, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or the effective date of the Plan, if later; and
(iii) As to any other Eligible Trustee, the Election shall be effective to defer any compensation that is earned from and after the first day of the calendar year next succeeding the calendar year in which the Election is filed.
(b) A Participant may revoke such Participant's Election at any time by filing a written notice of termination with the Participating Fund. Any compensation earned by the Participant after receipt of the notice by the Participating Fund shall be paid currently and no longer deferred as provided in the Plan.
(c) A Participant who has filed a notice to terminate
deferral of compensation may thereafter again file a new Election pursuant to
Section 2.2(a) hereof effective for any calendar year subsequent to the calendar
year in which the new Election is filed.
2.4 Valuation of Deferral Account.
(a) Each Participating Fund shall establish a Deferral
Account to which will be credited in an amount equal to the Participant's
Deferred Compensation under the Plan. Any compensation earned by the Participant
which the Participant has elected to defer will be credited to the Deferral
Account on the date such amounts otherwise would have been payable to such
Participant. On each Valuation Date, each Deferral Account will be credited or
debited (as described in subsection (b) below) with the amount that would have
been realized had the Deferral Account been invested in the Eligible Investments
designated by the Participant. The Deferral Account shall be debited to reflect
any distributions as of the date such distributions are made in accordance with
Section 3 of the Plan.
(b) Each Participating Fund shall adjust the Participant's Deferral Account to reflect a value which would have been earned as if the amount of Deferred Compensation represented by such Deferral Account had been invested and reinvested in shares of the Eligible Investments designated by the Participant as follows:
The value of each account will be determined by reference to the number of the shares of the Eligible Investment that the Deferred Compensation would have purchased (or sold) at the then Fair Market Value per share on the date such amounts are credited to (or debited from) the Deferral Account (less any brokerage fees payable upon the acquisition of shares of such in the open market) as well as the Fair Market Value of shares that would have been acquired through reinvestment of dividends and capital gains distributed.
(c) As of each Valuation Date, income, gain and loss equivalents (determined as if the Deferral Accounts are invested in the manner set forth in Section 2.2(a) hereof) attributable to the period following the next preceding Valuation Date shall be credited to and/or debited from the Participant's Deferral Account.
2.5 Investment of Deferral Account Balance.
(a) The Participating Funds shall from time to time designate one or more funds eligible for investment. A Participant, at the time of Election, shall have the right to select from the then-current list of Eligible Investments one or more Eligible Investments in which amounts deferred shall be deemed invested as set forth in Section 3. The Participant may select from the Eligible Investments to which all or part of the amounts in the Deferral Account shall be deemed to be invested.
(b) The Participant shall make investment designations at the time such Participant files the Election with the Participating Fund which shall remain effective until another valid direction has been made by the Participant as herein provided. The Participant may amend the investment designations only once each calendar year by giving written notice at least thirty (30) days prior to the end of such calendar year. A timely change to a Participant's investment designation shall become effective as soon as practicable following receipt of notice by the Participating Fund.
(c) The Eligible Investments deemed to be made available to the Participant, and any restrictions or limitation on the maximum or minimum percentages of the Participant's Deferral Account that may be invested in any Eligible Investment, shall be the same as from time-to-time communicated to the Participant.
(d) A Participant may elect to transfer Deferred
Compensation from one Eligible Investment to a different Eligible Investment,
provided that in no event may any such election become effective sooner than six
(6) months following the last date on which Deferred Compensation was allocated
to the former Eligible Investment, and the Participant shall not be permitted to
defer any compensation earned after such date to such former Eligible Investment
for a period of six (6) months from the date of such transfer. A transfer
election shall be made by written notice signed by the Participant and filed
with the Participating Fund.
(e) Notwithstanding the foregoing, the Participating Funds may, from time to time, remove any fund from or add any fund to the list of Eligible Investments. If the Participating Funds discontinue an Eligible Investment, the Participant shall complete and file an election to transfer the amounts deferred in the discontinued Eligible Investment to such other then-
current Eligible Investment. In the event that the Participant shall fail to timely elect a new Eligible Investment, such amounts shall be transferred to an Eligible Investment that the Participating Fund deems appropriate.
(f) Except as provided below, the Participant's Deferral Account shall be deemed to be invested in accordance with the Participant's Election, provided such Election conforms to the provisions of this Section. If -
(i) the Participant does not furnish complete, written investment instructions; or
(ii) the written investment instructions from the Participant are unclear,
the Participant's Deferral Account shall be deemed to be invested in such other then-current Eligible Investments as the Participating Funds shall select, until such time as the Participant shall provide complete investment instructions.
3. DISTRIBUTIONS FROM DEFERRAL ACCOUNT
3.1 Distribution Election.
The aggregate value of a Participant's Deferral Account will be paid in a lump sum or in ten (10) or fewer annual installments, as specified in the Participant's Election (or Elections). Distributions will be made as of the first business day of January of the calendar year following the calendar year in which the Participant ceases being a Trustee or on such other dates as the Participant may specify in such Election (or Elections), which shall not be earlier than six (6) months following the Election.
(a) If a Participant elects installment payments, the
unpaid balance in the Participant's Deferral Account shall continue to accrue
earnings and dividend equivalents, computed in accordance with the provisions of
Section 2.4(b), and shall be prorated and paid over the installment period. The
amount of the first payment shall be a fraction of the then Fair Market Value of
such Participant's Deferral Account, the numerator of which is one, and the
denominator of which is the total number of installments. The amount of each
subsequent payment shall be a fraction of the then Fair Market Value of the
Participant's Deferral Account remaining after the prior payment, the numerator
of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid.
(b) All payments shall be in cash; provided, however if a lump sum payment is elected, the Participant may elect to receive payment in full and fractional shares of the Eligible Investments selected by such Participant at Fair Market Value at the time of payment of the amounts credited to the Participant's Deferral Account. Any such election shall be filed in writing by the Participant with the Participating Fund at least ten (10) business days prior to the date which such payment is to be made.
(c) A Participant may at any time, and from time to time, change any distribution election applicable to such Participant's Deferral Account, provided that no election to change the timing of any distribution shall be effective unless it is made in writing and received by the Participating Fund at least six (6) months prior to the earlier of (i) the time at which the Participant ceases to be a Trustee or (ii) the time such distribution shall commence.
3.2 Death Prior to Complete Distribution. In the event of a
Participant's death prior to distribution of all amounts in such Participant's
Deferral Account, notwithstanding any Election made by the Participant and
notwithstanding any other provision set forth herein, the value of such Deferral
Account shall be paid in a lump sum in accordance with the provisions of the
Plan as soon as reasonably possible to the Participant's designated
beneficiary(ies) (the "Beneficiary") or, if such Beneficiary(ies) does not
survive the Participant or no beneficiary is designated, to such Participant's
estate. Any Beneficiary(ies) so designated by a Participant may be changed at
any time by notice in writing from such Participant to the Participating Fund.
All payments under this subsection shall otherwise be paid in accordance with
Section 3.1 hereof.
3.1 Payment in Discretion of Participating Funds.
Amounts deferred hereunder, based on the then adjusted value of the Participant's Deferral Account as of the Valuation Date next following, may become payable to the Participant in the discretion of the Participating Fund:
(a) Disability. If the Participating Fund finds on the basis of medical evidence satisfactory to it that the Participant is prevented from engaging in any suitable gainful employment or occupation and that such disability will be permanent and continuous during the remainder of such Participant's life, the
Participating Fund shall distribute the amounts in the Participant's Deferral Account in a lump sum or in the number of installments previously selected by the Participant.
(b) Financial Hardship. If the Participant requests and if the Participant provides evidence of financial hardship, the Participating Fund may, in its sole and absolute discretion, permit a distribution of all or a portion of the Participant's Deferral Account prior to the date on which payments would have commenced under Section 3.1.
3.4 Acceleration of Payments.
(a) In the event of the liquidation, dissolution or winding up of a Participating Fund or the distribution of all or substantially all of a Participating Fund's assets and property to its shareholders (for this purpose a sale, conveyance or transfer of a Participating Fund's assets to a trust, partnership, association or another corporation in exchange for cash, shares or other securities with the transfer being made subject to, or with the assumption by the transferee of, the liabilities of such Participating Fund shall not be deemed a termination of such Participating Fund or such a distribution), the entire unpaid balance of the Participant's Deferral Account of such Participating Fund shall be paid in a lump sum as of the effective date thereof.
(b) The Participating Funds are empowered to accelerate the payment of deferred amounts to all Participants and Beneficiaries in the event that there is a change in law which would have the effect of adversely affecting such persons rights and benefits under the Plan if acceleration did not occur.
4. MISCELLANEOUS
4.1 Statements of Account.
The Participating Funds will furnish each Participant with a
statement setting forth the value of such Participant's Deferral Account as of
the end of each calendar year and all credits and debits of such Deferral
Account during such year. Such statements will be furnished no later than sixty
(60) days after the end of each calendar year.
4.2 Rights in Deferral Account.
Credits to the Deferral Accounts shall (i) remain part of the general assets of the Participating Funds, (ii) at all times be the sole and absolute property of the Participating Funds and (iii) in no event be deemed to constitute a fund, trust or collateral security for the payment of the Deferred Compensation to which Participants are entitled from such Deferral Accounts. The right of the Participant or any Beneficiary or estate to receive future payment of Deferred Compensation under the provisions of the Plan shall be an unsecured claim against the general assets of the Participating Funds, if any, available at the time of payment. A Participating Fund shall not reserve or set aside funds for the payment of its obligations hereunder by any form of trust, escrow, or similar arrangement. The arrangement described in this Plan shall be "unfunded" for U.S. federal income tax purposes and for purposes of the Employee Retirement Security Income Act of 1974, as amended.
4.3 Non-Assignability.
The rights and benefits of Participants under the Plan and any other person or persons to whom payments may be made pursuant to the Plan shall not be subject to alienation, assignment, pledge, transfer or other disposition, except as otherwise provided by law.
4.4 Interpretation and Administration.
(a) The Participating Funds shall have the general authority to interpret, construe and implement provisions of the Plan and to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as shall be from time to time, deemed advisable. Any determination by the Participating Funds shall be final and conclusive.
4.5 Amendment and Termination.
The Participating Funds may in their sole discretion amend or terminate the Plan at any time. No amendment or termination shall adversely affect any then existing deferred amounts or rights under the Plan. Upon termination of the Plan, the remaining balance of the Participant's Deferral Account shall be paid to the Participant (or to a beneficiary, as the case may be), in a lump sum as soon as practicable but no more than thirty (30) days following termination of the Plan.
4.6 Incapacity.
If the Participating Funds shall receive satisfactory evidence that the Participant or any Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of the Participant or Beneficiary and that no guardian, committee or other representative of the estate of the Participant or Beneficiary shall have been duly appointed, the Participating Funds may make payment of such benefit otherwise payable to the Participant or Beneficiary to such other person or institution and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.
4.7 Payments Due Missing Persons.
The Participating Funds shall make a reasonable effort to locate all persons entitled to benefits under the Plan. However, notwithstanding any provisions of the Plan to the contrary, if, after a period of five (5) years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Participating Funds shall send a certified letter to all such persons to their last known address advising them that their benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Participating Funds for a period of three (3) additional years (or a total of eight (8) years from the time the benefits first become payable) and thereafter, if unclaimed, such amounts shall be forfeited, subject to applicable laws in the jurisdiction in which the respective Participating Fund is organized.
4.8 Agents.
The Participating Funds may employ agents and provide for such clerical, legal, actuarial, accounting, advisory or other services as they deem necessary to perform their duties under the Plan. The Participating Funds shall bear the cost of such services and all other expenses incurred in connection with the administration of the Plan.
4.9 Governing Law.
All matters concerning the validity, construction and administration of the Plan shall be governed by the laws of the state in which the respective Participating Fund is organized.
4.10 Non-Guarantee of Status.
Nothing contained in the Plan shall be construed as a contract or guarantee of the right of the Participant to be, or remain as, a Trustee of any of the Participating Funds or to receive any, or any particular rate of, compensation from any of the Participating Funds.
4.11 Counsel.
The Participating Funds may consult with legal counsel with respect to the meaning or construction of the Plan, their obligations or duties hereunder or with respect to any action or proceeding or any question of law, and they shall be fully protected with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel.
4.12 Entire Plan.
The Plan contains the entire understanding between the Participating Funds and the Participant with respect to the payment of non-qualified elective deferred compensation by the Participating Funds to the Participant.
4.13 Non-liability of Participating Funds.
Interpretations of, and determinations (including factual determinations) related to, the Plan made by the Participating Funds in good faith, including any determinations of the amounts of the Deferral Accounts, shall be conclusive and binding upon all parties; and the Participating Funds and their officers and Trustees shall not incur any liability to the Participant for any such interpretation or determination so made or for any other action taken by it in connection with the Plan in good faith.
4.14 Successors and Assigns.
The Plan shall be binding upon, and shall inure to the benefit of, the Participating Funds and their successors and assigns and to the Participants and their heirs, executors, administrators and personal representatives.
4.15 Severability.
In the event any one or more provisions of the Plan are held to be invalid or unenforceable, such illegality or unenforceability shall not affect the validity or enforceability of the other provisions hereof and such other provisions shall remain in full force and effect unaffected by such invalidity or unenforceability.
4.16 Rule 16b-3 Compliance.
It is the intention of the Participating Fund that all transactions under the Plan be exempt from liability imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. Therefore, if any transaction under the Plan is found not to be in compliance with Section 16(b), the provision of the Plan governing such transaction shall be deemed amended so that the transaction does so comply and is so exempt, to the extent permitted by law and deemed advisable by the Participating Fund, and in all events the Plan shall be construed in favor of its meeting the requirements of an exemption.
IN WITNESS WHEREOF, each Participating Fund has caused this Plan to be executed by one of its duly authorized officers, this __ day of __________, 2000.
By:________________________________
Name:
Title:
Witness:__________________________
Name:
Title:
SCHEDULE A
BLACKROCK FUNDS
DEFERRED COMPENSATION PLAN
PARTICIPATING FUNDS
BlackRock Advantage Term Trust
BlackRock Broad Investment Grade 2009 Term Trust
BlackRock California Insured Municipal 2008 Term Trust
BlackRock California Investment Quality Municipal Trust
BlackRock California Municipal Income Trust
BlackRock California Municipal 2018 Term Trust
BlackRock Core Bond Trust
BlackRock Florida Insured Municipal 2008 Term Trust
BlackRock Florida Investment Quality Municipal Trust
BlackRock Florida Municipal Income Trust
BlackRock High Yield Trust
BlackRock Income Trust
BlackRock Insured Municipal 2008 Term Trust Inc.
BlackRock Insured Municipal Term Trust
BlackRock Investment Quality Municipal Trust
BlackRock Investment Quality Term Trust
BlackRock Municipal Income Trust
BlackRock Municipal Target Term Trust
BlackRock Municipal 2018 Term Trust
BlackRock New Jersey Investment Quality Municipal Trust
BlackRock New Jersey Municipal Income Trust
BlackRock New York Insured Municipal 2008 Term Trust
BlackRock New York Investment Quality Municipal Trust
BlackRock New York Municipal Income Trust
BlackRock New York Municipal 2018 Term Trust
BlackRock North American Government Income Trust
BlackRock Pennsylvania Strategic Municipal Trust
BlackRock Strategic Municipal Trust
SCHEDULE B
ELIGIBLE INVESTMENTS
You may choose from the following eligible investments:
BlackRock Advantage Term Trust
BlackRock Broad Investment Grade 2009 Term Trust
BlackRock High Yield Trust
BlackRock Income Trust
BlackRock Investment Quality Term Trust
BlackRock North American Government Income Trust
BLACKROCK FUNDS
DEFERRED COMPENSATION PLAN
Deferral Election Form
The undersigned hereby elects to participate in the Deferred Compensation Plan ("Plan") in accordance with the elections made in this Deferral Election Form.
1. AMOUNT DEFERRED
I hereby elect to defer compensation earned as a Trustee which are earned subsequent to the date of this election, as follows:
|_| All fees; or
|_| _______________ % of fees.
|_| $_______________ of fees.
2. INVESTMENT CHOICE
I hereby elect to have the deferred compensation valued by an investment in the Eligible Investments as set forth on the attachment to this Deferral Election Form. I understand that I may change this election by giving written notice at least thirty (30) days prior to the end of each calendar year.
3. TIME OF PAYMENT
I hereby elect to be paid as follows:
|_| On the first business day in January of the calendar year following the calendar year in which I cease to be a Trustee; or
|_| On the following other date or event:
4. NUMBER OF PAYMENTS
I hereby elect to receive payment as follows:
|_| Entire amount in a lump sum; or
|_| In __________________ annual installments (not to exceed 10).
I hereby relinquish and release any and all rights to receive payment of the deferred amounts except in accordance with the Plan.
Executed this day of , _____
Received and accepted by the Participating Funds:
By: ______________________________
Date: ____________________________
BLACKROCK FUNDS
DEFERRED COMPENSATION PLAN
Designation of Beneficiary
The undersigned hereby designates the person or persons named below as the beneficiary(ies) of any benefits which may become due according to the terms and conditions of the BlackRock Funds Deferred Compensation Plan (the "Plan") in the event of my death.
|_| To my Estate: or
|_| To the following beneficiaries:
Primary: ___________________________________________________________
___________________________________________________________
___________________________________________________________
(Name, address and relationship) if living, or if not living
at my death, to
Secondary: ___________________________________________________________
___________________________________________________________
___________________________________________________________
(Name, address and relationship) or if not living at
my death or is not designated, to my Estate.
|
I hereby revoke all prior beneficiary designation(s) made under the terms of the Plan by execution of this form.
Executed this day of , ______
Exhibit (p)
FORM OF
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT is entered into as of the ___ day of
[_____________], 2001, between BlackRock Core Bond Trust, a business trust
organized and existing under the laws of Delaware (the "Trust"), and BlackRock
Advisors, Inc. or one of its affiliates (the "Purchaser").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF THE SHARES
1.1 SALE AND ISSUANCE OF SHARES. Subject to the terms and conditions of this Agreement, the Trustees agree to sell to the Purchaser, and the Purchaser agrees to purchase from the Trustees [________] common shares of beneficial interest, par value $0.001, representing undivided beneficial interests in the Trust (the "Shares") at a price per Share of $[_________] for an aggregate purchase price of $[_________].
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER. The Purchaser hereby represents and warrants to, and covenants for the benefit of, the Trust that:
2.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made by the Trustees with the Purchaser in reliance upon the Purchaser's representation to the Trustees, which by the Purchaser's execution of this Agreement the Purchaser hereby confirms, that the Shares are being acquired for investment for the Purchaser's own account, and not as a nominee or agent and not with a view to the resale or distribution by the Purchaser of any of the Shares, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the Shares, in either case in violation of any securities registration requirement under applicable law, but subject nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Agreement, the Purchaser further represents that the Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Shares.
2.2 INVESTMENT EXPERIENCE. The Purchaser acknowledges that it can bear the economic risk of the investment for an indefinite period of time and has such knowledge and experience in financial and business matters (and particularly in the business in which the Trust operates) as to be capable of evaluating the merits and risks of the investment in the Shares. The Purchaser is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act of 1933 (the "1933 Act").
2.3 RESTRICTED SECURITIES. The Purchaser understands that the Shares are characterized as "restricted securities" under the United States securities laws inasmuch as they are being acquired from the Trustees in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the 1933 Act only in certain circumstances. In this connection, the Purchaser represents that it understands the resale limitations imposed by the 1933 Act and is generally familiar with the existing resale limitations imposed by Rule 144.
2.4 FURTHER LIMITATIONS ON DISPOSITION. The Purchaser further agrees not to make any disposition directly or indirectly of all or any portion of the Shares unless and until:
(a) There is then in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or
(b) The Purchaser shall have furnished the Trustees with an opinion of counsel, reasonably satisfactory to the Trustees, that such disposition will not require registration of such Shares under the 1933 Act.
(c) Notwithstanding the provisions of subsections (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by the Purchaser to any affiliate of the Purchaser, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if it were the original Purchaser hereunder.
2.5 LEGENDS. It is understood that the certificate evidencing the Shares may bear either or both of the following legends:
(a) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the
absence of a registration statement in effect with respect to the Shares under such Act or an opinion of counsel reasonably satisfactory to the Trustees of BlackRock Core Bond Trust that such registration is not required."
(b) Any legend required by the laws of any other applicable jurisdiction.
The Purchaser and the Trustees agree that the legend contained in the paragraph (a) above shall be removed at a holder's request when they are no longer necessary to ensure compliance with federal securities laws.
2.6 COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
BLACKROCK CORE BOND TRUST
BLACKROCK ADVISORS, INC.
EX-99.2(r)(1)
THE BLACKROCK CLOSED END TRUSTS
CODE OF ETHICS
I. INTRODUCTION.
The purpose of this Code of Ethics is to prevent Access Persons (as defined below) of The BlackRock Closed End Trusts (the "Trusts") from engaging in any act, practice or course of business prohibited by paragraph (b) of Rule 17j-l (the "Rule") under the Investment Company Act of 1940, as amended (the "Act"). This Code of Ethics is required by paragraph (c) of the Rule. A copy of the Rule is attached to this Code of Ethics as Appendix 1.
Access Persons of the Trusts, in conducting their personal securities transactions, owe a fiduciary duty to the shareholders of the Trusts. The fundamental standard to be followed in personal securities transactions is that Access Persons may not take inappropriate advantage of their positions. All personal securities transactions by Access Persons must be conducted in such a manner as to avoid any actual or potential conflict of interest between the Access Person's interest and the interests of the Trusts, or any abuse of an Access Person's position of trust and responsibility. Potential conflicts arising from personal investment activities could include buying or selling securities based on knowledge of the Trust's trading position or plans (sometimes referred to as front-running), and acceptance of personal favors that could influence trading judgments on behalf of the Trusts. While this Code of Ethics is designed to address identified conflicts and potential conflicts, it cannot possibly be written broadly enough to cover all potential situations and, in this regard, Access Persons are expected to adhere not only to the letter, but also the spirit, of the policies contained herein.
II. DEFINITIONS.
In order to understand how this Code of Ethics applies to particular persons and transactions, familiarity with the key terms and concepts used in this Code of Ethics is necessary. Those key terms and concepts are:
1. "Access Person" means any trustee, officer or "advisory person" of the Trusts. A list of the Trust's Access Persons is attached as Appendix 2 to this Code of Ethics and will be updated from time to time.
2. "Advisory person" means (a) any employee of the Trusts or of any company in a control relationship to the Trusts, who, in connection with his regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a "Covered Security" by the Trusts, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (b) any natural person in a control relationship to the Trusts who obtains information concerning recommendations made to the Trusts with regard to the purchase or sale of "Covered Securities".
3. "Beneficial ownership" has the meaning set forth in Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended, a copy of which is included as Appendix 3. The determination of direct or indirect beneficial ownership shall apply to all securities which an Access Person has or acquires.
4. "BlackRock" means BlackRock Advisors, Inc. the investment advisor of the Trusts.
5. "BlackRock Code" means the Employee Investment Transaction Policy adopted by BlackRock and approved by the Board.
6. "Control" has the meaning set forth in Section 2(a)(9) of the Act.
7. "Covered Security" has the meaning set forth in Section 2(a)(36) of the Act, except that it shall not include: direct obligations of the Government of the United States; bankers' acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments, including repurchase agreements; and shares issued by registered open-end investment companies. A high-quality short-term debt instrument is one with a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a nationally recognized statistical rating organization.
8. "Independent trustee" means a trustee of the Trusts who is not an "interested person" of the Trusts within the meaning of Section 2(a)(19) of the Act.
9. "Investment Personnel" of the Trusts means (a) any employee of the Trusts (or of any company in a control relationship to the Trusts) who, in connection with his or her regular functions or duties, makes or participates in making recom-
mendations regarding the purchase or sale of securities by the Trusts and (b) any natural person who controls the Trusts and who obtains information concerning recommendations made to the Trusts regarding the purchase or sale of securities by the Trusts.
10. "IPO" means an offering of securities registered under the Securities Act of 1933, the issuer or which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act.
11. "Limited Offering" means an offering exempt from registration under the Securities Act of 1933 pursuant to Section 4(2), 4(6) or Rule 504, 505 or 506 under the Securities Act of 1933.
12. "Purchase or sale of a Covered Security" includes, among other things, the writing of an option to purchase or sell a Covered Security.
III. RESTRICTIONS APPLICABLE TO DIRECTORS, OFFICERS AND EMPLOYEES OF BLACKROCK.
1. All Directors, officers and employees of BlackRock's investment advisory companies shall be subject to the restrictions, limitations and reporting responsibilities set forth in the BlackRock Code, respectively, as if fully set forth herein.
2. Persons subject to this Section III shall not be subject to the
restrictions, limitations and reporting responsibilities set forth in Sections
IV. and V. below.
IV. PROHIBITIONS; EXEMPTIONS.
1. PROHIBITED PURCHASES AND SALES.
A. No Access Person may purchase or sell, directly or indirectly, any Covered Security in which that Access Person has, or by reason of the transaction would acquire, any direct or indirect beneficial ownership and which to the actual knowledge of that Access Person at the time of such purchase or sale:
(1) is being considered for purchase or sale by the Trusts; or
(2) is being purchased or sold by the Trusts.
2. EXEMPTIONS FROM CERTAIN PROHIBITIONS.
A. The prohibited purchase and sale transactions described in paragraph
IV.1 above do not apply to the following personal securities transactions:
(1) purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control;
(2) purchases or sales which are non-volitional on the part of either the Access Person or the Trusts;
(3) purchases which are part of an automatic dividend reinvestment plan (other than pursuant to a cash purchase plan option);
(4) purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its securities, to the extent the rights were acquired from that issuer, and sales of the rights so acquired;
(5) any purchase or sale, or series of related transactions, involving 500 shares or less in the aggregate, if the issuer has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion;
(6) any purchase or sale which the Compliance Officer of BlackRock (as defined in the BlackRock Code) approves on the grounds that its potential harm to the Trusts is remote.
3. PROHIBITED RECOMMENDATIONS.
An Access Person may not recommend the purchase or sale of any Covered Security to or for the Trusts without having disclosed his or her interest, if any, in such security or the issuer thereof, including without limitation:
A. any direct or indirect beneficial ownership of any Covered Security of such issuer, including any Covered Security received in a private securities transaction;
B. any contemplated purchase or sale by such person of a Covered Security;
C. any position with such issuer or its affiliates; or
D. any present or proposed business relationship between such issuer or its affiliates and such person or any party in which such person has a significant interest.
4. PRE-APPROVAL OF INVESTMENTS IN INITIAL PUBLIC OFFERINGS OR LIMITED OFFERINGS.
A. No Investment Personnel shall purchase any security (including, but not limited to, any Covered Security) issued in an initial public offering ("IPO") or a Limited Offering unless an officer of the Trusts approves the transaction in advance. The Secretary shall maintain a written record of any decisions to permit these transactions, along with the reasons supporting the decision.
V. REPORTING.
1. INITIAL HOLDINGS REPORTS.
No later than ten (10) days after a person becomes an Access Person, he or she must report to the Trusts the following information:
(i) the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person;
(ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and
(iii) the date that the report is submitted by the Access Person.
2. QUARTERLY REPORTING.
A. Every Access Person shall either report to the Trusts the information described in paragraphs B and C below with respect to transactions in any Covered
Security in which the Access Person has, or by reason of the transaction acquires, any direct or indirect beneficial ownership in the security or, in the alternative, make the representation in paragraph D below.
B. Every report shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected and shall contain the following information:
(1) the date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved;
(2) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(3) the price at which the transaction was effected;
(4) the name of the broker, dealer or bank with or through whom the transaction was effected;
(5) the date that the report is submitted by the Access Person; and
(6) a description of any factors potentially relevant to an analysis of whether the Access Person may have a conflict of interest with respect to the transaction, including the existence of any substantial economic relationship between the transaction and securities held or to be acquired by the Trusts.
C. With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person, no later than 10 days after the end of a calendar quarter, an Access Person shall provide a report to the Trusts containing the following information:
(1) the name of the broker, dealer or bank with whom the Access Person established the account;
(2) the date the account was established; and
(3) the date that the report is submitted by the Access Person.
D. If no transactions were conducted by an Access Person during a calendar quarter that are subject to the reporting requirements described above, such Access Person shall, not later than 10 days after the end of that calendar quarter, provide a written representation to that effect to the Trusts.
3. ANNUAL REPORTING.
A. Every Access Person shall report to the Trusts the information described in paragraph B below with respect to transactions in any Covered Security in which the Access Person has, or by reason of the transaction acquires, any direct or indirect beneficial ownership in the security.
B. Annually, within 30 days of the end of each calendar year, the following information (which information must be current as of a date no more than 30 days before the report is submitted):
(1) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership;
(2) The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and
(3) The date that the report is submitted by the Access Person.
4. EXCEPTIONS TO REPORTING REQUIREMENTS.
A. An Access Person is not required to make a report otherwise required under paragraphs 1, 2 or 3 above with respect to any transaction effected for any account over which the Access Person does not have any direct or indirect influence or control; provided, (however, that if the Access Person is relying upon the provisions of this paragraph 4(A) to avoid making such a report, the Access Person shall, not later than 10 days after the end of each calendar quarter, identify any such account in writing and certify in writing that he or she had no direct or indirect influence over any such account.
B. An independent trustee of the Trusts who would be required to make a report pursuant to paragraphs 1, 2 or 3 above solely by reason of being a trustee of the Trusts is not required to make an initial holdings report under paragraph 1 above and an annual report under paragraph 3 above, and is only required to make a
quarterly report under paragraph 2 above if the independent trustee, at the time of the transaction, knew or, in the ordinary course of fulfilling the independent trustee's official duties as a trustee of the Trusts, should have known that (a) the Trusts has engaged in a transaction in the same security within the last 15 days or is engaging or going to engage in a transaction in the same security within the next 15 days, or (b) the Trusts or BlackRock has within the last 15 days considered a transaction in the same security or is considering a transaction in the same security or within the next 15 days is going to consider a transaction in the same security.
5. ANNUAL CERTIFICATION.
A. All Access Persons are required to certify that they have read and understand this Code of Ethics and recognize that they are subject to the provisions hereof and will comply with the policy and procedures stated herein. Further, all Access Persons are required to certify annually that they have complied with the requirements of this Code of Ethics and that they have reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of such policies. A copy of the certification form to be used in complying with this paragraph A is attached to this Code of Ethics as Appendix 4.
B. The Trusts and BlackRock shall prepare an annual report to the Board of Trustees of the Trusts to be presented at the first regular meeting of the Board after March 31 of each year and which shall:
(1) Summarize existing procedures concerning personal investing, including pre-clearance policies and the monitoring of personal investment activity after pre-clearance has been granted, and any changes in the procedures during the past year;
(2) describe any issues arising under the Code of Ethics or procedures since the last report to the Board including, but not limited to, information about any material violations of the Code of Ethics or procedures and the sanctions imposed during the past year;
(3) identify any recommended changes in existing restrictions or procedures based upon experience under this Code of Ethics, evolving industry practice or developments in applicable laws and regulations;
(4) contain such other information, observations and recommendations as deemed relevant by the Trusts or BlackRock; and
(5) certify that the Trusts, BlackRock have adopted Codes of Ethics with procedures reasonably necessary to prevent Access Persons from violating the provisions of Rule 17j-1(b) or this Code.
6. NOTIFICATION OF REPORTING OBLIGATION AND REVIEW OF REPORTS.
Each Access Person shall receive a copy of this Code of Ethics and be notified of his or her reporting obligations. All reports shall be promptly submitted upon completion to the Trust's Secretary who shall review such reports.
7. MISCELLANEOUS.
A. Any report under this Code of Ethics may contain a statement that the report shall not be construed as an admission by the person making the report that the person has any direct or indirect beneficial ownership in the securities to which the report relates.
VI. CONFIDENTIALITY.
No Access Person shall reveal to any other person (except in the normal course of his or her duties on behalf of the Trusts) any information regarding securities transactions by the Trusts or consideration by the Trusts or BlackRock of any such securities transaction.
All information obtained from any Access Person hereunder shall be kept in strict confidence, except that reports of securities transactions hereunder will be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization to the extent required by law or regulation.
VII. SANCTIONS.
Upon discovering a violation of this Code of Ethics, the Board of Trustees of the Trusts may impose any sanctions it deems appropriate, including a letter of censure, the suspension or termination of any trustee, officer or employee of the Trusts, or the recommendation to the employer of the violator of the suspension or termination of the employment of the violator.
Dated: May 18, 2000
APPENDIX 1
RULE 17j-l UNDER THE INVESTMENT COMPANY ACT OF 1940
APPENDIX 2
The following are "Access Persons" for purposes of the foregoing Code of Ethics:
NAME TITLE ---- ----- DIRECTORS Laurence D. Fink Chairman/Director Andrew F. Brimmer Director Richard E. Cavanagh Director Kent Dixon Director Frank J. Fabozzi Director James Clayburn La Force, Jr. Director Walter F. Mondale Director Ralph L. Schlosstein Director |
OFFICERS
Ralph L. Schlosstein President Scott Amero Vice President (Taxables Only) Keith T. Anderson Vice President Michael C. Heubsch Vice President Robert S. Kapito Vice President Kevin Klingert Vice President (Municipals Only) Dennis Schaney Vice President (BHY Only) Richard M. Shea Vice President/Tax Henry Gabbay Treasurer James Kong Assistant Treasurer Anne Ackerley Secretary |
APPENDIX 3
RULE 16a-l(a)(2) UNDER THE SECURITIES EXCHANGE ACT OF 1934
APPENDIX 4
CERTIFICATION FORM
This is to certify that I have read and understand the Code of Ethics of the BlackRock Closed End Trusts dated May 18, 2000, and that I recognize that I am subject to the provisions thereof and will comply with the policy and procedures stated therein.
This is to further certify that I have complied with the requirements of such Code of Ethics and that I have reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of such Code of Ethics.
Please sign two copies of this Certification Form, return one copy to Mr. Bart Battista, Chief Compliance Officer, BlackRock Advisors, Inc., 345 Park Avenue, New York, NY 10154, and retain the other copy, together with a copy of the Code of Ethics, for your records.
EX-99(r)(2)
EMPLOYEE INVESTMENT TRANSACTION POLICY
FOR
BLACKROCK INVESTMENT ADVISER COMPANIES
Effective March 1, 2000
EMPLOYEE INVESTMENT TRANSACTION POLICY
TABLE OF CONTENTS
TABLE OF CONTENTS............................................................................i
I. PREAMBLE.............................................................................1
A. General Principles..........................................................1
B. The General Scope Of The Policy's Application To Personal Investment
Transactions................................................................3
C. The Organization Of This Policy.............................................3
D. Questions...................................................................4
II. PERSONAL INVESTMENT TRANSACTIONS.....................................................4
A. In General..................................................................4
B. Reporting Obligations.......................................................4
1. Use Of Broker-Dealers And Futures Commission Merchants.............4
2. Initial Report.....................................................4
3. New Accounts.......................................................6
4. Timely Reporting Of Investment Transactions........................6
5. Related Accounts...................................................6
6. Annual Holdings Report.............................................6
7. Exemptions From Reporting..........................................7
C. Prohibited Or Restricted Investment Transactions............................8
1. Initial Public Offerings...........................................8
2. Private Placements.................................................8
D. Investment Transactions Requiring Prior Notification........................8
1. Prior Notification Procedure.......................................9
2. Exemptions From Prior Notification.................................9
(a) Transactions Exempt From Prior Notification...............9
(b) Securities Exempt From Prior Notification................10
(c) Futures Contracts Exempt From Prior Notification.........10
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E. Ban On Short-Term Trading Profits..........................................11
F. Blackout Periods...........................................................11
1. Specific Blackout Periods.........................................11
2. Exemptions From Blackout Restrictions.............................12
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR........................................13
A. Inside Information........................................................13
B. Service As A Director.....................................................13
IV. EXEMPTIONS..........................................................................14
V. COMPLIANCE..........................................................................14
A. Certifications.............................................................14
1. Upon Receipt Of This Policy.......................................14
2. Annual Certificate Of Compliance..................................15
B. Supervisory Procedures.....................................................15
1. The Compliance Committee..........................................15
2. The Compliance Officer............................................15
3. Post-Trade Monitoring And Investigations..........................16
4. Remedial Actions..................................................16
5. Reports Of Material Violations....................................17
6. Annual Reports....................................................17
VI. EFFECTIVE DATE......................................................................17
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APPENDICES
I. Definitions Of Capitalized Terms
II. Acknowledgment Of Receipt Of The Policy
III. Annual Certification Of Compliance With The Policy
III-A. Annual Holdings Report
IV. Initial Report Of Accounts
V-A. Request For Duplicate Broker Reports (For persons NOT associated with
BlackRock Investments, Inc.)
V-B. Request For Duplicate Broker Reports (For persons associated with
BlackRock Investments, Inc.)
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VI. Investment Transaction Prior Notification Form
VII. Fully Discretionary Account Form
EMPLOYEE INVESTMENT TRANSACTION POLICY
FOR BLACKROCK, INVESTMENT ADVISER COMPANIES
I. PREAMBLE
A GENERAL PRINCIPLES
This Employee Investment Transaction Policy (the "Policy") is based on the principle that you, as an officer, director or other Advisory Employee of an Advisor affiliated with BlackRock, Inc. ("BlackRock"), owe a fiduciary duty of undivided loyalty to the registered investment companies, institutional investment clients, personal trusts and estates, guardianships, employee benefit trusts, and other Advisory Clients which that Advisor serves.(1) Accordingly, you must avoid transactions, activities, and relationships that might interfere or appear to interfere with making decisions in the best interests of those Advisory Clients.
At all times, you must observe the following GENERAL PRINCIPLES:
1. YOU MUST PLACE THE INTERESTS OF ADVISORY CLIENTS FIRST. As a fiduciary you must scrupulously avoid serving your own personal interests ahead of the interests of Advisory Clients. You must adhere to this general fiduciary principle as well as comply with the Policy's specific provisions. Technical compliance with the
The term "ADVISOR" means any entity affiliated with BlackRock, whether
now in existence or formed after the date hereof, that is registered as
(i) an investment advisor under the Investment Advisers Act of 1940, as
amended, or (ii) a broker-dealer under the Securities Exchange Act of
1934, as amended, other than any such investment advisor or
broker-dealer that has adopted its own employee investment transaction
policy.
The term "ADVISORY CLIENT" means a registered investment company, an institutional investment client, a personal trust or estate, a guardianship, an employee benefit trust, or another client with which the Advisor by which you are employed or with which you are associated has an investment management, advisory or sub-advisory contract or relationship.
The term "ADVISORY EMPLOYEE" means an officer, director, or employee of an Advisor, or any other person identified as a "control person" on the Form ADV or the Form BD filed by the Advisor with the U.S. Securities and Exchange Commission, (1) who, in connection with his or her regular functions or duties, generates, participates in, or obtains information regarding that Advisor's purchase or sale of a Security by or on behalf of an Advisory Client; (2) whose regular functions or duties relate to the making of any recommendations with respect to such purchases or sales; (3) who obtains information or exercises influence concerning investment recommendations made to an Advisory Client of that Advisor; or (4) who has line oversight or management responsibilities over employees described in (1), (2) or (3), above.
Policy will not automatically insulate from scrutiny any Investment Transaction(2) that indicates an abuse of your fiduciary duties or that creates an appearance of such abuse.
Your fiduciary obligation applies not only to your personal Investment Transactions but also to actions taken on behalf of Advisory Clients. In particular, you may not cause an Advisory Client to take action, or not to take action, for your personal benefit rather than for the benefit of the Advisory Client. For example, you would violate this Policy if you caused an Advisory Client to purchase a Security you owned for the purpose of increasing the value of that Security. If you are a Portfolio Employee,(3) you would also violate this Policy if you made a personal investment in a Security that might be an appropriate investment for an Advisory Client without first considering the Security as an investment for the Advisory Client.
As a GENERAL MATTER, the term "SECURITY" means any stock, note, bond, debenture or other evidence of indebtedness (including any loan participation or assignment), limited partnership interest or investment contract OTHER THAN AN EXEMPT SECURITY (as defined above). The term "Security" includes an OPTION on a Security, an index of Securities, a currency or a basket of currencies, including such an option traded on the Chicago Board of Options Exchange or on the New York, American, Pacific or Philadelphia Stock Exchanges as well as such an option traded in the over-the-counter market. The term "Security" does NOT include a physical commodity or a Futures Contract.
The term "FUTURES CONTRACT" includes (a) a futures contract and an option on a futures contract traded on a U.S. or foreign board of trade, such as the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, or the London International Financial Futures Exchange (a "Publicly-Traded Futures Contract"), as well as (b) a forward contract, a "swap", a "cap", a "collar", a "floor" and an over-the-counter option (other than an option on a foreign currency, an option on a basket of currencies, an option on a Security or an option on an index of Securities) (a "Privately-Traded Futures Contract").
As a GENERAL MATTER, you are considered to have a "BENEFICIAL
OWNERSHIP" interest in a Security or Futures Contract if you have the
opportunity, directly or indirectly, to profit or share in any profit derived
from a transaction in that Security or Futures Contract. YOU ARE PRESUMED TO
HAVE A BENEFICIAL OWNERSHIP INTEREST IN ANY SECURITY OR FUTURES CONTRACT HELD,
INDIVIDUALLY OR JOINTLY, BY YOU AND/OR BY A MEMBER OF YOUR IMMEDIATE FAMILY (AS
DEFINED BELOW). In addition, unless specifically excepted by the Compliance
Officer based on a showing that your interest or control is sufficiently
attenuated to avoid the possibility of a conflict, you will be considered to
have a Beneficial Ownership interest in a Security held by: (1) a JOINT ACCOUNT
to which you are a party, (2) a PARTNERSHIP in which you are a general partner,
(3) a LIMITED LIABILITY COMPANY in which you are a manager-member, (4) a TRUST
in which you or a member of your Immediate Family has a pecuniary interest or
(5) an INVESTMENT CLUB in which you are a member.
See Appendix I for more complete definitions of the terms "Beneficial Ownership," "Futures Contract," and "Security."
(3) The term "PORTFOLIO EMPLOYEE" means a Portfolio Manager or an Advisory Employee who provides information or advice to a Portfolio Manager, who helps execute a Portfolio Manager's decisions, or who directly supervises a Portfolio Manager. The term "PORTFOLIO MANAGER" means any employee of an Advisor who has the authority, whether sole or shared or only from time to time, to make investment decisions or to direct trades affecting an Advisory Client.
2. YOU MUST CONDUCT ALL OF YOUR PERSONAL INVESTMENT TRANSACTIONS IN FULL COMPLIANCE WITH THIS POLICY, THE BLACKROCK, INC. INSIDER TRADING POLICY, THE PNC CODE OF ETHICS, AND THE OTHER POLICIES OF THE PNC FINANCIAL SERVICES GROUP, INC. ("PNC") AND BLACKROCK (including the policies that prohibit insider trading or that restrict trading in PNC Securities). BlackRock encourages you and your family to develop personal investment programs. However, those investment programs must remain within boundaries reasonably necessary to insure that appropriate safeguards exist to protect the interests of our Advisory Clients and to avoid even the APPEARANCE of unfairness or impropriety. Doubtful situations should be resolved in favor of our Advisory Clients and against your personal Investment Transactions.
3. YOU MUST NOT TAKE INAPPROPRIATE ADVANTAGE OF YOUR POSITION. The receipt of investment opportunities, perquisites, gifts or gratuities from persons seeking to do business, directly or indirectly, with BlackRock, an affiliate, or an Advisory Client could call into question the independence of your business judgment. Doubtful situations should be resolved against your personal interests.
B. THE GENERAL SCOPE OF THE POLICY'S APPLICATION TO PERSONAL INVESTMENT TRANSACTIONS
Rule 17j-1 under the Investment Company Act of 1940, as amended, requires REPORTING of all personal Investment Transactions in Securities (other than certain "Exempt Securities") by Advisory Employees, whether or not they are Securities that might be purchased or sold by or on behalf of an Advisory Client. This Policy implements that reporting requirement.
However, since a primary purpose of the Policy is to avoid conflicts of interest arising from personal Investment Transactions in Securities and other instruments that are held or might be acquired on behalf of Advisory Clients, this Policy only places RESTRICTIONS on personal Investment Transactions in such investments. This Policy also requires reporting and restricts personal Investment Transactions in certain Futures Contracts which, although they are not Securities, are instruments that Advisors buy and sell for Advisory Clients.
Although this Policy applies to all officers, directors and other Advisory Employees of BlackRock, the Policy recognizes that Portfolio Managers, and the other Portfolio Employees who provide them with advice and who execute their decisions, occupy more sensitive positions than other Advisory Employees, and that it is appropriate to subject their personal Investment Transactions to greater restrictions.
C. THE ORGANIZATION OF THIS POLICY
The remainder of this Policy is divided into four main topics. Section
II concerns PERSONAL INVESTMENT TRANSACTIONS. Section III describes restrictions
that apply to Advisory Employees who receive INSIDE INFORMATION or seek to serve
on a BOARD OF DIRECTORS OR SIMILAR GOVERNING BODY. Section IV outlines the
procedure for seeking case-by-case EXEMPTIONS from the Policy's requirements.
Section V summarizes the methods for ensuring COMPLIANCE under this Policy. In
addition, the following APPENDICES are also a part of this Policy:
I. Definitions Of Capitalized Terms
II. Acknowledgment Of Receipt Of The Policy
III. Annual Certification Of Compliance With The Policy
IV. Initial Report Of Accounts
V. Request For Duplicate Broker Reports
VI. Investment Transaction Prior Notification Form
VII. Fully Discretionary Account Form
D. QUESTIONS
Questions regarding this Policy should be addressed to the Compliance Officer. If you have any question regarding the interpretation of this Policy or its application to a potential Investment Transaction, you should consult the Compliance Officer BEFORE you execute that transaction.
II. PERSONAL INVESTMENT TRANSACTIONS
A. IN GENERAL
Subject to the limited exceptions described below, you are required to REPORT all Investment Transactions in Securities and Futures Contracts made by you, a member of your Immediate Family, a trust or an investment club in which you have an interest, or on behalf of any account in which you have an interest or which you direct.(4) In addition, you must provide PRIOR NOTIFICATION of certain Investment Transactions in Securities and Futures Contracts that an Advisor holds or may acquire on behalf of an Advisory Client. (The exercise of an option is an Investment Transaction for purposes of these requirements.) The details of these reporting and prior notification requirements are described below.
B. REPORTING OBLIGATIONS
1. USE OF BROKER-DEALERS AND FUTURES COMMISSION MERCHANTS
YOU MUST USE A REGISTERED BROKER-DEALER OR FUTURES COMMISSION MERCHANT to engage in any purchase or sale of a publicly traded Security or Futures Contract. This requirement also applies to any purchase or sale of a Security or Futures Contract in which you have, or by reason of the Investment Transaction will acquire, a Beneficial Ownership interest. Thus, as a general matter, any Securities or Futures Contract transactions by members of your Immediate Family will need to be made through a registered broker-dealer or futures commission merchant.
2. INITIAL REPORT
Within 10 days of commencing employment or within 10 days of any event that causes you to become subject to this Policy, you must supply to the Compliance Officer copies of the most recent statements for each and every Personal Account and Related Account that holds or is likely to hold a Security or Futures Contract in which you have a Beneficial Ownership interest, as well as copies of confirmations for any and all transactions subsequent to the effective dates of
those statements.(5) These documents should be supplied to the Compliance Officer by attaching them to the form attached hereto as Appendix IV.
On that same form you should supply the name of any registered broker-dealer and/or futures commission merchant and the number for any Personal Account and Related Account that holds or is likely to hold a Security or Futures Contract in which you have a Beneficial Ownership interest for which you CANNOT supply the most recent account statement. You must also certify, where indicated on the form, that the contents of the form and the documents attached thereto disclose all such Personal Accounts and Related Accounts.
In addition, you must also supply, where indicated on the form, the following information for each Security or Futures Contract in which you have a Beneficial Ownership interest, to the extent that this information is not available from the statements attached to the form:
1. A description of the Security or Futures Contract, including its name or title;
2. The quantity (E.G., in terms of numbers of shares, units or contracts) and value (in dollars) of the Security or Futures Contract; and
3. The custodian of the Security or Futures Contract.
o any account in your individual name;
o any joint or tenant-in-common account in which you have an interest or are a participant;
o any account for which you act as trustee, executor, or custodian; and
o any account over which you have investment discretion or have the power (whether or not exercised) to direct the acquisition or disposition of Securities or Futures Contracts (other than an Advisory Client's account that you manage or over which you have investment discretion), including the accounts of any individual or entity that is managed or controlled directly or indirectly by or through you, such as the account of an investment club to which you belong. There is a presumption that you can control accounts held by members of your Immediate Family sharing the same household. This presumption may be rebutted only by convincing evidence.
The term "RELATED ACCOUNT" means any account, other than a Personal Account, that holds a Security or Futures Contract in which you have a direct or indirect Beneficial Ownership interest (other than an account over which you have no investment discretion and cannot otherwise exercise control) and any account (other than an Advisory Client's account) of any individual or entity to whom you give advice or make recommendations with regard to the acquisition or disposition of Securities or Futures Contracts (whether or not such advice is acted upon).
3. NEW ACCOUNTS
Upon the opening of a new Personal Account or a Related Account that holds or is likely to hold a Security or a Futures Contract in which you have a Beneficial Ownership interest, you must give written notice to the Compliance Officer of the name of the registered broker-dealer or futures commission merchant for that account, the identifying number for that Personal Account or Related Account and the date that the account was established.
4. TIMELY REPORTING OF INVESTMENT TRANSACTIONS
You must cause each broker-dealer or futures commission merchant that maintains a Personal Account or a Related Account that holds a Security or a Futures Contract in which you have a Beneficial Ownership interest to provide to the Compliance Officer, on a timely basis, duplicate copies of confirmations of all transactions in that account and of periodic statements for that account ("Duplicate Broker Reports"). A form for that purpose is attached hereto as Appendix V.
In addition, you must report to the Compliance Officer, on a timely basis, any transaction in a Security or Futures Contract in which you have or acquired a Beneficial Ownership interest that was made without the use of a registered broker-dealer or futures commission merchant.
5. RELATED ACCOUNTS
The reporting obligations described above also apply to any Related Account (as defined in Appendix I) and to any Investment Transaction in a Related Account.
It is important that you recognize that the definitions of "Personal Account," "Related Account" and "Beneficial Ownership" in Appendix I probably will require you to provide, or to arrange for the broker-dealer or futures commission merchant to furnish, copies of reports for any account used by or for a member of your Immediate Family or a trust in which you or a member of your Immediate Family has an interest, as well as for any other accounts in which you may have the opportunity, directly or indirectly, to profit or share in the profit derived from any Investment Transaction in that account, including the account of any investment club to which you belong.
6. ANNUAL HOLDINGS REPORT
You must report to the Compliance Officer on an annual basis holdings
of all Securities and Futures Contracts in which you have a Beneficial Ownership
interest. This requirement can generally be satisfied by causing each
broker-dealer or futures commission merchant that maintains a Personal Account
and/or a Related Account that holds a Security or Futures Contract in which you
have a Beneficial Ownership interest to provide to the Compliance Officer, on a
timely basis, Duplicate Broker Reports in accordance with the requirements under
Section II.B.4 above. If you have a Beneficial Ownership Interest in a Security
or Futures Contract that is not held in an account with a broker-dealer or a
futures commission merchant or other custodian from whom the Compliance Officer
receives a periodic statement of your Personal Account and/or Related Accounts,
you must complete the Annual Holdings Report attached hereto as Appendix III-A
and submit it to the Compliance Officer at the time you make your Annual
Certification of Compliance in accordance with the requirements under Section
V.A.2 of this
Policy. The information in the Annual Holdings Report must be current as of a date no more than 30 days before the report is submitted.
You must supply, where indicated on the form, the following information for each Security or Futures Contract:
1. Name of the person who owns the Security or Futures Contract;
2. A description of the Security or Futures Contract, including its name or title;
3. The quantity (E.G., in terms of numbers of shares, units or contracts) and value (in dollars) of the Security or Futures Contract;
4. The valuation date of the Security or Futures Contract; and
5. The custodian of the Security or Futures Contract.
7. EXEMPTIONS FROM REPORTING
You need not report Investment Transactions in any account, including a Fully Discretionary Account,(6) over which neither you nor an Immediate Family Member has or had any direct or indirect influence or control. For example, Investment Transactions in the account of your spouse in an employee benefit plan would not have to be reported if neither you nor your spouse has any influence or control over those Investment Transactions.
You also need not report Investment Transactions in Exempt Securities nor need you furnish, or require a broker-dealer or futures commission merchant to furnish, copies of confirmations or periodic statements for accounts that hold ONLY Exempt Securities.(7) This
(7) The term "EXEMPT SECURITY" means any Security (as defined in Appendix I) not included within the definition of Security in SEC Rule 17j-1(a)(4) under the Investment Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies (I.E., mutual funds); and
3. HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, including, but not limited to, bankers' acceptances, bank certificates of deposit, commercial paper and repurchase agreements.
includes accounts that only hold U.S. Government securities, money market interests, or shares in registered open-end investment companies (I.E., mutual funds). This exemption from reporting will end immediately, however, at such time as there is an Investment Transaction in that account in a Security that is not an Exempt Security.
C. PROHIBITED OR RESTRICTED INVESTMENT TRANSACTIONS
1. INITIAL PUBLIC OFFERINGS
As an Advisory Employee, you may not acquire Beneficial Ownership of
any Security in an initial public offering, except that, with the approval of
the Compliance Committee and the General Counsel of BlackRock, you may acquire
Beneficial Ownership of a Security in an initial public offering directed or
sponsored by BlackRock. For purposes of this Policy, an initial public offering
shall not include the purchase of a Security in an initial public offering by
(I) a savings bank to its depositors, (II) a mutual insurance company to its
policyholders, (III) an issuer of debt securities (other than debt securities
convertible into common or preferred stock) or (IV) with respect to an Advisory
Employee employed by BlackRock International, Ltd. a building society to its
depositors.
2. PRIVATE PLACEMENTS
If you are a Portfolio Employee, you may not acquire Beneficial Ownership of any Security in a private placement, or subsequently sell that interest, unless you have received the prior written approval of the Compliance Officer and of any supervisor designated by the Compliance Officer. Approval will not be given unless a determination is made that the investment opportunity should not be reserved for one or more Advisory Clients, and that the opportunity to invest has not been offered to you by virtue of your position with an Advisor.
If you have acquired Beneficial Ownership of Securities in a private placement, you must DISCLOSE that investment to your supervisor when you play a part in any consideration of any investment by an Advisory Client in the issuer of the Securities, and any decision to make such an investment must be INDEPENDENTLY REVIEWED by a Portfolio Manager who does not have a Beneficial Ownership interest in any Securities of the issuer.
D. INVESTMENT TRANSACTIONS REQUIRING PRIOR NOTIFICATION
You must give prior notification to the Compliance Officer of ANY Investment Transaction in Securities or Futures Contracts in a Personal Account or Related Account, or in which you otherwise have or will acquire a Beneficial Ownership interest, UNLESS that Investment Transaction, Security or Futures Contract falls into one of the following categories that are identified as "exempt from prior notification." The purpose of prior notification is to permit the Compliance Officer and the Compliance Committee to take reasonable steps to investigate whether that Investment Transaction is in accordance with this Policy. Satisfaction of the prior notification requirement does not, however, constitute approval or authorization of any Investment Transaction for which you have given prior notification. As a result, the primary responsibility for compliance with this Policy rests with you.
See Appendix I for a more complete definition of "Exempt Security."
1. PRIOR NOTIFICATION PROCEDURE
Prior notification must be given by completing and submitting to the Compliance Officer a copy of the prior notification form attached hereto as Appendix VII. No Investment Transaction requiring prior notification may be executed prior to notice by the Compliance Officer that the prior notification process has been completed. The time and date of that notice will be reflected on the prior notification form. Unless otherwise specified, an Investment Transaction requiring prior notification must be placed and executed by the end of trading in New York City or, in the case of Advisory Employees employed by BlackRock International, Ltd., by the end of trading in the United Kingdom on the day of notice from the Compliance Officer that the prior notification process has been completed. If a proposed Investment Transaction is not executed (with the exception of a limit order) within the time specified, you must repeat the prior notification process before executing the transaction. A notice from a Compliance Officer that the prior notification process has been completed is no longer effective if you discover, prior to executing your Investment Transaction, that the information on your prior notification form is no longer accurate, or if the Compliance Officer revokes his or her notice for any other reason.
The Compliance Officer may undertake such investigation as he or she considers necessary to investigate whether an Investment Transaction for which prior notification has been sought complies with the terms of this Policy and is consistent with the general principles described at the beginning of this Policy.
As part of that investigation, the Compliance Officer or a designee of the Compliance Officer will determine whether there is a pending BUY or SELL order in the same equity Security or Futures Contract, or a Related Security, on behalf of an Advisory Client.8 If such an order exists, the Compliance Officer will not provide notice that the prior notification process has been completed UNTIL the Advisory Client's order is executed or withdrawn.
2. EXEMPTIONS FROM PRIOR NOTIFICATION
Prior notification will not be required for the following Investment Transactions, Securities and Futures Contracts. They are exempt only from the Policy's prior notification requirement, and, unless otherwise indicated, remain subject to the Policy's other requirements, including its reporting requirements.
(A) TRANSACTIONS EXEMPT FROM PRIOR NOTIFICATION
Prior notification is not required for any of the following Investment Transactions:
1. Any Investment Transaction in a Fully Discretionary Account that has been approved as such by the Compliance Officer.
2. Purchases of Securities under dividend reinvestment plans.
3. Purchases of Securities by an exercise of rights issued to the holders of a class of Securities PRO RATA, to the extent those rights are issued with respect to Securities of which you have Beneficial Ownership.
4. Acquisitions or dispositions of Securities as the result of a stock dividend, stock split, reverse stock split, merger, consolidation, spin-off or other similar corporate distribution or reorganization applicable to all holders of a class of Securities of which you have Beneficial Ownership.
5. Purchases of common stock of BlackRock, Inc under the BlackRock, Inc. Employee Stock Purchase Plan.
6. With respect to Advisory Employees who are employed by BlackRock International, Inc., automatic investments by direct debit into a personal equity plan (PEP), or similar type of plan in Exempt Securities if the pre-notification process was completed for the first such investment.
7. Investment Transactions made by a person who serves on the Board of Directors of an Advisor and is not involved with the Advisory operations of such Advisor nor engages in the type of activities described under (1) (2) or (3) under the term Advisory Employee as defined in Appendix I.
8. Investment Transactions in Exchange Traded Funds ("ETFs"), such as the Nasdaq-100 Index Tracking Stock, (QQQ), SPDR Trust, (SPY), DIAMONDS Trust, (DIA), Merrill Lynch Semiconductor HOLDRS, (SMH), iSHARES MSCI Japan, (EWJ), Merrill Lynch Biotech HOLDRS, (BBH), Select Sector SPDR Fund - Technology, (XLK), Select Sector SPDR Fund - Financial, (XLF), MidCap SPDR Trust, (MDY), and other ETF's as determined from time to time by the Compliance Committee to have sufficient liquidity as not to present the type of conflict that this policy is designed to protect against. Any questions about whether an ETF not listed in this Section II.D.2.(a) is exempt from prior-notification should be directed to the Compliance Officer.
(B) SECURITIES EXEMPT FROM PRIOR NOTIFICATION
Prior notification is not required for an Investment Transaction in an Exempt Security, as defined in Appendix I, E.G., U.S. Government securities, shares in registered open-end investment companies (I.E., mutual funds) and "high quality short-term debt instruments" (as defined in Appendix I).
(C) FUTURES CONTRACTS EXEMPT FROM PRIOR NOTIFICATION
Prior notification is not required for an Investment Transaction in the following Futures Contracts:
1. Currency futures.
2. U.S. Treasury futures.
3. Eurodollar futures.
4. Physical commodity futures (E.G., contracts for future delivery of grain, livestock, fiber or metals).
5. Futures contracts to acquire Fixed Income Securities issued by a U.S. Government agency, a foreign government, or an international or supranational agency.
6. Futures contracts on the Standard and Poor's 500 (S&P 500) or the Dow Jones Industrial Average or NASDAQ 100 stock indexes.
7. For Advisory Employees who are employed by BlackRock International, Ltd., futures contracts on the Financial Times Stock Exchange 100 (FTSE) Index.
E. BAN ON SHORT-TERM TRADING PROFITS
You may not profit from the purchase and sale, or the sale and purchase, within 60 calendar days, of the same Securities and/or Related Security. Any such short-term trade must be reversed or unwound, or if that is not practical, the profits must be disgorged and distributed in a manner determined by the Compliance Committee.
This short-term trading ban does NOT apply to Investment Transactions in Exempt Securities (as defined in Appendix I) or in Futures Contracts. This ban also does NOT apply to a purchase or sale in connection with a Transaction Exempt From Prior Notification (as described above in Section II.D.2.(a)), a transaction in a Fully Discretionary Account or a transaction exempt from the "blackout" periods pursuant to Section II.F.2 below.
You are considered to profit from a short-term trade if Securities of which you have Beneficial Ownership (including Securities held by Immediate Family members) are sold for more than their purchase price, even though the Securities purchased and the Securities sold are held of record or beneficially by different persons or entities.
F. BLACKOUT PERIODS
Your ability to engage in certain Investment Transactions may be prohibited or restricted during the "blackout" periods described below:
1. SPECIFIC BLACKOUT PERIODS
a. You may not purchase or sell a Security, a Related Security, or Futures Contract at a time when you intend or know of another's intention to purchase or sell that same Security, a Related Security, or Futures Contract, on behalf of an Advisory Client of ANY Advisor (the "Specific Knowledge Blackout Period").
b. In addition, if you are a PORTFOLIO EMPLOYEE, you may not purchase or sell a Security, a Related Security or a Futures Contract which you are actively considering or which you have actively considered and rejected for purchase or sale for an Advisory Client within the previous 15 CALENDAR DAYS (the "15-Day Blackout
Period") unless the Compliance Officer, after consultation with your supervisor, has approved your Investment Transaction.(9)
c. Finally, if you are a PORTFOLIO MANAGER, you may not purchase or sell a Security, a Related Security, or Futures Contract within 7 CALENDAR DAYS before or after a transaction in that Security, a Related Security, or Futures Contract, by an Advisory Client for which you are responsible (the "7-Day Blackout Period").
For Portfolio Employees or Portfolio Managers, the Compliance Officer will not give such notice until any applicable 15-Day Blackout Period or 7-Day Blackout Period has expired or any required approvals or exemptions have been obtained. An Investment Transaction that violates one of these Blackout restrictions must be reversed or unwound, or if that is not practical, the profits must be disgorged and distributed in a manner determined by the Compliance Committee.
2. EXEMPTIONS FROM BLACKOUT RESTRICTIONS
The foregoing blackout period restrictions do NOT apply to Investment Transactions in:
a. Exempt Securities, as defined in Appendix I.
b. Securities of a company listed on the Standard & Poor's 100 (S & P 100) Index.
c. A Futures Contract Exempt From Prior Notification under this Policy (as described above).
d. A Fully Discretionary Account.
e. With respect to Advisory Employees who are employed by BlackRock International, Ltd., securities of a company listed on the Financial Times Stock Exchange 100 (FTSE 100).
f. Exchange Traded Funds Exempt From Prior Notification under this Policy (as described above).
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR
A. INSIDE INFORMATION
As an employee of a subsidiary of PNC and BlackRock, Inc., you must comply with the PNC Insider Trading Policy and the BlackRock, Inc. Insider Trading Policy. A copy of the PNC
Insider Trading Policy is included in Section E of the PNC Code of Ethics. A copy of the BlackRock, Inc. Insider Trading Policy was furnished to all employees at the time of its adoption and is furnished to all new employees at the commencement of their employment. In addition, as an Advisory Employee, you must notify the General Counsel of BlackRock if you receive or expect to receive material non-public information about an entity that issues securities. The General Counsel will determine the restrictions, if any, that will apply to your communications and activities while in possession of that information. In general, those restrictions will include:
1. An undertaking not to trade, either on your own behalf or on behalf of an Advisory Client, in the securities of the entity about which you have material non-public information.
2. An undertaking not to disclose material non-public information to other Advisory Employees.
3. An undertaking not to participate in discussions with or decisions by other Advisory Employees relating to the entity about which you have material non-public information.
The General Counsel, in cooperation with the Compliance Officer, will maintain a "restricted list" of entities about which Advisory Employees may have material non-public information. This "restricted list" will be available to the Compliance Officer when he or she conducts investigations or reviews related to the Prior Notification Procedure described previously in Section II(D)(1) or the Post-Trade Monitoring process described below in Section V(B)(3).
B. SERVICE AS A DIRECTOR
You may not serve on the board of directors or other governing board of any entity unless you have received the prior written approval of the General Counsel of PNC, to the extent such approval is required under the terms of the PNC Code of Ethics, and the General Counsel of BlackRock. If permitted to serve on a governing board, an Advisory Employee will be ISOLATED from those Advisory Employees who make investment decisions regarding the securities of that entity, through a "Chinese wall" or other procedures determined by the General Counsel of BlackRock. In general, the "Chinese wall" or other procedures will include:
1. An undertaking not to trade or to cause a trade on behalf of an Advisory Client in the securities of the entity on whose board you serve.
2. An undertaking not to disclose material non-public information about that entity to other Advisory Employees.
3. An undertaking not to participate in discussions with or decisions by other Advisory Employees relating to the entity on whose board you serve.
Any entity on whose board an Advisory Employee serves will be included on the "restricted list" referenced in subsection A, above.
IV. EXEMPTIONS
The Compliance Committee, in its discretion, may grant case-by-case exceptions to any of the foregoing requirements, restrictions or prohibitions, except that the Compliance Committee may not exempt any Investment Transaction in a Security (other than an Exempt Security) or a Futures Contract from the Policy's reporting requirements. Exemptions from the Policy's prior notification requirements and from the Policy's restrictions on acquisitions in initial public offerings, short-term trading and trading during blackout periods will require a determination by the Compliance Committee that the exempted transaction does not involve a realistic possibility of violating the general principles described at the beginning of this Policy. An application for a case-by-case exemption, in accordance with this paragraph, should be made IN WRITING to the Compliance Officer, who will promptly forward that written request to the members of the Compliance Committee.
V. COMPLIANCE
A. CERTIFICATIONS
1. UPON RECEIPT OF THIS POLICY
Upon commencement of your employment or the effective date of this Policy, whichever occurs later, you will be required to acknowledge receipt of your copy of this Policy by completing and returning to the Compliance Officer a copy of the form attached hereto as Appendix II. By that acknowledgment, you will also agree:
1. To read the Policy, to make a reasonable effort to understand its provisions, and to ask the Compliance Officer questions about those provisions you find confusing or difficult to understand.
2. To comply with the Policy, including its general principles, its reporting requirements, its prohibitions, its prior notification requirements, its short-term trading and blackout restrictions.
3. To advise the members of your Immediate Family about the existence of the Policy, its applicability to their personal Investment Transactions, and your responsibility to assure that their personal Investment Transactions comply with the Policy.
4. To cooperate fully with any investigation or inquiry by or on behalf of the Compliance Officer or the Compliance Committee to determine your compliance with the provisions of the Policy.
In addition, your acknowledgment will recognize that any failure to comply with the Policy and to honor the commitments made by your acknowledgment may result in disciplinary action, including dismissal.
2. ANNUAL CERTIFICATE OF COMPLIANCE
You are required to certify on an annual basis, on a copy of the form attached hereto as Appendix III, that you have complied with each provision of your initial acknowledgment (see above). In particular, your annual certification will require that you certify
that you have read and that you understand the Policy, that you recognize that you are subject to its provisions, that you complied with the requirements of the Policy during the period to which it applies, and that you have disclosed, reported, or caused to be reported all Investment Transactions required to be disclosed or reported pursuant to the requirements of the Policy and that you have disclosed, reported or caused to be reported all Personal Accounts and Related Accounts that hold or are likely to hold a Security or Futures Contract in which you have a Beneficial Ownership interest. In addition, you will be required to confirm the accuracy of the record of information on file with the Advisor with respect to such Personal Accounts and Related Accounts. If you have a Beneficial Ownership Interest in a Security or Futures Contract that is not reported to the Compliance Officer on a periodic basis through Duplicate Broker Reports, you must complete the Annual Holdings Report (Appendix III-A) as described under Section II.B.6 above and submit it to the Compliance Officer at the time you make your Annual Certification of Compliance. The information in the Annual Holdings Report must be current as of a date no more than 30 days before the report is submitted.
B. SUPERVISORY PROCEDURES
1. THE COMPLIANCE COMMITTEE
The Policy will be implemented, monitored and reviewed by the Compliance Committee. The initial members of the Compliance Committee will be appointed by the management committee of BlackRock. The Compliance Committee, by a simple majority of its members, may appoint new members of the Committee, may replace existing members of the Committee, and may fill vacancies on the Committee. Among other responsibilities, the Compliance Committee will consider requests for case-by-case exemptions (described above) and will conduct investigations (described below) of any actual or suspected violations of the Policy. The Compliance Committee will determine what remedial actions, if any, should be taken by an Advisor in response to a violation of the Policy. The Compliance Committee will also provide reports (described below) regarding significant violations of the Policy and the procedures to implement the Policy. The Compliance Committee may recommend changes to those procedures or to the Policy to the management of the Advisors. Finally, the Compliance Committee will designate one person to act as Compliance Officer for all Advisors.
2. THE COMPLIANCE OFFICER
The Compliance Officer designated by the Compliance Committee will be responsible for the day-to-day administration of the Policy for all Advisors, subject to the direction and control of the Compliance Committee. Based on information supplied by the management of each Advisor, the Compliance Officer will forward a copy of the Policy to each Advisory Employee subject to the Policy and will notify each such person of his or her designation as an Advisory Employee, Portfolio Employee or Portfolio Manager. The Compliance Officer will also be responsible for administration of the reporting and prior notification functions described in the Policy, and will maintain the reports required by those functions. In addition, the Compliance Officer will attempt to answer any questions from an Advisory Employee regarding the interpretation or administration of the Policy. When necessary or desirable, the Compliance Officer will consult with the Compliance Committee about such questions. The Compliance Officer may designate one or more Assistant Compliance Officers to whom the Compliance Officer may delegate any of the duties described in this paragraph or in the succeeding paragraph,
and who shall be empowered to act on the Compliance Officer's behalf when the Compliance Officer is absent or unavailable.
3. POST-TRADE MONITORING AND INVESTIGATIONS
The Compliance Officer will review the Duplicate Broker Reports and other information supplied for each Advisory Employee so that the Compliance Officer can detect and prevent potential violations of the Policy. This information may also be disclosed to the Advisor's auditors, attorneys and regulators. If, based on his or her review of information supplied for an Advisory Employee, or based on other information, the Compliance Officer suspects that the Policy may have been violated, the Compliance Officer will perform such investigations and make such inquiries as he or she considers necessary. You should expect that, as a matter of course, the Compliance Officer will make inquiries regarding any personal Investment Transaction in a Security or Futures Contract that occurs on the same day as a transaction in the same Security or Futures Contract on behalf of an Advisory Client. If the Compliance Officer reaches a preliminary conclusion that an Advisory Employee may have violated this Policy, the Compliance Officer will report that preliminary conclusion in a timely manner to the Compliance Committee and will furnish to the Committee all information that relates to the Compliance Officer's preliminary conclusion. The Compliance Officer may also report his or her preliminary conclusion and the information relating to that preliminary conclusion to the Advisor's auditors, attorneys and regulators.
Promptly after receiving the Compliance Officer's report of a possible violation of the Policy, the Compliance Committee, with the aid and assistance of the Compliance Officer, will conduct an appropriate investigation to determine whether the Policy has been violated and will determine what remedial action should be taken by the Advisor in response to any such violation(s). For purposes of these determinations, a majority of the Compliance Committee will constitute a quorum and action taken by a simple majority of that quorum will constitute action by the Committee.
4. REMEDIAL ACTIONS
The remedial actions that may be recommended by the Compliance Committee may include, but are not limited to, disgorgement of profits, imposition of a fine, censure, demotion, suspension or dismissal. As part of any sanction, E.G., for violation of the Policy's restrictions on short-term trading or trading during blackout periods, you may be required to reverse or unwind a transaction and to forfeit any profit or to absorb any loss from the transaction. If an Investment Transaction may not be reversed or unwound, you may be required to disgorge any profits associated with the transaction, which profits will be distributed in a manner prescribed by the Compliance Committee in the exercise of its discretion. Profits derived from Investment Transactions in violation of this Policy may not be offset by any losses from Investment Transactions in violation of this Policy. Finally, evidence suggesting violations of criminal laws will be reported to the appropriate authorities, as required by applicable law.
In determining what, if any, remedial action is appropriate in response to a violation of the Policy, the Compliance Committee will consider, among other factors, the gravity of your violation, the frequency of your violations, whether any violation caused harm or the potential of harm to any Advisory Client, whether you knew or should have known that your Investment Transaction violated the Policy, whether you engaged in an Investment Transaction with a view to making a profit on the anticipated market action of a transaction by an Advisory Client, your efforts to cooperate with the Compliance Officer's investigation, and your efforts to correct any conduct that led to a violation. In rare instances, the Compliance Committee may find that, for equitable reasons, no remedial action should be taken.
5. REPORTS OF MATERIAL VIOLATIONS
In a timely manner, and not less frequently than annually, the Compliance Committee will report to the management committee of BlackRock, and to the directors or trustees of each investment company that is an Advisory Client, any known material violation of the Policy and sanctions imposed in response to the material violation. Evidence suggesting violations of criminal laws will be reported to the appropriate authorities, as required by applicable law.
6. ANNUAL REPORTS
The Compliance Committee will furnish an annual report to the management committee of BlackRock, and to the directors or trustees of each investment company that is an Advisory Client, that, at a minimum, will:
1. Summarize existing procedures and restrictions concerning personal investing by Advisory Employees and any changes in those procedures and restrictions that were made during the previous year;
2. Describes any issues arising under the Policy since the last report, including, but not limited to, information about any material violations of the Policy or procedures and the sanctions imposed in response to those violations; and
3. Describe any changes in existing procedures or restrictions that the Compliance Committee recommends based upon its experience under the Policy, evolving industry practices, or developments in applicable laws or regulations.
VI. EFFECTIVE DATE
The provisions of this Policy will take effect on October 1, 1998. Amendments to this Policy will take effect at the time such amendments are promulgated and distributed to the Advisory Employees governed by this Policy.
APPENDIX I
DEFINITIONS OF CAPITALIZED TERMS
The following definitions apply to the capitalized terms used in the Policy:
ADVISOR
The term "Advisor" means any entity affiliated with BlackRock, whether
now in existence or formed after the date hereof, that is registered as (i) an
investment advisor under the Investment Advisers Act of 1940, as amended, or
(ii) a broker-dealer under the Securities Exchange Act of 1934, as amended,
other than any such investment advisor or broker-dealer that has adopted its own
employee investment transaction policy.
ADVISORY CLIENT
The term "Advisory Client" means a registered investment company, an institutional investment client, a personal trust or estate, a guardianship, an employee benefit trust, or another client with which the Advisor by which you are employed or with which you are associated has an investment management, advisory or sub-advisory contract or relationship.
ADVISORY EMPLOYEE
The term "Advisory Employee" means an officer, director, or employee of an Advisor, or any other person identified as a "control person" on the Form ADV or the Form BD filed by the Advisor with the U.S. Securities and Exchange Commission, (1) who, in connection with his or her regular functions or duties, generates, participates in, or obtains information regarding that Advisor's purchase or sale of a Security by or on behalf of an Advisory Client; (2) whose regular functions or duties relate to the making of any recommendations with respect to such purchases or sales; or (3) who obtains information or exercises influence concerning investment recommendations made to an Advisory Client of that Advisor or who has line oversight or management responsibilities over employees who obtain such information or who exercise such influence.
BENEFICIAL OWNERSHIP
As a GENERAL MATTER, you are considered to have a "Beneficial Ownership" interest in a Security or Futures Contract if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in that Security. YOU ARE PRESUMED TO HAVE A BENEFICIAL OWNERSHIP INTEREST IN ANY SECURITY OR FUTURES CONTRACT HELD, INDIVIDUALLY OR JOINTLY, BY YOU AND/OR BY A MEMBER OF YOUR IMMEDIATE FAMILY (AS DEFINED BELOW). In addition, unless specifically excepted by the Compliance Officer based on a showing that your interest or control is sufficiently attenuated to avoid the possibility of a conflict, you will be considered to have a Beneficial Ownership interest in a Security or Futures Contract held by: (1) a JOINT ACCOUNT to which you are a party, (2) a PARTNERSHIP in which you are a general partner, (3) a LIMITED LIABILITY COMPANY in which you are a manager-member, or (4) a TRUST in which you or a member of your Immediate Family has a pecuniary interest. Although you may have a Beneficial Ownership interest in a Security or Futures Contract held in a Fully Discretionary Account (as defined below), the application of this Policy to such a Security or Futures Contract may be modified by the special exemptions provided for Fully Discretionary Accounts.
As a TECHNICAL MATTER, the term "Beneficial Ownership" for purposes of this Policy will be interpreted in the same manner as it would be under SEC Rule 16a-1(a)(2) in determining
whether a person has beneficial ownership of a security for purposes of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder.
BLACKROCK
The term "BlackRock" means BlackRock, Inc.
COMPLIANCE COMMITTEE
The term "Compliance Committee" means the committee of persons who have responsibility for implementing, monitoring and reviewing the Policy, in accordance with Section V(B)(1) of the Policy.
COMPLIANCE OFFICER
The term "Compliance Officer" means the person designated by the Compliance Committee as responsible for the day-to-day administration of the Policy in accordance with Section V(B)(2) of the Policy.
DUPLICATE BROKER REPORTS
The term "Duplicate Broker Reports" means duplicate copies of confirmations of transactions in your Personal or Related Accounts and of periodic statements for those accounts.
EXEMPT SECURITY
The term "Exempt Security" means any Security (as defined below) not included within the definition of Security in SEC Rule 17j-1(a)(4) under the Investment Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies; and
3. HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, including, but not limited to, bankers' acceptances, bank certificates of deposit, commercial paper and repurchase agreements. For these purposes, a "HIGH QUALITY SHORT-TERM DEBT INSTRUMENT" means any instrument having a maturity at issuance of less than 366 days and which is rated in one of the highest two rating categories by a Nationally Recognized Statistical Rating Organization, or which is unrated but is of comparable quality.
4. For Advisory Employees employed by BlackRock International, Ltd., shares of authorized unit trusts, open-ended investment companies (OEIC's) and direct obligations of the Government of the United Kingdom.
FIXED INCOME SECURITIES
For purposes of this Policy, the term "Fixed Income Securities" means fixed income Securities issued by agencies or instrumentalities of, or unconditionally guaranteed by, the Government of the United States, corporate debt Securities, mortgage-backed and other asset-backed Securities, fixed income Securities issued by state or local governments or the political subdivisions thereof, structured notes and loan participations, foreign government debt Securities, and debt Securities of international agencies or supranational agencies. For purposes
of this Policy, the term "Fixed Income Securities" will not be interpreted to include U.S. Government Securities or any other Exempt Security (as defined above).
FULLY DISCRETIONARY ACCOUNT
The term "Fully Discretionary Account" means a Personal Account or Related Account (as defined below) managed or held by a broker-dealer, futures commission merchant, investment advisor or trustee as to which neither you nor an Immediate Family Member (as defined below): (a) exercises any investment discretion; (b) suggests or receives notice of transactions prior to their execution; and (c) otherwise has any direct or indirect influence or control. In addition, to qualify as a Fully Discretionary Account, the individual broker, registered representative or merchant responsible for that account must not be responsible for nor receive advance notice of any purchase or sale of a Security or Futures Contract on behalf of an Advisory Client. To qualify an account as a Fully Discretionary Account, the Compliance Officer must receive and approve a written notice, in the form attached hereto as Appendix VIII, that the account meets the foregoing qualifications as a Fully Discretionary Account.
FUTURES CONTRACT
The term "Futures Contract" includes (a) a futures contract and an option on a futures contract traded on a U.S. or foreign board of trade, such as the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, or the London International Financial Futures Exchange (a "Publicly-Traded Futures Contract"), as well as (b) a forward contract, a "swap", a "cap", a "collar", a "floor" and an over-the-counter option (other than an option on a foreign currency, an option on a basket of currencies, an option on a Security or an option on an index of Securities, which fall within the definition of "Security") (a "Privately-Traded Futures Contract"). You should consult with the Compliance Officer if you have any doubt about whether a particular Investment Transaction you contemplate involves a Futures Contract. For purposes of this definition, a Publicly-Traded Futures Contract is defined by its expiration month, I.E., a Publicly-Traded Futures Contract on a U.S. Treasury Bond that expires in June is treated as a separate Publicly-Traded Futures Contract, when compared to a Publicly-Traded Futures Contract on a U.S. Treasury Bond that expires in July.
IMMEDIATE FAMILY
The term "Immediate Family" means any of the following persons who RESIDE IN YOUR HOUSEHOLD OR WHO DEPEND ON YOU FOR BASIC LIVING SUPPORT: your spouse, any child, stepchild, grandchild, parent, stepparent, grandparent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including any adoptive relationships.
INVESTMENT TRANSACTION
For purposes of this Policy, the term "Investment Transaction" means any transaction in a Security or Futures Contract in which you have, or by reason of the transaction will acquire, a Beneficial Ownership interest. The exercise of an option to acquire a Security or Futures Contract is an Investment Transaction in that Security or Futures Contract.
PERSONAL ACCOUNT
The term "Personal Account" means the following accounts that hold or are likely to hold a Security or Futures Contract in which you have a Beneficial Ownership interest:
o any account in your individual name;
o any joint or tenant-in-common account in which you have an interest or are a participant;
o any account for which you act as trustee, executor, or custodian; and
o any account over which you have investment discretion or have the power (whether or not exercised) to direct the acquisition or disposition of Securities or Futures Contracts (other than an Advisory Client's account that you manage or over which you have investment discretion), including the accounts of any individual or entity that is managed or controlled directly or indirectly by or through you. There is a presumption that you can control accounts held by members of your Immediate Family sharing the same household. This presumption may be rebutted only by convincing evidence.
POLICY
The term "Policy" means this Employee Investment Transaction Policy.
PORTFOLIO EMPLOYEE
The term "Portfolio Employee" means a Portfolio Manager or an Advisory Employee who provides information or advice to a Portfolio Manager, who helps execute a Portfolio Manager's decisions, or who directly supervises a Portfolio Manager.
PORTFOLIO MANAGER
The term "Portfolio Manager" means any employee of an Advisor who has the authority, whether sole or shared or only from time to time, to make investment decisions or to direct trades affecting an Advisory Client.
RELATED ACCOUNT
The term "Related Account" means any account, other than a Personal Account, that holds a Security or Futures Contract in which you have a direct or indirect Beneficial Ownership interest (other than an account over which you have no investment discretion and cannot otherwise exercise control) and any account (other than an Advisory Client's account) of any individual or entity to whom you give advice or make recommendations with regard to the acquisition or disposition of Securities or Futures Contracts (whether or not such advice is acted upon).
RELATED SECURITY
The term "Related Security" means, as to any Security, any instrument related in value to that Security, including, but not limited to, any option or warrant to purchase or sell that Security, and any Security convertible into or exchangeable for that Security. For example, the purchase and exercise of an option to acquire a Security is subject to the same restrictions that would apply to the purchase of the Security itself.
SECURITY
As a GENERAL MATTER, the term "Security" means any stock, note, bond, debenture or other evidence of indebtedness (including any loan participation or assignment), limited partnership interest, or investment contract, OTHER THAN AN EXEMPT SECURITY (as defined above). The term "Security" includes an OPTION on a Security, an index of Securities, a currency or a basket of
currencies, including such an option traded on the Chicago Board of Options Exchange or on the New York, American, Pacific or Philadelphia Stock Exchanges as well as such an option traded in the over-the-counter market. The term "Security" does NOT include a physical commodity or a Futures Contract. The term "Security" may include an interest in a limited liability company (LLC) or in a private investment fund.
As a TECHNICAL MATTER, the term "Security" has the meaning set forth in
Section 2(a)(36) of the Investment Company Act of 1940, which defines a Security
to mean:
Any note, stock, treasury stock, bond debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, warrant or right to subscribe to or purchase any of the foregoing,
EXCEPT THAT the term "Security" does not include any Security that is an Exempt Security (as defined above), a Futures Contract (as defined above), or a physical commodity (such as foreign exchange or a precious metal).
Exhibit (r) (3)
J.J.B. Hilliard, W.L. Lyons, Inc is an afilliate of PNC Bank Corp. It has adopted PNC Bank Corp's Code of Ethics.
PNC CODE OF ETHICS
INTRODUCTION
The PNC Bank Code of Ethics ("Code") conveys key information to assist you in discharging your responsibilities on behalf of PNC Bank Corp. and its subsidiaries ("PNC Bank" or "PNC") in an ethical and legally proper manner.
The PNC Code of Ethics (formerly known as the Guidelines for Corporate Conduct at PNC Bank) is based on the principles that PNC Bank believes in:
o We conduct business with the highest ethical standards;
o We obey the law;
o We follow the policies and procedures of PNC Bank;
o We maintain confidentiality;
o We have a work environment that is fair and bias-free; and
o We are honest and trustworthy.
The Code applies to all employees and directors as well as to agents when acting on behalf of PNC. Certain provisions of the Code also apply to others (such as family members).
Supervisors and managers should help their staff understand and apply the above principles and comply with the standards in the Code.
The conduct of each of us reflects on our organization and affects how we are perceived. Whether inside or outside of work, your personal conduct should be an asset to PNC Bank.
Use your good judgment, follow the standards set forth in the Code, and report your concerns as provided in the Code. By doing so, we can ensure that PNC Bank continues to stand for honesty, integrity and fairness.
RESPONSIBILITIES AND STANDARDS OF CONDUCT
1.00 RESPONSIBILITIES
As part of your responsibilities, you must:
o understand and comply with the Code, other PNC policies and procedures, and applicable laws and regulations;
o provide the required notifications and obtain the necessary approvals in accordance with the Code; and
o report any possible violations of the Code of which you are aware.
You are not permitted to act in a way that violates the Code. Lines of business or departments may have supplemental policies or procedures with which employees also must comply.
1.01 ADMINISTRATION
The PNC Code of Ethics is administered by PNC's Director of Compliance or a designee (referred to in the Code as "Director of Compliance"). A PNC Code of Ethics Policy Committee ("Ethics Policy Committee") has been established to determine policy issues relating to the Code, oversee resolution of major ethical issues, and receive and review reports relating to the Code's administration.
1.02 NOTIFICATIONS/APPROVALS
You should become familiar with the following situations in the Code that require you to provide notification or obtain prior approval:
CODE
SITUATION SECTION
Insider Trading 2.02
Corporate Property 2.04
Inventions 2.04
Conflicts of Interest 2.05
Gifts and Entertainment 2.05.1
Gifts to Public Officials 2.05.2
Inheritances; Fiduciary Compensation
and Fees for Personal Services 2.05.7
Outside Activities 2.05.9
Other Employment 2.05.9a
Officer or Directorships 2.05.9b/
Exhibit 7
Public Office 2.05.10
Expert Witnesses 2.05.11
Antitrust 2.07
Fair Competition 2.08
Political Contributions 2.10
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You can provide notification or obtain approval either (i) by contacting the Director of Compliance or (ii) through submission of the Code of Ethics Notification/Approval Form ("Notification/Approval Form")to your supervisor and market Human Resources ("HR") representative, as designated in the Code. A sample of the Notification/Approval Form is attached as Exhibit 1; the form is available from your Human Resources Department. If employees have any questions regarding how to provide notification or obtain approval, they should contact their market HR representative. Directors and agents should contact the Director of Compliance regarding notifications or approvals, questions or any other matters under the Code.
1.03 REPORTING PROCEDURES
Reports of any possible violations of the Code, including dishonest or fraudulent acts, or questions or concerns regarding matters covered by the Code, should be made immediately to any of the following people:
o your supervisor;
o your market HR representative;
o the Security Services representative;
o the Director of Compliance; or
o the General Counsel.
You have been provided with several alternative people to whom you can report a possible violation so that you can choose a person with whom you feel comfortable. You may make an anonymous report if you wish.
Note: Any supervisor who receives a report of a possible violation should refer it immediately to the market HR representative, the Security Services representative, the Director of Compliance, or the General Counsel.
When you report a possible violation, you will be protected from any employment discrimination, retaliation, or retribution for good faith reporting.
1.04 KEY CONTACTS
Market HR representatives, the Security Services representative, the Director of Compliance, the General Counsel and others referenced in the Code are Key Contacts to assist you on Code matters for PNC Bank. Their telephone numbers can be found in the Key Contacts and Reference Guide attached as an Addendum to the Code or on the PNC intranet.
1.05 EXCEPTIONS/QUESTIONS
Exceptions to the Code and certain approvals will need to be made by the Ethics Policy Committee. If you would like to ask for an exception or have a question about any part of the Code, you should first discuss it with your supervisor and your market HR representative who will process your request, or you may contact the Director of Compliance. The Director of Compliance, as appropriate, will present requests for exceptions or approvals to the Ethics Policy Committee.
1.06 ENFORCEMENT
If an employee violates the Code, PNC policies and procedures or any applicable laws or regulations, the employee may be subject to disciplinary action, which may include termination of employment. Violation of laws could also result in legal proceedings and penalties, including, in some circumstances, criminal penalties.
You are required to cooperate fully with investigations, audits, monitoring procedures, and other inquiries regarding Code matters, including requests to provide documentation. Refusal to comply may result in disciplinary action, which may include termination of employment.
1.07 WRITTEN ACKNOWLEDGEMENT
When you are hired, and at certain times during your employment, you will be required to sign a written acknowledgment certifying that you have received, have read, understand, and will comply with the Code. Refusal to complete the acknowledgment may result in disciplinary action, which may include termination of employment.
2.00 STANDARDS OF CONDUCT
The following are standards of conduct for some specific issues that
may arise in our business. We may amend or change these standards from
time to time.
2.01 CONFIDENTIALITY
FUNDAMENTAL PRINCIPLE
Confidentiality is a fundamental principle in PNC Bank's business. You
may deal with confidential, non-public information concerning PNC Bank,
its clients, shareholders, employees and suppliers. You must protect
all confidential information from unauthorized disclosure.
DEFINITIONS
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The term "confidential information" includes, but is not limited to:
o PNC's business information, records, activities and plans;
o The identity, business information, records, activities and plans of clients and prospective clients;
o the identity of, or information relating to, merger and acquisition candidates;
o PNC's sources of supply, sales methods and sales proposals;
o PNC's computer programs, system documentation, special hardware, product hardware, software and technology developments;
o manuals, formulae, processes, methods, machines, compositions, ideas, improvements, inventions, or other confidential or proprietary information belonging to PNC or related to PNC's affairs;
o security information such as passwords, personal identification numbers (PIN's), and electronic keys;
o reports written to and by regulatory agencies; and
o any additional confidential information described in PNC's Insider Trading Policy (attached as Exhibit 2).
YOUR RESPONSIBILITIES
Your responsibilities with regard to confidential information are:
o You must not disclose confidential information to any person within PNC, unless that person has a need to know such information in connection with his or her employment responsibilities.
o You must not disclose confidential information to anyone outside of PNC, unless:
o such person is employed by an outside firm (i.e., a law, accounting or other firm) retained by PNC and that person needs to know the information in connection with the service to be provided by the firm to PNC;
o pursuant to proper legal process or regulation. (PNC's Legal Department has written guidelines for handling legal process. If you receive a request for confidential information, or subpoena or other legal process, you must immediately inform your supervisor who will contact the Legal Department.); or
o the individual or organization to which the information relates gives written consent, and release of the information is approved by the Legal Department.
o You must never use confidential information for personal financial gain or to compete with PNC.
o You must keep in a secure way all files, records, or inquiries regarding clients and employees, and other records that contain confidential information.
o You must keep all identification and access codes, security equipment, security programs, and security procedures confidential.
o You must avoid discussing confidential information in public places (for example, elevators, restaurants or at social events).
o You must avoid discussing confidential information on cellular or car phones.
o You must be sensitive to whether information is confidential when using E-mail, or facsimile machines.
o You must not disclose confidential information, whether it is in written form or in your memory, even after you leave your employment or position with PNC.
In addition, you must comply with all other PNC policies and procedures relating to confidentiality, including those that have been adopted for your line of business or department. All employees should also become familiar with and follow the standards relating to confidentiality of information set forth in the Information Security Policy Manual, available on the PNC Intranet and from Information Security.
2.02 INSIDER TRADING
PNC has adopted an Insider Trading Policy which is attached as Exhibit
2 to this Code. You should become familiar with the requirements of the
Policy and must comply with its rules and standards.
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2.03 CLIENTS' PROPERTY
FUNDAMENTAL PRINCIPLE
You must maintain the highest standards of honesty and integrity in
handling clients' money and other property. You are not permitted to
make unauthorized use of any client's money or property.
2.04 CORPORATE PROPERTY
FUNDAMENTAL PRINCIPLE
Corporate property may be used and removed from PNC premises only for
business purposes, UNLESS APPROVED BY YOUR SUPERVISOR, or in accordance
with policies adopted by the Board of Directors of PNC or a committee
of the Board.
Corporate property includes, but is not limited to:
information;
files;
products;
office supplies and furnishings;
services;
automobiles;
technologies;
concepts;
client lists;
policies and procedures manuals;
computer and other equipment, such as facsimile machines;
computer data bases, programs and software;
data processing systems;
voice mail;
E-Mail; and
any other electronic messaging systems or information about
PNC's business.
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INSPECTIONS
Corporate property and personal possessions that you may bring onto PNC premises are subject to inspection.
INVENTIONS
If you invent something, make a discovery, improve something or write something during your employment which is related to PNC's business or activities, you are required to:
o DISCLOSE YOUR WORK TO YOUR SUPERVISOR;
o assign any rights to the work to PNC, if appropriate; and
o assist PNC, either during or after your employment, in getting the use and benefits of the work, including anything necessary for PNC to get a patent or copyright or obtain other protection for the work.
2.05 CONFLICTS OF INTEREST
FUNDAMENTAL PRINCIPLE
You owe PNC Bank and its clients undivided loyalty. You should not have
an interest that conflicts with, or may reasonably appear to conflict
with PNC Bank or its clients, unless approved as set forth in this
Code.
DEFINITION
A conflict of interest exists when:
o you engage in a personal activity or have a personal interest
that may influence your decisions when acting for PNC or that
may be at odds with PNC's interests; or
o you use your position with PNC or use PNC's confidential
information to benefit yourself rather than PNC.
A conflict of interest may be based on your financial, business, family
or other personal relationships with clients, suppliers, competitors or
others, or on some other factor.
APPEARANCE OF CONFLICT
The appearance of a conflict can be as damaging as an actual conflict
and can erode trust and confidence in PNC. When faced with a situation
involving a potential conflict of interest, you should ask yourself
whether public disclosure of the matter would embarrass PNC or lead an
outside observer to believe a conflict exists.
DISCLOSURE REQUIREMENTS
YOU MUST DISCLOSE IN WRITING TO YOUR SUPERVISOR AND YOUR MARKET HR
REPRESENTATIVE ALL KNOWN OR POTENTIAL CONFLICTS OF INTEREST BY
SUBMITTING A NOTIFICATION/APPROVAL FORM. The Director of Compliance
should be contacted on how to handle a situation, if necessary.
ILLUSTRATIONS
Some illustrations of areas where potential conflicts of interests
could occur and PNC's policies are:
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2.05.1 GIFTS AND ENTERTAINMENT
FUNDAMENTAL PRINCIPLE
You may not ask for or accept a gift or anything of value from anyone (before or after a transaction is discussed or concluded or a business decision is made) if you intend to be influenced or rewarded, or you believe the giver intends to exert influence, in connection with any business decision or transaction involving PNC. Where this is not the case, under certain circumstances, you may accept gifts or something of value from someone doing or seeking to do business with PNC. Examples of such circumstances are:
PERMISSIBLE GIFTS
o accepting a gift that is based on obvious family or personal relationships (such as between you and your parents, children, spouse or close friend) and it is clear that the gift is being accepted because of the relationship rather than any PNC business;
o letting someone else occasionally pay for meals, refreshments, travel arrangements, accommodations, or entertainment to discuss business or foster business relationships if the expense is of reasonable value. In general, such items are of "reasonable value" if they involve a level of expense that customarily would be reimbursed by PNC as a reasonable business expense if not paid for by the other party;
o accepting loans from other banks or financial institutions on normal terms to finance usual activities, such as home mortgage loans, except where prohibited by law;
o occasionally accepting advertising or promotional material having a value not in excess of $100, such as pens, pencils, note pads, key chains, calendars and similar items;
o accepting discounts or rebates on merchandise or services that is not more than those available to other clients;
o accepting gifts having a value not in excess of $100 that are related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, holiday, birthday, or bar or bat mitzvah; and
o accepting civic, charitable, educational or religious organizational awards for recognition of service and accomplishment.
DISCLOSURE REQUIREMENTS
You must make every effort to refuse or return a gift or something of value that goes beyond those permissible circumstances listed above. IN THE FOLLOWING CIRCUMSTANCES, YOU MUST PROMPTLY NOTIFY YOUR SUPERVISOR AND MARKET HR REPRESENTATIVE, OR THE DIRECTOR OF COMPLIANCE, TO DISCUSS HOW TO HANDLE THE SITUATION:
o if you are offered a gift or something of value that goes beyond those permissible circumstances above and you cannot refuse or return it; or
o you have any doubts about whether it is permissible to accept a gift or something of value.
Only the Ethics Policy Committee can give approval to accept a gift or something of value outside of the permissible circumstances listed above.
YOU CAN PROVIDE NOTIFICATION OR OBTAIN APPROVAL BY SUBMITTING THE NOTIFICATION/ APPROVAL FORM TO YOUR SUPERVISOR AND MARKET HR REPRESENTATIVE, OR YOU MAY CONTACT THE DIRECTOR OF COMPLIANCE.
GIVING GIFTS
The above standards for accepting gifts also apply to giving gifts, except that giving gifts to public officials is addressed separately in the next section.
2.05.2 GIFTS TO PUBLIC OFFICIALS
MONETARY GIFTS PROHIBITED
You may not give a gift of money to a public official, except for legitimate personal campaign contributions to candidates for public office. (Certain employees must obtain prior written approval before making political contributions. See Section 2.10)
GIFTS OF VALUE TO INFLUENCE PARTICULAR ACTS PROHIBITED
You may not give anything of value (including, for example, gifts, meals, recreation, entertainment, flowers, transportation, lodging or sporting event tickets, which will be referred to in this section as "gifts") to a public official for the purpose of influencing a particular act by the official or his or her agency.
LIMITATIONS ON OTHER TYPES OF GIFTS
Limitations on giving items of value are discussed below with respect to different types of public officials with whom PNC employees are likely to have contact. These limitations, which should be interpreted as applying also to the spouse or family members of the public official, do not apply to gifts based on obvious family or close personal relationships.
LIMITATIONS FOR DIFFERENT TYPES OF PUBLIC OFFICIALS
o FEDERAL OFFICIALS -- Gifts of over $20 in value may not be offered to officials in the executive branch of the federal government ("executive branch official"). For example, the value of an executive branch official's meal paid for by PNC may not be greater than $20. If all of the gifts to an executive branch official are added together in any calendar year, they may not be greater than $50. ANY GIFT TO AN EXECUTIVE BRANCH OFFICIAL MUST RECEIVE ADVANCE WRITTEN APPROVAL FROM THE DIRECTOR OF COMPLIANCE SO THAT THE $50 LIMIT CAN BE MONITORED. ADVANCE APPROVAL OF EACH GIFT, REGARDLESS OF AMOUNT, IS IMPORTANT BECAUSE ---- GIFTS GIVEN BY ALL PNC OFFICERS TO ONE EXECUTIVE BRANCH OFFICIAL WILL BE AGGREGATED.
Members of Congress and Congressional staff are subject to restrictions on gifts they may accept. ANY GIFT TO A MEMBER OF CONGRESS OR TO CONGRESSIONAL STAFF MEMBERS MUST RECEIVE ADVANCE WRITTEN APPROVAL FROM THE DIRECTOR OF COMPLIANCE.
o PENNSYLVANIA STATE OFFICIALS -- Gifts of more than nominal value may not be offered to officials in the executive branch of Pennsylvania government. Although nominal value does not have a specific dollar limit, you should be guided by the principles set forth in Section 2.05.1 above concerning PNC employees' receipt of gifts. ANY GIFT TO A PENNSYLVANIA STATE OFFICIAL MUST RECEIVE ADVANCE WRITTEN APPROVAL FROM THE DIRECTOR OF COMPLIANCE SO THAT REPORTING REQUIREMENTS IMPOSED BY THE LOBBYING DISCLOSURE ACT MAY BE SATISFIED.
o PENNSYLVANIA COUNTY OFFICIALS -- In counties in which PNC employees are likely to have significant activity, the rules for Pennsylvania state officials apply, except as follows. In Erie County, all gifts -D even of nominal value -D are prohibited. In Philadelphia County, the aggregate value of gifts may not exceed $100 annually. However, in Philadelphia County, gifts of food and beverage consumed at an event or meeting at which the official is attending are not restricted as to dollar amount and do not count against the aggregate annual limit.
o KENTUCKY STATE AND JEFFERSON COUNTY OFFICIALS -- Gifts, even of nominal value, may not be given to Kentucky state officials. Gifts to Jefferson County officials are prohibited if they are based on an understanding that they are given for the purpose of influencing the officer, directly or indirectly, in the discharge of his/her official duties.
o OHIO STATE AND COUNTY OFFICIALS -- Gifts of more than $20 in value may not be offered to Ohio state or county officials. Gifts of $20 or less in value (for example, business lunches) may not be offered on a regular basis.
o DELAWARE STATE AND NEW CASTLE COUNTY OFFICIALS -- Gifts of more than nominal value may not be offered to officials in the executive branch of Delaware government. Although nominal value does not have a specific dollar limit, you should be guided by the principles set forth in Section 2.05.1 above concerning PNC employees' receipt of gifts.
o MASSACHUSETTS STATE AND COUNTY OFFICIALS -- Gifts of $50 or more may not be offered to Massachusetts state, county or municipal officials. Gifts of less than $50 in value (for example, business lunches) may not be offered on a regular basis or in a pattern.
o NEW JERSEY STATE OFFICIALS -- Gifts, even of nominal value, may not be given to officials in the executive branch of New Jersey government.
o INDIANA STATE OFFICIALS -- Gifts of more than $25 in value may not be offered to officials in the executive branch of Indiana government; in certain cases, the official may be required to obtain written approval from a designated state official before accepting the gift.
In preparing this section, the laws and regulations of only the states and counties which are referred to above were reviewed. Check with the Director of Compliance before offering gifts to other public officials.
The restrictions discussed above apply to gifts given to public officials directly or indirectly (for example, through another person).
QUESTIONS
IF YOU HAVE DOUBTS ABOUT WHETHER A GIFT TO A PUBLIC OFFICIAL IS ALLOWED UNDER THE CODE, YOU SHOULD EITHER NOT GIVE THE GIFT OR YOU SHOULD CONTACT THE DIRECTOR OF COMPLIANCE FOR AN INTERPRETATION OR TO OBTAIN APPROVAL FROM THE ETHICS POLICY COMMITTEE.
2.05.3 BORROWING FROM CLIENTS OR SUPPLIERS/LENDING
FUNDAMENTAL PRINCIPLE
Employees cannot accept a loan from clients, suppliers or any other business contact of PNC unless the client, supplier or business contact is an immediate family member, or:
o the loan is given by those who lend money in the usual course of their business; and
o then only in accordance with the law and on terms offered to others who have similar credit standing, without special arrangements on interest rates, security, repayment terms and other conditions.
ADDITIONAL RESTRICTIONS
Employees must not lend personal funds to, or cosign, endorse, or guarantee, or otherwise assume responsibility for the borrowing of any client, supplier or any other business contact of PNC unless the client, supplier or business contact is an immediate family member.
2.05.4 SELF-DEALING
Self-dealing means using your employment or position for personal gain. Whether you are acting individually, through a business, or in a fiduciary capacity (a position of trust for another person), you are prohibited from self-dealing.
PROHIBITIONS
o You may not accept from someone either doing business or trying to do business with PNC a business opportunity that is not available to other people on similar terms, or that is made available to you because of your position with PNC.
o You may not take for yourself a business opportunity that belongs to PNC Bank. An opportunity belongs to PNC when the company has pursued the opportunity, it has been offered to PNC, it is the kind of business PNC competes in, PNC has funded it, or PNC has devoted time, facilities, personnel, or other corporate resources to develop it.
2.05.5 SALES/PURCHASES OF PROPERTY SERVICES TO/FROM EMPLOYEES
You may not purchase property or services from PNC other than products or services offered:
o to the general public; and
o on terms that are available to all employees or similarly situated clients.
Further, you may not sell any property or services to PNC.
2.05.6 DEALING WITH SUPPLIERS
MERIT BASED AWARDS
Awards of orders, contracts and commitments for goods and services should always be made in the best interests of PNC. In your dealings with suppliers, you may not request or accept any kick-backs or other inducements.
2.05.7 INHERITANCES; FIDUCIARY COMPENSATION AND FEES FOR PERSONAL SERVICES
FUNDAMENTAL PRINCIPLE
Neither you nor any member of your immediate family may accept any inheritance from any PNC client or the immediate family of any PNC client, unless the person giving you the inheritance is your relative or a relative of someone in your immediate family (through blood, marriage or adoption).
APPLICATION OF RULE
This rule applies only if the relationship between the client and you or your immediate family was established through your employment or position with PNC.
PROHIBITED APPOINTMENTS
Also, neither you nor any member of your immediate family may accept appointment as:
o executor;
o administrator;
o personal representative;
o attorney-in-fact;
o guardian;
o custodian under any Uniform Transfer or Gifts to Minors Act; or
o Trustee
for any PNC client or the immediate family of any PNC client if the relationship between that person and you or your immediate family was established through your employment or position with PNC and you are to be compensated for the appointment through payment of fees or otherwise.
IF THE APPOINTMENT IS TO BE UNCOMPENSATED, YOU MUST RECEIVE PRIOR APPROVAL FROM THE ETHICS POLICY COMMITTEE. YOU SHOULD CONTACT THE DIRECTOR OF COMPLIANCE TO OBTAIN APPROVAL.
CLIENT RELATIONS
If you have advance knowledge of any inheritance or appointment that may violate this rule, you must try to discourage the client from making the gift or appointment. YOU MUST ALSO NOTIFY THE DIRECTOR OF COMPLIANCE.
2.05.8 USE OF POSITION OR AUTHORITY
FUNDAMENTAL PRINCIPLES
You may not act on behalf of PNC in any transaction involving a member of your immediate family or in any situation where you or a member of your immediate family has a personal or financial interest. You also may not act on behalf of PNC in connection with an organization with which you or a member of your immediate family is associated or has a personal or financial interest.
NOTE: THIS SECTION DOES NOT APPLY TO YOUR ACTIONS RELATED TO PUBLICLY HELD PNC SUBSIDIARIES IN WHICH YOU OWN STOCK WHERE YOUR ACQUISITION OF THE STOCK WAS APPROVED BY THE ETHICS POLICY COMMITTEE OR PNC'S BOARD OF DIRECTORS AND YOU COMPLY WITH THE STOCK OWNERSHIP POLICY ADOPTED BY THE ETHICS POLICY COMMITTEE WHICH IS ATTACHED TO THIS POLICY AS EXHIBIT #6.
2.05.9 OUTSIDE ACTIVITIES
LIMITS ON OUTSIDE ACTIVITIES
PNC encourages employees to participate in charitable or community activities outside of the company. These activities must not interfere with your ability to meet your employment responsibilities nor cause harm to PNC's reputation in the community or business interests.
Some typical examples of outside activities are described below:
A. OTHER EMPLOYMENT
RESTRICTIONS ON OUTSIDE EMPLOYMENT/POSITIONS
You may not have any outside employment with a competitor or hold a position with a competitor while an employee of PNC. Nor may you be self-employed in competition with PNC.
In addition, you may not engage in any outside employment (including self-employment) or hold any position which PNC determines may interfere with your PNC employment responsibilities. PNC may also determine that you are legally prohibited from or restricted in such outside employment while an employee of PNC, such as in the securities industry. You should be aware of your department's supplemental policies and procedures in this regard, if any.
NOTIFICATION/APPROVAL
ALL OUTSIDE EMPLOYMENT (INCLUDING SELF-EMPLOYMENT) FOR PNC EMPLOYEES MUST BE APPROVED IN ADVANCE AND IN WRITING BY SUBMITTING THE NOTIFICATION/APPROVAL FORM TO YOUR SUPERVISOR AND YOUR MARKET HR REPRESENTATIVE.
In some instances where approval to engage in outside employment has been given, it may be necessary to revisit the issue. In particular, where PNC determines that the outside activity is interfering with your PNC responsibilities, or where PNC determines that the outside activity or position is in competition with PNC, authorization to continue such outside employment or in such position may be withdrawn.
B. OFFICER OR DIRECTORSHIPS IMPORTANCE TO PNC
PNC has adopted a Policy for Employees Holding Director and Officer Positions in Outside Profit and Non-Profit Organizations which is attached as Exhibit #7 to the Code. You must become familiar and comply with this Policy.
2.05.10 PUBLIC OFFICE
GUIDELINES
PNC has adopted a Public Office Policy which is attached as Exhibit #8 to this Code. You must become familiar and comply with this Policy.
Except for lobbyists and other officers authorized to act on behalf of PNC, employees participating in political activities do so as individuals and not AT THE REQUEST OF or as representatives of PNC.
2.05.11 EXPERT WITNESSES
HANDLING REQUEST TO SERVE
You may be asked to serve as an expert witness or to provide technical assistance in litigation or other proceedings not involving PNC. These activities generally take a lot of time and may be in conflict with PNC's policies and practices or with positions PNC has taken in other lawsuits. FOR THESE REASONS, IF YOU ARE ASKED TO SERVE AS AN EXPERT WITNESS OR PROVIDE TECHNICAL ASSISTANCE FOR A PARTY OTHER THAN PNC, YOU MUST RECEIVE ADVANCE WRITTEN APPROVAL. YOU SHOULD SUBMIT THE NOTIFICATION/APPROVAL FORM TO YOUR SUPERVISOR AND MARKET HR REPRESENTATIVE TO REQUEST SUCH APPROVAL.
2.05.12 INSIDER LENDING
REGULATORY REQUIREMENTS
No PNC bank, under the requirements of Regulation O, may extend credit on preferential terms to:
o any of PNC's directors or executive officers; or
o any related interest of these individuals.
REVIEWING REGULATION O POLICY
PNC has adopted a Regulation O Policy to implement the provisions of the regulation in all PNC markets. You should contact your Compliance Department representative to obtain a copy of the policy if applicable to your line of business or department.
2.05.13 INTEREST ON DEPOSITS OF DIRECTORS, OFFICERS, ATTORNEYS AND EMPLOYEES
FUNDAMENTAL PRINCIPLE
PNC Banks are not permitted to pay any of their directors, officers, attorneys or employees a greater rate of interest on their deposits than that paid to other depositors on similar deposits with such bank.
2.05.14 SALES/PURCHASES OF PROPERTY AND SERVICES TO/FROM NON-OFFICER DIRECTORS
Unless pre-approved by a majority of disinterested members of the Board of Directors of PNC Bank Corp. or the appropriate subsidiary PNC Bank, non- officer directors and their firms may not:
o purchase property or services from PNC unless such property or services are offered in the regular course of PNC's business, and on terms not more favorable to the director or his or her firm than those offered to other similarly situated clients who are not directors; or
o sell any property or services to PNC other than property or services that are sold in the regular course of the director's (or firm's) business and are sold upon terms not less favorable to PNC than those offered to similarly situated clients of the director (or firm).
2.06 DISCRIMINATION, BIAS AND HARASSMENT
2.06.1 EQUAL EMPLOYMENT OPPORTUNITY POLICY
It is the policy of PNC affirmatively to implement equal opportunity for all qualified applicants and existing employees without regard to race, religion, color, national origin, sex, age (over 40), disability, status as a Vietnam-era veteran or any other basis which would be in violation of any applicable ordinance or law. All personnel actions, including recruitment, selection, hiring, training, transfer, promotion, termination, compensation and benefits conform to this policy.
A copy of the full Equal Employment Opportunity (EEO) policy may be obtained from your market HR representative.
WHAT TO DO
If you believe you have been denied equal employment opportunity because of discrimination, bias or harassment, you should report it to your supervisor or market HR representative or you may contact the Director of Compliance or the General Counsel. You will be protected from any employment discrimination, retaliation or retribution for good faith reporting.
2.06.2 BIAS AND HARASSMENT
You are entitled to a work environment free of racial, sexual, ethnic, and religious bias and harassment. Racial, sexual, ethnic or religious jokes or comments are subject to individual interpretation and may be offensive to some employees. Intimidation, coercion and threats, or actions leading to bodily harm are also unacceptable.
2.06.3 SEXUAL HARASSMENT
DEFINITION
Sexual harassment is any unwelcome conduct of a sexual nature that is sufficiently severe or pervasive so as to unreasonably interfere with an individual's work performance or create an intimidating, hostile or offensive working environment.
FORMS OF SEXUAL HARASSMENT
Sexual harassment can take various forms, including:
o verbal (for example, sexual innuendo, sexual propositions, threats, suggestive or insulting comments or sounds and jokes of a sexual nature);
o non-verbal (sexually suggestive pictures or objects, graphic commentaries and obscene gestures); and
o physical (unwelcome physical contact).
CRITERIA OF SEXUAL HARASSMENT
Any one or a combination of three basic criteria determines whether conduct is sexual harassment:
o If you are required to submit to the conduct as either an express or implied qualification for a job or a requirement of your employment relationship;
o If submission to, or rejection of, the conduct is used as a basis for employment decisions affecting you; or
o If the conduct has the purpose or effect of unreasonably interfering with your work performance, or creating an intimidating, hostile or offensive working environment.
COMPLIANCE REQUIREMENT
Sexual harassment by a manager/supervisor, or other employee, or client, supplier or visitor will not be tolerated within PNC. All employees must comply with this policy and take appropriate measures to ensure that sexual harassment does not occur.
WHAT TO DO
If you are confronted with actions that may be sexual harassment, you should report it to your supervisor or your market HR representative, or you may contact the Director of Compliance or the General Counsel.
2.07 ANTITRUST
WHAT ARE THE ANTITRUST LAWS?
You must obey the antitrust laws. The antitrust laws, which contain criminal and civil penalties, prohibit unfair methods of competition and agreements that restrain the way companies compete. The antitrust laws are most often enforced against agreements between separate businesses (for example, agreements between PNC and other companies) that limit competition. These agreements need not be in writing to raise a concern.
As a general matter, all of PNC strategies and other decisions should be made independently, without consultation with PNC's competitors. You may not enter into any of the following three types of arrangements or agreements:
TYPES OF ARRANGEMENTS
o PRICE-FIXING AGREEMENTS are agreements with competitors about the prices, terms, or conditions to be charged clients. To avoid even an allegation of price fixing, you should not discuss our prices, terms or conditions with a competitor, except as noted below.
NOTE: WHERE WE ARE OPENLY WORKING JOINTLY WITH OUR COMPETITORS TO PROVIDE A LOAN OR OTHER PRODUCT OR SERVICE TO A CLIENT (FOR EXAMPLE, LOAN SYNDICATIONS), AGREEMENTS WITH SUCH COMPETITORS ON THE PRICE TO BE CHARGED TO THE CLIENT GENERALLY DO NOT CONSTITUTE PRICE FIXING. YOU SHOULD ONLY ENTER INTO SUCH AGREEMENTS IF WE HAVE LEGITIMATE BUSINESS REASONS FOR WORKING JOINTLY WITH OUR COMPETITORS RATHER THAN PROVIDING THE PRODUCT OR SERVICE ON OUR OWN (FOR EXAMPLE, IN LOAN SYNDICATIONS, BECAUSE OF UNDUE CREDIT RISK TO PNC).
o GROUP BOYCOTT AGREEMENTS are agreements among two or more companies to "boycott" or otherwise not do business with another company.
o MARKET, CLIENT, TERRITORY OR LOCATION ALLOCATION AGREEMENTS AMONG COMPETITORS are agreements with competitors not to compete in a particular line of business or product, not to "poach" competitors' clients, or not to compete in a particular geographic area.
Because the following arrangements may raise antitrust concerns under certain circumstances, you should consult with the General Counsel before entering into any of them:
o TYING ARRANGEMENTS arise when a seller has a product or service buyers need, and requires buyers of that product or service to purchase a second product or service from the seller.
o Banking laws also prohibit certain ties. PNC Bank has adopted a Policy Statement on Product Tying Restrictions that you can obtain from your Compliance Department representative.
NOTE: MOST TYING ARRANGEMENTS THAT ARE LONG ESTABLISHED IN BANKING (SUCH AS COMPENSATING BALANCES) THAT FACILITATE REASONABLE ARRANGEMENTS INTENDED TO ASSURE THE SOUNDNESS OF CREDIT DO NOT POSE A PROBLEM UNDER EITHER THE BANKING OR ANTITRUST LAWS.
o PREDATORY PRICING is pricing at an unfairly low price for the purpose of driving all competitors out of the marketplace to reap the benefits of higher prices after the competitors are gone.
o EXCLUSIVE DEALING involves agreements to do business with one supplier or client that preclude PNC from doing business with other suppliers or clients. You should consult with the Director of Compliance if PNC's purchases or sales account for a substantial portion of the market for the product or service being purchased or sold.
o RECIPROCITY involves a company conditioning the purchase of products or services from suppliers on those suppliers' purchases of services from the company.
OTHER INSTANCES IN WHICH YOU SHOULD CONSULT WITH THE GENERAL COUNSEL
You should always consult the General Counsel:
o before a PNC unit that you manage merges with or acquires another company (including a division of another company or substantial assets of another company outside of the ordinary course of business); or
o if you believe that any activity that may be undertaken by PNC could be viewed as restraining fair or open competition, or if you have any questions about whether any such activities may fall within any of the categories of conduct described above.
2.08 FAIR COMPETITION
FUNDAMENTAL PRINCIPLE
PNC Bank expects you to engage in vigorous, but fair competition with our competitors. Unfair ways to compete are not permitted. For example, you must never direct or encourage any applicant or new employee to violate any contractual or legal obligations to a former employer, such as a responsibility to protect confidential business information, technical information or trade secrets.
REQUIREMENTS
ALSO, YOU ARE REQUIRED TO NOTIFY YOUR SUPERVISOR AND MARKET HR REPRESENTATIVE BY SUBMITTING A NOTIFICATION/APPROVAL FORM IF YOU HAVE ANY OBLIGATIONS THAT MAY INTERFERE WITH YOUR ABILITY TO PERFORM YOUR JOB DUTIES AT PNC BANK. THESE OBLIGATIONS MAY INCLUDE AN AGREEMENT WITH A FORMER EMPLOYER, BUSINESS PARTNER OR OTHER PERSON OR ENTITY THAT SAYS:
o you may not compete with them for a certain time or in a specific location;
o you may not ask their employees if they are interested in working for PNC;
o you may not ask their clients to do business with PNC;
o you may not take work-related inventions, developments, or writings to use at another business or place of employment;
o you may be limited in your use of trade secrets, business information, materials, training or techniques that you learned there; or
o you may have to notify them of any new employment or business venture.
2.09 PERSONAL RESPONSIBILITIES OF EMPLOYEES
2.09.1 DRUG ABUSE
DRUG-FREE WORKPLACE
PNC Bank is committed to promoting and maintaining a drug-free workplace. The illegal use of drugs interferes with effective and safe job performance. For this reason, PNC Bank has adopted a Drug Abuse Policy to prohibit employees from illegally using, possessing, distributing, or manufacturing drugs, or being under the illegal influence of drugs, while working or while on PNC property.
CONSEQUENCE OF VIOLATION
Employees who violate the Drug Abuse Policy (including the refusal to take a drug screening test) will be subject to disciplinary action.
A summary of the Drug Abuse Policy is attached as Exhibit 3. PNC's Drug Abuse Policy is available from your market HR representative.
2.09.2 ALCOHOL ABUSE
FUNDAMENTAL PRINCIPLE
The use of alcohol can have wide-ranging effects in the workplace, including declining job performance and diminished safety of co-workers and clients. For this reason, PNC prohibits any use of alcohol that may affect your fitness for work, the safety of co-workers or the public, your job performance or any operation of PNC.
2.09.3 PERSONAL FINANCES
EMPLOYEE RESPONSIBILITIES
Because one of the primary functions of PNC Bank is the efficient and effective management of money, you must demonstrate trustworthiness and financial responsibility. You are expected to maintain your personal account relationships and financial affairs in the same responsible manner that is expected of clients and to manage debts in relation to income and net worth. Abuse of employee checking accounts, credit cards or loans obtained through PNC Bank is not in the best interest of PNC Bank and may result in revocation of these privileges.
In addition, you must use your expense account in accordance with the guidelines set forth in the Employee Expense Reimbursement Guide, available from your market HR representative, as well as the standards set forth in the Code.
2.09.4 SOLICITATION
FUNDAMENTAL PRINCIPLE
You are prohibited from soliciting other employees on behalf of any cause or organization during working time (that is, when the soliciting employee or the receiving employee is required to be performing work duties) or in client areas. Examples of prohibited solicitation include raffles, lotteries or memberships. You are also prohibited from distributing advertising materials, handbills, literature or other materials which are not prepared, supplied or approved by PNC, on PNC premises during working time or in any work area or any area where clients are routinely present to transact any business with PNC.
It will not be a violation of this policy, however, if the solicitation or distribution is part of a campaign officially approved or sponsored by PNC, such as United Way.
Non-employees of PNC are prohibited from soliciting or distributing literature on behalf of any cause or organization at any time on any of PNC's premises.
2.10 POLITICAL CONTRIBUTIONS
PROHIBITIONS
PNC cannot make direct or indirect contributions to political candidates or office holders.
You should abide by the following:
o no payment or thing of value may be made or given by or on behalf of PNC to any political party, candidate for public office in relation to his or her candidacy, or to any committee or group formed to support a party or candidate.
o PNC will not reimburse you for personal political contributions.
o you may not use PNC facilities or equipment in connection with any federal, state, or local election.
o you may not participate in political activities during your working hours or on PNC property. For example, branch offices may not be used by candidates running for election for fund raisers or other activities related to running for office.
o if you are a foreign national, you may not make a contribution in connection with any election (federal, state or local) or make a contribution to a PNC-affiliated political action committee. This prohibition does not apply to U.S. citizens living outside the United States. If you are not a U.S. citizen and if you have not been lawfully admitted for permanent residence in the United States, you should not make any political contributions, directly or indirectly, without first checking with the Director of Compliance.
PERMITTED ACTIVITIES
Except as prohibited by Rule G-37 of the Municipal Securities Rulemaking Board ("MSRB") and other related policies of PNC discussed below, the following activities are permissible:
o you may use your own funds to make contributions to political parties, candidates, or political action committees;
o you may participate in volunteer political activities during non-working time and away from PNC premises, as long as you do not use any PNC resources in connection with your activities; and
o PNC may make its facilities available to an affiliated political action committee ("PAC") for PAC-related functions, including speeches by political candidates. In addition, PNC may absorb administrative or other expenses incurred by an affiliated PAC.
ADDITIONAL RULES FOR CERTAIN EMPLOYEES
Employees of PNC Securities Corp, PNC Brokerage Corp, and certain other PNC employees associated with municipal securities or municipal finance, are subject to the following rules by MSRB Rule G-37 and PNC policies:
o you may not make contributions to PACs affiliated with PNC or PACs controlled by any municipal finance professional.
o you may not participate in the management of any PACs affiliated with PNC.
o YOU MUST OBTAIN PRIOR WRITTEN APPROVAL FOR ANY POLITICAL CONTRIBUTIONS TO CANDIDATES OR PACS. CONTACT YOUR COMPLIANCE DEPARTMENT OR CONSULT THE PNC POLICY IMPLEMENTING RULE G-37 FOR MORE INFORMATION ON OBTAINING APPROVAL.
o you must limit any contributions to $250 per election and per candidate, and you may only make contributions to candidates for whom you are eligible to vote.
o you may not make any direct or indirect political contribution for the purpose of influencing the award of municipal securities business to PNC.
A copy of the PNC policy implementing MSRB Rule G-37 is located in the PNC Securities Corp and PNC Brokerage Corp Compliance Manuals.
2.11 LOBBYING
Specific laws apply to lobbying activities undertaken on behalf of PNC. You may obtain a summary of these laws and a copy of PNC's lobbying policy from the Director of Compliance.
2.12 OTHER MATTERS
CRIMES, SUSPECTED CRIMES, AND DISHONEST ACTS REPORTING REQUIREMENTS
PNC Bank must file information with law enforcement agencies under certain circumstances when criminal acts involving PNC Bank have occurred or are suspected. If you have knowledge of a mysterious disappearance or loss or an unexplained shortage, or know or suspect that any criminal, dishonest, or fraudulent act has occurred that may affect PNC, its employees, officers or clients, you should immediately use any of the Reporting Procedures set forth in Section 1.03 of the Code.
FIDELITY BOND COVERAGE
PNC holds a fidelity bond that covers all employees of PNC. The bond coverage for any employee may end as soon as PNC learns of any dishonest or fraudulent act that was or may have been committed by the employee at any time, whether or not the act was committed while in PNC's employment.
BONDING REQUIREMENT
If an employee does not meet the standard for bonding, employment usually must be terminated. To comply with the bonding requirements and other requirements imposed by law, PNC reserves the right to investigate the personal history of any applicant or employee, including any law enforcement records.
CONVICTIONS INVOLVING DISHONESTY OR BREACH OF TRUST
Any person who at any time:
o has been convicted of or plead guilty to any criminal offense involving dishonesty or breach of trust or money laundering; or
o has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such an offense is prohibited from participating, directly or indirectly, in any manner in the conduct of the affairs of any PNC bank without prior written consent from the appropriate regulatory agency.
CONSEQUENCES OF VIOLATION
If any employee or officer of a PNC Bank is convicted of or pleads guilty to such an offense or enters into a pretrial diversion or similar program to avoid such a conviction, employment will be terminated in the absence of consent from the appropriate regulatory agency.
2.13 MEDIA INQUIRIES
MEDIA INQUIRIES
You may be contacted by the media for information concerning PNC's position on various matters. You must always direct these inquiries to the Public Relations Department.
PROHIBITIONS
You also may not give information to the media about PNC activities, the activities of other employees, PNC clients or suppliers without the consent of the Public Relations Department. PNC (through the Public Relations Department) will speak out on issues of importance to PNC when appropriate. PNC will not, nor should you, without the consent of the Public Relations Department, identify clients or provide client information or do the following:
o comment on actions of any other company, entity or person;
o comment on issues that are in litigation or under governmental review;
o discuss financial projections;
o discuss plans, programs, products, or operations that have not been announced publicly;
o provide testimonials or endorsements; or
o describe the content of regulatory examination reports.
2.14 RECORDKEEPING POLICY
PNC maintains a record retention policy in accordance with legal, regulatory, and appropriate business requirements.
PROHIBITIONS
You may not dispose of or destroy any records that document or record the business of PNC, except in accordance with PNC's record retention policy.
If there is threatened or pending litigation, an administrative charge, a subpoena or other legal process, or if a government audit or review is in process, you must not dispose of or destroy any relevant records.
Intentional destruction of records to avoid disclosure is prohibited.
QUESTIONS
If you have questions about record retention, ask your supervisor. Supervisors may direct their questions to the Corporate Records Retention Coordinator.
2.15 ACCOUNTING PRACTICES/FOREIGN CORRUPT PRACTICES ACT
REQUIREMENTS
PNC has established internal accounting controls and recordkeeping policies to meet legal and business requirements, including the following:
o all business transactions and payments will be recorded accurately in supporting records;
o no unrecorded fund or asset of PNC will be established or maintained for any reason;
o the use or transfer of PNC funds for any purpose that would be in violation of any law or regulation or that would be improper is prohibited; and
o the accounting records of PNC, and any public record, must be complete, accurate, and in reasonable detail, and no false, artificial, or misleading entries will be made for any reason.
FOREIGN CORRUPT PRACTICES ACT OF 1977
Any dealings that you may have with an official of a foreign government, a foreign political party or party official, or candidate for foreign political office, must comply with the requirements of the Foreign Corrupt Practices Act of 1977, as amended. The Act also applies to officials of public international organizations.
o This law requires the use of proper accounting procedures.
o You are prohibited from giving or promising anything of value to such foreign officials for the purpose of influencing any act or decision of the official in his/her official capacity, or to obtain or retain business, or direct business to, any person. Violations may result in criminal penalties.
All laws of the applicable foreign country must be obeyed.
2.16 BANK SECRECY/MONEY LAUNDERING CONTROL ACT
POLICY
It is the policy of PNC Bank to have an effective Bank Secrecy Act (BSA) and anti-money laundering program. You are responsible for knowing and carrying out your responsibilities under the company's BSA polices and procedures. In particular, you must be aware of your responsibility regarding:
o requirements to report cash transactions on Currency Transaction Reports (CTRs);
o the company's systems and procedures to avoid being used by persons who are laundering money through the bank from drug activities and other illegal activities;
o "Know Your Customer" procedures; and
o the procedures to identify a client's suspicious activities and transactions and to report such matters to Security Services.
Your market's BSA Compliance Officer should be contacted regarding any BSA questions or concerns.
2.17 COMMUNITY REINVESTMENT ACT/FAIR LENDING
POLICY
It is the policy of PNC to respond to the credit needs of the communities in which it has facilities, including those of low and moderate income neighbor-hoods. In addition, each PNC Bank is expected to devote
human and financial resources, consistent with safe and sound banking practices, to the solution of community problems.
It is the policy of PNC Bank to conduct its business in accordance with fair lending laws. It is your responsibility to treat all clients fairly.
A copy of the Corporate Community Reinvestment Act (CRA) and Fair Lending Compliance Statements may be obtained from your Compliance Department representative or market CRA Officer.
2.18 SAFETY, HEALTH AND ENVIRONMENT
COMPLIANCE REQUIREMENT
You must comply with safety and health requirements governed by federal, state, and local laws. You have a responsibility:
o to follow safe operating procedures;
o to promote your own and your co-workers' health; and
o to encourage regard for the environment among fellow employees and in the community.
FIREARMS PROHIBITION
You are not permitted to possess firearms or other dangerous weapons on PNC premises, in PNC-owned vehicles or on work time, unless this is required as part of your job.
HOW TO REPORT
Reports of any actual or potential safety, health, or environmental
problems should be reported using the Reporting Procedures set forth in
Section 1.03 of the Code.
This Code reflects principles PNC intends to abide by. It is not necessarily a statement of the law and in many instances may go beyond what the law and industry practice require. This Code is not intended to result in the imposition of legal liability on PNC, or on any employee or any person who becomes subject to provisions of the Code, if such liability would not exist under law or regulations in the absence of the Code.
You are responsible for complying with the Code. This Code, however, does not, nor should it be construed to, imply an employment contract between you and PNC.
EXHIBIT 1: FORMS
Copy of the Notification/Approval Form
EXHIBIT 2: INSIDER TRADING
SUMMARY OF REQUIREMENTS
This chart summarizes certain rules described in PNC Financial Services Group, Inc.'s Insider Trading Policy (the "Policy"). It is intended to be used as a reference to help you in your compliance with the Policy. However, you should not use this summary in place of the Policy because, in addition to containing more detailed information on the rules summarized below, the Policy contains other rules and standards on topics that are not included in the summary. THE POLICY ALSO APPLIES TO THE FOLLOWING MEMBERS OF YOUR IMMEDIATE FAMILY: YOUR SPOUSE, MINOR CHILDREN, OLDER CHILDREN WHO LIVE IN YOUR HOUSEHOLD OR WHO RELY PRIMARILY ON YOU FOR FINANCIAL SUPPORT, AND ANY OTHER RELATIVES (BY BLOOD, MARRIAGE, OR OTHERWISE) LIVING IN YOUR HOUSEHOLD. YOU ARE RESPONSIBLE FOR THESE FAMILY MEMBERS' COMPLIANCE WITH THE POLICY, AND YOU MUST SEEK APPROVAL OF AND REPORT THEIR PERSONAL SECURITIES TRANSACTIONS IN ACCORDANCE WITH THIS POLICY AS IF SUCH TRANSACTIONS WERE FOR YOUR OWN ACCOUNT.
o transactions in any derivative of a PNC security, including but not limited to puts, calls, and options (other than stock options granted by PNC), subject to certain exceptions for employees who received PNC securities in connection with an acquisition day trading (buying and selling the same security during one calendar day)
PNC INSIDER TRADING POLICY
INTRODUCTION
The purpose of this Insider Trading Policy ("Policy") is to further compliance by PNC Financial Services Group, Inc. ("PNC") and its subsidiaries, employees, and directors with the federal securities laws and regulations. The Policy is designed not only to protect us from civil or criminal liability under these laws, but also to protect our reputation for integrity.
The Code of Ethics contains additional standards with respect to confidential information, and should be read in conjunction with this Policy. Further, your business unit may impose additional requirements. You may also be subject to Office of the Comptroller of the Currency requirements for fiduciary activities, Securities and Exchange Commission requirements, and other requirements of various self-regulatory organizations.
Certain of the following standards and rules are, of necessity, general in nature. In practice, there may be situations that warrant exceptions or interpretations that must be approved by the General Counsel's office of PNC ("General Counsel").
If you have questions regarding the Policy, you should contact the Director of Corporate Compliance or the General Counsel. Further, if you suspect a violation of this Policy, you should contact the Director of Corporate Compliance or the General Counsel, or use any of the reporting procedures set forth in the PNC Code of Ethics.
You are required to be familiar with and abide by this Policy. You must read it carefully and retain it. New employees will be required to certify in writing that they understand and will comply with the Policy. From time to time employees may also be asked to re-certify in writing that they have followed the Policy.
References to "PNC" apply to PNC Financial Services Group, Inc. and all organizations directly or indirectly under its control. References to an "affiliate" apply to the organization under the control of PNC with which an employee or director is associated.
WHAT IS "INSIDER TRADING"?
"Insider trading" generally involves the purchase or sale of securities while aware of material, non-public information ("inside information"). A person who communicates inside information (a "tipper") to another person (a "tippee") may also be liable if the tippee purchases or sells a security while aware of such information.
Penalties for insider trading violations are substantial. Civil penalties may be as high as three times the profit gained or loss avoided as a result of an unlawful purchase or sale of a security. For controlling persons who knowingly or recklessly fail to take appropriate measures designed to prevent the occurrence of insider trading violations, civil penalties of up to the greater of three times the profit gained or loss avoided or $1,000,000 may be imposed. In addition, criminal fines and jail terms may be imposed.
WHAT IS "MATERIAL INFORMATION"?
Material information generally means information relating to a company that issues securities (an "issuer"), such as information about its business operations or securities, the public dissemination of which would likely affect the market price of any of its securities, or which would likely be considered important by a reasonable investor in determining whether to buy, sell, or hold such securities.
WHAT IS "NON-PUBLIC INFORMATION"?
Information that has not been disclosed to the public is generally non-public. To show that information is public, there must be evidence that it is widely disseminated. Information would generally be considered widely disseminated if it has been disclosed, for example on the Dow Jones broad tape, news wire services such as AP or Reuters, radio or television; or in newspapers or magazines, or public disclosure documents filed with the Securities and Exchange Commission, such as prospectuses, proxy statements, and periodic reports.
EXAMPLES OF INSIDE INFORMATION
It is impossible to provide a complete list of information that may constitute inside information, but it may include:
o Unpublished financial reports or projections;
o Information about current, proposed, or contemplated transactions, business plans, financial restructurings, or acquisition targets;
o Dividend increases or decreases;
o Extraordinary borrowings or liquidity problems;
o Material defaults under agreements or actions by creditors, clients, or suppliers relating to a company's credit standing;
o Proposed or contemplated issuance, redemption, or repurchase of securities or stock splits;
o Significant expansions or contractions of operations, including acquisitions, mergers, divestitures, and joint ventures, and purchases or sales of substantial assets;
o Major new product developments;
o Significant increase or decrease in business or information about major contracts;
o Institution of, or developments in, major litigation, investigations, or regulatory actions or proceedings; and
o Developments regarding a company's senior management.
STATEMENT OF GENERAL POLICY APPLICABLE TO ALL EMPLOYEES
AND DIRECTORS
The following rules relate to your personal securities transactions. For purposes of these rules, your personal securities transactions include the securities transactions of your immediate family members, and the securities transactions of accounts in which you or your immediate family members have a beneficial interest or over which you or your immediate family members exercise investment discretion or control. If you or an immediate family member exercises investment discretion or control over non-related customer accounts in the normal course of employment responsibilities, those accounts are not subject to the pre-clearance and reporting requirements described below. However, transactions in such accounts may be subject to review by audit or compliance personnel.
Immediate family members consist of your spouse, any minor children, older children living in your household, older children who rely primarily on you for financial support, and any other relatives (by blood, marriage, or otherwise) living in your household. THE PERSONAL SECURITIES TRANSACTIONS OF YOUR IMMEDIATE FAMILY MEMBERS ARE SUBJECT TO THIS POLICY. YOU ARE RESPONSIBLE FOR THEIR TRANSACTIONS BEING IN COMPLIANCE WITH THESE RULES, AND YOU MUST PRE-CLEAR AND REPORT THEIR PERSONAL SECURITIES TRANSACTIONS AS IF SUCH TRANSACTIONS WERE FOR YOUR OWN ACCOUNT.
1. GENERAL PROHIBITION ON INSIDER TRADING:
o If you are aware of inside information concerning an issuer or its securities, including but not limited to PNC, you are prohibited from buying, selling, or recommending securities of that issuer. You also may not disclose such information to any other person, unless:
o that person is employed by PNC and has a need to know such information in connection with his or her employment or supervisory responsibilities;
o that person is employed by an outside firm (such as a law, accounting, or investment banking firm) retained by PNC and needs to know the information in connection with the service to be provided by the firm to PNC; or
o disclosure is otherwise authorized by the General Counsel.
o Once the inside information is released to the public and has been widely disseminated, then you may buy, sell, or recommend securities of that issuer unless otherwise restricted in this Policy.
o Unless you are sure that information is not inside information, you should presume that it is or consult with the General Counsel.
2. SPECIAL RULES REGARDING PNC FINANCIAL SERVICES GROUP, INC. SECURITIES:
o You are prohibited from purchasing or selling PNC securities beginning 15 days before the end of a calendar quarter until the second business day after PNC releases its earnings results for that
quarter (the "Blackout Period"). This prohibition does not include exercising with cash or already-owned PNC securities an option on PNC securities granted by PNC and holding the underlying securities received as a result of the option exercise. All pending purchase and sale orders regarding PNC securities that could be executed during a Blackout Period must be canceled before the beginning of the Blackout Period.
o You are prohibited from engaging in transactions in any
derivative of PNC securities, including but not limited to puts,
calls, and options. You are also prohibited from day trading
(buying and selling the same securities during one calendar day)
and short selling (selling the securities at a specified price on
a specified date without owning the securities on the trade date)
PNC securities. The receipt or exercise of an option grant or
other derivative security pursuant to a PNC compensation plan is
not a violation of the Policy.
NOTE: THERE IS A LIMITED EXCEPTION TO THE PROHIBITION ON
DERIVATIVE TRANSACTIONS FOR EMPLOYEES WHO HAVE RECEIVED PNC
SECURITIES IN CONNECTION WITH AN ACQUISITION. THIS EXCEPTION IS
NOT AVAILABLE TO PNC EXECUTIVE OFFICERS WHO ARE SUBJECT TO
SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934. YOU WILL BE
INFORMED IF THIS EXCEPTION APPLIES TO YOU. IF THIS EXCEPTION
APPLIES:
o YOU MAY SELL OR "WRITE" COVERED CALL OPTIONS, OR PURCHASE PROTECTIVE PUTS (EITHER ALONE OR IN COMBINATION, AS, FOR EXAMPLE, IN ESTABLISHING A COLLAR), PROVIDED THAT SUCH DERIVATIVE INSTRUMENTS RELATE ONLY TO THE NUMBER OF PNC SHARES YOU ORIGINALLY ACQUIRED IN CONNECTION WITH THE ACQUISITION.
o YOU MAY NOT ENTER INTO THESE TRANSACTIONS DURING A BLACKOUT PERIOD OR AT ANY TIME WHEN YOU ARE AWARE OF INSIDE INFORMATION REGARDING PNC.
o YOU MUST REMAIN "COVERED" (THAT IS, YOU MUST NOT SELL THE UNDERLYING PNC SHARES WITH RESPECT TO WHICH YOU HAVE ENTERED INTO THE DERIVATIVE TRANSACTION) AT ALL TIMES DURING THE TERM OF THE DERIVATIVE INSTRUMENT.
o YOU MAY NOT EXERCISE ANY SUCH INSTRUMENT DURING A BLACKOUT PERIOD OR AT ANY TIME WHEN YOU ARE AWARE OF INSIDE INFORMATION REGARDING PNC. (THE EXERCISE BY A COUNTERPARTY TO SUCH A DERIVATIVE TRANSACTION WOULD NOT BE DEEMED TO VIOLATE THIS RESTRICTION.)
o If you fail to meet a margin call or otherwise default on a loan secured by PNC securities, and the PNC securities are liquidated during a Blackout Period or while you are aware of inside information, you may be deemed to be in violation of this Policy.
PRE-CLEARANCE AND REPORTING REQUIREMENTS
Restricted Employees and Directors (each as defined below) are subject to additional pre-clearance and reporting requirements. If you are subject to these requirements, under no circumstance may you effect a transaction in any securities while you are aware of inside information, even if you have received pre-clearance. The ultimate responsibility for determining whether you have inside information rests with you. Pre-clearance of any particular transaction under this Policy will not necessarily protect you from liability under the laws prohibiting insider trading.
RESTRICTED EMPLOYEES
Restricted Employees include members of PNC's senior officer committee
(the Marketing Committee, as of the effective date of this Policy),
executive officers who are subject to the reporting requirements of
Section 16 of the Securities Exchange Act of 1934, designated employees
of Mergers and Acquisitions,
and other employees designated by the Director of Corporate Compliance. You will be informed if you have been designated a Restricted Employee.
If you are a Restricted Employee, you must obtain the approval of the Corporate Secretary or designate before:
o buying or selling PNC securities and securities issued by PNC affiliates that are publicly traded companies,
o making changes in elections or intra-plan transfers involving PNC securities or phantom shares under any PNC compensation or benefit plan,
o using PNC securities to secure a loan (including a margin account), or
o making a gift of PNC securities.
You must also pre-clear through the Insider Transaction Authorization System before buying or selling any publicly traded security other than securities issued by PNC or a PNC affiliate.
If you are a Restricted Employee, you must have your broker(s) send periodic statements at least quarterly of all of your purchases and sales of publicly traded securities to Corporate Compliance at the same time the broker sends such statements to you. In addition, you must provide periodic statements at least quarterly to Corporate Compliance of all of your purchases and sales of publicly traded securities other than through a broker-dealer.
The pre-clearance and reporting requirements do not apply to security transactions involving open-end mutual funds (such as money market funds), unit investment trusts, and U.S. government or federal agency obligations; reinvestment of dividends pursuant to an issuer's dividend reinvestment plan (but do apply to additional voluntary purchases or sales effected through such a plan); purchases of PNC securities under the Employee Stock Purchase Plan; or other situations where the Director of Corporate Compliance determines that pre-clearance or reporting is not necessary.
OUTSIDE DIRECTORS
Members of the Boards of Directors of PNC and PNC Bank, National Association must obtain the approval of the Corporate Secretary before:
o buying or selling PNC securities and securities issued by PNC affiliates that are publicly traded companies,
o using PNC securities to secure a loan (including a margin account),
o making a gift of PNC securities, or
o reallocating investments within the Directors Deferred Compensation Plan.
If you are a director, you must have your broker(s) send duplicate copies of trade confirmations of all of your purchases and sales of PNC securities (and PNC affiliates' publicly traded securities) to the Corporate Secretary at the same time the broker sends confirmations to you. In addition, you must report to the Corporate Secretary any transaction in PNC securities other than through a broker-dealer not later than 7 calendar days after such transaction.
The pre-clearance and reporting requirements do not apply to the reinvestment of dividends pursuant to PNC's dividend reinvestment plan (but do apply to additional voluntary purchases or sales effected through the plan).
OTHER PRE-CLEARANCE AND REPORTING REQUIREMENTS
A business unit may have or adopt policies governing the personal securities transactions of some or all of the employees of that business unit. For example, certain fiduciary, investment advisory, securities brokerage, and similar business units have supplemental policies governing the personal securities transactions of their employees. Such additional restrictions may include the pre-clearance of securities transactions or reporting requirements. You will be informed if you are in a business unit that has special policies applicable to you, and you will be required to be familiar with and abide by these policies.
SECURITIES OF CLIENTS
Employees of certain business units ("Designated Units") are prohibited from purchasing or selling securities of their clients. Employees will be informed if they are in a Designated Unit to which this restriction applies.
If you are in a designated unit and acquired securities of a client in a transaction permitted by the Insider Trading Policy in effect before this Policy, or before commencing employment in your business unit, you may continue to hold such securities, but may not acquire any additional securities of that client. You must disclose this investment to your business unit manager and Corporate Compliance, and must obtain clearance from your business unit manager and Corporate Compliance before selling any such client securities.
SECURITIES OF AFFILIATES
Certain PNC employees may be subject to different or additional restrictions with respect to their transactions in securities issued by PNC affiliates that are publicly-traded companies. You will be informed of any such restrictions if they are applicable to you.
INFORMATION BARRIERS
Because PNC is a diversified financial institution, one business unit may have inside information about an issuer while another business unit that does not have such information may wish to buy or sell that issuer's securities or recommend a purchase or sale of such securities. Information Barriers are policies and procedures designed to separate business units that are likely to receive inside information from business units that purchase, sell, or recommend the purchase or sale of securities. Information Barrier policies and procedures will be implemented for each applicable business unit.
POLICY PRESENTATION
A video tape that includes a summary of insider trading laws and review of this Policy will be shown to each new employee of PNC. All new employees will be required to certify in writing that they have seen or listened to the video tape, understand this Policy, and will comply with the rules and standards set forth in this Policy. Existing employees may from time to time also be required to provide a written certification
that they have followed this Policy. Periodically, the rules set forth in this Policy will be reviewed with all employees through meetings, internal communications and publications, or other means.
AUDIT
The General Auditor of PNC has the authority to audit compliance with this Policy and the policies of the business units. Each employee must cooperate with such an audit, including requests to provide documentation.
NONCOMPLIANCE
If you fail to comply with this Policy (including the refusal to re-certify compliance with it upon request or cooperate with an audit), you will be subject to disciplinary action, which could include termination of employment. In addition, apparent or suspected violations of laws applicable to PNC's business may be reported to appropriate authorities.
This Policy is not intended to result in the imposition of legal liability that would not exist in the absence of the Policy.
EXHIBIT 3: DRUG ABUSE POLICY SUMMARY
SUMMARY
We are committed to promoting and maintaining a drug-free workplace. An employee's illegal use of drugs interferes with effective and safe job performance, which is a matter of company concern. For this reason, it is our policy to prohibit employees from illegally using, possessing, distributing, selling or manufacturing, or being under the illegal influence of drugs while working or while on company property.
"Drugs" refer to, but are not limited to, controlled substances and any potentially mind-altering chemicals. This includes, but is not limited to, depressants (barbiturates); stimulants (amphetamines); cocaine; narcotics (opiates, such as heroin, morphine and codeine); hallucinogens (PCP, LSD); methadone, marijuana and other cannabinoids; legally obtainable drugs, with prescriptions (Darvon, Valium, Librium); and over-the-counter drugs.
According to the PNC Bank Drug Abuse Policy, a job applicant who is offered employment must successfully pass a drug screening test as a condition of employment. Failure to pass the test will render the offer null and void. In addition, an employee may be asked to submit to a drug screening test where there is reason to believe that he or she may have violated the Drug Abuse Policy. Further, in the future, drug screening tests may be conducted on those employees whose jobs are of a sensitive nature and whose use of drugs, therefore, would pose a risk to the company or the security or safety of co-workers and the public.
We have developed procedures and guidelines for determining whether to require an employee to take a drug test. The procedures include possible consultation with designated legal and Human Resources personnel and/or a medical evaluation. Because employees will only be required to take a test when there is reasonable cause to believe that the employee may have violated the Drug Abuse Policy, and after specified procedures have been followed, the employment of an employee who refuses to take a drug test will be terminated.
All drug screening tests will be conducted by an independent, certified toxicology laboratory, and all test results will be reviewed by an independent Medical Review Officer.
We have the right to search all company property assigned to employees and personal possessions brought onto company property or premises. The privacy of employees will be preserved to the extent possible.
Employees who violate the Drug Abuse Policy will be subject to disciplinary action up to and including employment termination.
Employees are encouraged to seek help with any drug abuse problem and are reminded of the availability of the various corporate benefit programs. Any eligible employee may voluntarily participate in a recognized drug rehabilitation and/or other appropriate counseling program to treat an existing drug use problem provided that he or she has not previously violated the Drug Abuse Policy. In that event, admitting to drug use and participating in a drug rehabilitation and/or other appropriate counseling program will not be considered a violation of the Drug Abuse Policy as long as the employee successfully completes the program and agrees to be subject to random drug screening tests for a period of two years and one month following initiation of the program.
Any employee who participates in a drug rehabilitation and/or counseling program, whether voluntarily or as a result of disciplinary action, will be subject to random drug screening tests for a period of two years and one month following initiation of the program.
Employees who are convicted in a court of law or plead guilty to the use, possession, manufacture, distribution and/or sale of drugs occurring on company premises are required to notify us in writing within five days of such conviction or plea.
Notwithstanding the foregoing, management has the right to take whatever disciplinary action it deems advisable, and deny any or all benefits under the Drug Abuse Policy, if such employee has violated any other PNC Bank and/or company policy or procedure.
Any employee who wishes to review the PNC Bank Drug Abuse Policy should contact his or her market Human Resources representative.
EXHIBIT 4: PNC BANK ELECTRONIC MEDIA POLICY
INTRODUCTION
PNC Bank ("PNC") employees have access to and use one or more forms of electronic media, for example, e-mail products such as OfficeVision and Lotus Notes, online services, the Internet, the World Wide Web, PNC Intranet, and electronic devices such as cellular phones and facsimile machines. PNC encourages proper use of these media because they make communication more efficient and effective and because they are valuable sources of information.
The purpose of this Electronic Media Policy ("Policy") is to summarize key elements of what constitutes the proper use of electronic media by PNC employees. The Policy applies to your use of all electronic media and services when:
o accessed on, or from, company premises;
o accessed using company computers, facsimile machines or other equipment;
o using PNC's leased or purchased services (E.G., the PNC corporate network, the company's Internet connection or external service providers); or
o the media is used in a manner that identifies the employee with PNC Bank (E.G., you join a chat room or publish a comment on the Internet referencing PNC).
You should be aware that the Policy applies even when using your own personal computer, cellular phone or other resources, if one of the above factors applies.
This Policy is part of the PNC Bank Code of Ethics. Other PNC policies and procedures may also be applicable and should be considered.
ELECTRONIC MEDIA: COMPANY PROPERTY AND BUSINESS USE
Electronic media and services are resources provided by the company to facilitate company-related business. Employees need to demonstrate a sense of responsibility and good judgment, just as with any company resource.
o You may not create, scan, fax, download, copy, or send articles, jokes, stories, chain letters and other similar items of personal interest to another employee, person or entity.
o You may not use e-mail products for any purpose unrelated to performance of your job duties, such as to sell raffle tickets or tickets to personal dinner events, UNLESS DIRECTED BY YOUR SUPERVISOR OR MANAGER. Solicitations are governed by PNC's solicitation policy (ss.2.09.4, CODE OF ETHICS)
o You may never use electronic (or any other) media to communicate offensive, harassing, pornographic or other inappropriate material.
Should you have questions on what is appropriate business use of electronic media, please contact your supervisor, your Human Resources representative or any other Key Contact as set forth in the Addendum to PNC's Code of Ethics.
SOFTWARE AND COPYRIGHTS
Only software developed, owned or licensed by PNC Bank may be installed on PNC computing resources and used for the purpose of promoting PNC's business. All employees are required to comply with software copyright laws and licensing agreements. UNAUTHORIZED DUPLICATION OF LICENSED SOFTWARE AND DOCUMENTATION IS STRICTLY PROHIBITED.
ELECTRONIC MEDIA PRIVACY
PNC Bank does not guarantee the privacy of communications transmitted over company established electronic media links. You should assume such communications are not private, and you should observe the CONFIDENTIALITY section of the PNC Bank Code of Ethics (ss. 2.01). Especially with cellular phones, you should assume that a third party may have the opportunity to overhear your conversation. Your use of electronic media, and the content of your communications, is subject to monitoring by PNC for operational, maintenance, security, business, legal or regulatory reasons.
SYSTEM SECURITY
PNC policies regarding system security are set forth in PNC'S INFORMATION SECURITY POLICY MANUAL; detailed Internet security controls and design requirements are provided at ss. 1100, No. 1104. Important considerations you should be aware of:
o Any business requirement resulting in file transfers over the Internet must be approved by your cost center manager. ALL FILES DOWNLOADED FROM THE INTERNET MUST BE FROM "KNOWN" RELIABLE SOURCES AND MUST BE SCANNED WITH PNC BANK STANDARD ANTI-VIRUS SOFTWARE.
o You may not use the Internet to communicate sensitive or confidential information unless management approved encryption standards are implemented. The CONFIDENTIALITY section of the Code of Ethics (ss.2.01) should be observed in any communications using electronic media.
o Access to the Internet from company resources (I.E., from PNC equipment or through PNC employees) must be approved through secured corporate gateways, approved and configured in accordance with PNC Information Technology Services standards. PASSWORDS MAINTAINED ON INTERNET-BASED SYSTEMS MUST BE DIFFERENT FROM PASSWORDS USED ON PNC BANK SYSTEMS.
o Certain Internet browsers and other similar technologies which are used to access World Wide Web-based resources and services, include the ability to store information locally in files that can be retained for an indefinite period. Browsers must be configured to ensure that any "temporary" information used during online sessions is not permanently stored on local user computers.
You should be aware that the network services and World Wide Web sites can identify individuals and companies accessing their services, and can and do monitor access and usage.
PNC PRODUCTS AND SERVICES: PUBLIC RELATIONS AND CUSTOMER INTERACTION
Products and services provided by PNC, regardless of the media used, are subject to a variety of legal and regulatory restrictions applicable to such matters as advertising, product and service availability, costs and fees, and disclosures and descriptions. Existing guidelines regarding product functions and features need to be complied with by all employees. THE POLICIES AND PROCEDURES THAT GOVERN EMPLOYEE BEHAVIOR REGARDING CUSTOMER CONTACT ARE APPLICABLE TO ALL INTERACTIONS VIA ELECTRONIC MEDIA.
o Employees should not use their status as PNC employees to set forth opinions, comments or information that may be contrary to PNC's interests. THEREFORE, PARTICIPATION IN ONLINE CHAT ROOMS AND PUBLICATION OF INFORMATION INVOLVING PNC MUST BE CONDUCTED WITH CARE. YOU MAY NOT USE COMPANY RESOURCES TO CREATE YOUR OWN PESONAL WEB SITE.
o Any negative or misleading information found on electronic media concerning PNC Bank should be referred to Public Relations immediately. Individual employees should not respond to such items.
o The standards for the Internet apply the same basic, corporate identity standards as those used in print which meet the objectives of visual clarity and consistency.
o Lines of business creating a PNC Intranet must observe corporate standards, including those defined for the PNC logo.
The Public Relations Department should be consulted if you have any questions.
ENFORCEMENT
In today's business environment, electronically distributed information can be transmitted much more quickly than in the past, so it is important to use caution and abide by the above principles in all stages of the use of electronic media.
Any employee found to be abusing the privilege of company-facilitated access to electronic media or devices is subject to disciplinary action, which may include termination of employment. Please speak to your supervisor or manager if you have any questions or contact the resources identified above. You may also use your KEY CONTACTS AND REFERENCE GUIDE in your CODE OF ETHICS ADDENDUM to help you reach the appropriate person at PNC to assist you.
(Note - there is no Exhibit 5)
EXHIBIT 6: PNC STOCK OWNERSHIP POLICY
(POLICY REGARDING OWNERSHIP OF STOCK IN PUBLICLY HELD SUBSIDIARIES)
PURPOSE
This is the stock ownership policy contemplated by Section 2.05.8 of the PNC Code of Ethics. The purpose of this policy is to avoid conflicts of interest or the appearance of conflicts of interest on the part of PNC personnel who are responsible for the relationship or transactions between PNC and its publicly held subsidiaries, while promoting ownership of stock in PNC and its publicly held subsidiaries.
SCOPE
This policy applies to PNC personnel who act, and exercise decision-making authority, on behalf of PNC with respect to the relationship or transactions between PNC and its publicly held subsidiaries. This policy does not apply to directors, officers and employees of a publicly held subsidiary whose principal employment or relationship is with that subsidiary.
DEFINITIONS
1. For purposes of this policy, PNC includes PNC Financial Services Group, Inc. and its subsidiaries other than the publicly held subsidiary in question.
2. PNC personnel includes directors, officers and employees of PNC Financial Services Group, Inc. and any of its subsidiaries other than persons whose principal employment or relationship is with the publicly held subsidiary in question.
3. Publicly held subsidiary means any entity in which PNC Financial Services Group, Inc. directly or indirectly owns at least 25% of the outstanding capital stock or other equity interest and that is subject to periodic reporting requirements under the federal securities laws.
RELATIVE OWNERSHIP REQUIREMENT
PNC personnel within the scope of this policy shall not acquire or hold an equity interest in a publicly held subsidiary of PNC that materially exceeds in value such person's equity interest in PNC Financial Services Group, Inc.
Your equity interest will be based for this purpose on the fair market value of securities (including phantom stock units) owned directly or indirectly through employee benefit or deferred compensation plans, owned beneficially through trusts or other vehicles, or that may be acquired upon exercise of stock options, whether exercisable or not.
Your equity interest includes securities owned by your spouse, any minor children, older children living in your household, older children who rely primarily on you for financial support, and other relatives (by marriage or otherwise) living in your household.
MONITORING REQUIREMENTS
PNC personnel within the scope of this policy should monitor their compliance with this Policy.
PNC personnel subject to this policy have 90 days from discovering an instance of noncompliance to reestablish compliance with this policy, unless an exception is granted or, under applicable insider trading policy or law, securities transactions to reestablish compliance are restricted in this time frame. In the latter event, compliance must be reestablished promptly after such restriction lapses.
QUESTIONS
Questions regarding this policy should be directed to PNC's General Counsel or Corporate Secretary.
EXHIBIT 7: PNC POLICY FOR EMPLOYEES HOLDING DIRECTOR AND OFFICER
POSITIONS IN OUTSIDE PROFIT AND NON-PROFIT ORGANIZATIONS
INTRODUCTION
The purpose of the PNC Policy for Employees Holding Director and Officer Positions in Outside Profit and Non-Profit Organizations ("Policy") is to establish certain rules and procedures for employees who hold or are considering taking a position as a director, trustee, officer or other similar position in a for-profit or non-profit corporation or other organization outside of PNC ("director/officer positions"). This Policy applies to all outside director/officer positions you currently hold as well as to any future positions and should be read together with the entire PNC Code of Ethics. It is your responsibility to understand and comply with this Policy and the PNC Code of Ethics.
If you have any questions regarding this Policy, you should contact your manager, your Human Resources (HR) representative, the Corporate Ethics Office, or any of the Key Contacts identified in the Addendum to the PNC Code of Ethics. References to "PNC" apply to The PNC Financial Services Group, Inc. and/or its subsidiaries.
SERVING AT THE REQUEST OF PNC
Employees will be deemed to be serving in a director/officer position in an organization outside of PNC AT THE REQUEST OF PNC only if they obtain written approval from the CEO or the Vice Chairman of The PNC Financial Services Group, Inc. (or in the case of the CEO or the Vice Chairman, from the Board of Directors or its Corporate Governance Committee).
NOTE: "AT THE REQUEST OF PNC" MEANS AT THE REQUEST OF THE PNC ENTITY BY WHICH THE EMPLOYEE IS EMPLOYED UNLESS OTHERWISE SPECIFIED ON THE WRITTEN APPROVAL FORM.
APPROVAL REQUIREMENTS IF YOU ARE SERVING AT THE REQUEST OF PNC
Employees who are asked to serve in a director/officer position in an outside organization AT THE REQUEST OF PNC must submit the "Form for Approval to Serve AT THE REQUEST OF PNC" to the Corporate Ethics Office. Prior to submission for final approval by the CEO or the Vice Chairman, the request must first be approved by the employee's Manager, Business CEO or Director of Staff Function, and Business HR Manager (as applicable). You can obtain a copy of this Form from PNC's internal website, from your HR representative, or from the Corporate Ethics Office.
The CEO or the Vice Chairman will be deemed to be serving AT THE REQUEST OF PNC if the outside director/officer position is approved by The PNC Financial Services Group, Inc. Board of Directors or its Corporate Governance Committee.
Approvals for all such requests will be based on the best interest of PNC. Approvals will be reviewed annually by the CEO or Vice Chairman or, in the case of the CEO or the Vice Chairman, by the Corporate Governance Committee, and may be modified or withdrawn at any time.
Employees will be considered for possible coverage in their capacity as outside directors/officers under PNC's directors and officers liability insurance policy and for possible indemnification by the applicable PNC entity only with respect to outside director/officer positions approved as being AT THE REQUEST OF PNC in accordance with this Policy, subject in each case to applicable law and governing documents. Any exceptions must be approved by the CEO or the Vice Chairman of The PNC Financial Services Group, Inc. (or, in the case of the CEO or the Vice Chairman, by the Board of Directors or its Corporate Governance Committee).
PUBLIC OFFICE DIRECTORS/OFFICERS
Employees considering or accepting a director/officer position that is also a public office position (such as school board director) must comply with the PNC Public Office Policy, which is Exhibit 8 to the PNC Code of Ethics.
ALL OTHER OUTSIDE DIRECTOR/OFFICER POSITIONS
Employees otherwise wishing to serve in a director/officer position in an outside organization are not required to provide notification or to obtain approval from PNC. However, the fOLLOWING RULES APPLY:
1. You may not serve if the outside organization is a PNC competitor.
NOTE: FOR PURPOSES OF THIS POLICY, A COMPETITOR MEANS ANY ORGANIZATION, WHEREVER LOCATED, THAT ENGAGES IN ANY OF THE SAME BUSINESSES AS PNC. FURTHER, IF AN OUTSIDE ORGANIZATION IS OR HAS A BANK, THRIFT OR OTHER DEPOSITORY ORGANIZATION ANYWHERE WITHIN ITS GROUP OF AFFILIATES, ALL MEMBERS OF THAT GROUP ARE CONSIDERED COMPETITORS.
2. You may not serve if your involvement with the outside organization would interfere with or impede your ability to perform your job duties and responsibilities at PNC.
3. You may not serve if your involvement with the outside organization would create a conflict with, or be reasonably perceived as conflicting with, the interests of PNC. If you accept a director/officer position in
an outside organization and a conflict of interest (actual or perceived) develops, you may be required to leave the outside organization or to resign your position with PNC.
4. Under certain circumstances, you may not serve if PNC holds an equity interest in the outside organization. It is your responsibility to ask the outside organization if PNC holds such an interest. If so, you must contact the Corporate Ethics Office to determine whether or not you may accept the director/officer position.
NOTE: EQUITY HELD BY PNC INCLUDES EQUITY HELD FOR PNC'S OWN ACCOUNT AND EQUITY PNC HOLDS AS A TRUSTEE OR OTHER FIDUCIARY. EQUITY INTERESTS MAY ALSO INCLUDE OPTIONS, CONVERTIBLE DEBT AND OTHER INSTRUMENTS.
CERTAIN ADDITIONAL RESPONSIBILITIES
By serving as a director/officer in an outside organization, you will also have certain responsibilities to that organization. You should be sure that you understand and comply with those responsibilities.
There may be occasions where contracts or transactions involving PNC are discussed or decided by that outside organization (E.G., the outside organization is interested in obtaining a loan from PNC or in engaging PNC as a trustee of a plan, program or fund, such as a pension plan or an endowment fund). In these instances, after disclosing your relationship with PNC, you should not participate in such discussions or in the decision-making process. If you are a director of the outside organization, you should ask the Board secretary to reflect in the meeting minutes that you did not participate in the discussions and did not vote on that matter because of your relationship with PNC.
DATA COLLECTION
PNC may collect information related to director/officer positions held by PNC employees in outside organizations from you for marketing or other business purposes. Neither a request for information related to outside director/officer positions nor an employee response to such a request will mean or imply that the employee is serving in such position(s) AT THE REQUEST OF PNC.
EXCEPTIONS
Any exceptions or amendments to this Policy must be approved by the PNC Ethics Policy Committee or the Director of Compliance or as otherwise provided in this Policy.
EXHIBIT 8: PNC PUBLIC OFFICE POLICY
INTRODUCTION
The purpose of the PNC Public Office Policy ("Policy") is to establish certain rules for employees who campaign for or seek appointment to a public office, who serve as public officials, or who serve as members of another candidate's political campaign committee ("public office positions"). This Policy applies to all public office positions you currently hold as well as to any future positions and should be read together with the entire PNC Code of Ethics. It is your responsibility to understand and comply with this Policy and the PNC Code of Ethics.
If you have any questions regarding this Policy, you should contact your manager, your Human Resources (HR) representative, the Corporate Ethics Office, or any of the Key Contacts identified in the Addendum to the PNC Code of Ethics. References to "PNC" apply to The PNC Financial Services Group, Inc. and/or its subsidiaries.
GENERAL RULES
SERVICE IN A PUBLIC OFFICE POSITION IS NOT AT THE REQUEST OF PNC. EMPLOYEES WISHING TO SERVE IN A PUBLIC OFFICE POSITION ARE NOT REQUIRED TO PROVIDE NOTIFICATION TO OR OBTAIN APPROVAL FROM PNC. HOWEVER, THE FOLLOWING RULES APPLY.
o GENERAL
o You may not serve if your involvement would interfere with or impede your ability to perform your job duties and responsibilities at PNC.
o You may not serve if your involvement would create a conflict with, or be reasonably perceived as conflicting with, the interests of PNC. If you accept a public office position and a conflict of interest (actual or perceived) develops, you may be required to leave your public office position or to resign your position with PNC.
o You may not represent or act on behalf of PNC in connection with any matter or transaction between PNC and your campaign, the governmental entity you serve, or the campaign of any other political candidate for which you are a member of the political campaign committee.
o WHILE YOU ARE CAMPAIGNING FOR OR SEEKING APPOINTMENT TO A PUBLIC OFFICE OR SERVING AS A MEMBER OF ANOTHER CANDIDATE'S POLITICAL CAMPAIGN COMMITTEE
Before beginning a campaign for public office or accepting such position, you must receive confirmation from the solicitor or other counsel for the governmental entity that your service as a public official would not prevent PNC from doing business with that governmental entity. All correspondence concerning campaign business, including but not limited to, campaign fundraising, must be on campaign letterhead exclusively and may not contain any reference to your status as a PNC employee other than to factually state your employment history.
o You may not engage in campaign business during working hours. To avoid any appearance of sponsorship or endorsement, PNC's name may not be used in any campaign material or in any fundraising activities, other than to factually state your employment history.
o You may not take a paid leave of absence to work on your or another candidate's campaign, except earned vacation time. If you take an unpaid leave of absence, either you or the campaign must promptly reimburse PNC for any benefits (E.G., insurance) provided by PNC to you during that leave of absence.
o You may not solicit contributions from any employee of PNC Capital Markets or any other PNC employee without first obtaining preclearance from the PNC Legal Department.
o Your campaign (or the campaign you are serving) may not use PNC's facilities, equipment, supplies or personnel in connection with the campaign effort. Volunteer efforts conducted after working hours off PNC premises are permitted, but PNC equipment and supplies may not be used in such efforts.
o You may not direct or coerce any PNC employee to provide services to a campaign, or make the provision of such services a condition of employment. You may not ask PNC employees to work on your or another candidate's campaign, even on a volunteer basis, unless you have obtained preclearance from the PNC Legal Department.
o PNC does not make political contributions to any candidate or campaign committee. You must therefore avoid any circumstance involving the use of PNC facilities or personnel that could be interpreted as an in-kind corporate contribution to the campaign.
o WHILE SERVING AS A PUBLIC OFFICIAL
o You may not solicit business between PNC and any governmental entity of which you are a public official.
o If at any time you are contemplating a change in your PNC duties that would involve the municipal securities business undertaken by a PNC affiliate, you must have your situation reviewed by the PNC Legal Department before accepting any such position.
CERTAIN ADDITIONAL RESPONSIBILITIES
By serving as a public official, you will also have certain responsibilities to the governmental entity you serve. You should be sure that you understand and comply with those responsibilities.
There may be occasions where contracts or transactions involving PNC are discussed or decided by the governmental entity you serve. In these instances, after disclosing your relationship with PNC, you should not participate in such discussions or in the decision making process.
DATA COLLECTION
PNC may collect information related to public office positions held by PNC employees from you for various business purposes. Neither a request for information related to public office positions nor an employee response to such a request will mean or imply that the employee is serving in such position(s) AT THE REQUEST OF PNC.
EXCEPTIONS
Any exceptions or amendments to this Policy must be approved by the PNC Ethics Policy Committee or the Director of Compliance.
KEY CONTACTS AND REFERENCE GUIDE
Under the PNC Bank Code of Ethics, the Reporting Procedures outlined in the Code provide a number of individuals to contact to assist you regarding notifications, prior approvals, report a potential Code violation or a concern, or any questions regarding the Code. The Key Contacts and Reference Guide lists those persons you will be dealing with most frequently regarding Code matters and how to contact them, as well as resource materials and how to obtain them. You are encouraged to call anyone with whom you feel comfortable.
KEY CONTACTS
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BUSINESS NAME PHONE FAX MAILSTOP
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HUMAN RESOURCES/ EMPLOYEE RELATIONS REPRESENTATIVES
EMPLOYEES WORKING IN:
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BlackRock Robert P. Connolly (212) 409-3743 (212) 409-3744 XX-R345-30-1
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Corporate
Bank/Treasury
Management Jim Popp (412) 768-2378 (412) 762-3985 P2-PTPP-02-1
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Employees in Other
Areas Linda K. Williamson (412) 762-5413 (412) 762-2256 P2-PTPP-02-1
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Regional Community Bank Theresa Kiwior 570-961-6174 570-961-6340 N1-NADM-04-A
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PNC Advisors Vic Orriola 412-768-5983 412-762-3142 P1-POPP-29-1
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TPS
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Staff Services Marilyn Crump (412) 762-2193 (412) 762-2256 P2-PTPP-02-1
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SECURITY SERVICES
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PNC Bank Helpline: 1-800-937-4445 When calling, select option #2 (Security Services), then select #4
(Incident Reporting)
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Director of Corporate John P.Ericksen (412) 762-7761 (412) 762-0726 P2-PTPP-06-1
Security Services
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CORPORATE COMPLIANCE: For Any Matter Under the Code
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Director, Corporate
Compliance/Risk
Management &
Administrator
of the Code Eva T. Blum (412) 762-2748 (412) 705-0829 P1-POPP-22-2
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Senior Compliance
Manager Michelle O. Manning (412) 762-8234 (412) 705-0829 P1-POPP-22-2
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Code of Ethics Manager Peg Holmes (412) 762-8205 (412) 705-0829 P1-POPP-22-2
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GENERAL COUNSEL: For Any Matter Under the Code
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General Counsel Helen P. Pudlin (412) 762-7987 (412) 762-5920 P1-POPP-21-1
(215) 585-5174 (215) 585-8564 F5-F012-02-7
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REFERENCE GUIDE
PNC BANK CODE OF ETHICS FORMS
All Code Forms are available on PNC's Intraweb, Lotus Notes, or from your Human Resources Department. Sample copies of the Forms are attached as Exhibit 1 to the Code.
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FORM DESCRIPTION
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Notification/Approval Form This Form is used to provide notification or
(Exhibit 1A) obtain approval under the Code. You should follow
the instructions on the reverse side. MATTERS WHICH
REQUIRE NOTIFICATION OR PRIOR APPROVAL ARE
SUMMARIZED IN SECTION 1.02 OF THE CODE.
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Form for Approval This Form is used to obtain all necessary approvals
to Serve at the Request in accordance with the PNC Policy for Employees
of PNC (Exhibit 1-B) Holding Director and Officer Positions in Outside
Profit and Non-Profit Organizations (attached as
Exhibit 7 to the Code).
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