As filed with the Securities and Exchange Commission on March 28, 1997
File Nos. 333- 18737
811-07989
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 2
Post-Effective Amendment No. ___
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
Metropolitan West Funds
(Exact Name of Registrant as Specified in its Charter)
10880 Wilshire Blvd., Suite 2020
Los Angeles, California 90024
(Address of Principal Executive Office)
(310) 446-7727
(Registrant's Telephone Number, Including Area Code)
Scott B. Dubchansky
10880 Wilshire Blvd., Suite 2020
Los Angeles, California 90024
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date hereof.
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
____ on _______________, pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)
____ on _______________, pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant is registering an indefinite number of securities under the Securities Act of 1933.
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 this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933.
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
BRUCE W. MAISEL, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____.
Metropolitan West Funds
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross - Reference Sheets for Metropolitan West Funds
Part A - Combined Prospectus for Metropolitan West Funds
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short-Term Investment Fund
Part B - Combined Statement of Additional Information for Metropolitan
West Funds
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short-Term Investment Fund
Part C - Other Information
Signature Page
Exhibits
Metropolitan West Funds
CROSS REFERENCE SHEETS
FORM N-1A
Part A: Information Required in Prospectus
(Combined Prospectus for Metropolitan West Funds)
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short-Term Investment Fund
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- --------------------
1. Cover Page Cover Page
2. Synopsis "Summary of Expenses and Example"
and "Prospectus Summary"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "Prospectus Summary",
of Registrant "Investment Objectives and Policies,"
"Securities and Techniques Used by the
Funds," "Investment Risks," "Principal
Investment Restrictions," and
"Organization and Management"
5. Management of "Investment Objectives and Policies,"
the Fund "Securities and Techniques Used by the
Funds," "Organization and Management"
and "How to Purchase Shares"
5A. Management's Not Applicable
Discussion of Fund
Performance
6. Capital Stock and "Organization and Management,"
Other Securities "Dividends and Tax Status" and "General
Information"
7. Purchase of Securities "How to Purchase Shares," "How to Redeem
Being Offered Shares"
8. Redemption or "How to Redeem Shares"
Repurchase
9. Pending Legal Not Applicable
Proceedings
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PART B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information for Metropolitan West Funds)
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short-Term Investment Fund
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- --------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Cover Page and "Management"
and History
13. Investment Objectives "Investment Objectives and Policies"
14. Management of the "Management"
Registrant
15. Control Persons and "Management of the Funds" and "General
Principal Holders of Information About the Trust"
Securities
16. Investment Advisory "Management"
and Other Services
17. Brokerage Allocation "Management"
18. Capital Stock and "General Information About the Trust"
Other Securities
19. Purchase, Redemption "Net Asset Value"
and Pricing of
Securities Being
Offered
20. Tax Status "Dividends and Tax Status"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements Not Applicable
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PART A
COMBINED PROSPECTUS
Metropolitan West Total Return Bond Fund Metropolitan West Low Duration Bond Fund Metropolitan West Short-Term Investment Fund
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may any offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State.
[GRAPHIC OMITTED]
SUBJECT TO COMPLETION -- Dated March __, 1997
PROSPECTUS
METROPOLITAN WEST ASSET MANAGEMENT
METROPOLITAN WEST FUNDS (THE "TRUST"), IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY CONSISTING OF THREE SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"), EACH OF WHICH IS A SEPARATE MUTUAL FUND.
TOTAL RETURN BOND FUND
Seeks to maximize long-term total return. The Fund invests in a diversified portfolio of fixed-income securities of varying maturities with a portfolio duration of two to eight years. The Fund's dollar-weighted average maturity will exceed its portfolio duration.
LOW DURATION BOND FUND
Seeks to maximize current income, consistent with preservation of capital. Capital appreciation is a secondary consideration of the Fund. The Fund invests in a diversified portfolio of fixed-income securities of varying maturities with a portfolio duration of one to three years. The Fund's dollar-weighted average maturity will exceed its portfolio duration.
SHORT-TERM INVESTMENT FUND
Seeks to maximize current income, consistent with the preservation of capital.
Capital appreciation is a secondary consideration of the Fund. The Fund invests
in a diversified portfolio of fixed-income securities of varying maturities with
a portfolio duration of up to one year. The Fund's dollar-weighted average
maturity will exceed its portfolio duration.
This Prospectus provides you with the basic information you should know before investing in any of the Funds. You should read it and keep it for future reference. A Statement of Additional Information dated _______________, 1997, as may be revised, containing additional information about the Trust and each Fund has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus. You may obtain a copy of the Statement of Additional Information without charge by calling (800) ________________ or writing to the Funds at 10880 Wilshire Boulevard, Suite 2020, Los Angeles, California 90024. If you are viewing the electronic version of this prospectus through an online computer service, you may request a printed version free of charge by calling (800) _______________.
The Internet address for the Metropolitan West Funds is [www.mws.com].
Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, any bank, nor are they federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. Investment in a Fund's shares involves risk, including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
There can be no assurance that the investment objective of any Fund will be achieved.
Metropolitan West Funds
10880 Wilshire Boulevard, Suite 2020
Los Angeles, California 90024
(310) 446-7727
___________________, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES............................................................3
ADVISER INVESTMENT RETURNS.....................................................4
PROSPECTUS SUMMARY.............................................................5
INVESTMENT OBJECTIVES AND POLICIES.............................................6
SECURITIES AND TECHNIQUES USED BY THE FUNDS....................................9
INVESTMENT RISKS..............................................................13
PRINCIPAL INVESTMENT RESTRICTIONS.............................................14
ORGANIZATION AND MANAGEMENT...................................................14
HOW TO PURCHASE SHARES........................................................16
HOW TO REDEEM SHARES..........................................................17
DIVIDENDS AND TAX STATUS......................................................18
PERFORMANCE INFORMATION.......................................................19
APPENDIX -- DESCRIPTION OF RATINGS............................................20
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The application for investing in the Metropolitan West Funds is included in this prospectus.
The following information is provided in order to assist you in understanding the various costs and expenses that you will bear directly or indirectly as an investor in the Funds. These are the expenses, including the estimated other expenses, of each Fund for the first full year of operations.
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Load Imposed on Purchases..............................None
Maximum Sales Load Imposed on Reinvested Dividends...................None
Deferred Sales Load..............................................None
Redemption Fees .................................................None
Exchange Fees....................................................None
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Investment dealers and other firms may independently charge additional fees for shareholder transactions or for advisory services. Please see their materials for details.
Shareholders effecting transactions via wire transfer may be required to pay fees, including the wire fee and other fees, that will be deducted directly from redemption proceeds.
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets) Total Low Short-Term
- ---------------------------------------- Return Duration Investment
Bond Fund Bond Fund Fund
----------- ---------- ------------
Management fees .55% .48% .40%
Rule 12b-1 expenses** None None None
Other expenses after expense reimbursement .10% .10% .10%
----------- ---------- ----------
Total Fund operating expenses after expense
reimbursement .65% .58% .50%
=========== ========== ==========
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*Although not required to do so, Metropolitan West Asset Management, LLC (the "Adviser"), has agreed to limit the annual operating expenses of the Total Return Bond Fund to .65%, the Low Duration Bond Fund to .58% and the Short Term Investment Fund to .50% of each Fund's respective average net assets. The ratios of total operating expenses to average net assets for each Fund before the Adviser's voluntary reimbursement are estimated as follows: Total Return Bond Fund - 1.00% (.45% other expenses); Low Duration Bond Fund - 1.00% (.52% other expenses); and Short Term Investment Fund - .90% (.50% other expenses). In subsequent years, overall operating expenses for each Fund may not fall below the applicable percentage limitation until the Adviser has been fully reimbursed for fees foregone or expenses paid it under the Management Agreement. Each Fund will reimburse the Adviser in the three following years if operating expenses (before reimbursement) are less than the applicable percentage limitation charged to the Fund.
The Funds have adopted a Rule 12b-1 plan to pay for distribution expenses. The Funds may charge up to an annual rate of .25% of average net assets but currently are waiving all Rule 12b-1 fees.
You would pay the following expenses on a $1,000 investment, assuming:
(1) 5% annual return; and
(2) redemption at the end of Total Low Short Term
each time period: Return Duration Investment
Bond Fund Bond Fund Fund
- ----------------------------------- --------- --------- ----------
One Year $ 7 $ 6 $ 5
Three Years $21 $19 $16
- ----------------------------------------------------------------------------
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The example assumes that the Adviser will limit the annual operating expenses of each Fund to the total shown. The example should not be considered a representation of past or future expenses; actual Fund expenses may be greater or less than those shown. The assumption in the Example of a 5% annual return is required by regulations of the Securities and Exchange
Commission applicable to all mutual funds and does not represent, the projected or actual performance of any Fund. See "Organization and Management."
Set forth in the table below is certain performance data provided by the Adviser
relating to a performance record of the Adviser for __________ investment
advisory accounts (the "Low Duration Accounts"), during the period August 1,
1996 through December 31, 1996, utilizing the specific investment approach
specified for the Low Duration Bond Fund under "Investment Objectives and
Policies." The Low Duration Accounts constitute all of the accounts managed by
the Adviser that have an identical or similar investment objective or investment
approach as the Low Duration Bond Fund. The Low Duration Accounts are not
subject to the same types of expenses to which the Low Duration Bond Fund is
subject, nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Low Duration Bond Fund by the Investment
Company Act of 1940, as amended. From May 18, 1993 through July 31, 1996
performance data is for the Hotchkis and Wiley Low Duration Bond Fund that Tad
Rivelle and Laird Landmann, now Managing Director-Chief Investment Officer and
Managing Director of the Adviser, respectively, personally managed in their
capacities as principals and Co-Directors of Fixed Income for Hotchkis and
Wiley. The Low Duration Accounts and the Hotchkis and Wiley Low Duration Bond
Fund are collectively called the "Low Duration Assets." The Low Duration Assets
have been managed with investment objectives and investment policies and
strategies substantially similar to those to be employed by Mr. Rivelle and Mr.
Landmann in managing the Low Duration Bond Fund. The results presented are not
intended to predict or suggest the return to be experienced by the Low Duration
Bond Fund or the return an investor might achieve by investing in the Low
Duration Bond Fund. Investors should not rely on the following performance data
as an indication of future performance of the Adviser or of the Low Duration
Bond Fund.
TOTAL RETURN OF LOW DURATION ASSETS
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
- --------------------------------------------------------------------------------
Low Duration Assets [2.68%] 12.75% 5.22% 7.14%*
Performance Record
Merrill Lynch 1-3 Year U.S. Treasury [1.75%] 11.00% 0.57% 2.62%*
Index
- --------------------------------------------------------------------------------
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*From May 18, 1993
Please read the following important notes concerning the Low Duration Assets.
1. Performance before August 1, 1996 was calculated using the standard total return formula required by the Securities and Exchange Commission ("SEC") for all mutual funds.
2. The results for the Low Duration Accounts reflect both income and capital appreciation or depreciation (total return). Returns are time-weighted and net of all applicable fees and expenses.
3. Annual rate of return for the Low Duration Accounts is calculated using the modified Dietz method, which is defined as the portfolio gain (including all realized and unrealized gains and losses as well as all income) over the average capital for the period. Average capital is the beginning market value plus/minus weighted subscriptions/redemptions. Calculation is done monthly, but is subject to revaluation during the month when there is a cash flow that exceeds 10% of the beginning market value of the Low Duration Accounts.
4. Investors should note that the Low Duration Bond Fund will compute and disclose its average annual compounded rate of return using the standard formula set forth in SEC rules, which differs in certain respects from returns for the Low Duration Accounts noted above. The SEC total return calculation method calls for computation and disclosure of an average annual compounded rate of return for one, five and ten year periods or shorter periods from inception. The SEC formula provides a rate of return that equates a hypothetical initial investment of $1,000 to an ending redeemable value. The returns shown for the Low Duration Accounts are net of advisory fees in accordance with the SEC calculation formula, which requires that returns be shown for the Low Duration Bond Fund be net of advisory fees as well as all other applicable Fund operating expenses. Performance was calculated on a trade date basis.
5. The Merrill Lynch 1 to 3 year U.S. Treasury Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has its own investment objective. See "Investment Objectives and Policies" for a full discussion of the objectives of each Fund. The investment objective of each Fund is fundamental and may not be changed without shareholder approval.
THE INVESTMENT ADVISER
The Adviser, Metropolitan West Asset Management, LLC, is a registered investment adviser organized as a California limited liability company in 1996. The Adviser is owned in part by Metropolitan West Securities, Inc., a registered investment adviser and broker-dealer. The Adviser is in the business of furnishing investment advice to institutional and private clients and currently manages approximately [$___] billion for such clients. The Adviser has not previously managed a mutual fund. The Adviser's affiliate, Metropolitan West Securities, Inc., has managed fixed-income investments since 1992 and currently manages approximately $_______ billion for its clients.
MANAGEMENT FEE
For its services, the Adviser receives a fee, accrued daily and paid monthly, at the following annual percentages of average daily net assets: Total Return Bond Fund--0.55%; Low Duration Bond Fund--0.48%; and Short-Term Investment Fund--0.40%.
INVESTMENT RISKS
Like all investments, an investment in each Fund involves certain risks. The securities held by the Funds and the value of the Funds' shares will fluctuate with market and other economic conditions, so that investors' shares, when redeemed, may be worth more or less than their original cost. See "Investment Risks" for a further discussion of certain risks.
MINIMUM PURCHASE
The minimum initial investment in a Fund is $5,000. For retirement plan investments the minimum initial investment is $1,000.
OFFERING PRICE
Shares are offered at their net asset value without a sales charge and may be redeemed at their net asset value on any business day. See "How To Purchase Shares" and How To Redeem Shares."
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to declare dividends daily and pay them monthly to shareholders. Distributions of net capital gains, if any, will be made at least annually. The Board of Trustees may determine to declare dividends and make distributions more or less frequently.
Dividends and capital gain distributions (net of any required tax withholding) are automatically reinvested in additional shares at the net asset value per share on the reinvestment date unless the shareholder has previously requested in writing to the Transfer Agent that payment be made in cash.
The following descriptions are designed to help you choose the Fund that best fits your investment objective. You may want to pursue more than one objective by investing in more than one Fund. Each Fund's investment objective is a fundamental policy, which cannot be changed without the approval of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). There can be no assurance that any objective will be met. In addition, each Fund may use certain types of investments and investing techniques that are described under the caption "Securities and Techniques Used by the Funds." For a discussion of certain risks associated with an investment in the Funds, including their use of derivatives, see "Investment Risks."
Metropolitan West Asset Management, LLC (the "Adviser") acts as investment adviser to each Fund.
THE TOTAL RETURN BOND FUND
The investment objective of the TOTAL RETURN BOND FUND is to maximize long-term total return. The Fund invests in a diversified portfolio of fixed-income securities of varying maturities with a portfolio duration of from two to eight years. The meaning of "duration" is explained below under "Investment Policies of the Funds." The dollar-weighted average maturity of the portfolio of the Fund is expected to range from two to fifteen years. Portfolio holdings will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) which the Adviser believes to be relatively undervalued. The Adviser views bonds to mean any interest-bearing security that obligates the issuer to pay the holder specified sums of money on specified dates (or at maturity) and generally requires the issuer to repay the principal amount of the loan at maturity.
THE LOW DURATION BOND FUND
The investment objective of the LOW DURATION BOND FUND is to maximize current income, consistent with preservation of capital. The Fund invests in a diversified portfolio of fixed-income securities of varying maturities with a portfolio duration of from one to three years. The meaning of "duration" is explained below under "Investment Policies of the Funds." The dollar-weighted average maturity of the portfolio of the Fund is expected to range from one to five years. The total rate of return for this Fund is expected to exhibit less volatility than that of a longer duration fixed-income fund such as the TOTAL RETURN BOND FUND.
SHORT-TERM INVESTMENT FUND
The investment objective of the SHORT TERM INVESTMENT FUND is to maximize current income, consistent with preservation of capital. The Fund invests in a portfolio of fixed-income securities of varying maturities with a portfolio duration of up to one year. The meaning of "duration" is explained below under "Investment Policies of the Funds." The Fund's dollar-weighted average maturity will exceed its portfolio duration. The total rate of return for this Fund is expected to exhibit less volatility than that of the longer duration TOTAL RETURN BOND FUND or the LOW DURATION BOND FUND
INVESTMENT POLICIES OF THE FUNDS
Portfolio Securities. THE TOTAL RETURN BOND FUND, THE LOW DURATION BOND FUND and
THE SHORT-TERM INVESTMENT FUND (the "Funds") will attempt to achieve their
objectives by investing in the following types of securities that may be issued
by domestic or foreign entities: (i) U.S. Government securities; (ii) corporate
debt securities, including bonds, notes and debentures; (iii) corporate
commercial paper; (iv) mortgage- and other asset-backed securities, including
CMOs and REMICs; (v) variable and floating rate debt securities (including
inverse floaters); (vi) structured debentures, bonds and notes; (vii) bank
certificates of deposit; (viii) fixed time deposits and bankers' acceptances;
(ix) repurchase agreements and reverse repurchase agreements; (x) debt
securities that are convertible into or exchangeable for equity securities
("convertible securities"); (xi) obligations of foreign governments or their
subdivisions, agencies and instrumentalities; and (xii) obligations of
international agencies (such as the Agency for International Development) or
supranational entities. There is no limitation on the percentage of a Fund's
assets that may be committed to any of these types of securities, except to the
extent that a security may be deemed to be illiquid. See "Securities and
Techniques Used by the Funds."
Credit Ratings. Under normal circumstances, the TOTAL RETURN BOND FUND will invest at least 70% of its net assets in debt instruments rated at least (i) Baa3 by Moody's Investor's Service ("Moody's") or BBB- by Standard & Poor's Rating Group ("S&P"), Fitch Investors Services, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps"), (ii) A-2 by S&P, P-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations ("Investment Grade Securities"), or (iii) of comparable quality to Investment Grade Securities as determined by the Adviser in the case of unrated securities. Up to 15% of the TOTAL RETURN BOND FUND'S net assets may be invested in securities rated below Investment Grade Securities but rated B or higher by one of the nationally recognized statistical rating organizations or, if unrated, of comparable quality in the opinion of the Adviser. Up to 15% of the Total Return Bond Fund's net assets may be invested in emerging market
foreign securities, which are generally considered to be of a credit quality below Investment Grade Securities.
Under normal circumstances, the LOW DURATION BOND FUND and the SHORT-TERM INVESTMENT FUND each will invest at least 70% of its net assets in securities rated at least: (i) A by Moody's, S&P, Fitch or Duff & Phelps, (ii) A-2 by S&P, P-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations ("Highly Rated Securities"), or (iii) of comparable quality to Highly Rated Securities as determined by the Adviser in the case of unrated securities. Up to 20% of the LOW DURATION BOND FUND'S and the SHORT-TERM INVESTMENT FUND'S net assets may be invested in securities rated below Highly Rated Securities but with ratings equal at least to Investment Grade Securities by one of the nationally recognized statistical rating organizations or, if unrated, of comparable quality in the opinion of the Adviser. Up to 10% of the LOW DURATION BOND FUND'S and the SHORT TERM INVESTMENT FUND'S net assets may be invested in securities rated below Investment Grade Securities but rated B or higher by one of the nationally recognized statistical rating organizations or, if unrated, of comparable quality in the opinion of the Advisor.
Securities rated Baa are considered by Moody's to have speculative characteristics. For Baa/BBB rated securities, changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade securities. Securities rated below BBB or Baa are judged to be predominantly speculative with respect to their capacity to pay interest and repay principal in accordance with the terms of their obligations and are commonly known as "junk bonds." See "Investment Risks--Risks of Investing in Fixed-Income Securities."
After its purchase by one of the Funds, a security may be assigned a lower rating or cease to be rated. This would not require the Fund to sell the security, but the Adviser will consider such an event in determining whether the Fund should continue to hold the security in the portfolio.
Each Fund may invest up to 25% of its total assets in securities of foreign issuers that are denominated in U.S. dollars. Investment in securities of foreign issuers that are not denominated in U.S. dollars by the Funds will be limited to a maximum of 15% of each Fund's total assets.
Duration. The Funds each invest in a diversified portfolio of fixed-income securities of varying maturities with a different portfolio "duration." Duration is a measure of the expected life of a fixed-income security that was developed as a more precise alternative to the concept of "term to maturity." Duration incorporates a bond's yield, coupon interest payments, final maturity, call and put features and prepayment exposure into one measure. Traditionally, a fixed-income security's "term to maturity" has been used as a proxy for the sensitivity of the security's price to changes in interest rates (which is the "interest rate risk" or "volatility" of the security). However, "term to maturity" measures only the time until a fixed-income security provides its final payment, taking no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security on a present value basis. Duration takes the length of time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a mortgage-backed, asset-backed, or callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time. For any fixed-income security with interest payments occurring prior to the payment of principal, duration is ordinarily less than maturity. In general, all other things being equal, the lower the stated or coupon rate of interest of a fixed-income security, the longer the duration of the security; conversely, the higher the stated or coupon rate of interest of a fixed-income security, the shorter the duration of the security. There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. In these and other similar situations, the Adviser will use more sophisticated analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure. A Fund's computation of duration is based on estimated rather than known factors. Thus, there can be no assurance that a particular portfolio duration will at all times be achieved by a Fund.
Duration is used in the management of the Funds as a tool to measure interest rate risk. For example, a Fund with a 2-year duration would be expected to change in value 2% for every 1% move in interest rates. Assuming an expected average duration of .75 years for the SHORT-TERM INVESTMENT FUND, a 1% decline in interest rates would cause the Fund to gain .75% in value; likewise, a 1% rise in interest would produce a decline of .75% in the Fund's value. Assuming an expected average duration of 2 years for the LOW DURATION BOND FUND, a 1% decline in interest rates would cause the Fund to gain 2% in value; likewise, a 1% rise in interest rates would produce a decline of 2% in the Fund's value. Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND FUND, a 1% decline in interest rates would cause the Fund to gain 4.5% in value; likewise, a 1% rise in interest rates would produce a decline of 4.5% in the Fund's value. Other factors such as changes in credit quality, prepayments, the shape of the yield curve and liquidity affect the net asset value of the Funds and may be correlated with changes in interest rates. These factors can exacerbate swings in the Fund's share prices during periods of volatile interest rate changes.
For a more detailed discussion of duration, see "Investment Objectives and Policies--Duration" in the Statement of Additional Information.
See "Securities and Techniques Used by the Funds--Foreign Securities
The following provides a summary of the securities and techniques used by the Funds. The Statement of Additional Information contains more detailed information about these investments and the risks associated with them.
U.S. GOVERNMENT SECURITIES
The Funds may invest in U.S. Government securities. U.S. Government securities include direct obligations issued by the United States Treasury, such as Treasury bills, certificates of indebtedness, notes, bonds and component parts of notes or bonds (including the principal of such obligations or the interest payments scheduled to be paid on such obligations). U.S. Government securities also include securities issued or guaranteed by U.S. Government agencies and instrumentalities that issue or guarantee securities, including, but not limited to, the Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal Financing Bank, and Student Loan Marketing Association.
Funds may also invest in Treasury Receipts. Treasury Receipts are not issued by the United States Treasury and, therefore, they are not U.S. Government securities.
All Treasury securities are backed by the full faith and credit of the United States. Obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some, such as the Federal Home Loan Banks, are backed by the right of the agency or instrumentality to borrow from the Treasury. Others, such as securities issued by FNMA, are supported only by the credit of the instrumentality and not by the Treasury. If the securities are not backed by the full faith and credit of the United States, the owner of the securities must look principally to the agency issuing the obligation for repayment and may not be able to assert a claim against the United States if the agency or instrumentality does not meet its commitment.
Among the U.S. Government securities that may be purchased by the Funds are certain "mortgage-backed securities" of GNMA, the Federal Home Loan Mortgage Corporation ("FHLMC") and FNMA. See the discussion under "Mortgage-Related Securities."
CORPORATE AND OTHER OBLIGATIONS
The Funds may invest in corporate debt securities, variable and floating rate debt securities and corporate commercial paper in the rating categories described above. Floating rate securities normally have a rate of interest which is set as a specific percentage of a designated base rate, such as the rate on Treasury bonds or bills or the prime rate at a major commercial bank. The interest rate on floating rate securities changes periodically when there is a change in the designated base rate. Variable rate securities provide for a specified periodic adjustment in the interest rate based on prevailing market rates.
The Funds may invest in corporate debt securities with contractual call provisions that permit the seller of the security to repurchase the security at a pre-determined price. The market price typically reflects the presence of a call provision.
Structured debentures and structured notes are hybrid instruments with characteristics of both bonds and swap agreements. Like a bond, these securities make regular coupon payments and generally have fixed principal amounts. However, the coupon payments are typically tied to a swap agreement which can be affected by changes in a variety of factors such as exchange rates, the shape of the yield curve and foreign interest rates. Because of these factors, structured debentures and structured notes can display price behavior that is more volatile than and often not correlated to other fixed-income securities.
The Funds may also invest in inverse floaters and tiered index bonds. An inverse floater is a type of derivative that bears a floating or variable interest rate that moves in the opposite direction to the interest rate on another security or index level. Changes in the interest rate of the other security or index inversely affect the residual interest rate paid on the inverse floater, with the result that the inverse floater's price will be considerably more volatile than that of a fixed-rate bond. Tiered index bonds are also a type of derivative instrument. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined "strike" rate, the interest rate on the tiered index bond remains fixed. If, however, the specified index or market rate rises above the "strike" rate, the interest rate on the tiered index bond will decrease. In general, the interest rates on tiered index bonds and inverse floaters move in the opposite direction of prevailing interest rates. The market for inverse floaters and tiered index bonds is relatively new. These corporate debt obligations may have characteristics similar to those of mortgage-related securities, but corporate debt obligations, unlike mortgage-related securities, are not subject to prepayment risk other than through contractual call provisions which generally impose a penalty for prepayment.
ASSET-BACKED SECURITIES
The Funds may invest in securities with principal and interest payouts backed by, or supported by, any of various types of assets. These assets typically include receivables related to the purchase of automobiles, credit card loans, and
home equity loans. These securities generally take the form of a structured type of security, including pass-through, pay-through, and stripped interest payout structures.
FOREIGN SECURITIES
Each Fund has the right to invest in foreign securities. Foreign economies may differ from the U.S. economy; individual foreign companies may differ from domestic companies in the same industry; and foreign currencies may be stronger or weaker than the U.S. dollar. The Adviser believes that the ability to invest abroad will enable the Funds to take advantage of these differences when they are favorable.
Fixed-income securities that may be purchased by the Funds include debt obligations issued or guaranteed by foreign governments, their subdivisions, agencies or instrumentalities, or by supranational entities that have been constituted by the governments of several countries to promote economic development, such as The World Bank and The Asian Development Bank. Foreign investment in certain foreign government debt is restricted or controlled to varying degrees.
The Funds may invest in fixed-income securities of issuers located in emerging foreign markets. Such markets generally include every country in the world other than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong Kong, Singapore, Korea and most Western European countries. From time to time, emerging markets have offered the opportunity for higher returns but involve a higher level of risk. Accordingly, the Adviser believes that the Funds' limited ability to invest in emerging markets throughout the world may enable the Funds to obtain a wider range of attractive investment opportunities. Emerging market securities include securities issued or guaranteed by governments, their agencies, instrumentalities or central banks ("sovereign debt"); securities of issuers organized and operated to restructure the investment characteristics of sovereign debt; securities of banks and other business entities; and securities denominated in or indexed to currencies of emerging markets. These securities include "Brady Bonds," which afford emerging market countries a means to restructure their outstanding commercial bank debt. Foreign governmental issuers of debt or the governmental authorities that control repayment of the debt may be unable or unwilling to repay principal or pay interest when due and all or a portion of the interest payments and/or principal repayment with respect to Brady Bonds may be uncollateralized.
Emerging market securities are generally considered to be of a credit quality below investment grade, even though they often are not rated by any nationally recognized statistical rating organizations. The Adviser seeks to reduce the risk associated with emerging market securities by limiting the amount of such securities held by the Funds, by the depth of its own credit analysis, and evaluation of political, economic, currency and other factors that may be pertinent.
There are risks in investing in emerging market and other foreign securities. See "Investment Risks--Risks of Investing in Emerging Market and Other Foreign Securities."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government securities or other collateral including mortgage-related products or corporate securities with commercial banks or broker-dealers, whereby the seller of a security agrees to repurchase the security from the Fund on an agreed-upon date in the future. While each Fund intends to be fully collateralized as to such agreements, and the collateral will be marked to market daily, if the person obligated to repurchase from the Fund defaults, there may be delays and expenses in liquidating the securities subject to the repurchase agreement, a decline in their value and a loss of interest income.
REVERSE REPURCHASE AGREEMENTS
The Funds may enter into reverse repurchase agreements, whereby a Fund sells securities concurrently with entering into an agreement to repurchase those securities at a later date at a fixed price. During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on those securities. Reverse repurchase agreements are speculative techniques involving leverage and are considered borrowings by the Fund for purposes of the percentage limitations applicable to borrowings.
BORROWING
As a fundamental policy, a Fund may borrow for temporary, emergency or investment purposes up to 10% of its total assets. This borrowing may be unsecured. Borrowing subjects a Fund to interest costs which may or may not be recovered by appreciation of the securities purchased, and can exaggerate the effect on net asset value of any increase or decrease in the market value of a Fund's portfolio. This is the speculative factor known as leverage.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, a Fund may lend its portfolio securities, provided: (i) the loan is secured continuously by collateral consisting of short-term, high quality debt securities, including U.S. Government securities, negotiable certificates of deposit, bankers' acceptances or letters of credit, maintained on a daily marked-to-market basis in an amount at least equal to the current market value of the securities loaned; (ii) the Fund may at any time call the loan and obtain the return of the securities loaned; (iii) the Fund will receive any interest or dividends paid on the loaned securities; and (iv) the
aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the Fund.
WHEN-ISSUED SECURITIES
The Funds may purchase securities on a when-issued or delayed-delivery basis, generally in connection with an underwriting or other offering. When-issued and delayed-delivery transactions occur when securities are bought with payment for and delivery of the securities scheduled to take place at a future time, beyond normal settlement dates, generally from 15 to 45 days after the transaction. The price that the Fund is obligated to pay on the settlement date may be different from the market value on that date. While securities may be sold prior to the settlement date, the Funds intend to purchase such securities with the purpose of actually acquiring them, unless a sale would be desirable for investment reasons. At the time the Fund makes a commitment to purchase a security on a when-issued basis, it will record the transaction and reflect the value of the security each day in determining the Fund's net asset value. The Fund will also establish a segregated account with its custodian in which it will hold cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, equal in value to its obligations for when-issued securities.
SHORT SALES
If a Fund anticipates that the price of a security will decline, it may sell the security "short" and borrow the same security from a broker or other institution to complete the sale. The Fund may make a profit or loss depending upon whether the market price of the security decreases or increases between the date of the short sale and the date on which the Fund must replace the borrowed security. Until the security is replaced, the Fund generally is required to pay to the lender amounts equal to any interest which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would also increase the cost of the security sold. The proceeds of the short sale will be retained by the broker (or by the Fund's custodian in a special custody account), to the extent necessary to meet the margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid high-grade debt securities at such a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short and (ii) the amount deposited in the segregated account plus the amount deposited with the broker as collateral will not be less than the market value of the security at the time it was sold short.
A Fund may not make short sales of securities or maintain a short position if more than 25% of the Fund's net assets (taken at current value) are held as collateral for such sales at any one time.
MORTGAGE-RELATED SECURITIES
The Funds may invest in mortgage-related securities, including mortgage pass-through securities and collateralized mortgage obligations. Mortgage pass-through securities are securities representing interests in pools of mortgages in which payments of both interest and principal on the securities are generally made monthly, in effect "passing through" monthly payments made by the individual borrowers on the residential mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). For a discussion of certain risks associated with investment in mortgage-related securities, including their volatility, see "Investment Risks--Risks of Investing in Fixed Income Securities."
Payment of principal and interest on some mortgage-related securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by GNMA) or by agencies or instrumentalities of the U S. Government (in the case of securities guaranteed by FNMA or the FHLMC, which are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations). Mortgage pass-through securities created by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) 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.
Collateralized mortgage obligations ("CMOs"), including CMOs that have elected to be treated for federal income tax purposes as Real Estate Mortgage Investment Conduits ("REMICs"), are hybrid instruments with characteristics of both bonds and mortgage pass-through securities. Similar to a bond, interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of securities guaranteed by GNMA, FHLMC or FNMA or of mortgage pass-through securities created by non-governmental issuers. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after earlier classes have been retired.
Other mortgage-related securities include those that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property, such as
CMO residuals, stripped mortgage-backed securities, variable rate securities (including inverse floaters), or tiered index bonds and may be structured in classes with rights to receive varying proportions of principal and interest. Stripped mortgage-backed securities are derivative, multi-class mortgage securities. The Funds may invest in stripped mortgage-backed securities issued by the U.S. Government, its agencies and instrumentalities.
Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yields to maturity on IOs and POs are sensitive to the rate of principal repayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than expected prepayments of principal, the yield on POs could be materially adversely affected. Such securities will be considered liquid only if so determined in accordance with guidelines established by the Trustees. The Funds also may invest in stripped mortgage-backed securities that are privately issued. These securities will be considered illiquid for purposes of each Fund's limit on illiquid securities.
CMOs and other mortgage-related securities that are issued or guaranteed by the U.S. Government or by any of its agencies or instrumentalities will be considered U.S. Government securities for purposes of applying a Fund's diversification tests. Generally, the entity that has the ultimate responsibility for the payment of interest and principal on a security is deemed to be the issuer of an obligation.
OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities (including tiered index bonds and inverse floaters) which may be purchased by the Funds, the Funds may utilize certain other financial instruments with performance derived from the performance of an underlying asset ("derivatives"). The Funds may purchase and write call and put options on securities, securities indexes and on foreign currencies, and enter into futures contracts and use options on futures contracts. The Funds also may enter into swap agreements with other institutional investors with respect to foreign currencies, interest rates, and securities indexes. The Funds may use these techniques to hedge against changes in interest rates, foreign currency exchange rates or securities prices or as part of their overall investment strategies. Each Fund will maintain segregated accounts consisting of cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily (or, as permitted by applicable regulation, enter into certain offsetting positions), to cover its obligations under options, futures contracts and swap agreements to avoid leveraging of the Fund. See "Investment Risks--Risks of Using Certain Derivatives."
The Funds may buy or sell interest rate futures contracts, options on interest rate futures contracts and options on debt securities for the purpose of hedging against changes in the value of securities which a Fund owns or anticipates purchasing due to anticipated changes in interest rates. The Funds also may engage in currency exchange transactions by means of buying or selling foreign currency on a spot basis, entering into forward foreign currency exchange contracts, and buying and selling foreign currency options, futures and options on futures. Foreign currency exchange transactions may be entered into for the purpose of hedging against foreign currency exchange risk arising from the Funds' investment or anticipated investment in securities denominated in foreign currencies.
A Fund will not enter into futures contracts or options thereon for non-hedging purposes if, immediately thereafter, the aggregate initial margin deposits on the Fund's futures positions and premiums paid for options thereon would exceed 5% of the liquidation value of the Fund's total assets. There is no other percentage limitation on a Fund's use of options, futures and options thereon, except for the limitation on foreign currency option contracts described below.
Also, the Funds may enter into interest rate, index and currency exchange rate swap agreements to attempt to obtain a particular desired return at a lower cost than if the Fund had invested directly in an instrument that yielded that desired return. In a standard swap agreement, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on a particular predetermined investment or investments. Swap agreements are subject to the Funds' overall limit that no more than 15% of net assets may be invested in illiquid securities, and a Fund will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Fund's assets.
The Funds may purchase foreign currency options or enter into forward foreign currency exchange contracts for the purpose of hedging against the effect that currency fluctuations will have on the value of Fund liabilities, such as known or expected redemptions or the payment of any declared dividends. No Fund will enter into foreign currency option contracts if the premiums on such options exceed 5% of the Fund's total assets. See "Investment Objectives and Policies--Derivative Instruments" in the Statement of Additional Information.
The investment practices described above involve certain risks. The net asset value of any Funds may increase or decrease for many reasons. These include changes in the market prices of portfolio securities, the success or failure (and the associated costs) of investment strategies used by the Adviser in seeking to achieve a Fund's investment objective, and the payment of dividends and distributions to shareholders. The following provides a summary of the more significant risks associated with investing in the Funds. The Statement of Additional Information contains more detailed information about these investments and the risks that are associated with them.
RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk considerations not typically associated with investing in securities of U.S. issuers, including: (a) currency devaluations and other currency exchange rate fluctuations; (b) political uncertainty and instability; (c) more substantial government involvement in the economy; (d) higher rates of inflation; (e) less government supervision and regulation of the securities markets and participants in those markets; (f) controls on foreign investment and limitations on repatriation of invested capital and on a Fund's ability to exchange local currencies for U.S. dollars; (g) greater price volatility, substantially less liquidity and significantly smaller capitalization of securities markets; (h) absence of uniform accounting and auditing standards; (i) generally higher commission expenses; (j) delay in settlement of securities transactions; and (k) greater difficulty in enforcing shareholder rights and remedies.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Funds are subject primarily to interest rate and credit risk. Interest rate risk is the potential for a decline in bond prices due to rising interest rates. In general, bond prices vary inversely with interest rates. The change in bond price depends on several factors, including the bond's maturity date. In general, bonds with longer maturities are more sensitive to changes in interest rates than bonds with shorter maturities. Credit risk is the possibility that a bond issuer will fail to make timely payments of interest or principal to a Fund.
The Funds may invest in mortgage- and asset-backed securities. The yield characteristics of mortgage-backed and asset backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if a Fund purchases such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if a Fund purchases these securities at a discount, faster than expected prepayments will increase yield to maturity, while slower than expected prepayments will reduce yield to maturity. Although the extent of prepayments on a pool of mortgage loans depends on various economic and other factors, as a general rule, prepayments on fixed-rate mortgage loans will increase during a period of falling interest rates and decrease during a period of rising interest rates. Asset-backed securities, although less likely to experience the same prepayment rates as mortgage-backed securities, may respond to certain of the same factors influencing prepayments, while at other times different factors will predominate.
Mortgage-backed securities and asset-backed securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed-income securities from declining interest rates because of the risk of prepayment.
The Funds may invest in stripped mortgage- or asset-backed securities, which receive differing proportions of the interest and principal payments from the underlying assets. The market value of such securities generally is more sensitive to changes in prepayment and interest rates than is the case with traditional mortgage- and asset-backed securities, and in some cases the market value may be extremely volatile. With respect to certain stripped securities, such as IO and PO classes, a rate of prepayment that is faster or slower than anticipated may result in a Fund failing to recover all or a portion of its investment, even though the securities are rated investment grade. Certain of the stripped mortgage- and asset-backed securities held by the Funds are considered to be illiquid under guidelines established by the Trustees.
The Funds may invest a portion of their assets in non-investment grade debt securities, commonly referred to as "junk bonds." Low-rated and comparable unrated securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as speculative with respect to the issuer's capacity to pay interest and to repay principal. The market values of certain of these securities tend to be more sensitive to individual corporate development and changes in economic conditions than higher quality bonds. In addition, low-rated and comparable unrated securities tend to be less marketable than higher-quality debt securities because the market for them is not as broad or active. The lack of a liquid secondary market may have an adverse effect on market price and a Fund's ability to sell particular securities.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Adviser's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (i) dependence on the Adviser's ability to predict
correctly movements in the direction of interest rates and securities prices;
(ii) imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being hedged;
(iii) the fact that skills needed to use these strategies are different from
those needed to select portfolio securities; (iv) the absence of a liquid
secondary market for any particular instrument at any time; (v) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (vi) the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell the security at a disadvantageous
time, due to the requirement that the Fund maintain "cover" or segregate
securities in connection with hedging transactions. The loss from investing in
futures transactions and other derivatives is potentially unlimited. There also
is no assurance that a liquid secondary market will exist for futures contracts
and options thereon in which a Fund may invest. See "Investment Objectives and
Policies--Derivative Instruments" in the Statement of Additional Information.
Each Fund is subject to certain investment restrictions that are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its fundamental policies, a Fund may not (i) with respect to 75% of its
total assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities) (ii) with respect to 75% of its total assets, purchase more than 10%
of the outstanding voting securities of any one issuer or (iii) invest more than
25% of its total assets (determined at the time of investment) in one or more
issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. As a matter of operating policy (though
not a fundamental policy), the Funds limit investments in illiquid securities to
no more than 15% of the value of their net assets. Illiquid securities include:
(i) securities for which there is no readily available market; (ii) securities
which may be subject to legal restrictions (so-called "restricted securities")
other than Rule 144A securities noted below; (iii) repurchase agreements having
more than seven days to maturity; (iv) fixed time deposits subject to withdrawal
penalties (other than those with a term of less than seven days); and (v)
foreign securities subject to repatriation restrictions on the sale proceeds
other than minor settlement procedures. Restricted securities do not include
those which meet the requirements of Rule 144A under the Securities Act of 1933,
as amended, and which the Trustees have determined to be liquid based on the
applicable trading markets and the availability of reliable price information.
ORGANIZATION AND VOTING RIGHTS
The Trust was organized on December 9, 1996 as a Delaware business trust. It is a diversified open-end, management investment company currently consisting of three separate series. The Trust's Board Of Trustees decides matters of general policy and reviews the activities of the Adviser. The Trust's officers conduct and supervise the daily business operations of the Trust. Each Fund is a series of shares of the Trust, having separate assets and liabilities. The Board of Trustees may, at its own discretion, create additional series of shares and classes within series.
Generally, the Funds will not hold an annual meeting of shareholders unless required by the 1940 Act. Shareholders have one vote per dollar net asset value of shares owned. Matters submitted to shareholders must be approved by the requisite vote of each Fund, unless it is clear that the interests of each Fund in the matter are identical or the matter does not affect a Fund. At the request of the holders of at least 10% of the shares, the Trust will hold a meeting to vote on the removal of a Trustee, which can occur by a vote of more than two-thirds of the outstanding shares. Shareholders holding the lesser of $25,000 worth or one percent of a Fund's shares may then advise the Trustees in writing that they wish to communicate with other shareholders for the purpose of requesting a meeting to remove a Trustee. The Trustees will then, if requested by the applicants, mail at the applicants' expense the applicants' communications to all other shareholders.
THE ADVISER
General. The Adviser is located at 10880 Wilshire Blvd., Suite 2020, Los Angeles, California 90024, and acts as the investment adviser to the Funds and generally administers the affairs of the Trust. Subject to the direction and control of the Board of Trustees, the Adviser supervises and arranges the purchase and sale of securities held in the portfolios of the Funds. The Adviser, Metropolitan West Asset Management, LLC, is a registered investment adviser organized as a California limited liability company in 1996. The Adviser is owned in part by Metropolitan West Securities, Inc., a registered investment adviser and broker-dealer. The Adviser is in the business of furnishing investment advice to institutional and private clients and currently manages approximately [$___] billion for such clients. The Adviser has not previously managed a mutual fund. The Adviser's affiliate, Metropolitan West Securities, Inc., has managed fixed-income investments since 1992 and currently manages approximately $_______ billion for its clients.
Advisory Fees. Under the Investment Advisory Agreement relating to the TOTAL RETURN BOND FUND, the Trust pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 0.55% of the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the LOW DURATION BOND FUND, the Trust pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 0.48% of the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the SHORT-TERM INVESTMENT FUND, the Trust pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 0.40% of the Fund's average daily net assets.
Rule 12b-1 Fee. The Funds have a plan of distribution or "12b-1 Plan" under which they may finance activities primarily intended to sell shares, provided the categories of expenses are approved in advance by the board and the expenses paid under the plan were incurred within the last 12 months and accrued while the plan is in effect. Expenditures by the fund under the plan may not exceed 0.25% of its average net assets annually (all of which may be for service fees). See "Summary of Expenses" below.
Other Expenses. In addition to the fee payable to the Adviser, each Fund is responsible for its operating expenses including; (i) interest and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses of the Trust's Trustees other than those affiliated with the Adviser; (v) legal and audit expenses; (vi) fees and expenses of the Fund's custodian and any subcustodian, shareholder servicing or transfer agent and accounting services agent; (vii) expenses incident to the issuance of its shares, including issuance on the payment of, or reinvestment of, dividends; (viii) fees and expenses incident to the registration under federal or state securities laws of the Trust or its shares; (ix) expenses of preparing, printing and mailing reports and notices and proxy material to shareholders of the Trust; (x) all other expenses incident to holding meetings of the Trust's shareholders; (xi) dues or assessments of or contributions to the Investment Company Institute or any successor; and (xii) such non-recurring expenses as may arise, including litigation affecting the Trust and the legal obligations which the Trust may have to indemnify its officers and Trustees with respect thereto.
Compensation of other Parties. The Adviser may in its discretion and out of its own funds compensate third parties for the sale and marketing of the Fund. The Advisor also may use its own funds to sponsor seminars and educational programs on the Funds for financial intermediaries and shareholders.
Although not required to do so, the Adviser has voluntarily agreed to limit the annual expenses of the TOTAL RETURN BOND FUND to 0.65%, the LOW DURATION BOND FUND to 0.58% and the SHORT-TERM INVESTMENT FUND to 0.50% of those Funds' respective average net assets. The Adviser will give shareholders at least 30 days' notice of any decision to change this policy.
The Adviser also manages individual investment advisory accounts. The Adviser credits the fees charged to individual advisory accounts by the amount of the investment advisory fee and expenses charged to that portion of the client's assets that are invested in any Fund.
The Investment Advisory Agreement permits the Adviser to allocate brokerage based on sales of shares of Funds managed by the Adviser. No such allocation has been made to date.
THE ADMINISTRATOR
FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903 serves as administrator to the Trust pursuant to a Fund Administration Servicing Agreement.
THE DISTRIBUTOR
FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903 serves as principal underwriter to the Trust pursuant to a Distribution Agreement.
PORTFOLIO MANAGERS
The portfolio managers who have day-to-day responsibility for the management of the Funds' portfolios are listed below, together with their biographical information for the past five years.
Scott B. Dubchansky has been the Chief Executive Officer of the Adviser since September 1996 and a Managing Director-Fixed Income of Metropolitan West Securities, Inc., an affiliate of the Adviser, from August 1996 through December 1996 while the Adviser was in formation. From August 1992 through August 1996, Mr. Dubchansky was a Senior Vice President of Donaldson Lufkin Jenrette in the Fixed Income division. Prior to August 1992, Mr. Dubchansky was Senior Vice President fixed income sales at Kidder Peabody and responsible for fixed income sales to institutional clients. Mr. Dubchansky, together with Mr. Rivelle, manages the SHORT TERM INVESTMENT FUND.
Stephen Kane has been a portfolio manager with the Adviser since September 1996 and a portfolio manager with Metropolitan West Securities, Inc. from August 1996 through December 1996 while the Adviser was in formation. From November 1995 until July 1996, Mr. Kane was a portfolio manager with Hotchkis and Wiley in Los Angeles. From July 1992 until October 1995, he was an account manager with Pacific Investment Management Co. ("PIMCO") in Newport Beach, California. Before then, Mr. Kane was a Merchant Banking Associate with Union Bank in Los Angeles. Mr. Kane, together with Messrs. Landmann and Rivelle, manages the TOTAL RETURN BOND FUND.
Laird R. Landmann has been a Managing Director of the Adviser since September 1996 and a Managing Director-Fixed Income of Metropolitan West Securities, Inc. from August 1996 through December 1996 while the Adviser was in formation. From November 1992 until July 1996, Mr. Landmann was a principal and Co-Director of Fixed Income with Hotchkis and Wiley in Los Angeles. Before then, he was a portfolio manager with PIMCO. Mr. Landmann, together with Messrs. Kane and Rivelle, manages the TOTAL RETURN BOND FUND and the LOW DURATION BOND FUND.
Tad Rivelle has been the Chief Investment Officer and a Managing Director of the Adviser since September 1996 and a Managing Director-Fixed Income of Metropolitan West Securities, Inc. from August 1996 through December 1996 while the Adviser was in formation. From November 1992 until July 1996, Mr. Rivelle was a principal and Co-Director of Fixed Income with Hotchkis and Wiley in Los Angeles. Before then, he was a portfolio manager with PIMCO in Newport Beach, California. Mr. Rivelle, together with Messrs. Kane and Landmann, manages the TOTAL RETURN BOND FUND and the LOW DURATION BOND FUND. Mr. Rivelle, together with Mr. Dubchansky, also manages the SHORT TERM INVESTMENT FUND.
The minimum initial investment in each Fund is $5,000. For retirement plan investments the initial minimum is $1,000. The Trust reserves the right to reject any order and to waive its minimum investment requirements.
Investors may invest in any Fund by wiring the amount to be invested to Metropolitan West Funds in care of FPS Services, Inc. ("Transfer Agent"), at the following address: 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903.
For further credit to Metropolitan West Funds
[Name of Fund]
Account # [Shareholder account number]
Prior to wiring any funds, the shareholder should call 1-800-_________________ to notify us of the wire to insure proper credit when the wire is received. If the wire represents an initial investment, the investor should mail an application form to the Transfer Agent by regular mail to:
3200 Horizon Drive
P.O. Box 61503
King of Prussia, Pennsylvania 19406-0903
Investors may also purchase shares by sending a check payable to Metropolitan West Funds, together with the application form to the address above.
Checks should be drawn on a U.S. bank and must be payable in U.S. dollars. Shares of a Fund will be purchased for the account of the investor at the net asset value next determined after receipt by the Transfer Agent, or an authorized sub-agent, of the investor's wire or check. In the event a check is not honored by the investor's bank, the investor will be liable for any loss sustained by the Fund, as well as a $15 service charge imposed by the Transfer Agent. Forms for additional contributions by check or change of address are provided on account statements.
The Trust may also accept orders from certain qualified institutions, with payment made to the Fund at a later time. The Adviser is responsible for insuring that such payment is made on a timely basis. A broker-dealer which effects such a purchase for an investor may charge the investor a
reasonable service fee, no part of which will be paid to the Fund or the Adviser.
The Adviser may make payments out of its own resources to dealers and other persons who distribute shares of the Funds.
Shareholder inquiries should be directed to the Trust.
The Trust does not consider the U.S. Postal Service or other independent delivery service to be its agent. Therefore, deposit in the mail or with such service does not constitute receipt by the Transfer Agent.
NET ASSET VALUE
The net asset value per share of each Fund is determined on each day that the New York Stock Exchange is open for trading, as of the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time). The net asset value per share is the value of the Fund's assets, less its liabilities, divided by the number of shares of the Fund outstanding. The value of a Fund's portfolio securities is determined on the basis of the market value of such securities or, if market quotations are not readily available, at fair value under guidelines established by the Trustees. Short-term investments maturing in less than 60 days are valued at amortized cost which the Board has determined to equal fair value. See "Net Asset Value" in the Statement of Additional Information for further information.
REGULAR REDEMPTION
A shareholder may redeem shares at any time by delivering instructions by regular mail to the Transfer Agent. If you would like to send a package via overnight mail to the Transfer Agent, the address is 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennslyvania 19406-0903.
The redemption request should identify the Fund, specify the number of shares to be redeemed and be signed by all registered owners exactly as the account is registered, and it will not be accepted unless it contains all required documents. The shares will be redeemed at the net asset value next determined after receipt of the request by the Transfer Agent. A redemption of shares is a sale of shares and a shareholder may realize a taxable gain or loss.
TELEPHONE REDEMPTION
You may redeem shares by telephone and have the proceeds wired to the bank
account as stated on the Transfer Agent's records. In order to redeem by
telephone, you must select the appropriate box on the Account Application. In
order to arrange for telephone redemptions after an account has been opened or
to change the bank account or address designated to receive redemption proceeds,
a written request must be sent to the Trust. The request must be signed by each
shareholder of the account, with the signatures guaranteed as described above.
Once this feature has been requested, shares may be redeemed by calling
[Investor Services] at ___________________ and giving the account name, account
number, and amount of the redemption. Joint accounts require only one
shareholder to call. If redemption proceeds are to be mailed or wired to the
shareholder's bank account, the bank involved must be a commercial bank located
within the United States.
If an investor redeems shares by telephone and requests wire payment, payment of the redemption proceeds will normally be made in federal funds on the next business day provided that the redemption order is received by the Transfer Agent before 3:00 p.m. (Central time). There will be a $10 charge for all wire redemptions.
The Funds reserve the right to reject any redemption request and the redemption privilege may be modified or terminated at any time on 30-days' notice to shareholders. In an effort to prevent unauthorized or fraudulent redemption requests by telephone, the Trust and the Transfer Agent employ reasonable procedures specified by the Funds to confirm that such instructions are genuine. Among the procedures used to determine authenticity, investors electing to redeem or exchange by telephone will be required to provide their account number or other identifying information. All such telephone transactions will be tape recorded and confirmed in writing to the shareholder. The Trust may implement other procedures from time to time. If reasonable procedures are not implemented, the Trust and/or the Transfer Agent may be liable for any loss due to unauthorized or fraudulent transactions. In all other cases, the shareholder is liable for any loss for unauthorized transactions. In periods of severe market or economic conditions, the telephone redemption of shares may be difficult to implement and shareholders should redeem shares by writing to the Transfer Agent at the address listed above. If for any other reason a shareholder is unable to redeem by telephone, shareholders should redeem shares by writing to the Transfer Agent at the address listed above.
TELEPHONE EXCHANGE
Shareholders are permitted to exchange their shares in a Fund for shares of other Funds in the Trust, provided that such shares may legally be sold in the state of the investor's residence, the shareholder has selected the appropriate box on the Account Application, and shares are held in non-certificate form. In order to arrange for telephone exchange after an account has been opened, a written
request must be sent to the Transfer Agent at its address listed above. The request must be signed by each shareholder of the account, with the signatures guaranteed as described above. Shares exchanged for shares of another Fund will be priced at their respective net asset values. In order to request an exchange by telephone, an investor must give the account name, account number and the amount or number of shares to be exchanged. An exchange of shares is treated for federal income tax purposes as a redemption (sale) of shares given in exchange by the shareholder and an exchanging shareholder may, therefore, realize a taxable gain or loss in connection with the exchange.
Exchange requests should be directed to the Transfer Agent at 1-800-_____________________. Shares subject to an exchange must have a current value of at least $1,000.
The Funds reserve the right to reject any exchange request and the exchange privilege may be modified or terminated at any time on 30-days' notice to shareholders. In periods of severe market or economic conditions, the telephone exchange of shares may be difficult to implement and shareholders should redeem shares by writing to the Transfer Agent at the address listed above.
In an effort to prevent unauthorized or fraudulent redemption requests by telephone, the Trust and the Transfer Agent employ reasonable procedures specified by the Funds to confirm that such instructions are genuine. Among the procedures used to determine authenticity, investors electing to exchange by telephone will be required to provide their account number. All such telephone transactions will be tape recorded and confirmed in writing to the shareholder. The Trust may implement other procedures from time to time. If reasonable procedures are not implemented, the Trust and/or the Transfer Agent may be liable for any loss due to unauthorized or fraudulent transactions. In all other cases, the shareholder is liable for any loss for unauthorized transactions.
PAYMENTS
After the Transfer Agent has received the redemption request and all proper documents, payment for shares tendered will generally be made within three business days. Payment may be delayed under unusual circumstances, as specified in the 1940 Act. Payment will be sent only to shareholders at the address of record. In addition, if the shares being redeemed were purchased by check, the Trust reserves the right to delay up to 12 days payment of the redemption proceeds until it is satisfied that the check has been honored by the investor's bank.
REDEMPTION IN KIND
If the Board of Trustees determines that it would be detrimental to the best interests of the remaining shareholders of any Fund to make payment wholly in cash, the Fund may pay the redemption price in part by a distribution in kind of readily marketable securities from the portfolio of that Fund, in lieu of cash. The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which each Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or one percent of the net asset value of the Fund during any 90-day period for any one shareholder. Should redemptions by any shareholder exceed such limitation the Fund will have the option of redeeming the excess in cash or in kind. If shares are redeemed in kind, the redeeming shareholder would incur brokerage costs in converting the assets into cash.
REDEMPTIONS OF SMALL ACCOUNTS
A Fund may redeem all of the shares of any shareholder whose account has declined to a net asset value of less than $500, as a result of a transfer or redemption, at the net asset value determined as of the close of business on the business day preceding the sending of the proceeds of such redemption. The Trust would give shareholders whose shares were being redeemed 60-days' prior written warning in which to purchase sufficient shares to avoid such redemption.
REPURCHASES
The Trust may accept orders for the repurchase of its shares from certain qualified institutions. Such an institution may charge the shareholder a fee for its services. The Trust may also waive or modify its requirements as to proper form for such institutions.
WITHHOLDINGS; REPORTING
The Fund may be required to withhold federal income tax, at a rate of 31%, from proceeds of redemptions, if the shareholder is subject to backup withholding. Failure to provide a certified tax identification number at the time an account is opened will cause tax to be withheld. A Fund also may be required to report redemptions to the Internal Revenue Service.
The Funds expect to declare dividends daily and pay them monthly to shareholders.
Distributions from net realized short-term gains, if any, and distributions from any net capital gains (i.e., the excess of net long-term capital gains over net short-term capital losses) realized through October 31st of each year and not previously paid out will be paid out after that date; each Fund may also pay supplemental distributions after the end of the Fund's fiscal year. Dividends and distributions are
paid in full and fractional shares of each Fund based on the net asset value per share at the close of business on the record date, unless the shareholder requests, in writing to the Trust, payment in cash. The Trust will notify each shareholder after the close of its fiscal year of both the dollar amount and the tax status of that year's distributions.
Each Fund intends to elect and qualify to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1980, as amended (the "Code"). Each Fund is taxed as a separate entity under Subchapter M and must qualify on a separate basis. If so qualified, each Fund will not be subject to federal income taxes on its net investment income and capital gains, if any, realized during any fiscal year which it distributes to its shareholders provided that at least 90% of its net investment income earned in the fiscal year is distributed. All dividends from net investment income together with distributions of short-term capital gains will be taxable as ordinary income to the shareholders even though paid in additional shares. Any net capital gains ("capital gains distributions") distributed to shareholders are taxable as long-term capital gains to the shareholders regardless of the length of time a shareholder has owned his shares.
Any gain or loss realized upon a sale or redemption of Fund shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. Any such loss, however, on shares that are held for six months or less will be treated as long-term capital loss to the extent of any capital gain distributions received by the shareholder.
Dividends, interest and gains received by a Fund may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate these foreign taxes.
Distributions will be taxable in the year in which they are received, except for certain distributions received in January, which will be taxable as if received the prior December. Shareholders of a Fund will be informed annually of the amount and nature of the Fund's distributions, including the portions, if any, that qualify for the dividends-received deduction, that are capital gain distributions, and that are a return of capital.
Additional information about taxes is set forth in the Statement of Additional Information. The foregoing discussion has been prepared by the management of the Funds, and does not purport to be a complete description of all tax implications of an investment in a Fund. Shareholders should consult their own advisors concerning the application of federal, state and local tax laws to their particular situations.
From time to time the Funds may quote average annual total return ("standardized return") in advertisements or promotional materials. Advertisements and promotional materials reflecting standardized return ("performance advertisements") will show percentage rates reflecting the average annual change in the value of an assumed initial investment in a Fund at the end of one-, five- and ten-year periods. If such periods have not yet elapsed, data will be given as of the end of a shorter period corresponding to the duration of the Fund. Standardized return assumes the reinvestment of all dividends and capital gain distributions.
The Funds also may refer in advertising and promotional materials to yield. A Fund's yield shows the rate of income that a Fund earns on its investments, expressed as a percentage of the net asset value of Fund shares. A Fund calculates yield by determining the income it earned from its portfolio investments for a specified 30-day period (net of expenses), dividing such income by the average number of Fund shares outstanding, and expressing the result as an annualized percentage based on the net asset value at the end of that 30-day period. Yield accounting methods differ from the methods used for other accounting purposes; accordingly, a Fund's yield may not equal the dividend income actually paid to investors or the income reported in the Fund's financial statements.
In addition to standardized return, performance advertisements also may include other total return performance data ("non-standardized return"). Non-standardized return may be quoted for the same or different periods as those for which standardized return is quoted and may consist of aggregate or average annual percentage rate of return, actual year-by-year rates or any combination thereof. Further performance information is contained in the Funds' annual reports to shareholders, which may be obtained without cost.
All data included in performance advertisements will reflect past performance and are not indicative of future results. The investment return and principal value of an investment in a Fund will fluctuate, and an investor's proceeds upon redeeming Fund shares may be more or less than the original cost of the shares.
MOODY'S INVESTORS SERVICE
BOND RATINGS:
"Aaa"--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-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 which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "l", "2" and "3" in each generic rating classification from Aa through B. The modifier "l" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that the company ranks in the lower end of that generic rating category.
"A"--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment some time in the future.
"Baa"--Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
"Ba"--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
"B"--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions regarding the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
"P-1"--Issuers rated "Prime-l" or "P-1" (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations.
"P-2"--Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATING GROUP
BOND RATINGS:
"AAA"--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
"AA"--Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree.
"A"--Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
"BBB"--Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits 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.
Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market.
"A-1"--This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) designation.
"A-2"--Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1.
FITCH INVESTORS SERVICES, INC.
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate 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 is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
"BB"--Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements.
"B"--Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category.
SHORT-TERM DEBT RATINGS:
"F-1+"--Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
"F-1"--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"--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 for issues assigned "F-1+" or "F-1" ratings.
DUFF & PHELPS CREDIT RATING CO.
BOND RATINGS:
The following summarizes the ratings used by Duff & Phelps for long-term debt:
"AAA"--Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt.
"AA+," "AA," "AA-"--High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
"A+," "A," "A-"--Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress.
"BBB+," "BBB," "BBB-"--Below average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles.
"BB+," "BB," "BB-"--Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category.
"B+," "B," "B-"--Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade.
SHORT-TERM DEBT RATINGS:
"D-1+"--Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding and safety is just below risk-free U.S. Treasury short-term obligations.
"D-1"--Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.
"D-1-"--High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small.
"D-2"--Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small.
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Metropolitan West Total Return Bond Fund Metropolitan West Low Duration Bond Fund Metropolitan West Short-Term Investment Fund
[GRAPHIC OMITTED]
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may any offers to buy be accepted prior to the time the registration statement becomes effective. This Statement of Additional Information does not constitute a prospectus.
SUBJECT TO COMPLETION -- Dated March __, 1997
METROPOLITAN WEST FUNDS
Statement of Additional Information
__________________, 1997
This Statement of Additional Information is not a prospectus, and it should be read in conjunction with the prospectus dated ____________________, 1997 of the Total Return Bond Fund (the "Total Return Bond Fund"), the Low Duration Bond Fund (the "Low Duration Bond Fund") and the Short-Term Investment Fund (the "Short-Term Investment Fund"). Copies of the prospectus may be obtained at no charge from the Trust by writing to Metropolitan West Funds, 10880 Wilshire Boulevard, Suite 2020, Los Angeles, CA 90024. In this Statement of Additional Information, the Total Return Bond Fund, the Low Duration Bond Fund and the Short-Term Investment Fund may be referred to collectively as "the Funds" or individually as "a Fund." Metropolitan West Asset Management, LLC (the "Adviser") is the investment adviser to the Funds.
TABLE OF CONTENTS
Cross reference
to page in the
prospectus for the Funds
------------------------
Investment Objectives and Policies B-2 6
Investment Restrictions B-2 13
Repurchase Agreements B-3 9
U.S. Government Securities B-3 8
Corporate Debt Securities B-4 8
Convertible Securities B-4 6
Mortgage-Related Securities B-5 10
Asset-backed Securities B-8 9
Risk Factors Relating to Investing in Mortgage-Related and B-8 12
Asset-Backed Securities
Duration B-9 7
Derivative Instruments B-10 11
Foreign Securities B-13 9
Foreign Currency Options and Related Risks B-15 11
Forward Foreign Currency Exchange Contracts B-15 11
Risk Factors Relating to Investing in High Yield Securities B-18 12
Illiquid Securities B-18 13
Management B-19 13
Portfolio Transactions and Brokerage B-20 14
Administrator B-20 14
Principal Underwriter B-21 14
Net Asset Value B-22 16
Dividends and Tax Status B-23 18
Performance Information B-25 19
General Information About the Trust B-26 19
Additional Information B-26
Financial Statements B-27
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Investment Objectives and Policies
The investment objective of the Total Return Bond Fund is to maximize long-term total return.
The investment objective of the Low Duration Bond Fund is to maximize current income, consistent with preservation of capital. Capital appreciation is a secondary consideration of the Fund.
The investment objective of the Short-Term Investment Fund is to maximize current income, consistent with the preservation of capital. Capital appreciation is a secondary consideration of the Fund.
The portfolio, and strategies with respect to the composition of each Fund, are described in the Funds' prospectus.
Investment Restrictions
Each Fund has adopted the following restrictions (in addition to those indicated in the prospectus) as fundamental policies, which may not be changed without the favorable vote of the holders of a "majority" of that Fund's outstanding voting securities, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of a Fund's outstanding voting securities means the vote of the holders of the lesser of (i) 67% of the shares of the Fund represented at a meeting at which the holders of more than 50% of its outstanding shares are represented or (ii) more than 50% of the outstanding shares.
Except as noted, no Fund may:
1. Purchase any security, other than obligations of the U.S. Government, its agencies, or instrumentalities ("U.S. Government securities"), if as a result: (i) with respect to 75% of its total assets, more than 5% of the Fund's total assets (determined at the time of investment) would then be invested in securities of a single issuer, or (ii) more than 25% of the Fund's total assets (determined at the time of investment) would be invested in one or more issuers having their principal business activities in a single industry.
2. Purchase securities on margin (but any Fund may obtain such short-term credits as may be necessary for the clearance of transactions), provided that the deposit or payment by a Fund of initial or maintenance margin in connection with futures or options is not considered the purchase of a security on margin.
3. Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short (short sale against-the-box), and unless not more than 25% of the Fund's net assets (taken at current value) is held as collateral for such sales at any one time.
4. Issue senior securities, borrow money or pledge its assets, except that any Fund may borrow from a bank for temporary or emergency purposes in amounts not exceeding 10% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) and pledge its assets to secure such borrowings. The Funds may borrow from banks or enter into reverse repurchase agreements and pledge assets in connection therewith, but only if immediately after each borrowing there is asset coverage of at least 300%.
5. Purchase any security (other than U.S. Government securities) if as a result, with respect to 75% of the Fund's total assets, the Fund would then hold more than 10% of the outstanding voting securities of an issuer.
6. Act as an underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws.
7. Make investments for the purpose of exercising control or management.
8. Participate on a joint or joint and several basis in any trading account in securities.
In addition, the Trust has adopted the following non-fundamental policies so that no Fund will: (a) invest in securities of any issuer if, to the knowledge of the Trust, any officer or Trustee of the Trust or managing director of the Adviser owns more than 1/2 of 1% of the outstanding securities of such issuer, and such Trustees and managing directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer; (b) invest in interests in oil, gas, or other mineral leases or exploration of development programs, although it may invest in the common stocks of companies which invest in or sponsor such programs; (c) invest more than 15% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended ("Securities Act") that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted securities will not exceed 15% of total assets; and (d) purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or other acquisition of assets, unless immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company would be owned by the Fund, (ii) 5% of the Fund's total assets would be invested in any one such company, and (iii) 10% of the Fund's total assets would be invested in such securities.
Repurchase Agreements
A repurchase transaction occurs when, at the time a Fund purchases a security, that Fund also resells it to a vendor (normally a commercial bank or broker-dealer) and must deliver the security (and/or securities substituted for them under the repurchase agreement) to the vendor on an agreed-upon date in the future. Such securities, including any securities so substituted, are referred to as the "Resold Securities." The resale price is in excess of the purchase price in that it reflects an agreed-upon market interest rate effective for the period of time during which the Fund's money is invested in the Resold Securities. The majority of these transactions run from day to day, and the delivery pursuant to the resale typically will occur within one to five days of the purchase. The Fund's risk is limited to the ability of the vendor to pay the agreed-upon sum at the delivery date; in the event of bankruptcy or other default by the vendor, there may be possible delays and expenses in liquidating the instrument purchased, decline in its value and loss of interest. The Adviser will consider the creditworthiness of any vendor of repurchase agreements. Repurchase agreements can be considered as loans "collateralized" by the Resold Securities, and are defined as "loans" in the 1940 Act. The return on such collateral may be more or less than that from the repurchase agreement. The Resold Securities will be marked to market every business day so that the value of the collateral is at least equal to the value of the loan, including the accrued interest earned thereon. All Resold Securities will be held by the Fund's custodian either directly or through a securities depository (tri-party repurchase agreement) or the Federal Reserve book-entry system.
U.S. Government Securities
U.S. Government agencies or instrumentalities which issue or guarantee securities include, but are not limited to, the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Tennessee Valley Authority, Inter-American Development Bank, Asian Development Bank, Student Loan Marketing Association and the International Bank for Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the Treasury; others by discretionary authority of the U.S. Government to purchase the agencies' obligations; while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. Each Fund will invest in securities of such instrumentality only when the Adviser is satisfied that the credit risk with respect to that instrumentality is acceptable.
The Funds may invest in component parts of the U.S. Treasury notes or bonds, namely, either the principal of such Treasury obligations or one of the interest payments scheduled to be paid on such obligations. These obligations may take the form of (i) Treasury obligations from which the interest coupons have been stripped, (ii) the interest coupons that are stripped, (iii) book-entries at a Federal Reserve member bank representing ownership of Treasury obligation components, or (iv) receipts evidencing the component parts (principal or interest) of Treasury obligations that have not actually been stripped. Such receipts evidence ownership of component parts of Treasury obligations (principal or interest) purchased by a third party (typically an investment banking firm) and held on behalf of the third party in physical or book-entry form by a major commercial bank or trust company pursuant to a custody agreement with the third party. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and "Certificates of Accrual on Treasury Securities" (CATS), and are not issued by the U.S. Treasury, therefore they are not U.S. Government securities, although the underlying bonds represented by these receipts are debt obligations of the U.S. Treasury.
Corporate Debt Securities
A Fund's investments in U.S. dollar or foreign currency-denominated corporate debt securities of domestic or foreign issuers are limited to corporate debt securities (corporate bonds, debentures, notes or other similar corporate debt instruments) which meet the minimum ratings criteria set forth for the Fund, or, if unrated, which are in the Adviser's opinion comparable in quality to corporate debt securities in which the Fund may invest. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Convertible Securities
The Funds may invest in convertible securities of domestic or foreign issuers, that meet the ratings criteria set forth in the Prospectus. A convertible security is a fixed-income security (a bond or preferred stock) which may be converted at a stated price within a specific period of time into a certain quantity of common stock or other equity securities of the same or a different issuer. Convertible securities rank senior to common stock in a corporation's capital structure but are usually subordinated to similar non-convertible securities. While providing a fixed-income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also offers an investor the opportunity, through its conversion feature, to participate in the capital attendant upon a market price advance in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the higher of its "investment value" (i.e., its value as a fixed-income security) or its "conversion value" (i.e., its value upon conversion into its underlying stock). As a fixed-income security, a convertible security tends to increase in market value when interest rates decline and tends to decrease in value when interest rates rise. However, the price of a convertible security is also influenced by the market value of the security's underlying stock. The price of a convertible
security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying stock declines. While no securities investment is without some risk, investments in convertible securities generally entail less risk than investments in the stock of the same issuer.
Mortgage-Related Securities
The Funds may invest in residential or commercial mortgage-related securities, including mortgage pass-through securities, collateralized mortgage obligations ("CMOs"), adjustable rate mortgage securities, CMO residuals, stripped mortgage-related securities, floating and inverse floating rate securities and tiered index bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made monthly, in effect "passing through" monthly payments made by borrowers on the residential or commercial mortgage loans which underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage pass-through securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Early payment of principal on mortgage pass-through securities (arising from prepayments of principal due to the sale of underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose a Fund to a lower rate of return upon reinvestment of principal. Also, if a security subject to repayment has been purchased at a premium, in the event of prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities,
(i) those issued by the U.S. Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers
that represent an interest in or are collateralized by pass-through securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is 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 the institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage banks), and backed by pools of FHA-insured or VA-guaranteed mortgages.
Obligations of FNMA and FHLMC are not backed by the full faith and credit of the United States Government. In the case of obligations not backed by the full faith and credit of the United States Government, a Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment. FNMA and FHLMC may borrow from the U.S. Treasury to meet their obligations, but the U.S. Treasury is under no obligation to lend to FNMA or FHLMC.
Private mortgage pass-through securities are structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by originators of and investors in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. Pools created by private mortgage pass-through issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the private pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. The insurance and guarantees and the credit worthiness of the issuers thereof
will be considered in determining whether a mortgage-related security meets the Funds' 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. Private mortgage pass-through securities may be bought without insurance or guarantees if, through an examination of the loan experience and practices of the originator/services and poolers, the Adviser determines that the securities meet the Funds' quality standards.
Collateralized Mortgage Obligations. CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage-pass-through securities guaranteed by GNMA, FHLMC or FNMA. The issuer of a series of CMOs may elect to be treated for tax purposes as a Real Estate Mortgage Investment Conduit ("REMIC"). All future references to CMOs shall also be deemed to include REMICs.
CMOs are structured into multiple classes, each bearing a different stated maturity. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal only after shorter classes have been retired. An investor may be partially protected against a sooner than desired return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant to a rule recently adopted by the Securities and Exchange Commission ("SEC"), and the Funds may invest in the securities of such issuers without the limitations imposed by the 1940 Act on investments by the Fund in other investment companies. In addition, in reliance on an earlier SEC interpretation, the Fund's investments in certain other qualifying CMOs, which cannot or do not rely on the rule, are also not subject to the limitation of the 1940 Act on acquiring interests in other investment companies. In order to be able to rely on the SEC's interpretation, issuers of these CMOs must be unmanaged, fixed asset issuers, that (a) invest primarily in mortgage-backed securities, (b) do not issue redeemable securities, (c) operate under general exemptive orders exempting them from all provisions of the 1940 Act and (d) are not registered or regulated under the 1940 Act as investment companies. To the extent that the Funds select CMOs that cannot rely on the rule or do not meet the above requirements, the Funds may not invest more than 10% of their assets in all such entities and may not acquire more than 3% of the voting securities of any single entity.
The Funds also may invest in, among other things, parallel pay CMOs, Planned Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. PAC bonds generally require payments of a specified amount of principal on each payment date. Sequential pay CMOs generally pay principal to only one class while paying interest to several classes. Floating rate CMOs are securities whose coupon rate fluctuates according to some formula related to an existing mortgage index or rate. Typical indices would include the eleventh district cost-of-funds index, the London Interbank Offered Rate, one-year Treasury yields, and ten-year Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities ("ARMs") are pass-through securities collateralized by mortgages with adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for either the first three, six, twelve, thirteen, 36, or 60 scheduled monthly payments. Thereafter, the interest rates are subject to periodic adjustment based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional limitations on the maximum amount by which the mortgage interest may be adjusted for any single adjustment period. In the event that market rates of interest rise more rapidly to levels above that of the ARM's maximum rate, the ARM's coupon
may represent a below market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Some ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess interest is added to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is then utilized to reduce the outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-related securities. See "Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO 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-related securities, in certain circumstances a Fund may fail to recoup its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act. CMO residuals, whether or not registered under the Securities Act, may be subject to certain restrictions on transferability, and may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Related Securities. Stripped mortgage-related 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently introduced. As a result, established trading markets have not yet been fully developed and accordingly, these securities may be deemed "illiquid" and subject to a Fund's limitations on investment in illiquid securities. See "Securities and Techniques Used by the Funds-Mortgage-Related Securities" in the Prospectus.
Inverse Floaters. An inverse floater is a debt instrument with a floating or variable interest rate that moves in the opposite direction to the interest rate on another security or index level. Changes in the interest rate on the other security or index inversely affect the residual interest rate paid on the inverse floater, with the result that the inverse floater's price will be considerably more volatile than that of a fixed-rate bond. Inverse floaters may experience gains when interest rates fall and may suffer losses in periods of rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined "strike" rate, the interest rate on the tiered index bond remains fixed. If, however, the specified index or market rate rises above the "strike" rate, the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an inverse floater, will move in the opposite direction of prevailing interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate bond.
Asset-Backed Securities
The Funds may invest in various types of asset-backed securities. Through the use of trusts and special purpose corporations, various types of assets, primarily automobile and credit card receivables and home equity loans, are being securitized in pass-through structures similar to the mortgage pass-through or in a pay-through structure similar to the CMO structure. Investments in these and other types of asset-backed securities must be consistent with the investment objectives and policies of the Funds.
Risk Factors Relating to Investing in Mortgage-Related and Asset-Backed Securities
The yield characteristics of mortgage-related and asset-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if the Funds purchase such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if the Funds purchase these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. The Funds may invest a portion of their assets in derivative mortgage-related securities which are highly sensitive to changes in prepayment and interest rates. The Adviser will seek to manage these risks (and potential benefits) by diversifying its investments in such securities and through hedging techniques.
During periods of declining interest rates, prepayment of mortgages underlying mortgage-related securities can be expected to accelerate. Accordingly, a Fund's ability to maintain positions in high-yielding mortgage-related securities will be affected by reductions in the principal amount of such securities resulting from such prepayments, and its ability to reinvest the returns of principal at comparable rates is subject to generally prevailing interest rates at that time. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or the loss of opportunity to realize capital gains in the future from possible future appreciation.
Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities.
Duration
In selecting fixed-income securities for the Funds, the Adviser makes use of the concept of duration. Duration is a measure of the expected life of a fixed-income security that was developed as a more precise alternative to the concept of "term to maturity." Duration incorporates a bond's yield, coupon interest payments, final maturity and call features into one measure.
Most debt obligations provide interest ("coupon") payments in addition to a final ("par") payment at maturity. Some obligations also have call provisions. Depending on the relative magnitude of these payments, the market values of debt obligations may respond differently to changes in the level and structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a proxy for the sensitivity of the security's price to changes in interest rates (which is the "interest rate risk" or "volatility" of the security). However, "term to maturity" measures only the time until a debt security provides its final payment, taking no account of the pattern of the security's payments prior to maturity. Duration is a measure of the expected life of a fixed-income security on a present value basis. Duration takes the length of the time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time. For any fixed-income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. In general, all other things being the same, the lower the stated or coupon rate of interest of a fixed-income security, the longer the duration of the security; conversely, the higher the stated or coupon rate of interest of a fixed-income security, the shorter the duration of the security.
Futures, options and options on futures have durations, which, in general, are closely related to the duration of the securities which underlie them. Holding long futures or call option positions (backed by a segregated account of cash and cash equivalents) will lengthen a Fund's duration by approximately the same amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the negative of the duration of the securities that underlie those positions, and have the effect of reducing portfolio duration by approximately the same amount that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however, their interest rate exposure corresponds to the frequency that coupon is reset. Another example where the interest rate exposure is not properly captured by duration is the case of mortgage pass-through securities. The stated final maturity of such securities is generally 30 years, but current prepayment rates are more critical in determining the securities' interest rate exposure. In these and other similar situations, the Adviser will use more sophisticated analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure.
Derivative Instruments
As indicated in the Prospectus, to the extent consistent with their investment objectives and policies, the Funds may purchase and write call and put options on securities, securities indexes and on foreign currencies and enter into futures contracts and use options on futures contracts. The Funds also may enter into swap agreements with respect to foreign currencies, interest rates and securities indexes. The Funds may use these techniques to hedge against changes in interest rates, foreign currency exchange rates, or securities prices or as part of their overall investment strategies. Each Fund will maintain segregated accounts consisting of cash, U.S. Government securities, or other high grade debt obligations (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its obligations under options and futures contracts to avoid leveraging of the Fund.
Options on Securities and on Securities Indexes. A Fund may purchase put options on securities to protect holdings in an underlying or related security against a substantial decline in market value. A Fund may purchase call options on securities to protect against substantial increases in prices of securities the Fund intends to purchase pending its ability to invest in such securities in an orderly manner. A Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. A Fund may write a call or put option only if the option is "covered" by the Fund holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Fund's obligation as writer of the option. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying securities above the sum of the premium and exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying securities decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. Furthermore, if trading restrictions or suspensions are imposed on the options markets, a Fund may be unable to close out a position.
As mentioned above, there are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.
If trading were suspended in an option purchased by a Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it had purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
Futures Contracts and Options on Futures Contracts. A Fund may use interest rate, foreign currency or index futures contracts, as specified for that Fund in the Prospectus. An interest rate, foreign currency or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering several indexes as well as a number of financial instruments and foreign currencies, including: the S & P 500; the S & P 100; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the German mark; the Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain multinational currencies, such as the European Currency Unit. It is expected that other future contracts will be developed and traded in the future.
A Fund may purchase and write call and put options on futures. Options on futures possess many of the same characteristics as options on securities and indexes (discussed above). An option on a futures contract gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true.
Each Fund will use futures contracts and options on futures contracts in accordance with the rules of the Commodity Futures Trading Commission ("CFTC"). For example, a Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Fund's securities or the price of the securities which the Fund intends to purchase. A Fund's hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce a Fund's exposure to interest rate fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and options on futures contracts.
A Fund will only enter into futures contracts and options on futures contracts which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. Each Fund expects to earn interest income on its initial margin deposits. A futures contract held by a Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Fund will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related margin requirements), the current market value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options Thereon. When purchasing a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) cash, U.S. Government securities, or other highly liquid debt securities that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Fund may "cover" its position by purchasing a put option on the same futures contract with a strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) liquid assets that, when added to the amount deposited with a futures commission merchant as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) cash, U.S. Government securities, or other highly liquid debt securities that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) cash, U.S. Government securities, or other highly liquid debt securities that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Fund.
In order to comply with current applicable regulations of the CFTC pursuant to which the Funds avoid being deemed a "commodity pool operator," the Funds are limited in their futures trading activities to positions which constitute "bona fide hedging" positions within the meaning and intent of applicable CFTC rules, or to non-hedging positions for which the aggregate initial margin and premiums will not exceed 5% of the liquidation value of the Fund's assets.
The requirements for qualification for tax purposes as a regulated investment company also may limit the extent to which a Fund may enter into futures contracts, options thereon or forward contracts. See "Dividends and Tax Status."
Risks Associated with Futures and Options on Futures Contracts. There are several risks associated with the use of futures contracts and options on futures contracts as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variation in speculative market demand for futures and options on futures, including technical influences in futures trading and options on futures, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist when a Fund seeks to close out a futures contract or an option on a futures position, and that Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon. Options on securities, futures contracts, options on futures contracts, forward currency exchange contracts and options may be traded on foreign exchanges. These transactions may not be regulated as effectively as similar transactions in the United States; may not involve a clearing mechanism and related guarantees; and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Funds' ability to act upon economic events occurring in foreign markets during non-business hours in the United States, and (iv) lesser trading volume.
Foreign Securities
The Funds may also invest in fixed-income securities of issuers located in emerging foreign markets. Emerging markets generally include every country in the world other than the United States, Canada, Japan, Australia, Malaysia, New Zealand, Hong Kong, Singapore and most Western European countries. In determining what countries constitute emerging markets, the Adviser will consider, among other things, data,
analysis and classification of countries published or disseminated by the International Bank for Reconstruction and Development (the "World Bank") and the International Financial Corporation. Currently, investing in many emerging markets may not be desirable or feasible, because of the lack of adequate custody arrangements for a Fund's assets, overly burdensome repatriation and similar restrictions, the lack of organized and liquid securities markets, unacceptable political risks or other reasons. As opportunities to invest in securities in emerging markets develop, the Funds expect to expand and further broaden the group of emerging markets in which they invest.
From time to time, emerging markets have offered the opportunity for higher returns in exchange for a higher level of risk. Accordingly, the Adviser believes that each Fund's ability to invest in emerging markets throughout the world may enable the achievement of results superior to those produced by funds, with similar objectives to those of the Funds, that invest solely in securities in developed markets. There is no assurance that any Fund will achieve these results.
The Funds may invest in the following types of emerging market
fixed-income securities: (a) fixed-income securities issued or guaranteed by
governments, their agencies, instrumentalities or political subdivisions, or by
government-owned, controlled or sponsored entities, including central banks
(collectively, "Sovereign Debt"), including Brady Bonds (described below); (b)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt; (c) fixed-income securities issued
by banks and other business entities; and (d) fixed-income securities
denominated in or indexed to the currencies of emerging markets. Fixed-income
securities held by the Funds may take the form of bonds, notes, bills,
debentures, bank debt obligations, short-term paper, loan participations,
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of any of the foregoing.
There is no requirement with respect to the maturity of fixed-income securities
in which the Funds may invest.
The Funds may invest in Brady Bonds and other Sovereign Debt of countries that have restructured or are in the process of restructuring Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International Monetary Fund ("IMF"). The Brady Plan framework, as it has developed, contemplates the exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements or other agreements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount.
Emerging market fixed-income securities generally are considered to be of a credit quality below investment grade, even though they often are not rated by any nationally recognized statistical rating organizations. Investment in emerging market fixed-income securities will be allocated among various countries based upon the Adviser's analysis of credit risk and its consideration of a number of factors, including: prospects for relative economic growth among the different countries in which the Funds may invest; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of the individual investment opportunities available to international investors. The Adviser's emerging market sovereign credit analysis includes an evaluation of the issuing country's total debt levels, currency reserve levels, net exports/imports, overall economic growth, level of inflation, currency fluctuation, political and social climate and payment history. Particular fixed-income securities will be selected based upon credit risk analysis of potential issuers, the characteristics of the security and interest rate sensitivity of the various debt issues available with respect to a particular issuer, analysis of the anticipated volatility and liquidity
of the particular debt instruments, and the tax implications to the Fund. The emerging market fixed-income securities in which the Funds may invest are not subject to any minimum credit quality standards.
Foreign Currency Options and Related Risks
The Funds may take positions in options on foreign currencies to hedge against the risk of foreign exchange rate fluctuations on foreign securities the Funds hold in their portfolios or intend to purchase. For example, if a Fund were to enter into a contract to purchase securities denominated in a foreign currency, it could effectively fix the maximum U.S. dollar cost of the securities by purchasing call options on that foreign currency. Similarly, if a Fund held securities denominated in a foreign currency and anticipated a decline in the value of that currency against the U.S. dollar, it could hedge against such a decline by purchasing a put option on the currency involved. The markets in foreign currency options are relatively new, and a Fund's ability to establish and close out positions in such options is subject to the maintenance of a liquid secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by all of those factors that influence foreign exchange rates and investments generally.
The quantities of currencies underlying option contracts represent odd lots in a market dominated by transactions between banks, and as a result extra transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations be firm or revised on a timely basis. Quotation information is generally representative of very large transactions in the interbank market and may not reflect smaller transactions where rates may be less favorable. Option markets may be closed while round-the-clock interbank currency markets are open, and this can create price and rate discrepancies.
Risks of Options Trading. The Funds may effectively terminate their rights or obligations under options by entering into closing transactions. Closing transactions permit a Fund to realize profits or limit losses on its options positions prior to the exercise or expiration of the option. The value of a foreign currency option depends on the value of the underlying currency relative to the U.S. dollar. Other factors affecting the value of an option are the time remaining until expiration, the relationship of the exercise price to market price, the historical price volatility of the underlying currency and general market conditions. As a result, changes in the value of an option position may have no relationship to the investment merit of a foreign security. Whether a profit or loss is realized on a closing transaction depends on the price movement of the underlying currency and the market value of the option.
Options normally have expiration dates of up to nine months. The exercise price may be below, equal to or above the current market value of the underlying currency. Options that expire unexercised have no value, and a Fund will realize a loss of any premium paid and any transaction costs. Closing transactions may be effected only by negotiating directly with the other party to the option contract, unless a secondary market for the options develops. Although the Funds intend to enter into foreign currency options only with dealers which agree to enter into, and which are expected to be capable of entering into, closing transactions with the Funds, there can be no assurance that a Fund will be able to liquidate an option at a favorable price at any time prior to expiration. In the event of insolvency of the counter-party, a Fund may be unable to liquidate a foreign currency option. Accordingly, it may not be possible to effect closing transactions with respect to certain options, with the result that a Fund would have to exercise those options that it had purchased in order to realize any profit.
Forward Foreign Currency Exchange Contracts
The Funds may use forward contracts to protect against uncertainty in the level of future exchange rates. The Funds will not speculate with forward contracts or foreign currency exchange rates.
A Fund may enter into forward contracts with respect to specific transactions. For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Fund anticipates the receipt in a foreign currency of dividend or interest payments on a security that it holds, the Fund may desire to "lock" in the U.S. dollar price of the security or the U.S. dollar equivalent of the payment, by entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars or foreign currency, of the amount of foreign currency involved in the underlying transaction. A Fund will thereby be able to protect itself against a possible loss resulting from an adverse change in the relationship between the currency exchange rates during the period between the date on which the security is purchased or sold, or on which the payment is declared, and the date on which such payments are made or received.
A Fund also may use forward contracts in connection with portfolio positions to lock in the U.S. dollar value of those positions, to increase the Fund's exposure to foreign currencies that the Adviser believes may rise in value relative to the U.S. dollar or to shift the Fund's exposure to foreign currency fluctuations from one country to another. For example, when the Adviser believes that the currency of a particular foreign country may suffer a substantial decline relative to the U.S. dollar or another currency, it may enter into a forward contract to sell the amount of the former foreign currency approximating the value of some or all of the Funds' portfolio securities denominated in such foreign currency. This investment practice generally is referred to as "cross-hedging" when another foreign currency is used.
The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Fund to sustain losses on these contracts and transaction costs. A Fund may enter into forward contracts or maintain a net exposure to such contracts only if (1) the consummation of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency or (2) the Fund maintains cash, U.S. Government securities or liquid, high-quality debt securities in a segregated account in an amount not less than the value of the Fund's total assets committed to the consummation of the contracts. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the Adviser believes it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of a Fund will be served.
At or before the maturity date of a forward contract that requires a Fund to sell a currency, the Fund may either sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, a Fund may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. The Fund would realize a gain or loss as a result of entering into such an offsetting forward contract under either circumstance to the extent the exchange rate between the currencies involved moved between the execution dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because forward contracts are usually entered into on a principal basis, no fees or commissions are involved. The use of forward contracts does not eliminate fluctuations in the prices of the underlying securities the Fund owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although forward contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.
Although the Funds value their assets daily in terms of U.S. dollars, they do not intend to convert holdings of foreign currencies into U.S. dollars on a daily basis. The Funds may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Swap Agreements. The Funds may enter into interest rate, index and currency exchange rate swap agreements for purposes of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded the desired return. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. A Fund's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). A Fund's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counter-party will be covered by the maintenance of a segregated account consisting of cash, U.S. Government securities, or high grade debt obligations, to avoid any potential leveraging of the Fund's portfolio. A Fund will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering its investment objective of total return will depend on the Adviser's ability correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms exceeding seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counter-party. The Adviser will cause a Fund to enter into swap agreements only with counter-parties that would be eligible for consideration as repurchase agreement counter-parties. Restrictions imposed by the Internal Revenue Code of 1986, as amended (the "Code") may limit the Funds' ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Risk Factors Relating to Investing in High Yield Securities
Lower-rated or unrated (i.e. high yield) securities are more likely to react to developments affecting market risk (such as interest rate sensitivity, market perception of creditworthiness of the issuer and general market liquidity) and credit risk (such as the issuer's inability to meet its obligations) than are more highly rated securities, which react primarily to movements in the general level of interest rates. The Adviser considers both credit risk and market risk in making investment decisions for the Funds. Investors should carefully consider the relative risk of investing in high yield securities and understand that such securities are not generally meant for short-term trading.
The amount of high-yield securities outstanding proliferated in the 1980's in conjunction with the increase in merger and acquisition and leveraged buyout activity. Under adverse economic conditions, there is a risk that highly leveraged issuers may be unable to service their debt obligations upon maturity. In addition, the secondary market for high-yield securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. Under adverse market or economic conditions, the secondary market for high-yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer. As a result, the Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower-rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Funds' net asset value.
Lower-rated or unrated debt obligations present risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of the Fund's portfolio and increasing the exposure of the Fund to the risks of high-yield securities.
Illiquid Securities
A Fund may not invest more than 15% of its net assets in repurchase agreements which have a maturity of longer than seven days or in other illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market (either within or outside of the United States) or legal or contractual restrictions of resale. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act, securities which are otherwise not readily marketable and repurchase agreements have a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illegal securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. Currently the Funds may invest in securities issued in private placements.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A established a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The Adviser anticipates that the market for certain restricted securities such as institutional commercial paper and foreign securities will expand further as a result of this rule and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Adviser will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Adviser will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g. the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (i) it must be rated in one or two of the highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSRO"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the Adviser, and
(ii) it must not be "traded flat" (i.e., without accrued interest) or in default
as to principal or interest. Investing in Rule 144A securities could have the
effect of increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Management
The Trustees and officers of the Trust are:
Name, Address Age Position with the Trust Principal Occupations During Past Five Years
- ------------- --- ----------------------- --------------------------------------------
Scott B. Dubchansky* 36 Chief Executive Officer Mr. Dubchansk served as Managing Director-Fixed Income of
10880 Wilshire Blvd., Suite 2020 and Trustee Metropolitan West Securities, Inc. from August, 1996 through
Los Angeles, CA 90024 December, 1996 while the Adviser was in formation. From August,
1992 through August, 1996, Mr. Dubchansky was a Senior Vice
President of Donaldson Lufkin Jenrette in the Fixed Income
division. Prior to August, 1992, Mr. Dubchansky was Senior Vice
President fixed income sales at Kidder Peabody and responsible
for fixed income sales to institutional clients.
- -------------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Adviser.
|
The Trust does not pay salaries to any of its officers or fees to any of its Trustees affiliated with the Adviser.
For information as to ownership of shares by officers and Trustees of the Trust, see below under "General Information About the Trust."
Portfolio Transactions and Brokerage
The Investment Advisory Agreement states that in connection with its
duties to arrange for the purchase and sale of securities held in the portfolio
of each Fund by placing purchase and sale orders for that Fund, the Adviser
shall select such broker-dealers ("brokers") as shall, in the Adviser's
judgment, implement the policy of the Trust to achieve "best execution", i.e.,
prompt and efficient execution at the most favorable securities price. In making
such selection, the Adviser is authorized in the Agreement to consider the
reliability, integrity and financial condition of the broker. (It is the
Adviser's current practice generally to pay brokerage commissions at rates
determined by the Adviser, based on the Adviser's assessment of the difficulty
of execution.) The Adviser is also authorized by the Agreement to consider
whether the broker provides brokerage and/or research services to the Funds
and/or other accounts of the Adviser. The Agreement states that the commissions
paid to brokers may be higher than another broker would have charged if a good
faith determination is made by the Adviser that the commission is reasonable in
relation to the services provided, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities as to the accounts as to
which it exercises investment discretion and that the Adviser shall use its
judgment in determining that the amount of commissions paid are reasonable in
relation to the value of brokerage and research services provided and need not
place or attempt to place a specific dollar value on such services or on the
portion of commission rates reflecting such services. The Agreement provides
that to demonstrate that such determinations were in good faith, and to show the
overall reasonableness of commissions paid, the Adviser shall be prepared to
show that commissions paid (i) were for purposes contemplated by the Agreement;
(ii) were for products or services which provide lawful and appropriate
assistance to the Adviser's decision-making process; and (iii) were within a
reasonable range as compared to the rates charged by brokers to other
institutional investors as such rates may become known from available
information. The Adviser is also authorized to consider sales of shares of each
Fund and/or of any other investment companies for which the Adviser acts as
Adviser as a factor in the selection of brokers to execute brokerage and
principal transactions, subject to the requirements of "best execution," as
defined above.
The research services discussed above may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information assisting the Trust in the valuation of the Funds' investments. The research which the Adviser receives for the Funds' brokerage commissions, whether or not useful to a Fund, may be useful to the Adviser in managing the accounts of the Adviser's other advisory clients. Similarly, the research received for the commissions of such accounts may be useful to any Fund.
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 the security usually includes a profit to the dealer. Money market instruments usually trade on a "net" basis as well. On occasion, certain money market instruments may be purchased by the Funds directly from an issuer in which case no commissions or discounts are paid. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount.
Administrator
The Funds have an Administration Agreement with FPS Services, Inc. (the "Administrator"), with offices at 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903. The Administration Agreement provides that the Administrator will prepare and coordinate reports and other materials supplied to the Trustees; prepare and/or supervise the preparation and filing of all securities filings, periodic financial reports, prospectuses, statements of additional information, marketing materials, tax returns, shareholder reports and other regulatory reports or filings required of the Funds; prepare all required filings necessary to maintain the Funds' qualifications and/or registrations to sell shares in all states where each Fund
currently does, or intends to do, business; coordinate the preparation, printing and mailing of all materials (e.g., Annual Reports) required to be sent to shareholders; coordinate the preparation and payment of Fund-related expenses; monitor and oversee the activities of the Funds' servicing agents (i.e., transfer agent, custodian, fund accountants, etc.); review and adjust as necessary each Fund's daily expense accruals; and perform such additional services as may be agreed upon by the Funds and the Administrator. For its services, the Administrator receives an annual fee of .0015% of the first $50 million of the Trust's average daily net assets, .0010 % of the next $50 million and .0005% over $100 million, subject to a $55,000 minimum.
Principal Underwriter
FPS Broker Services, Inc. (the "Distributor"), a broker-dealer affiliated with the Administrator, acts as each Fund's principal underwriter in a continuous public offering of the Fund's shares. The Distribution Agreement between the Funds and the Distributor continues in effect for periods not exceeding one year if approved at least annually by (i) the Board of Trustees or the vote of a majority of the outstanding shares of each Fund (as defined in the 1940 Act) and (ii) a majority of the Trustees who are not parties to such agreement or interested persons of any such party, in each case cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement may be terminated without penalty by the parties thereto upon 60-days' written notice, and is automatically terminated in the event of its assignment as defined in the 1940 Act.
Share Marketing Plan
The Trust has adopted has adopted a Share Marketing Plan (or Rule 12b-1 Plan) (the "12-b-1 Plan") with respect to the Funds Pursuant to Rule 12b-1 under the 1940 Act. The Adviser serves as the distribution coordinator under the 12b-1 Plan and, as such, receives any fees paid by the Funds pursuant to the 12b-1 Plan.
On March __, 1997, the Board of Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the "Independent Trustees") adopted the 12b-1 Plan.
Under the 12b-1 Plan, each Funds pays distribution fees to the Adviser at an annual rate of up to 0.25% of the Fund's aggregate average daily net assets to reimburse the Adviser for its expenses in connection with the promotion and distribution of the shares. The Funds and the Adviser presently are waiving all Rule 12b-1 fees. The Funds would notify shareholders in writing at least 30 days before rescinding that waiver.
The 12b-1 Plan provides that the Adviser may use the Rule 12b-1 distribution fees received from a Fund only to pay for the distribution expenses of that Fund. Distribution fees are accrued daily and paid monthly, and are charged as expenses of the shares as accrued.
A Fund's shares are not obligated under the 12b-1 Plan to pay any distribution expense in excess of the distribution fee. Thus, if the 12b-1 Plan were terminated or otherwise not continued, no amounts (other than current amounts accrued but not yet paid) would be owed to the Adviser.
The 12b-1 Plan provides that it shall continue in effect from year to year provided that a majority of the Board of Trustees of the Trust, including a majority of the Independent Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Trust, the Distributor or the Adviser and a selling agent) may be terminated without penalty upon at least 60-days' notice by the Distributor or the Adviser, or by the Trust by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding shares (as defined in the 1940 Act).
All distribution fees paid by the Funds under the 12b-1 Plan will be paid in accordance with Conduct Rule 2830 of the National Association of Securities Dealers, Inc., as such Rule may change from time to time. Pursuant to the 12b-1 Plan, the Board of Trustees will review at least quarterly a written report of the
distribution expenses incurred by the Adviser on behalf of each Fund. In addition, as long as the 12b-1 Plan remains in effect, the selection and nomination of Trustees who are not interested persons (as defined in the Investment Company Act) of the Trust shall be made by the Trustees then in office who are not interested persons of the Trust.
Net Asset Value
As indicated in the Prospectus, the net asset value per share of each Fund's shares will be determined at 4:00 p.m. New York time on each day that the New York Stock Exchange (the "NYSE") is open for trading. The NYSE annually announces the days on which it will not be open for trading; the most recent announcement indicates that it will not be open on the following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the NYSE may close on days not included in that announcement. Also, no Fund is required to compute its net asset value on any day on which no order to purchase or redeem its shares is received.
Fixed-income securities which are traded on a national securities exchange will be valued at the last sale price or, if there was no sale on such day, at the average of readily available closing bid and asked prices on such exchange. However, securities with a demand feature exercisable within one to seven days are valued at par. Prices for fixed-income securities may be based on quotations received from one or more market-makers in the securities, or on evaluations from pricing services. Debt securities which mature in less than 60 days are valued at amortized cost (unless the Board of Trustees determines that this method does not represent fair value), if their original maturity was 60 days or less or by amortizing the value as of the 61st day prior to maturity, if their original term to maturity exceeded 60 days.
In determining the net asset value of each Fund's shares, equity securities that are listed on a securities exchange (whether domestic or foreign) or quoted by the Nasdaq Stock Market are valued at the last sale price on that day as of the close of regular trading on the NYSE (which is currently 4:00 p.m., New York time), or, in the absence of recorded sales, at the average of readily closing bid and asked prices on the NYSE or Nasdaq. Unlisted equity securities that are not included on Nasdaq are valued at the average of the quoted bid and asked prices in the over-the-counter market.
Options, futures contracts and options thereon which are traded on exchanges are valued at their last sale or settlement price as of the close of the exchanges or, if no sales are reported, at the average of the quoted bid and asked prices as of the close of the exchange.
Trading in securities listed on foreign securities exchanges or over-the-counter markets is normally completed before the close of regular trading on the NYSE. In addition, foreign securities trading may not take place on all business days in New York and may occur on days on which the NYSE is not open. In addition, foreign currency exchange rates are generally determined prior to the close of trading on the NYSE. Events affecting the value of foreign securities and currencies will not be reflected in the determination of net asset value unless the Board of Trustees determines that the particular event would materially affect net asset value, in which case an adjustment will be made. Investments quoted in foreign currency are valued daily in U.S. dollars on the basis of the foreign currency exchange rate prevailing at the time of valuation. Foreign currency exchange transactions conducted on a spot basis are valued at the spot rate prevailing in the foreign exchange market.
Securities and other assets for which market quotations are not readily available are valued at their fair value as determined by the Adviser under guidelines established by and under the general supervision and responsibility of the Board of Trustees.
Dividends and Tax Status
Each Fund intends to elect and qualify to be treated as a regulated
investment company under Subchapter M of the Code. Qualification as a regulated
investment company requires, among other things, that (a) at least 90% of a
Fund's annual gross income, without offset for losses from the sale or other
disposition of securities, be derived from interest, dividends, payments with
respect to securities loans, and gains from the sale or other disposition of
securities, foreign currencies or options (including forward contracts) thereon;
(b) a Fund derive less than 30% of its annual gross income from gains (without
offset for losses) from the sale or other disposition of securities or options
thereon held for less than three months; and (c) a Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities). In
addition, in order to qualify as a regulated investment company a Fund must
distribute to its shareholders at least 90% of its net investment income, other
than net capital gains, earned in each year. As such, and by complying with the
applicable provisions of the Code, a Fund will not be subject to federal income
tax on taxable income (including realized capital gains) that it distributes to
shareholders in accordance with the timing requirements of the Code.
A Fund must pay an excise tax to the extent it does not distribute to its shareholders during each calendar year at least 98% of its ordinary income for that calendar year, 98% of its capital gains over capital losses for the one-year period ending October 31 in such calendar year, and all undistributed ordinary income and capital gains for the preceding respective one-year period. The Funds intend to meet these distribution requirements to avoid excise tax liability. The Funds also intend to continue distributing to shareholders all of the excess of net long-term capital gain over net short-term capital loss on sales of securities. If the net asset value of shares of a Fund should, by reason of a distribution of realized capital gains, be reduced below a shareholder's cost, such distribution would to that extent be a return of capital to that shareholder even though taxable to the shareholder, and a sale of shares by a shareholder at net asset value at that time would establish a capital loss for federal income tax purposes.
In determining the extent to which a Fund's dividends may be eligible for the 70% dividends received deduction by corporate shareholders, interest income, capital gain net income, gain or loss from Section 1256 contracts (described below), dividend income from foreign corporations and income from other sources will not constitute qualified dividends. Corporate shareholders should consult their tax advisers regarding other requirements applicable to the dividends received deduction.
The use of hedging strategies, such as entering into futures contracts and forward contracts and purchasing options, involves complex rules that will determine the character and timing of recognition of the income received in connection therewith by the Funds. Income from foreign currencies (except certain gains therefrom that may be excluded by future regulations) and income from transactions in options, futures contracts and forward contracts derived by a Fund with respect to its business of investing in securities or foreign currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when a Fund purchases an option, the premium paid by the Fund is recorded as an asset and is subsequently adjusted to the current market value of the option. Any gain or loss realized by a Fund upon the expiration or sale of such options held by the Fund generally will be capital gain or loss.
Any security, option, or other position entered into or held by a Fund that substantially diminishes the Fund's risk of loss from any other position held by the Fund may constitute a "straddle" for federal income tax purposes. In general, straddles are subject to certain rules that may affect the amount, character and timing of a Fund's gains and losses with respect to straddle positions by requiring, among other things, that the loss realized on disposition of one position of a straddle be deferred until gain is realized on disposition of the offsetting position; that the Fund's holding period in certain straddle positions not begin until the straddle is terminated
(possibly resulting in the gain being treated as short-term capital gain rather than long-term capital gain); and that losses recognized with respect to certain straddle positions, which would otherwise constitute short-term capital losses, be treated as long-term capital losses. Different elections are available to a Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
A Fund may be subject to foreign withholding taxes on dividends and interest earned with respect to securities of foreign corporations. A Fund may invest in the stock of foreign investment companies that may be treated as "passive foreign investment companies" ("PFICs") under the Code. Certain other foreign corporations, not operated as investment companies, may nevertheless satisfy the PFIC definition. A portion of the income and gains that a Fund derives from PFIC stock may be subject to a non-deductible federal income tax at the Fund level. In some cases, a Fund may be able to avoid this tax by electing to be taxed currently on its share of the PFIC's income, whether or not such income is actually distributed by the PFIC. Each Fund will endeavor to limit its exposure to the PFIC tax by investing in PFICs only where the election to be taxed currently will be made. Because it is not always possible to identify a foreign issuer as a PFIC in advance of making the investment, a Fund may incur the PFIC tax in some instances.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities are treated as ordinary income or loss. Similarly, gains or losses on forward foreign currency exchange contracts (other than forward foreign currency exchange contracts that are governed by Section 1256 of the Code and for which no election is made) or dispositions of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition are also treated as ordinary gain or loss. These gains and losses, referred to as "Section 988" gains or losses, increase or decrease the amount of a Fund's investment company taxable income available to be distributed to its shareholders as ordinary income, rather than increasing or decreasing the Fund's net capital gain. If a Fund's Section 988 losses exceed other investment company taxable income during a taxable year, the Fund 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 the basis of each shareholder's shares.
Any loss realized on a sale, redemption or exchange of shares of a Fund by a shareholder will be disallowed to the extent the shares are replaced within a 61-day period (beginning 30 days before the disposition of shares). Shares received in connection with the payment of a dividend by a Fund constitute a replacement of shares.
The above discussion and the related discussion in the prospectus are not intended to be complete discussions of all applicable federal tax consequences of an investment in a Fund. Heller Ehrman White & McAuliffe has expressed no opinion in respect thereof. Nonresident aliens and other foreign persons are subject to different tax rules, and may be subject to United States federal income tax withholding of up to 30% on certain payments received from a Fund. Shareholders are advised to consult with their own tax advisers concerning the application of federal, state, local, and foreign taxes to an investment in a Fund.
Performance Information
Total Return. Average annual total return quotations used in the Funds' advertising and promotional materials are calculated according to the following formula:
P(1 + T)n = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1000 payment made at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions.
Yield. Annualized yield quotations used in a Fund's advertising and promotional materials are calculated by dividing the Fund's income for a specified 30-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the net asset value per share at the end of the period. Yield quotations are calculated according to the following formula:
YIELD = 2 [ (a-b + 1)6 - 1]
where a equals dividends and interest earned during the period; b equals expenses accrued for the period, net of reimbursements; c equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and d equals the maximum offering price per share on the last day of the period.
Except as noted below, in determining net investment income earned during the period ("a" in the above formula), a Fund calculates interest earned on each debt obligation held by it during the period by (1) computing the obligation's yield to maturity, based on the market value of the obligation (including actual accrued interest) on the last business day of the period or, if the obligation was purchased during the period, the purchase price plus accrued interest; (2) dividing the yield to maturity by 360; and (3) multiplying the resulting quotient by the market value of the obligation (including actual accrued interest). Once interest earned is calculated in this fashion for each debt obligation held by the Fund, net investment income is then determined by totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date.
Other information. Each Fund's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in a Fund will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. In advertising and promotional materials a Fund may compare its performance with data published by Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund also may refer in such materials to mutual fund performance rankings and other data, such as comparative asset, expense and fee levels, published by Lipper or CDA. Advertising and promotional materials also may refer to discussions of the Fund and comparative mutual fund data and
ratings reported in independent periodicals including, but not limited to, The Wall Street Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
General Information About the Trust
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in each Fund. Each share represents an interest in a Fund proportionately equal to the interest of each other share. Upon the Trust's liquidation, all shareholders would share pro rata in the net assets of the Fund in question available for distribution to shareholders. If they deem it advisable and in the best interest of shareholders, the Board of Trustees may create additional classes of shares which differ from each other only as to dividends. Each of such classes has or will have a designation including the word "Series." Income and operating expenses not specifically attributable to a particular Fund are allocated fairly among the Funds by the Trustees, generally on the basis of the relative net assets of each Fund.
The Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon.
The Trust's custodian is responsible for holding the Funds' assets and acts as the Trust's accounting services agent. Subcustodians provide custodial services for assets of the Trust held outside the U.S. The Trust's independent accountants examine the Trust's financial statements and assist in the preparation of certain reports to the Securities and Exchange Commission.
Additional Information
Legal Opinion
The validity of the shares offered by the Prospectus will be passed upon by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Auditors
The annual financial statements of the Funds will be audited by Deloitte & Touche LLP, independent public accountant for the Funds.
License to Use Name
Metropolitan West Securities, Inc. has granted the Trust and each Fund the right to use the designation "Metropolitan West" in its name, and has reserved the right to withdraw its consent to the use of such designation under certain conditions, including the termination of the Adviser as the Funds' investment adviser. Metropolitan West also has reserved the right to license others to use this designation, including any other investment company.
Other Information
The Prospectus and this Statement of Additional Information, together, do not contain all of the information set forth in the Registration Statement of Metropolitan West Funds filed with the Securities and Exchange Commission. Certain information is omitted in accordance with rules and regulations of the Commission. The Registration Statement may be inspected at the Public Reference Room of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates.
Financial Statements
Statements of Assets and Liabilities for the Metropolitan West Total Return Bond Fund and the Metropolitan West Low Duration Bond Fund, as of March 31, 1997 and accompanying notes, together with the Independent Auditor's Report dated March 31, 1997, are attached to this Statement of Additional Information.
METROPOLITAN WEST FUNDS
Statement of Assets and Liabilities
March 27, 1997
Assets
Total Return Low Duration
Bond fund Bond Fund
Cash $ 50,000 $ 50,000
Deferred Organization Costs 17,500 17,500
----------- ----------
Total Assets 67,500 67,500
Liabilities
Accrued Expenses 17,500 17,500
----------- ----------
Net Assets $ 50,000 $ 50,000
=========== =========
Fund shares (unlimited authorization --
$0.01 par value) 5,000 outstanding
shares of beneficial interest of each Fund
Net asset value $ 10.00 $ 10.00
=========== =========
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The accompanying notes are an integral part of this financial statement.
METROPOLITAN WEST FUNDS
Statement of Assets and Liabilities
March 27, 1997
1. Organization
The Metropolitan West Funds (the "Trust") was organized as a Delaware Business Trust under a Trust Instrument dated December 9, 1996 and is registering under the Investment Company Act of 1940, as amended, as an open-end investment company to consist of three separate diversified portfolios (the "Funds"), each of which is a separate mutual fund. The Funds are the Total Return Bond Fund, Low Duration Bond Fund and the Short-Term Investment Fund. The Funds have not commenced operations except those related to organizational matters and the sale of initial shares of beneficial interest to initial shareholders in the Total Return Bond Fund and the Low Duration Bond Fund.
It is the intention of the Funds to qualify and elect treatment as "regulated investment companies" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), by complying with the provisions available to certain investment companies as defined in applicable sections of the Code, and to make distributions of taxable income to shareholders sufficient to relieve the Funds from all, or substantially all, federal income tax.
The preparation of the accompanying financial statements in conformation with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements. Actual results may differ from these estimated.
2. Investment Advisory, Management, Distribution and Shareholder Servicing Agreement
The Trust has entered into the following service agreement:
An Investment Advisory Agreement pursuant to which Metropolitan West Asset Management, LLC (the "Adviser") will act as the investment adviser to the Funds. For providing investment advisory services, the Adviser receives a fee, accrued daily and paid monthly, at the following annual percentages of average daily net assets: Total Return Bond Fund -- 0.55%, Low Duration Bond Fund -- 0.48%, and Short-Term Investment Fund -- 0.40%. The Adviser has voluntarily agreed to limit the annual operating expenses of the Total Return Bond Fund to 0.65%, the Low Duration Bond Fund tp 0.58% and the Short-Term Investment Fund to 0.50% of each Fund's respective average net assets.
An Administration Agreement pursuant to which FPS Services, Inc. ("FPS") will provide the Trust with overall management services. Subject to a minimum fee of
$55,000 per year for the first portfolio and $12,000 per year for additional portfolio or class, the Trust agrees to pay FPS each month a fee at the annual rate of 0.15% on the first $50 million of average net assets of the Trust, 0.10% on the next $50 million, and 0.05% on average net assets greater than $100 million for these administrative services.
A Distribution Services Agreement pursuant to which FPS Broker Services, Inc. will serve as the Fund's distributor. The Funds have adopted a Rule 12b-1 plan to pay for distribution expenses. The Funds may charge up to an annual rate of .25% of average net assets but currently are waiving all Rule 12b-1 fees.
A Transfer Agent Services Agreement and Accounting Services Agreement pursuant to which FPS will act as the transfer agent and fund accounting service provider for the Trust, respectively.
3. Deferred Organizational Costs
Organizational costs have been capitalized by the Funds and are being amortized on a straight line basis over 60 months commencing with operations. In the event any of the initial shares are redeemed by the holder thereof during the period that the Funds are amortizing its organizational costs, the redemption proceeds payable to the holder thereof by the Funds will be reduced by the unamortized organizational costs in the same ratio as the number of initial shares being redeemed bears to the number of initial shares outstanding at the time of the redemption.
4. Transactions with Affiliates
The Adviser intends to pay $35,000 of organization costs on behalf of the Funds.
Certain officers and/or trustees of the Trust are also officers of the Adviser. The Trust pays each unaffiliated Trustee a fee for attendance at quarterly, interim and committee meetings. Compensation of officers and affiliated Trustees of the Trust is paid by the Adviser.
5. Disclosure of Credit Risk
Cash is held at The Bank of New York. The Funds have a policy of reviewing, as considered necessary, the credit standing of each bank with which it conducts business.
Independent Auditors' Report
To the Shareholders and Board of Trustees of the Metropolitan West Funds:
We have audited the accompanying statements of assets and liabilities of the Metropolitan West Total Return Bond Fund and the Metropolitan West Low Duration Bond Fund (the "Funds") as of March 27, 1997. These financial statements are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Metropolitan West Total Return Bond Fund and the Metropolitan West Low Duration Bond Fund as of March 27, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 27, 1997
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Statements of Assets and Liabilities for the Metropolitan West Total Return Bond Fund and the Metropolitan West Low Duration Bond Fund, as of March 31, 1997, and accompanying notes, together with the Independent Auditor's Report dated March 31, 1997, all incorporated by reference to Part B.
(b) Exhibits:
(1) Agreement and Declaration of Trust (filed as part of the Registration Statement on Form N-1A filed on December 24, 1996 [the "Registration Statement"]).
(2) By-Laws (filed as part of the Registration Statement).
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement (filed as part of the Registration Statement).
(6) Form of Underwriting Agreement.
(7) Benefit Plan(s) - Not applicable.
(8)(A) Form of Custody Agreement.
(8)(B) Form of Custody Adminstration and Agency Agreement.
(9)(A) Form of Administration Agreement.
(9)(B) Form of Accounting Services Agreement.
(9)(C) Form of Transfer Agent Services Agreement.
(10) Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on March 18, 1997 [Pre-Effective Amendment No. 1"]).
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Form of Subscription Agreement.
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(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Rule 12b-1 Plan (incorporated by reference to Pre-Effective Amendment No. 1).
(16) Performance Computation - Not Applicable.
(17) Financial Data Schedule - Not Applicable
Item 25. Persons Controlled by or Under Common Control with Registrant.
Metropolitan West Asset Management, LLC, a California limited liability company, is the manager of each series of the Registrant (the "Manager"). Metropolitan West Securities, Inc., a California corporation ("MWS"), is a member of the Manager. Also members of the Manager are Scott B. Dubchansky, Tad Rivelle and Laird R. Landmann.
Persons holding more than a five percent beneficial interest in MWS
include Paul C. Chow, Terry M. Crow, Edward E. Curiel, Thomas W. Hayes, Richard
S. Hollander and Roland R. Moos. MWS is registered with the Securities and
Exchange Commission as an investment adviser and a broker-dealer.
Item 26. Number of Holders of Securities
As of March 26, 1997, Scott B. Dubchansky and Tad Rivelle are the only shareholders of each series of the Registrant.
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the Trustees of the Trust, to the full extent permitted by law, to purchase with Trust assets insurance for indemnification from liability and to pay for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust.
Article VII of the By-Laws of the Trust provides that the Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is and other amounts or was an agent of the Trust, against expenses, judgments, fines, settlement and other amounts actually and reasonable incurred in connection with such proceeding if that person acted in good faith and reasonably believed his or her conduct to be in the best interests of the Trust. Indemnification will not be provided in certain circumstances, however, including instances of willful misfeasance, bad faith, gross negligence, and reckless disregard of the duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to the Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 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 of 1933 and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Information about Scott B. Dubchansky, Tad Rivell and Laird R. Landmann is set forth in Part B under "Management."
Item 29. Principal Underwriter.
(a) FPS Broker Services, Inc. is the principal underwriter for the following investment companies or series thereof:
The Brinson Funds, Inc.
Chicago Trust Funds
Fairport Funds
First Mutual Funds
Focus Trust, Inc.
IAA Trust Mutual Funds
Matthews International Funds
McM Funds
Polynous Trust
Sage/Tso Trust
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Trust
The Stratton Funds, Inc.
The Japan Alpha Fund
Stratton Growth Fund, Inc.
Stratton Monthly Dividend Shares, Inc.
The Timothy Plan
(b) The following information is furnished with respect to the officers of FPS Broker Services, Inc.:
Name and Principal Position and Offices with Positions and Offices Business Address Underwriter with Registrant - ---------------- ------------------- ---------------------- Kenneth J. Kempf Director and President None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 Lynne M. Cannon Vice President and Principal None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 Rocky C. Cavalieri Director and Vice President None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 Gerald J. Holland Director, Senior Vice President None 3200 Horizon Drive and Principal P.O. Box 61503 King of Prussia, PA 19406-0903 Joseph M. O'Donnell, Esq. Director and Vice President None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 |
Name and Principal Position and Offices with Positions and Offices Business Address Underwriter with Registrant - ---------------- ------------------- ---------------------- Sandra L. Adams Assistant Vice President and None 3200 Horizon Drive Principal P.O. Box 61503 King of Prussia, PA 19406-0903 Mary P. Efstration Secretary None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 John H. Leven Treasurer None 3200 Horizon Drive P.O. Box 61503 King of Prussia, PA 19406-0903 |
James W. Stratton may be considered a control person of the Underwriter due to his direct or indirect ownership of FPS Services, Inc., the Parent of the Underwriter.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 will be kept by the Registrant's Transfer Agent, FPS Services, Inc., 3200 Horizon Drive, King Prussia, PA 19406-0903 except those records relating to portfolio transactions and the basic organizational and Trust documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 10880 Wilshire Boulevard, Suite 2020, Los Angeles, California 90024
Item 31. Management Services.
There are no management-related service contracts not discussed in Parts A and B.
Item 32. Undertakings.
(a) Registrant hereby undertakes to file a post-effective amendment including financial statements of each series of the Registrant, which need not be certified, within four to six months from the effective date of Registrant's 1933 Act Registration Statement with respect to shares of each of them.
(b) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, and State of California on the 27th day of March, 1997.
Metropolitan West Funds
By: /s/ Scott B. Dubchansky*
------------------------------
Scott B. Dubchansky
Principal Executive Officer,
Principal Financial and
Accounting Officer and Sole
Trustee
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Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment to its Registration Statement has been signed below by the following person in the capacities and on the date indicated.
/s/ Scott B. Dubchansky* Principal Executive Officer, March 27, 1997
- ------------------------ Principal Financial and
Scott B. Dubchansky Accounting Officer and Sole
Trustee
*by /s/ David A. Hearth
------------------------------------
David A. Hearth, Attorney-in-Fact
pursuant to Power of Attorney
previously filed
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
under
THE INVESTMENT COMPANY ACT OF 1940
Metropolitan West Funds
(Exact Name of Registrant as Specified in its Charter)
Exhibit(s) Index
Exhibit No. Document Page No. - ------------ -------- -------- (6) Form of Underwriting Agreement _____ (8)(A) Form of Custody Agreement _____ (8)(B) Form of Custody Administration and Agency Agreement _____ (9)(A) Form of Administration Agreement _____ (9)(B) Form of Accounting Services Agreement _____ (9)(C) Form of Transfer Agent Services Agreement _____ (11) Consent of Independent Auditors _____ (13) Form of Subscription Agreement _____ |
UNDERWRITING AGREEMENT
ThisAgreement, dated as of the _______ day of _______, 1997, made by and between Metropolitan West Funds, (the "Trust") a Delaware business trust operating as an open end management investment company registered under the Investment Company Act of 1940, as amended (the "Act"); Metropolitan West Asset Management, LLC ("Metropolitan"), a registered investment adviser existing as corporation duly organized and existing under the laws of the State of California; and FPS Broker Services, Inc. ("FPSB"), a corporation duly organized and existing under the laws of the State of Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate series of shares representing interests in separate investment portfolios (the "Series"), which Series are identified on Schedule "C" attached hereto, and which Schedule "C" may be amended from time to time by mutual agreement among the Parties;
WHEREAS, Metropolitan has been appointed investment adviser to the Trust;
WHEREAS, FPSB is a broker-dealer registered with the U.S. Securities and Exchange Commission and a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Parties are desirous of entering into an agreement providing for the distribution by FPSB of the shares of the Trust (the "Shares").
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and in exchange of good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the Parties hereto, intending to be legally bound, do hereby agree as follows;
1. Appointment.
The Trust hereby appoints FPSB as its exclusive agent for the distribution of the Shares in the fifty United States of America, the District of Columbia and Commonwealth of Puerto Rico, and FPSB hereby accepts such appointment under the terms of this Agreement. The Trust agrees that it will not sell any shares to any person except to full orders for the shares received through FPSB; provided, however, that the foregoing exclusive right shall not apply: (a) to shares issued or sold in connection with the merger or consolidation of any other investment company with the Trust or the acquisition by purchase or otherwise of all or substantially all of the assets of any investment company or substantially all of the outstanding shares of any such company by the Trust; (b) to shares which may be offered by the Trust to its stockholders for reinvestment of cash distributed from capital gains or net investment income of the Trust; (c) to shares which may be issued to shareholders of other funds who exercise any exchange privilege set forth in the Trust's Prospectus. Notwithstanding any other provision hereof, the Trust may terminate, suspend, or withdraw the offering of the Shares whenever, in its sole discretion, it deems such action to be desirable.
2. Sale and Repurchase of Shares.
FPSB agrees to provide the services contemplated hereby, and
(a) FPSB is hereby granted the right, as agent for the Trust, to sell Shares to the public against orders therefor at the public offering price (as defined in subparagraph 2.(c) below).
(b) FPSB will also have the right to take, as agent for the Trust, all actions which, in FPSB's judgment, and subject to the Trust's reasonable approval, are necessary to carry into effect the distribution of the Shares.
(c) The public offering price for Shares shall be the net asset value per Share then in effect, plus a sales charge, if applicable.
(d) The net asset value of the Shares shall be determined in the manner provided in the then current Prospectus and Statement of Additional Information relating to the Shares, and when determined shall be applicable to all transactions as provided in the Prospectus. The net asset value of the Shares shall be calculated by the Trust or by another entity on behalf of the Trust. FPSB shall have no duty to inquire into, or liability for, the accuracy of the net asset value per Share as calculated.
(e) On every sale, the Distributor shall promptly pay to the Trust the applicable net asset value of the Shares.
(f) Upon receipt of purchase instructions, FPSB will transmit such instructions to the Trust or its transfer agent for registration of the Shares purchased.
(g) Nothing in this Agreement shall prevent FPSB or any affiliated person (as defined in the Act) of FPSB from acting as underwriter or distributor for any other person, firm or corporation (including other investment companies), or in any way limit or restrict FPSB or such affiliated person from buying, selling or trading any securities for its or their own account or for the accounts of others for whom it or they may be acting; provided, however, that FPSB expressly agrees that it will not for its own account purchase any Shares of the Trust except for investment purposes, and that it will not for its own account sell any such Shares except by redemption of such Shares by the Trust, and that it will not undertake in any activities which, in its judgment, will adversely affect the performance of its obligations to the Trust under this Agreement.
(h) FPSB may repurchase Shares at such prices and upon such terms and conditions as shall be specified in the Prospectus.
3. Rules of Sale of Shares.
FPSB does not agree to sell any specific number of Shares. FPSB, as Underwriter for the Trust, undertakes to sell Shares on a best efforts basis and only against orders received therefor. The Trust reserves the right to terminate, suspend or withdraw the sale of its Shares for any reason deemed adequate by it, and the Trust reserves the right to refuse at any time or times to sell any of its Shares to any person for any reason deemed adequate by it.
4. Rules of NASD.
(a) FPSB will conform to the Rules of Fair Practice of the NASD and the securities laws of any jurisdiction in which it directly or indirectly sells any Shares.
(b) FPSB will require each dealer with whom FPSB has a selling agreement to conform to the applicable provisions of the Prospectus, with respect to the public offering price of the Shares, and FPSB shall not cause the Trust to withhold the placing of purchase orders so as to make a profit thereby.
(c) The Trust and Metropolitan agree to furnish to FPSB sufficient copies of any and all: agreements, plans, communications with the public or other materials which the Trust or Metropolitan intends to use in connection with any sales of Shares, in adequate time for FPSB to file and clear such materials with the proper authorities before they are put in use. FPSB and the Trust or Metropolitan may agree that any such material does not need to be filed subsequent to distribution. In addition, the Trust and Metropolitan agree not to use any such materials until so filed and cleared for use by appropriate authorities as well as by FPSB.
(d) FPSB, at its own expense, will qualify as a dealer or broker, or otherwise, under all applicable state or federal laws required in order that the Shares may be sold in such states as may be mutually agreed upon by the Parties.
(e) FPSB shall remain registered with the U.S. Securities and Exchange Commission and a member of the National Association of Securities Dealers for the term of this Agreement.
(f) FPSB shall not, in connection with any sale or solicitation of a sale of the Shares, make or authorize any representative, service organization, broker or dealer to make any representations concerning the Shares, except those contained in the Prospectus covering the Shares and in communications with the public or sales materials approved by FPSB as information supplemental to such Prospectus. Copies of the Prospectus will be supplied by the Trust or Metropolitan to FPSB in reasonable quantities upon request.
5. Records to be Supplied by the Trust.
The Trust shall furnish to FPSB copies of all information, financial statements and other papers which FPSB may reasonably request for use in connection with the distribution of the Shares including, but not limited to, one certified copy of all financial statements prepared for the Trust by its independent public accountants.
6. Expenses.
(a) The Trust will bear the following expenses:
(i) preparation, setting in type, and printing of sufficient copies of the Prospectuses and Statements of Additional Information for distribution to shareholders, and the cost of distribution of same to the shareholders;
(ii) preparation, printing and distribution of reports and other communications to shareholders;
(iii) registration of the Shares under the federal securities laws;
(iv) qualification of the Shares for sale in the jurisdictions as directed by the Trust;
(v) maintaining facilities for the issue and transfer of the Shares;
(vi) supplying information, prices and other data to be furnished by the Trust under this Agreement; and
(vii) any original issue taxes or transfer taxes applicable to the sale or delivery of the Shares or certificates therefor.
(b) Metropolitan will pay all other expenses incident to the sale and distribution of the Shares sold hereunder.
7. Term and Compensation.
(a) The term of this Agreement shall commence on the date on which the Trust's registration statement is declared effective-by the U.S. Securities and Exchange Commission ("Effective Date").
(b) This Agreement shall remain in effect for two (2) years from the Effective Date. This Agreement shall continue thereafter for periods not exceeding one (1) year, if approved at least annually (i) by a vote of a majority of the outstanding voting securities of each Series; or (ii) by a vote of a majority of the Trustees of the Trust who are not parties to this Agreement (other than as Trustees of the Trust) or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval.
(c) Fees payable to FPSB shall be paid by Metropolitan as set forth in Schedule "B" attached and shall be fixed for the two (2) year period commencing on the Effective Date of this Agreement. Thereafter, the fee schedule will be subject to annual review and adjustment.
(d) This Agreement (i) may at any time be terminated without the payment of any penalty, either by a vote of the Trustees of the Trust or by a vote of a majority of the outstanding voting securities of each Series with respect to such Series, on sixty (60) days
written notice to FPSB; and (ii) may be terminated by FPSB on sixty (60) days written notice to the Trust with respect to any Series.
(e) This Agreement shall automatically terminate in the event of its assignment.
8. Indemnification of FPSB by Metropolitan.
Metropolitan and the Trust will indemnify and hold FPSB harmless for the actions of Metropolitan employees registered with the NASD as FPSB representatives, and hereby undertakes to maintain compliance with all rules and regulations concerning any and all sales presentations made by such employees.
9. Liability of FPSB.
(a) FPSB, its directors, officers, employees, shareholders and agents shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of FPSB's obligation pursuant to Section 4 of this Agreement (Rules of NASD), a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or negligence on the part of FPSB in the performance of its obligations and duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
(b) The Trust agrees to indemnify and hold harmless FPSB against any and all liability, loss, damages, costs or expenses (including reasonable counsel fees) which FPSB may incur or be required to pay hereafter, in connection with any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which FPSB may be involved as a party or otherwise or with which FPSB may be threatened, by reason of the offer or sale of the Trust Shares by persons other than FPSB or its representatives, prior to the execution of this Agreement. Indemnification under this paragraph shall not apply to actions or omissions of FPSB, or its directors, officers,
employees, shareholders and agents in cases of its or their willful misfeasance, bad faith, negligence or reckless disregard of its or their duties hereunder. If a claim is made against FPSB as to which FPSB may seek indemnity under this Section, FPSB shall notify the Trust promptly after any written assertion of such claim threatening to institute an action or proceeding with respect thereto and shall notify the Trust promptly of any action commenced against FPSB within 10 days time after FPSB shall have been served with a summons or other legal process, giving information as to the nature and basis of the claim. Failure to notify the Trust shall not, however, relieve the Trust from any liability which it may have on account of the indemnity under this Section 9(b) if the Trust has not been prejudiced in any material respect by such failure. The Trust may negotiate the settlement of any such action, suit or proceeding subject to FPSB's approval, which shall not be unreasonably withheld. FPSB shall have the right to participate in the defense of an action or proceeding and to retain its own counsel, and the reasonable fees and expenses of such counsel shall be borne by the Trust (which shall pay such fees, costs and expenses at least quarterly) if: (i) FPSB has received an opinion of counsel stating that the use of counsel chosen by the Trust to represent FPSB would present such counsel with a conflict of interest; (ii) the defendants in, or targets of, any such action or proceeding include both FPSB and the Trust, and legal counsel to FPSB shall have reasonably-concluded that there are legal defenses available to it which are different from or additional to those available to the Trust or which may be adverse to or inconsistent with defenses available to the Trust (in which case the Trust shall not have the right to direct the defense of such action on behalf of FPSB); or (iii) the Trust shall authorize FPSB to employ separate counsel at the expense of the Trust.
(c) Any person, even though also a director, officer, employee, shareholder or agent of FPSB, who may be or become an officer, director, trustee, employee or agent of
the Trust, shall be deemed, when rendering services to the Trust or acting on any business of the Trust (other than services or business in connection with FPSB's duties hereunder), to be rendering such services to or acting solely for the Trust and not as a director, officer, employee, shareholder or agent, or one under the control or direction of FPSB even though receiving a salary from FPSB.
(d) The Trust agrees to indemnify and hold harmless FPSB, and each person who controls FPSB within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigative, legal and other expenses incurred in connection therewith) to which they, or any of them, may become subject under the Act, the Securities Act, the Exchange Act or other federal or state law or regulation, at common law or otherwise insofar as such losses, claims, damages or liabilities (or actions, suits or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Prospectus, Statement of Additional Information, supplement thereto, sales literature or other written information prepared by the Trust and furnished by the Trust to FPSB for FPSB's use hereunder, disseminated by the Trust or which arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. Such indemnity shall not, however, inure to the benefit of FPSB (or any person controlling FPSB) on account of any losses, claims, damages or liabilities (or actions, suits or proceedings in respect thereof) arising from the sale of the Shares of the Trust to any person by FPSB (i) if such untrue statement or omission or alleged untrue statement or omission was made in the Prospectus, Statement of Additional Information, or supplement, sales or other literature, in reliance upon and in conformity with
information furnished in writing to the Trust by FPSB specifically for use therein or (ii) if such losses, claims, damages or liabilities arise out of or are based upon an untrue statement or omission or alleged untrue statement or omission found in any Prospectus, Statement of Additional Information, supplement, sales or other literature, subsequently corrected, but negligently distributed by FPSB and a copy of the corrected Prospectus was not delivered to such person at or before the confirmation of the sale to such person.
(e) FPSB shall not be responsible for any damages, consequential or otherwise, which Metropolitan or the Trust may experience, due to the disruption of the distribution of Shares caused by any action or inaction of any registered representative or affiliate of FPSB or of FPSB itself.
10. Amendments.
No provision of this Agreement may be amended or modified in any manner whatsoever, except by a written agreement properly authorized and executed by the Parties.
11. Section Headings.
Section and paragraph headings are for convenience only and shall not be construed as part of this Agreement.
12. Reports.
FPSB shall prepare reports for the Board of Trustees of the Trust, on a quarterly basis, showing such information as, from time to time, shall be reasonably requested by such Board.
13. Severability.
If any part, term or provision of this Agreement is held by any court to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not affected, and the rights and obligations of the Parties shall be construed and enforced as if the Agreement did not contain the particular part, term or
provision held to be illegal or invalid provided that the basic agreement is not thereby substantially impaired.
14. Governing Law.
This Agreement shall be governed by the laws of the State of California and the exclusive venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
15. Authority to Execute
The Parties represent and warrant to each other that the execution and delivery of this Agreement by the undersigned officer of each Party has been duly and validly authorized; and, when duly executed, this Agreement will constitute a valid and legally binding and enforceable obligation of each Party.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement consisting of ten type written pages, together with Schedules "A," "B" and "C," to be signed by their duly authorized officers, as of the day and year first above written.
SCHEDULE "A"
UNDERWRITER/SPONSOR SERVICES
FOR
METROPOLITAN WEST FUNDS
I. Underwriter/Sponsor services include:
(A) Preparation and execution of Underwriter and 12b-1 Plan
Agreements
o Monitoring accruals
o Monitoring expenses
o Disbursements for expenses and trail commissions
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(B) Quarterly 12b-1 Reports to Board of Directors and/or Trustees
(C) Literature review, recommendations and submission to the NASD
(D) Initial NASD Licensing and Transfers of Registered Representatives
o U4 Form and Fingerprint Submission to NASD
o Supplying. Series 6 and 63 written study material
o Registration for Exam Preparation classes
o Renewals and Terminations of Representatives
(E) Written supervisory procedures and manuals for Registered Representatives
(F) Ongoing compliance updates for Representatives regarding sales practices, written correspondence and other communications with the public.
(G) NASD Continuing Education Requirement
SCHEDULE "B"
UNDERWRITER AND DISTRIBUTION FEE SCHEDULE
FOR
METROPOLITAN WEST FUNDS
This Fee Schedule is fixed for a period of two (2) years from the Effective Date as that term is defined in the Agreement.
I. (A) Underwriter/Sponsor Services
The annual fee to FPS Broker Services, Inc. (FPSB) will be included under our Administration Services. As Underwriter/Distributor, including primary licensing/ regulatory agent for Fund personnel, FPS Broker Services, Inc. will be required to maintain the Fund's registration as Broker/Dealer of record.
These services include representing the Funds as primary Distributor includes the expenses and personnel required to maintain the various regulatory books and records of the Broker/Dealer and maintenance of shareholder files and records for all transactions processed on behalf of Metropolitan West Asset Management. The services also include the regulatory requirements of all marketing related and distribution reports including maintenance of records regarding individual transaction activities of the Funds' registered representatives.
(B) FPBS will maintain annual NASD and state license renewals and the monitoring required of representative activities as follows:
Up to 10 States $2,000 per Representative per Year All 50 States $4,000 per Representative per Year
(C) OUT-OF-POCKET EXPENSES
The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-pocket expenses, including telephone, postage, overdraft charges, EDGAR filings, Fund/SERV and Networking expenses, telecommunications, special reports, record retention, special transportation costs, copying and sending materials to auditors and/or regulatory agencies, as incurred and approved.
SCHEDULE "C"
Identification of Series
Below are listed the Series and Classes of Shares to which services under this Agreement are to be performed as of the Effective Date of this Agreement:
"Metropolitan West Funds"
1.. Metropolitan West Total Return Bond Fund
2. Metropolitan West Low Duration Bond Fund
3. Metropolitan West Short Term Investment Fund
This Schedule "C" may be amended from time to time by agreement of the Parties
CUSTODY AGREEMENT
Agreement made as of this day of , 1997, between METROPOLITAN WEST FUNDS, a Delaware business trust organized and existing under the laws of the State of Delaware, having its principal office and place of business at 10880 - Wilshire Boulevard, Los Angeles, California 90024 (hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a banking business, having its principal office and place of business at 48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
WHEREAS, the Fund represents that pursuant to the Custody Administration and Agency Agreement between FPS Services, Inc. ("FPS") and the Fund, FPS (a) has agreed to perform certain administrative functions which may include the functions of administrator, transfer agent and accounting services agent and (b) has been appointed by the Fund to act as its agent in respect of certain transactions contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) FPS has agreed to act as Fund's agent in respect of certain transactions contemplated in this Agreement and (b) the Custodian is authorized and directed to rely upon and follow Certificates and Instructions given by FPS, the Fund's agent, in respect of transactions contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:
1. "Administrator" shall mean FPS and such successors or permitted assigns as may succeed and perform its duties under the Administration Agreement.
2. "Administration Agreement" shall mean that certain separate agreement entitled "Custody Administration and Agency Agreement" dated as of _______________, 1997 between the Fund and the FPS.
3. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry system for United States and fed- eral agency securities, its successor or successors and its nominee or nominees.
4. "Call Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities.
5. "Certificate" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to the Custodian which is actually received by the Custodian and signed on behalf of the Fund by any two Officers, and the term Certificate shall also include Instructions communicated to the Custodian by the Administrator.
6. "Clearing Member" shall mean a registered broker-dealer which is a clearing member under the rules of O.C.C. and a member of a national securities exchange qualified to act as a custodian for an investment company, or any broker-dealer reasonably believed by the Custodian to be such a clearing member.
7. "Collateral Account" shall mean a segregated account so denominated which is specifically allocated to a Series and pledged to the Custodian as security for, and in consideration of, the Custodian's issuance of (a) any Put Option guarantee letter or similar document described in paragraph 8 of Article V herein, or (b) any receipt described in Article V or VIII herein.
8. "Composite Currency Unit" shall mean the European Currency Unit or any other composite unit consisting of the aggregate of specified amounts of specified Currencies as such unit may be constituted from time to time.
9. "Covered Call Option" shall mean an exchange traded option entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities (excluding Futures Contracts) which are owned by the writer thereof and subject to appropriate restrictions.
10. "Currency" shall mean money denominated in a lawful currency of any country or the European Currency Unit.
11. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing agency registered with the Securities and Exchange Commission, its successor or successors and its nominee or nominees. The term "Depository" shall further mean and include any other person authorized to act as a depository under the Investment Company Act of 1940, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Fund's Board of Trustees specifically approving deposits therein by the Custodian.
12. "Financial Futures Contract" shall mean the firm commitment to buy or sell fixed income securities including, without limitation, U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit, and Eurodollar certificates of deposit, during a specified month at an agreed upon price.
13. "Futures Contract" shall mean a Financial Futures Contract and/or Stock Index Futures Contracts.
14. "Futures Contract Option" shall mean an option with respect to a Futures Contract.
15. "FX Transaction" shall mean any transaction for the purchase by one party of an agreed amount in one Currency against the sale by it to the other party of an agreed amount in another Currency.
16. "Instructions" shall mean instructions communications transmitted by electronic or telecommunications media including S.W.I.F.T., computer-to-computer interface, dedicated transmission line, facsimile transmission (which may be signed by an Officer or unsigned) and tested telex.
17. "Margin Account" shall mean a segregated account in the name of a broker, dealer, futures commission merchant, or a Clearing Member, or in the name of the Fund for the benefit of a broker, dealer, futures commission merchant, or Clearing Member, or otherwise, in accordance with an agreement between the Fund, the Custodian and a broker, dealer, futures commission merchant or a Clearing Member (a "Margin Account Agreement"), separate and distinct from the custody account, in which certain Securities and/or money of the Fund shall be deposited and withdrawn from time to time in connection with such transactions as the Fund may from time to time determine. Securities held in the Book-Entry System or the Depository shall be deemed to have been deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting an appropriate entry in its books and records.
18. "Money Market Security" shall be deemed to include, without limitation, certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as to interest and principal by the government of the United States or agencies or instrumentalities thereof, any tax, bond or revenue anticipation note issued by any state or municipal government or public authority, commercial paper, certificates of deposit and bankers' acceptances, repurchase agreements with respect to the same and bank time deposits, where the purchase and sale of such securities normally requires settlement in federal funds on the same day as such purchase or sale.
19. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency registered under Section 17A of the Securities Exchange Act of 1934, its successor or successors, and its nominee or nominees.
20. "Officers" shall be deemed to include the President, any Vice President, the Secretary, the Clerk, the Treasurer, the Controller, any Assistant Secretary, any Assistant Clerk, any Assistant Treasurer, and any other person or persons, including officers or employees of the Administrator, whether or not any such other person is an officer of the Fund, duly authorized by the Board of Trustees of the Fund to execute any Certificate, instruction, notice or other
instrument on behalf of the Fund and listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time.
21. "Option" shall mean a Call Option, Covered Call Op- tion, Stock Index Option and/or a Put Option.
22. "Oral Instructions" shall mean verbal instructions actually received by the Custodian from an Officer or from a person reasonably believed by the Custodian to be an Officer.
23. "Put Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and tender of the specified underlying Securities, to sell such Securities to the writer thereof for the exercise price.
24. "Reverse Repurchase Agreement" shall mean an agreement pursuant to which the Fund sells Securities and agrees to repurchase such Securities at a described or specified date and price.
25. "Security" shall be deemed to include, without limitation, Money Market Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures Contracts, Stock Index Futures Contract Options, Financial Futures Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks and other securities having characteristics similar to common stocks, preferred stocks, debt obligations issued by state or municipal governments and by public authorities, (including, without limitation, general obligation bonds, revenue bonds, industrial bonds and industrial development bonds), bonds, debentures, notes, mortgages or other obligations, and any certificates, receipts, warrants or other instruments representing rights to receive, purchase, sell or subscribe for the same, or evidencing or representing any other rights or interest therein, or any property or assets.
26. "Senior Security Account" shall mean an account maintained and specifically allocated to a Series under the terms of this Agreement as a segregated account, by recordation or otherwise, within the custody account in which certain Securities and/or other assets of the Fund specifically allocated to such Series shall be deposited and withdrawn from time to time in accordance with Certificates received by the Custodian in connection with such transactions as the Fund may from time to time determine.
27. "Series" shall mean the various portfolios, if any, of the Fund as described from time to time in the current and effective prospectus for the Fund and listed on Appendix B hereto as amended from time to time.
28. "Shares" shall mean the shares of beneficial inter- est of the Fund, each of which is, in the case of a Fund hav- ing Series, allocated to a particular Series.
29. "Stock Index Futures Contract" shall mean a bilateral agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the value of a particular stock index at the close of the last business day of the contract and the price at which the futures contract is originally struck.
30. "Stock Index Option" shall mean an exchange traded option entitling the holder, upon timely exercise, to receive an amount of cash determined by reference to the difference between the exercise price and the value of the index on the date of exercise.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian of the Securities and moneys at any time owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in Article VIII, the Fund will deliver or cause to be delivered to the Custodian all Securities and all moneys owned by it, at any time during the period of this Agreement, and shall specify with respect to such Securities and money the Series to which the same are specifically allocated. The Custodian shall segregate, keep and maintain the assets of the Series separate and apart. The Custodian will not be responsible for any Securities and moneys not actually received by it. The Custodian will be entitled to reverse any credits made on the Fund's behalf where such credits have been previously made and moneys are not finally collected. The Fund shall deliver to the Custodian a certified resolution of the Board of Trustees of the Fund, substantially in the form of Exhibit A hereto, approving, authorizing and instructing the Custodian on a continuous and on-going basis to deposit in the Book-Entry System all Securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated and to utilize the Book-Entry System to the extent possible in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities and deliveries and returns of Securities collateral. Prior to a deposit of Securities specifically allocated to a Series in the Depository, the Fund shall deliver to the Custodian a certified resolution of the Board of Trustees of the Fund, substantially in the form of Exhibit B hereto, approving, authorizing and instructing the Custodian on a continuous and ongoing basis until
instructed to the contrary by a Certificate actually received by the Custodian to deposit in the Depository all Securities specifically allocated to such Series eligible for deposit therein, and to utilize the Depository to the extent possible with respect to such Securities in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities, and deliveries and returns of Securities collateral. Securities and moneys deposited in either the Book-Entry System or the Depository will be represented in accounts which include only assets held by the Custodian for customers, including, but not limited to, accounts in which the Custodian acts in a fiduciary or representative capacity and will be specifically allocated on the Custodian's books to the separate account for the applicable Series. Prior to the Custodian's accepting, utilizing and acting with respect to Clearing Member confirmations for Options and transactions in Options for a Series as provided in this Agreement, the Custodian shall have received a certified resolution of the Fund's Board of Trustees, substantially in the form of Exhibit C hereto, approving, authorizing and instructing the Custodian on a continuous and on-going basis, until instructed to the contrary by a Certificate actually received by the Custodian, to accept, utilize and act in accordance with such confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in the name of each Series, and shall credit to the separate account for each Series all moneys received by it for the account of the Fund with respect to such Series. Money credited to a separate account for a Series shall be disbursed by the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address of the person to whom the payment is to be made, the Series account from which payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall furnish the Administrator with confirmations and a summary, on a per Series basis, of all transfers to or from the account of the Fund for a Series, either hereunder or with any co-custodian or sub-custodian appointed in accordance with this Agreement during said day. Where Securities are transferred to the account of the Fund for a Series, the Custodian shall also by book-entry or otherwise identify as belonging to such Series a quantity of Securities in a fungible bulk of Securities registered in the name of the Custodian (or its nominee) or shown on the Custodian's account on the books of the Book-Entry System or the Depository. At least monthly and from time to time, the Custodian shall furnish the Administrator with a detailed statement, on a per Series basis, of the Securities and moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in Article VIII, all Securities held by the Custodian hereunder, which are issued or issuable only in bearer form, except such Securities as are held in the Book-Entry System, shall be held by the Custodian in
that form; all other Securities held hereunder may be registered in the name of the Fund, in the name of any duly appointed registered nominee of the Custodian as the Custodian may from time to time determine, or in the name of the Book-Entry System or the Depository or their successor or successors, or their nominee or nominees. The Fund agrees to furnish or cause to be furnished to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of its registered nominee or in the name of the Book-Entry System or the Depository any Securities which it may hold hereunder and which may from time to time be registered in the name of the Fund. The Custodian shall hold all such Securities specifically allocated to a Series which are not held in the Book-Entry System or in the Depository in a separate account in the name of such Series physically segregated at all times from those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise instructed to the contrary by a Certificate, the Custodian by itself, or through the use of the Book-Entry System or the Depository with respect to Securities held hereunder and therein deposited, shall with respect to all Securities held for the Fund hereunder in accordance with preceding paragraph 4:
4. (a) collect all income due or payable;
(b) present for payment and collect the amount payable upon such Securities which are called, but only if either (i) the Custodian receives a written notice of such call, or (ii) notice of such call appears in one or more of the publications listed in Appendix C annexed hereto, which may be amended at any time by the Custodian without the prior notification or consent of the Fund;
(c) present for payment and collect the amount pay- able upon all Securities which mature;
(d) surrender Securities in temporary form for definitive Securities;
(e) execute, as custodian, any necessary declarations or certificates of ownership under the Federal Income Tax Laws or the laws or regulations of any other taxing authority now or hereafter in effect; and
(f) hold directly, or through the Book-Entry System or the Depository with respect to Securities therein deposited, for the account of a Series, all rights and similar securities issued with respect to any Securities held by the Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly or through the use of the Book-Entry Sys- tem or the Depository, shall:
(a) execute and deliver to such persons as may be designated in such Certificate proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as
owner of any Securities held by the Custodian hereunder for the Series specified in such Certificate may be exercised;
(b) deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate in exchange for other Securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege and receive and hold hereunder specifically allocated to such Series any cash or other Securities received in exchange;
(c) deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold hereunder specifically allocated to such Series such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of the Series specified in such Certificate, and take such other steps as shall be stated in such Certificate to be for the purpose of effectuating any duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon Securities not described in preceding paragraph 5(b) of this Article which may be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the Custodian shall not be required to obtain possession of any instrument or certificate representing any Futures Contract, any Option, or any Futures Contract Option until after it shall have determined, or shall have received a Certificate from the Fund stating, that any such instruments or certificates are available. The Fund shall deliver to the Custodian such a Certificate no later than the business day preceding the availability of any such instrument or certificate. Prior to such availability, the Custodian shall comply with Section 17(f) of the Investment Company Act of 1940, as amended, in connection with the purchase, sale, settlement, closing out or writing of Futures Contracts, Options, or Futures Contract Options by making payments or deliveries specified in Certificates received by the Custodian in connection with any such purchase, sale, writing, settlement or closing out upon its receipt from a broker, dealer, or futures commission merchant of a statement or confirmation reasonably believed by the Custodian to be in the form customarily used by brokers, dealers, or future commission merchants with respect to such Futures Contracts, Options, or Futures Contract Options, as the case may be, confirming that such Security is held by such broker, dealer or futures commission merchant, in book-entry form or otherwise, in the name of the Custodian (or any nominee of the Custodian) as custodian for the Fund, provided, however, that notwithstanding the foregoing, payments to or deliveries from the Margin Account and payments with respect to Securities to which a Margin Account relates, shall be made in accordance with the terms and conditions of the Margin Account Agreement. Whenever any such instruments or certificates are available, the Custodian shall, notwithstanding any provision in
this Agreement to the contrary, make payment for any Futures Contract, Option, or Futures Contract Option for which such instruments or such certificates are available only against the delivery to the Custodian of such instrument or such certificate, and deliver any Futures Contract, Option or Futures Contract Option for which such instruments or such certificates are available only against receipt by the Custodian of payment therefor. Any such instrument or certificate delivered to the Custodian shall be held by the Custodian hereunder in accordance with, and subject to, the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a purchase of an Option, a Futures Contract, or a Futures Contract Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian (i) with respect to each purchase of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each purchase of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such purchase: (a) the Series to which such Securities are to be specifically allocated; (b) the name of the issuer and the title of the Securities; (c) the number of shares or the principal amount purchased and accrued interest, if any; (d) the date of purchase and settlement; (e) the purchase price per unit; (f) the total amount payable upon such purchase; (g) the name of the person from whom or the broker through whom the purchase was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom payment is to be made. The Custodian shall, upon receipt of Securities purchased by or for the Fund, pay to the broker specified in the Certificate out of the moneys held for the account of such Series the total amount payable upon such purchase, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale of any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase Agreement, the Fund shall deliver or cause the Administrator to deliver to the Custodian (i) with respect to each sale of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each sale of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such sale: (a) the Series to which such Securities were specifically allocated; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f) the total amount payable to the Fund upon such sale; (g) the name of the broker through whom or the person to whom the sale was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom the Securities are to be delivered. The Custodian shall deliver the Securities specifically allocated to such Series to the broker specified in the Certificate against payment
upon receipt of the total amount payable to the Fund upon such sale, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to each Option purchased: (a) the Series to which such Option is specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options purchased; (d) the expiration date; (e) the exercise price; (f) the dates of purchase and settlement; (g) the total amount payable by the Fund in connection with such purchase; (h) the name of the Clearing Member through whom such Option was purchased; and (i) the name of the broker to whom payment is to be made. The Custodian shall pay, upon receipt of a Clearing Member's statement confirming the purchase of such Option held by such Clearing Member for the account of the Custodian (or any duly appointed and registered nominee of the Custodian) as custodian for the Fund, out of moneys held for the account of the Series to which such Option is to be specifically allocated, the total amount payable upon such purchase to the Clearing Member through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to each such sale: (a) the Series to which such Option was specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options sold; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the Clearing Member through whom the sale was made. The Custodian shall consent to the delivery of the Option sold by the Clearing Member which previously supplied the confirmation described in preceding paragraph 1 of this Article with respect to such Option against payment to the Custodian of the total amount payable to the Fund, provided that the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Call Option: (a) the Series to which such Call Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Call Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid by the Fund upon such exercise;
and (g) the name of the Clearing Member through whom such Call Option was exercised. The Custodian shall, upon receipt of the Securities underlying the Call Option which was exercised, pay out of the moneys held for the account of the Series to which such Call Option was specifically allocated the total amount payable to the Clearing Member through whom the Call Option was exercised, provided that the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Put Option: (a) the Series to which such Put Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Put Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid to the Fund upon such exercise; and (g) the name of the Clearing Member through whom such Put Option was exercised. The Custodian shall, upon receipt of the amount payable upon the exercise of the Put Option, deliver or direct the Depository to deliver the Securities specifically allocated to such Series, provided the same conforms to the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series to which such Stock Index Option was specifically allocated; (b) the type of Stock Index Option (put or call); (c) the number of Options being exercised; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the total amount to be received by the Fund in connection with such exercise; and (h) the Clearing Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Covered Call Option: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares for which the Covered Call Option was written and which underlie the same; (c) the expiration date; (d) the exercise price; (e) the premium to be received by the Fund; (f) the date such Covered Call Option was written; and (g) the name of the Clearing Member through whom the premium is to be received. The Custodian shall deliver or cause to be delivered, in exchange for receipt of the premium specified in the Certificate with respect to such Covered Call Option, such receipts as are required in accordance with the customs prevailing among Clearing Members dealing in Covered Call Options and shall impose, or direct the Depository to impose, upon the underlying Securities specified in the Certificate specifically allocated to such Series such restrictions as may be required by such receipts. Notwithstanding the foregoing, the Custodian has the right, upon prior written notification to the Fund, at any time to refuse to issue any receipts for Securities in the possession of the Custodian and not deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate instructing the Custodian to deliver, or to direct the Depository to deliver, the Securities subject to such Covered Call Option and specifying: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares subject to the Covered Call Option; (c) the Clearing Member to whom the underlying Securities are to be delivered; and (d) the total amount payable to the Fund upon such delivery. Upon the return and/or cancellation of any receipts delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver, or direct the Depository to deliver, the underlying Securities as specified in the Certificate against payment of the amount to be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate specifying
with respect to such Put Option: (a) the Series for which such Put Option was
written; (b) the name of the issuer and the title and number of shares for which
the Put Option is written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the Fund; (f) the date
such Put Option is written; (g) the name of the Clearing Member through whom the
premium is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; and (i) the amount of cash and/or the amount
and kind of Securities specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account specified in the Certificate, issue a
Put Option guarantee letter substantially in the form utilized by the Custodian
on the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the preceding paragraph is exercised, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Series to which such Put Option was written; (b) the name of the issuer and title and number of shares subject to the Put Option; (c) the Clearing Member from whom the underlying Securities are to be received; (d) the total amount payable by the Fund upon such delivery; (e) the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be withdrawn from the Collateral Account for such Series and (f) the amount of cash and/or the amount and kind of Securities, specifically allocated to such Series, if any, to be withdrawn from the Senior Security Account. Upon the return and/or cancellation of any Put Option guarantee letter or similar document issued by the Custodian in connection with such Put Option, the Custodian shall pay out of the moneys held for the account of the Series to which such Put Option was specifically allocated the total amount payable to the
Clearing Member specified in the Certificate as set forth in such Certificate against delivery of such Securities, and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series for which such Stock Index Option was written; (b) whether such Stock Index Option is a put or a call; (c) the number of options written; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the Clearing Member through whom such Option was written; (h) the premium to be received by the Fund; (i) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Senior Security Account for such Series; (j) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Collateral Account for such Series; and (k) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Margin Account, and the name in which such account is to be or has been established. The Custodian shall, upon receipt of the premium specified in the Certificate, make the deposits, if any, into the Senior Security Account specified in the Certificate, and either (1) deliver such receipts, if any, which the Custodian has specifically agreed to issue, which are in accordance with the customs prevailing among Clearing Members in Stock Index Options and make the deposits into the Collateral Account specified in the Certificate, or (2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series for which such Stock Index Option was written; (b) such information as may be necessary to identify the Stock Index Option being exercised; (c) the Clearing Member through whom such Stock Index Option is being exercised; (d) the total amount payable upon such exercise, and whether such amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Senior Security Account for such Series; and the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Collateral Account for such Series. Upon the return and/or cancellation of the receipt, if any, delivered pursuant to the preceding paragraph of this Article, the Custodian shall pay out of the moneys held for the account of the Series to which such Stock Index Option was specifically allocated to the Clearing Member specified in the Certificate the total amount payable, if any, as specified therein.
12. Whenever the Fund prchases any Option identical to a previously written Option described in paragraphs, 6, 8 or 10 of this Article in a transaction expressly designated as a "Closing Purchase Transaction" in order to liquidate its position as a writer of an Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to the Option being purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase Transaction with respect to any Option purchased or written by the Fund and described in this Article, the Custodian shall delete such Option from the statements delivered to the Fund pursuant to paragraph 3 Article III herein, and upon the return and/or cancellation of any receipts issued by the Custodian, shall make such withdrawals from the Collateral Account, and the Margin Account and/or the Senior Security Account as may be specified in a Certificate received in connection with such expiration, exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Futures Contract, (or with respect to any number of identical Futures Contract(s)): (a) the Series for which the Futures Contract is being entered; (b) the category of Futures Contract (the name of the underlying stock index or financial instrument); (c) the number of identical Futures Contracts entered into; (d) the delivery or settlement date of the Futures Contract(s); (e) the date the Futures Contract(s) was (were) entered into and the maturity date; (f) whether the Fund is buying (going long) or selling (going short) on such Futures Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Senior Security Account for such Series; (h) the name of the broker, dealer, or futures commission merchant through whom the Futures Contract was entered into; and (i) the amount of fee or commission, if any, to be paid and the name of the broker, dealer, or futures commission merchant to whom such amount is to be paid. The Custodian shall make the deposits, if any, to the Margin Account in accordance with the terms and conditions of the Margin Account Agreement. The Custodian shall make payment out of the moneys specifically allocated to such Series of the fee or commission, if any, specified in the Certificate and deposit in the Senior Security Account for such Series the amount of cash and/or the amount and kind of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be made by the Fund to a broker, dealer, or futures commission merchant with respect to an outstanding Futures Contract, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker, dealer, or futures commission merchant to the Fund with respect to an outstanding Futures Contract, shall be received and dealt with by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is retained by the Fund until delivery or settlement is made on such Futures Contract, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Futures Contract and the Series to which the same relates; (b) with respect to a Stock Index Futures Contract, the total cash settlement amount to be paid or received, and with respect to a Financial Futures Contract, the Securities and/or amount of cash to be delivered or received; (c) the broker, dealer, or futures commission merchant to or from whom payment or delivery is to be made or received; and (d) the amount of cash and/or Securities to be withdrawn from the Senior Security Account for such Series. The Custodian shall make the payment or delivery specified in the Certificate, and delete such Futures Contract from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate specifying:
(a) the items of information required in a Certificate described in paragraph 1
of this Article, and (b) the Futures Contract being offset. The Custodian shall
make payment out of the money specifically allocated to such Series of the fee
or commission, if any, specified in the Certificate and delete the Futures
Contract being offset from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein, and make such withdrawals from the Senior
Security Account for such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
5. Notwithstanding any other provision in this Agreement to the contrary, the Custodian shall deliver cash and Securities to a future commission merchant upon receipt of a Certificate from the Fund or the Administrator specifying: (a) the name of the future commission merchant; (b) the specific cash and Securities to be delivered; (c) the date of such delivery; and (d) the date of the agreement between the Fund and such future commission merchant entered pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a Certificate by the Fund shall constitute (x) a representation and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized, executed and delivered by the Fund and the future commission merchant and complies with Rule 17f-6, and (y) an agreement by the Fund
that the Custodian shall not be liable for the acts or omissions of any such future commission merchant.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall deliver or cause the Admin- istrator to deliver to the
Custodian a Certificate specifying with respect to such Futures Contract Option:
(a) the Series to which such Option is specifically allocated; (b) the type of
Futures Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option purchased; (d) the expiration date; (e)
the exercise price; (f) the dates of purchase and settlement; (g) the amount of
premium to be paid by the Fund upon such purchase; (h) the name of the broker or
futures commission merchant through whom such option was purchased; and (i) the
name of the broker, or futures commission merchant, to whom payment is to be
made. The Custodian shall pay out of the moneys specifically allocated to such
Series, the total amount to be paid upon such purchase to the broker or futures
commissions merchant through whom the purchase was made, provided that the same
conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying with respect
to each such sale: (a) Series to which such Futures Contract Option was
specifically allocated; (b) the type of Future Contract Option (put or call);
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Contract Option; (d) the
date of sale; (e) the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of the broker of
futures commission merchant through whom the sale was made. The Custodian shall
consent to the cancellation of the Futures Contract Option being closed against
payment to the Custodian of the total amount payable to the Fund, provided the
same conforms to the total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to paragraph 1 is exercised by the Fund, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option (put or call) being exercised; (c) the type of Futures Contract underlying the Futures Contract Option; (d) the date of exercise; (e) the name of the broker or futures commission merchant through whom the Futures Contract Option is exercised; (f) the net total amount, if any, payable by the Fund; (g) the amount, if any, to be received by the Fund; and (h) the amount of cash and/or the amount and kind of Securities to be deposited in the Senior Security Account for such Series. The Custodian
shall make, out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to such Futures Contract Option: (a) the Series for which such Futures Contract Option was written; (b) the type of Futures Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the expiration date; (e) the exercise price; (f) the premium to be received by the Fund; (g) the name of the broker or futures commission merchant through whom the premium is to be received; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Senior Security Account for such Series. The Custodian shall, upon receipt of the premium specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series the deposits into the Senior Security Account, if any, as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call is exercised, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying the Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option was exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount of cash and/or the amount and kind of Securities to be deposited in the Senior Security Account for such Series. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in such Certificate make the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and which is a put is exercised, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Series to which such Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying such Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option is exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn from or deposited in, the Senior Security Account for such Series, if any. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a previously written Futures Contract Option described in this Article in order to liquidate its position as a writer of such Futures Contract Option, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to the Futures Contract Option being purchased: (a) the Series to which such Option is specifically allocated; (b) that the transaction is a closing transaction; (c) the type of Future Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Option Contract; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the expiration date; (g) the name of the broker or futures commission merchant to whom the premium is to be paid; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Senior Security Account for such Series. The Custodian shall effect the withdrawals from the Senior Security Account specified in the Certificate. The withdrawals, if any, to be made from the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction with respect to, any Futures Contract Option written or purchased by the Fund and described in this Article, the Custodian shall (a) delete such Futures Contract Option from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in the case of an exercise such deposits into the Senior Security Account as may be specified in a Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a Futures Contract Option described in this Article shall be subject to Article VI hereof.
10. Notwithstanding any other provision in this Agreement to the contrary, the Custodian shall deliver cash and Securities to a future commission merchant upon receipt of a Certificate from the Fund or the Administrator specifying: (a) the name of the future commission merchant; (b) the specific cash and Securities to be delivered; (c) the date of such delivery; and (d) the date of the agreement between the Fund and such future commission merchant entered pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a Certificate by the Fund shall constitute (x) a representation and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized, executed and delivered by the Fund and the future commission merchant and complies with Rule 17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable for the acts or omissions of any such future commission merchant.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying: (a) the Series for which such short sale was made; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest or dividends, if any; (d) the dates of the sale and settlement; (e) the sale price per unit; (f) the total amount credited to the Fund upon such sale, if any, (g) the amount of cash and/or the amount and kind of Securities, if any, which are to be deposited in a Margin Account and the name in which such Margin Account has been or is to be established; (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in a Senior Security Account, and (i) the name of the broker through whom such short sale was made. The Custodian shall upon its receipt of a statement from such broker confirming such sale and that the total amount credited to the Fund upon such sale, if any, as specified in the Certificate is held by such broker for the account of the Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a receipt or make the deposits into the Margin Account and the Senior Security Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to each such closing out: (a) the Series for which such transaction is being made; (b) the name of the issuer and the title of the Security; (c) the number of shares or the principal amount, and accrued interest or dividends, if any, required to effect such closing-out to be delivered to the broker; (d) the dates of closing-out and settlement; (e) the purchase price per unit; (f) the net total amount payable to the Fund upon such closing-out; (g) the net total amount payable to the broker upon such closing-out; (h) the amount of cash and the amount and kind of Securities to be withdrawn, if any, from the Margin Account; (i) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Senior Security Account; and (j) the name of the broker through whom the Fund is effecting such closing-out. The Custodian shall, upon receipt of the net total amount payable to the Fund upon such closing-out, and the return and/or cancellation of the receipts, if any, issued by the Custodian with respect to the short sale being closed-out, pay out of the moneys held for the account of the Fund to the broker the net total amount payable to the broker, and make the withdrawals from the Margin Account and the Senior Security Account, as the same are specified in the Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with respect to Securities and money held by the Custodian hereunder, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate, or in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions specifying: (a) the Series for which the Reverse Repurchase Agreement is entered; (b) the total amount payable to the Fund in connection with such Reverse Repurchase Agreement and specifically allocated to such Series; (c) the broker or dealer through or with whom the Reverse Repurchase Agreement is entered; (d) the amount and kind of Securities to be delivered by the Fund to such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and (f) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Senior Security Account for such Series in connection with such Reverse Repurchase Agreement. The Custodian shall, upon receipt of the total amount payable to the Fund specified in the Certificate or Oral Instructions make the delivery to the broker or dealer, and the deposits, if any, to the Senior Security Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in preceding paragraph 1 of this Article, the Fund shall deliver or cause the Administrator to deliver a Certificate or, in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions to the Custodian specifying: (a) the Reverse Repurchase Agreement being terminated and the Series for which same was entered; (b) the total amount payable by the Fund in connection with such termination; (c) the amount and kind of Securities to be received by the Fund and specifically allocated to such Series in connection with such termination; (d) the date of termination; (e) the name of the broker or dealer with or through whom the Reverse Repurchase Agreement is to be terminated; and (f) the amount of cash and/or the amount and kind of Securities to be withdrawn from the Senior Securities Account for such Series. The Custodian shall, upon receipt of the amount and kind of Securities to be received by the Fund specified in the Certificate or Oral Instructions, make the payment to the broker or dealer, and the withdrawals, if any, from the Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically allocated to a Series held by the Custodian hereunder, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to each such loan: (a) the Series to which the
loaned Securities are specifically allocated; (b) the name of the issuer and the title of the Securities, (c) the number of shares or the principal amount loaned, (d) the date of loan and delivery, (e) the total amount to be delivered to the Custodian against the loan of the Securities, including the amount of cash collateral and the premium, if any, separately identified, and (f) the name of the broker, dealer, or financial institution to which the loan was made. The Custodian shall deliver the Securities thus designated to the broker, dealer or financial institution to which the loan was made upon receipt of the total amount designated as to be delivered against the loan of Securities. The Custodian may accept payment in connection with a delivery otherwise than through the Book-Entry System or Depository only in the form of a certified or bank cashier's check payable to the order of the Fund or the Custodian drawn on New York Clearing House funds and may deliver Securities in accordance with the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying with respect to each such loan termination and return of Securities: (a) the Series to which the loaned Securities are specifically allocated; (b) the name of the issuer and the title of the Securities to be returned, (c) the number of shares or the principal amount to be returned, (d) the date of termination, (e) the total amount to be delivered by the Custodian (including the cash collateral for such Securities minus any offsetting credits as described in said Certificate), and (f) the name of the broker, dealer, or financial institution from which the Securities will be returned. The Custodian shall receive all Securities returned from the broker, dealer, or financial institution to which such Securities were loaned and upon receipt thereof shall pay, out of the moneys held for the account of the Fund, the total amount payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or withdrawals from, a Senior Security Account as specified in a Certificate received by the Custodian. Such Certificate shall specify the Series for which such deposit or withdrawal is to be made and the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be deposited in, or withdrawn from, such Senior Security Account for such Series. In the event the Certificate fails to specify the Series, the name of the issuer, the title and the number of shares or the principal amount of any particular Securities to be deposited by the Custodian into, or withdrawn from, a Senior Securities Account, the Custodian shall be under no obligation to make any such deposit or withdrawal and shall so notify the Administrator.
2. The Custodian shall make deliveries or payments from a Margin Account to the broker, dealer, futures commission merchant or Clearing Member in whose name, or for whose benefit, the account was established as specified in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with respect to Securities deposited in any Margin Account shall be dealt with in accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in and to any property at any time held by the Custodian in any Collateral Account described herein. In accordance with applicable law the Custodian may enforce its lien and realize on any such property whenever the Custodian has made payment or delivery pursuant to any Put Option guarantee letter or similar document or any receipt issued hereunder by the Custodian. In the event the Custodian should realize on any such property net proceeds which are less than the Custodian's obligations under any Put Option guarantee letter or similar document or any receipt, such deficiency shall be a debt owed the Custodian by the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a statement with respect to each Margin Account in which money or Securities are held specifying as of the close of business on the previous business day: (a) the name of the Margin Account; (b) the amount and kind of Securities held therein; and (c) the amount of money held therein. The Custodian shall make available upon request to any broker, dealer, or futures commission merchant specified in the name of a Margin Account a copy of the statement furnished the Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash and/or Securities are maintained in a Collateral Account for any Series, the Custodian shall furnish the Administrator with a statement with respect to such Collateral Account specifying the amount of cash and/or the amount and kind of Securities held therein. No later than the close of business next succeeding the delivery to the Fund of such statement, the Fund shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying the then market value of the Securities described in such statement. In the event such then market value is indicated to be less than the Custodian's obligation with respect to any outstanding Put Option guarantee letter or similar document, the Fund shall promptly specify or cause the Administrator to promptly specify in a Certificate the additional cash and/or Securities to be deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall deliver or cause the Administrator to deliver to the
Custodian a copy of the resolution of the Board of Trustees of the Fund,
certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant
Clerk, either (i) setting forth with respect to the Series specified therein the
date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral Instructions or Certificate, as the case may be, the Custodian shall pay out of the moneys held for the account of each Series the total amount payable to the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver or cause the Administrator to deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date, and price; and
(b) The amount of money to be received by the Custodian for the sale of such Shares and specifically allocated to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall credit such money to the separate account in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing provisions of this Article, the Custodian shall pay, out of the money held for the account of such Series, all
original issue or other taxes required to be paid by the Fund in connection with such issuance upon the receipt of a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the Custodian to make payment out of the money held by the Custodian hereunder in connection with a redemption of any Shares, it shall deliver or cause the Administrator to deliver to the Custodian a Certificate specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the Series and number of Shares received by the Transfer Agent for redemption and that such Shares are in good form for redemption, the Custodian shall make payment to the Transfer Agent out of the moneys held in the separate account in the name of the Series the total amount specified in the Certificate delivered pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any Shares, whenever any Shares are redeemed pursuant to any check redemption privilege which may from time to time be offered by the Fund, the Custodian, unless otherwise instructed by a Certificate, shall, upon receipt of an advice from the Fund or its agent setting forth that the redemption is in good form for redemption in accordance with the check redemption procedure, honor the check presented as part of such check redemption privilege out of the moneys held in the separate account of the Series of the Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on behalf of any Series which results in an overdraft because the moneys held by the Custodian in the separate account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate or Oral Instructions, or which results in an overdraft in the separate account of such Series for some other reason, or if the Fund is for any other reason indebted to the Custodian with respect to a Series, including any indebtedness to The Bank of New York under the Fund's Cash Management and Related Services Agreement, (except a borrowing for investment or for temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to be a loan made by the Custodian to the Fund for such Series payable on demand and shall bear interest from the date incurred at a rate per annum (based on a 360-day year for the actual number of days involved) equal to 1/2% over Custodian's prime commercial lending rate in effect from time to
time, such rate to be adjusted on the effective date of any change in such prime commercial lending rate but in no event to be less than 6% per annum, or at such other rate per annum, if any, as the Fund and the Custodian may agree upon in writing from time to time. In addition, the Fund hereby agrees that the Custodian shall have a continuing lien and security interest in and to any property specifically allocated to such Series at any time held by it for the benefit of such Series or in which the Fund may have an interest which is then in the Custodian's possession or control or in possession or control of any third party acting in the Custodian's behalf. The Fund authorizes the Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to such Series' credit on the Custodian's books. In addition, the Fund hereby covenants that on each Business Day on which either it intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a third party, or which next succeeds a Business Day on which at the close of business the Fund had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian, in writing, of each such borrowing, shall specify the Series to which the same relates, and shall not incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the
principal amount of any particular Securities to be delivered as collateral by the Custodian, the Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XV
INSTRUCTIONS
1. With respect to any software provided by the Custodian to the Administrator in order for the Administrator to transmit Instructions to the Custodian (the "Software"), the Custodian grants to the Administrator a personal, nontransferable and nonexclusive license to use the Software solely for the purpose of transmitting Instructions on behalf of the Fund to, and receiving communications from, the Custodian in connection with its account(s). The Administrator agrees not to sell, reproduce, lease or otherwise provide, directly or indirectly, the Software or any portion thereof to any third party without the prior written consent of the Custodian.
2. The Administrator shall obtain and maintain at its own cost and expense all equipment and services, including but not limited to communications services, necessary for it to utilize the Software and transmit Instructions to the Custodian. The Custodian shall not be responsible for the reliability, compatibility with the Software or availability of any such equipment or services or the performance or nonperformance by any nonparty to this Custody Agreement.
3. The Administrator acknowledges for itself and the Fund that the Software, all data bases made available to the Administrator by utilizing the Software (other than data bases relating solely to the assets of the Fund and transactions with respect thereto), and any proprietary data, processes, information and documentation (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of the Custodian. The Administrator shall keep the Information confidential by using the same care and discretion that the Administrator uses with respect to its own confidential property and trade secrets and shall neither make nor permit any disclosure without the prior written consent of the Custodian. Upon termination of this Agreement or the Software license granted hereunder for any reason, the Fund shall return to the Custodian all copies of the Information which are in its possession or under its control or which the Fund distributed to third parties.
4. The Custodian reserves the right to modify the Software from time to time upon reasonable prior notice and the Administrator shall install new releases of the Software as the Custodian may direct. The Administrator agrees not to modify or attempt to modify the Software without the Custodian's prior written consent. The Administrator acknowledges that any modifications to the Software, whether by the Administrator or the Custodian and whether with or without the Custodian's consent, shall become the property of the Custodian.
5. The Custodian makes no warranties or representations of any kind with regard to the Software or the method(s) by which the Administrator may transmit Instructions to the Custodian, express or implied, including but not limited to any implied warranties or merchantability or fitness for a particular purpose.
6. Where the method for transmitting Instructions by the Administrator on behalf of the Fund involves an automatic systems acknowledgment by the Custodian of its receipt of such Instructions, then in the absence of such acknowledgment the Custodian shall not be liable for any failure to act pursuant to such Instructions, neither the Administrator nor the Fund may claim that such Instructions were received by the Custodian, and the Administrator or the Fund shall deliver a Certificate by some other means.
7. (a) The Administrator and the Fund agree that where the Administrator delivers to the Custodian Instructions hereunder, it shall be the Administrator's sole responsibility to ensure that only persons duly authorized by the Administrator transmit such Instructions to the Custodian. The Administrator will cause all persons transmitting Instructions to the Custodian to treat applicable user and authorization codes, passwords and authentication keys with extreme care, and irrevocably authorizes the Custodian to act in accordance with and rely upon Instructions received by it pursuant hereto.
(b) The Administrator hereby represents, acknowledges and agrees that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Custodian and that there may be more secure methods of transmitting instructions to the Custodian than the method(s) selected by the Administrator on behalf of the Fund. The Fund hereby agree that the security procedures (if any) to be followed in connection with the Fund's transmission of Instructions provide a commercially reasonable degree of protection in light of its particular needs and circumstances. 8. The Administrator and the Fund hereby represent, warrant and covenant to the Custodian that this Agreement has been duly approved by a resolution of the Fund's Board of Directors Trustees, and that its transmission of Instructions pursuant hereto shall at all times comply with the Investment Company Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions or interruptions in, or delay or unavailability of, its ability to send Instructions as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, (ii) the Business Day on which discovery should have occurred through the exercise of reasonable care and (iii) in the case of any error, the date of actual receipt of the earliest notice which reflects such error, it being agreed that discovery and receipt of notice may only occur on a business day. The Custodian shall promptly advise the Administrator whenever the Custodian learns of any errors, omissions or interruption in, or delay or unavailability of, the Fund's ability to send Instructions.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian for each Series' Foreign Securities (as such term is defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as amended) and other assets, the foreign banking institutions and foreign securities depositories and clearing agencies designated on Schedule I hereto ("Foreign Sub-Custodians") to carry out their respective responsibilities in accordance with the terms of the sub-custodian agreement between each such Foreign SubCustodian and the Custodian, copies of which have been previously delivered to the Fund and receipt of which is hereby acknowledged (each such agreement, a "Foreign SubCustodian Agreement"). Upon receipt of a Certificate, together with a certified resolution substantially in the form attached as Exhibit E of the Fund's Board of Trustees, the Fund may designate any additional foreign sub-custodian with which the Custodian has an agreement for such entity to act as the Custodian's agent, as its sub-custodian and any such additional foreign sub-custodian shall be deemed added to Schedule I. Upon receipt of a Certificate from the Fund, the Custodian shall cease the employment of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the form previously delivered to the Fund and will not be amended in a way that materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each Series of the Fund the Foreign Securities of such Series held by each Foreign Sub-Custodian. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims by the Fund or any Series against a Foreign Sub-Custodian as a consequence of any loss, damage, cost, expense, liability or claim sustained or incurred by the Fund or any Series if and to the extent that the Fund or such Series has not been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms of the applicable Foreign SubCustodian Agreement, use reasonable efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any Foreign Sub-Custodian insofar as such books and records relate to the performance of such Foreign Sub-Custodian under its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of each Series held by Foreign Sub-Custodians, including but not limited to, an identification of entities having possession of each Series' Foreign Securities and other assets, and advices or notifications of any transfers of
Foreign Securities to or from each custodial account maintained by a Foreign SubCustodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed upon, information concerning the Foreign SubCustodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the Fund's initial approval of such Foreign Sub-Custodians and, in any event, shall include information pertaining to (i) the Foreign Custodians' financial strength, general reputation and standing in the countries in which they are located and their ability to provide the custodial services required, and (ii) whether the Foreign Sub-Custodians would provide a level of safeguards for safekeeping and custody of securities not materially different form those prevailing in the United States. The Custodian shall monitor the general operating performance of each Foreign SubCustodian. The Custodian agrees that it will use reasonable care in monitoring compliance by each Foreign Sub-Custodian with the terms of the relevant Foreign Sub-Custodian Agreement and that if it learns of any breach of such Foreign SubCustodian Agreement believed by the Custodian to have a material adverse effect on the Fund or any Series it will promptly notify the Fund of such breach. The Custodian also agrees to use reasonable and diligent efforts to enforce its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices, reports or other written information received pertaining to the Fund's Foreign Securities, including without limitation, notices of corporate action, proxies and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for securities received for the account of any Series and delivery of securities maintained for the account of such Series may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivery of securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the contrary, with respect to any losses or damages arising out of or relating to any actions or omissions of any Foreign Sub-Custodian the sole responsibility and liability of the Custodian shall be to take appropriate action at the Fund's expense to recover such loss or damage from the Foreign Sub-Custodian. It is expressly understood and agreed that the Custodian's sole responsibility and liability shall be limited to amounts so recovered from the Foreign SubCustodian.
ARTICLE XVII
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver or cause the Administrator to deliver to the Custodian a
Certificate or Oral Instructions specifying with respect to such FX Transaction:
(c) the Series to which such FX Transaction is specifically allocated; (b) the
type and amount of Currency to be purchased by the Fund; (c) the type and amount
of Currency to be sold by the Fund; (d) the date on which the Currency to be
purchased is to be delivered; (e) the date on which the Currency to be sold is
to be delivered; and (f) the name of the person from whom or through whom such
currencies are to be purchased and sold. Unless otherwise instructed by a
Certificate or Oral Instructions, the Custodian shall deliver, or shall instruct
a Foreign Sub-Custodian to deliver, the Currency to be sold on the date on which
such delivery is to be made, as set forth in the Certificate, and shall receive,
or instruct a Foreign Sub-Custodian to receive, the Currency to be purchased on
the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as the Currency to be purchased, as specified in the Certificate or Oral Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such deliveries and receipts to be made in accordance with the customs prevailing from time to time among brokers or dealers in Currencies, and such receipt and delivery may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with such receipts and deliveries, which responsibility and liability shall continue until the Currency to be received by the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with this Agreement may be entered with the Custodian, any office, branch or subsidiary of The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as principal or otherwise through customary banking channels. The Fund may issue a standing Certificate with respect to FX Transaction but the Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Fund. The Fund shall bear all risks of investing in Securities or holding Currency. Without limiting the foregoing, the Fund shall bear the risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign depositories, exchange controls, asset freezes or other laws, rules, regulations or orders shall prohibit or impose burdens or costs on the transfer to, by or for the account of the Fund of Securities or any cash held outside the Fund's jurisdiction or denominated in Currency other than its home jurisdiction or the conversion of cash from one Currency into another currency. The Custodian shall not be obligated to substitute another Currency for a Currency (including a Currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected by such law, regulation, rule or procedure. Neither the Custodian nor any
Foreign Sub-Custodian shall be liable to the Fund for any loss resulting from any of the foregoing events.
ARTICLE XVIII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI neither the Custodian nor its nominee shall be liable for any loss or damage, including reasonable counsel fees, resulting from its action or omission to act or otherwise, either hereunder or under any Margin Account Agreement, except for any such loss or damage arising out of its own negligence or willful misconduct. The Custodian agrees to indemnify and hold harmless the Trust and Trust's Trustees and officers to the extent described below against any loss as a result of any breach or violation of this Agreement by the Custodian or its officers, employees and agents or its nominees, resulting from their negligence or willful misconduct. The Custodian may, with respect to questions of law arising hereunder or under any Margin Account Agreement, apply for and obtain the advice and opinion of counsel to the Fund or of its own counsel, at the expense of the Fund, and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice or opinion. The Custodian shall be liable to the Fund for any loss or damage resulting from the use of the Book-Entry System or any Depository arising by reason of any negligence or willful misconduct on the part of the Custodian or any of its employees or agents. Notwithstanding the foregoing, or any other provision contained in this Agreement, in no event shall the Custodian be liable to the Trust, its Trustees or officers, or any third party, for special, indirect or consequential damages, or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action.
2. Without limiting the generality of the foregoing, the Custodian shall be under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or written by or for the Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the Fund;
(d) The legality of any borrowing by the Fund using Securities as collateral;
(e) The legality of any loan of portfolio Securities, nor shall the Custodian be under any duty or obligation to see to it that any cash collateral delivered to it by a broker, dealer, or
financial institution or held by it at any time as a result of such loan of portfolio Securities of the Fund is adequate collateral for the Fund against any loss it might sustain as a result of such loan. The Custodian specifically, but not by way of limitation, shall not be under any duty or obligation periodically to check or notify the Fund that the amount of such cash collateral held by it for the Fund is sufficient collateral for the Fund, but such duty or obligation shall be the sole responsibility of the Fund. In addition, the Custodian shall be under no duty or obligation to see that any broker, dealer or financial institution to which portfolio Securities of the Fund are lent pursuant to Article XIV of this Agreement makes payment to it of any dividends or interest which are payable to or for the account of the Fund during the period of such loan or at the termination of such loan, provided, however, that the Custodian shall promptly notify the Fund in the event that such dividends or interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of money and/or Securities held in any Margin Account, Senior Security Account or Collateral Account in connection with transactions by the Fund. In addition, the Custodian shall be under no duty or obligation to see that any broker, dealer, futures commission merchant or Clearing Member makes payment to the Fund of any variation margin payment or similar payment which the Fund may be entitled to receive from such broker, dealer, futures commission merchant or Clearing Member, to see that any payment received by the Custodian from any broker, dealer, futures commission merchant or Clearing Member is the amount the Fund is entitled to receive, or to notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian of, any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by it on behalf of the Fund until the Custodian actually receives and collects such money directly or by the final crediting of the account representing the Fund's interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for ascertaining or acting upon any calls, conversions, exchange offers, tenders, interest rate changes or similar matters relating to Securities held in the Depository, unless the Custodian shall have actually received timely notice from the Depository. In no event shall the Custodian have any responsibility or liability for the failure of the Depository to collect, or for the late collection or late crediting by the Depository of any amount payable upon Securities deposited in the Depository which may mature or be redeemed, retired, called or otherwise become payable. However, upon receipt of a Certificate from the Fund of an overdue amount on Securities held in the Depository the Custodian shall make a claim against the Depository on behalf of the Fund, except that the Custodian shall not be under any obligation to appear in, prosecute or defend any action suit or proceeding in respect to any Securities held by the Depository which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount due to the Fund from the Transfer Agent of the Fund nor to take any
action to effect payment or distribution by the Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount if the Securities upon which such amount is payable are in default, or if payment is refused after due demand or presentation, unless and until (i) it shall be directed to take such action by a Certificate and (ii) it shall be assured to its satisfaction of reimbursement of its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign Sub-Custodians pursuant to Article XVI appoint one or more banking institutions as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-Custodian or Co-Custodians including, but not limited to, banking institutions located in foreign countries, of Securities and moneys at any time owned by the Fund, upon such terms and conditions as may be approved in a Certificate or contained in an agreement executed by the Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain whether any Securities at any time delivered to, or held by it or by any Foreign Sub-Custodian, for the account of the Fund and specifically allocated to a Series are such as properly may be held by the Fund or such Series under the provisions of its then current prospectus, or (b) to ascertain whether any transactions by the Fund, whether or not involving the Custodian, are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Fund
represents that the Administrator has agreed to pay such compensation and ex-
penses promptly upon receipt of statements therefor, and hereby directs the
Custodian to (i) send all statements for compensation to its attention care of
FPS at the following address: FPS Services, Inc., 3200 Horizon Drive, King of
Prussia, PA 19406-0903, Attention: Mr. Elmer Gardner, Senior Vice President, and
(ii) accept all payments made by Fund/Plan in the Fund's name as if such
payments were made directly by the Fund. The Fund shall pay to FPS fees for
services (including custodian services provided by the Custodian) in accordance
with the Administration Agreement. The Custodian's compensation for services
rendered hereunder is set forth in a separate agreement between the Custodian
and Fund/Plan. Should Fund/Plan fail to pay or remit such compensation to the
Custodian within 20 days of the date the same is due and payable, Custodian
shall notify the Fund. If such payment or remittance is not received from FPS
within 15 days of such notice, then the Custodian will be entitled to debit the
Custody Account directly for such compensation. The Custodian may charge
compensation with respect to which it has properly sent a notice to the Fund, as
provided in the preceding sentence, and any expenses with respect to a Series
incurred by the Custodian in the performance of its duties pursuant to such
agreement against any money specifically allocated to such Series. Unless and
until the Fund or the Administrator instructs the Custodian by a Certificate to
apportion any loss, damage, liability or expense among the Series in a specified
manner, the Custodian shall also be entitled to charge against any money held by
it for the
account of a Series such Series' pro rata share (based on such Series net asset value at the time of the charge to the aggregate net asset value of all Series at that time) of the amount of any loss, damage, liability or expense, including counsel fees, for which it shall be entitled to reimbursement under the provisions of this Agreement. The expenses for which the Custodian shall be entitled to reimbursement hereunder shall include, but are not limited to, the expenses of sub-custodians and foreign branches of the Custodian incurred in settling outside of New York City transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or other instrument in writing received by the Custodian and reasonably believed by the Custodian to be a Certificate. The Custodian shall be entitled to rely upon any Oral Instructions actually received by the Custodian. The Fund agrees to forward or cause the Administrator to forward to the Custodian a Certificate or facsimile thereof confirming such Oral Instructions in such manner so that such Certificate or facsimile thereof is received by the Custodian, whether by hand delivery, telecopier or other similar device, or otherwise, by the close of business of the same day that such Oral Instructions are given to the Custodian. The Fund agrees that the fact that such confirming instructions are not received by the Custodian shall in no way affect the validity of the transactions or enforceability of the transactions hereby authorized by the Fund. The Fund agrees that the Custodian shall incur no liability to the Fund in acting upon Oral Instructions given to the Custodian hereunder concerning such transactions provided such instructions reasonably appear to have been received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument, instruction or notice received by the Custodian and reasonably believed by the Custodian to be given in accordance with the terms and conditions of any Margin Account Agreement. Without limiting the generality of the foregoing, the Custodian shall be under no duty to inquire into, and shall not be liable for, the accuracy of any statements or representations contained in any such instrument or other notice including, without limitation, any specification of any amount to be paid to a broker, dealer, futures commission merchant or Clearing Member.
12. The books and records pertaining to the Fund which are in the possession of the Custodian shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the Investment Company Act of 1940, as amended, and other applicable securities laws and rules and regulations. The Fund, or the Fund's authorized representatives, shall have access to such books and records during the Custodian's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by the Custodian to the Fund or the Fund's authorized representative, and the Fund shall reimburse the Custodian its expenses of providing such copies. Upon reasonable request of the Fund, the Custodian shall provide in hard copy or on micro-film, whichever the Custodian elects, any records included in any such delivery which are maintained by the Custodian on a computer disc, or are similarly maintained, and the Fund shall reimburse the Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the Custodian on the system of internal accounting control of the Book-Entry System, the Depository or O.C.C., and with such reports on its own systems of internal accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the Custodian harmless from all liability, claims, losses and demands whatsoever, including attorney's fees, howsoever arising or incurred because of or in connection with this Agreement, including the Custodian's payment or non-payment of checks pursuant to paragraph 6 of Article XIII as part of any check redemption privilege program of the Fund, except for any such liability, claim, loss and demand arising out of the Custodian's own negligence or willful misconduct. For any legal proceeding giving rise to the indemnification set forth above in this paragraph, the Fund shall be entitled to defend or prosecute any claim in the name of the Custodian at its own expense and through counsel of its own choosing reasonably acceptable to the Custodian if it gives written notice to the Custodian within ten (10) Business days of receiving notice of such claim. Notwithstanding the foregoing, the Custodian may participate in the litigation at its own expense and with counsel of its own choosing.
15. Subject to the foregoing provisions of this Agreement, including, without limitation, those contained in Article XVI the Custodian may deliver and receive Securities, and receipts with respect to such Securities, and arrange for payments to be made and received by the Custodian in accordance with the customs prevailing from time to time among brokers or dealers in such Securities. When the Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with the Custodian's delivery of Securities pursuant to Certificates or instructions of the Fund or the Administrator which responsibility and liability shall continue until final payment in full has been received by the Custodian.
16. In the event the Custodian is advised by the Fund that the Fund is no longer utilizing the services of the Administrator, then the Custodian shall furnish or give to the Fund the statements or notices described above as to be furnished or given to the Administrator.
17. The Custodian shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against the Custodian. Without limiting the generality of the foregoing, the Custodian shall have no duties or responsibilities by reason of any terms or provisions in the Administration Agreement, and if such Administration Agreement shall cease to be in effect the Custodian shall have no additional duties hereunder.
ARTICLE XIX
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice, provided, however, that if such notice is sent by the Fund and recites that it is being given contemporaneously with a termination of the Custody Administration any Agency Agreement with FPS, such notice may specify any date of termination selected by the Fund. In the event such notice is given by the Fund, it shall be accompanied by a copy of a resolution of the Board of Trustees of the Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by the Custodian, the Fund shall, on or before the termination date, deliver to the Custodian a copy of a resolution of the Board of Trustees of the Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, designating a successor custodian or custodians. In the absence of such designation by the Fund, the Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon the date set forth in such notice this Agreement shall terminate, and the Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and moneys then owned by the Fund and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the Custodian in accordance with the preceding paragraph, the Fund shall upon the date specified in the notice of termination of this Agreement and upon the delivery by the Custodian of all Securities (other than Securities held in the Book-Entry System which cannot be delivered to the Fund) and moneys then owned by the Fund be deemed to be its own custodian and the Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities held in the Book Entry System which cannot be delivered to the Fund to hold such Securities hereunder in accordance with this Agreement.
ARTICLE XX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the present Officers of the Fund under its seal, setting forth the names and the signatures of the present
Officers. The Fund agrees to furnish to the Custodian a new Certificate in similar form in the event that any such present Officer ceases to be an Officer or in the event that other or additional Officers are elected or appointed. Until such new Certificate shall be received, the Custodian shall be fully protected in acting under the provisions of this Agreement upon Oral Instructions or signatures of the present Officers as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Custodian, shall be sufficiently given if addressed to the Custodian and mailed or delivered to it at its offices at 90 Washington Street, New York, New York 10286, or at such other place as the Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and mailed or delivered to it at its office at the address for the Fund first above written, or at such other place as the Fund may from time to time designate in writing, and any notice or other instrument in writing authorized or required to be given to the Administrator shall be sufficiently given if addressed to the Administrator at such address as the Administrator may from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties with the same formality as this Agreement and approved by a resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of the Custodian, or by the Custodian without the written consent of the Fund, authorized or approved by a resolution of the Fund's Board of Trustees.
6. This Agreement shall be construed in accordance with the laws of the State of New York without giving effect to conflict of laws principles thereof. Each party hereby consents to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective Officers, thereunto duly authorized and their respective seals to be hereunto affixed, as of the day and year first above written.
METROPOLITAN WEST FUNDS
Attest:
THE BANK OF NEW YORK
Attest:
APPENDIX A
I, , President and I, , of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), do hereby certify that:
The following individuals including officers and employees of the Administrator have been duly authorized by the Board of Trustees of the Fund in conformity with the Fund's Declaration of Trust and By-Laws to give Certificates or Oral Instructions on behalf of the Fund, and the signatures set forth opposite their respective names are their true and correct signatures:
Name Signature
APPENDIX B
SERIES
Metropolitan West Total Return Bond Fund
Metropolitan Low Duration Bond Fund
APPENDIX C
I, Vincent Blazewicz, a Vice President with THE BANK OF NEW YORK do hereby designate the following publications:
The Bond Buyer Depository Trust Company Notices Financial Daily Card Service JJ Kenney Municipal Bond Service London Financial Times New York Times Standard & Poor's Called Bond Record Wall Street Journal
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly elected and acting of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of , 1997, (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis to deposit in the BookEntry System, as defined in the Custody Agreement, all securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated, and to utilize the Book-Entry System to the extent possible in connection with its performance thereunder, including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly elected and acting of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of , 1997, (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis until such time as it receives a Certificate, as defined in the Custody Agreement, to the contrary to deposit in the Depository, as defined in the Custody Agreement, all securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated, and to utilize the Depository to the extent possible in connection with its performance thereunder, including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly elected and acting of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of , 1997, (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis until such time as it receives a Certificate, as defined in the Custody Agreement, to the contrary to deposit in the Participants Trust Company as Depository, as defined in the Custody Agreement, all securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated, and to utilize the Participants Trust Company to the extent possible in connection with its performance thereunder, including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly elected and acting of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of , 1997, (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis until such time as it receives a Certificate, as defined in the Custody Agreement, to the contrary, to accept, utilize and act with respect to Clearing Member confirmations for Options and transaction in Options, regardless of the Series to which the same are specifically allocated, as such terms are defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
EXHIBIT D
The undersigned, , hereby certifies that he or she is the duly elected and acting President of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), further certifies that the following resolutions were adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolutions have not been modified or rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the Custody Agreement between The Bank of New York and the Fund dated as of , 1997 (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis to act in accordance with, and to rely on Instructions (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of such access codes only to Officers of the Fund as defined in the Custody Agreement, shall establish internal safekeeping procedures to safeguard and protect the confidentiality and availability of user and access codes, passwords and authentication keys, and shall use Instructions only in a manner that does not contravene the Investment Company Act of 1940, as amended, or the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
EXHIBIT E
The undersigned, , hereby certifies that he or she is the duly elected and acting of METROPOLITAN WEST FUNDS, a Delaware business trust (the "Fund"), further certifies that the following resolutions were adopted by the Board of Trustees of the Fund at a meeting duly held on , 1997, at which a quorum was at all times present and that such resolutions have not been modified or rescinded and are in full force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country listed in Schedule I hereto be, and hereby is, approved by the Board of Trustees as consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign branches of The Bank of New York (the "Bank") listed in Schedule I located in the countries specified therein, and with the foreign sub-custodians and depositories listed in Schedule I located in the countries specified therein be, and hereby is, approved by the Board of Directors as consistent with the best interest of the Fund and its shareholders; and further
RESOLVED, that the Sub-custodian Agreements presented to this meeting between the Bank and each of the foreign sub-custodians and depositories listed in Schedule I providing for the maintenance of the Fund's assets with the applicable entity, be and hereby are, approved by the Board of Trustees as consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby authorized to place assets of the Fund with the afore-mentioned foreign branches and foreign sub-custodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them, are authorized to do any and all other acts, in the name of the Fund and on its behalf, as they, or any of them, may determine to be necessary or desirable and proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of METROPOLITAN WEST FUNDS, as of the day of , 1997.
[SEAL]
CUSTODY ADMINISTRATION AND AGENCY AGREEMENT
This Agreement, dated as of the _____ day of ____________, 1997 made by and between Metropolitan West Funds (the "Trust"), a business trust operating as an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "Act"), duly organized and existing under the laws of the State of Delaware and FPS Services, Inc. ("FPS"), a corporation duly organized and existing under the laws of the State of Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate series of shares representing interests in separate investment portfolios (the "Series"), which Series are identified on Schedule "B" attached hereto, and which Schedule "B" may be amended from time to time by mutual agreement of the Trust and FPS; and
WHEREAS, the Parties desire to enter into an agreement whereby FPS will provide certain custody administration services on behalf of the Trust on the terms and conditions set forth in this Agreement; and
WHEREAS, the Trust desires that FPS act as its agent for the specific purpose of taking receipt of, and making payment for, custody services performed on the Trust's behalf by The Bank of New York pursuant to an agreement between The Bank of New York and the Trust; and
WHEREAS, FPS is willing to serve in such capacity and perform such functions upon the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for good and valuable consideration, the receipt and sufficiency is hereby acknowledged, the Parties hereto, intending to be legally bound, do hereby agree as follows:
APPOINTMENT OF FPS AS AGENT
Section 1. The Trust hereby appoints FPS as an agent of the Trust, and FPS hereby accepts such appointment, for the limited purpose of: (i) accepting invoices charged to the Trust for custody services performed by The Bank of New York on the Trust's behalf, and (ii) remitting payment to The Bank of New York for such services performed in amounts as set forth in Schedule "A" attached hereto.
Section 2. As Custody Administrator, FPS shall:
a) coordinate and process portfolio trades through terminal links with The Bank of New York.
b) input and verify portfolio trades
c) monitor pending and failed security trades
d) coordinate communications between brokers and banks to resolve any operational problems
e) advise the Trust of any corporate action information, address and follow up on any dividend or interest discrepancies
f) process the Trust's expenses
g) interface with the accounting services provider and the transfer agent to research and resolve custody cash problems
h) provide daily and monthly reports
TERMS AND FEES
Section 3.
(a) The term of this Agreement shall be for a period of two (2) years commencing on the date which the Trust's registration statement is declared effective by the U.S. Securities and Exchange Commission ("Effective Date") and shall continue thereafter on a year to year term subject to termination by either Party as set forth below.
(b) After the initial term of this Agreement, the Trust or FPS may give written notice to the other of the termination of this Agreement, such termination to take effect at the time specified in the notice, which date shall not be less than one hundred and eighty (180) days after the date of receipt of such notice. Upon the effective termination date, the Trust shall pay to FPS such compensation as may be due as of the date of termination and shall likewise reimburse FPS for any out-of-pocket expenses and disbursements reasonably incurred by FPS to such date.
(c) If a successor to any of FPS's duties or responsibilities under this Agreement is designated by the Trust by written notice to FPS in connection with the termination of this Agreement, FPS shall promptly, upon such termination and at the expense of the Trust, transfer
all records belonging to the Trust and shall cooperate in the transfer of such records, duties and responsibilities.
(d) The Trust agrees to pay FPS compensation for its services and to reimburse it for expenses at the rates and amounts as set forth in Schedule "A" attached hereto, and as shall be set forth in any amendments to such Schedule "A" approved by the Trust and FPS. The Trust agrees and understands that FPS's compensation be comprised of two components, payable on a monthly basis, as follows:
(i) a fixed fee for each Series, together with an asset based fee which the Trust hereby authorizes FPS to collect by debiting the Trust's custody account for invoices which are rendered for the services performed for the applicable function. The invoices for the services performed will be sent to the Trust after such debiting with the indication that payment has been made; and
(ii) reimbursement of any out-of-pocket expenses paid by FPS on behalf of the Trust, which out-of-pocket expenses will be billed to the Trust within the first ten calendar days of the month following the month in which such out-of-pocket expenses were incurred. The Trust agrees to reimburse FPS for such expenses within ten calendar days of receipt of such bill.
For the purpose of determining fees payable to FPS, the value of a Series' net assets shall be computed at the times and in the manner specified in the Trust's Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Trust seek services or functions in addition to those stated, a written amendment to this Agreement specifying the additional services and corresponding compensation shall be executed by both FPS and the Trust.
GENERAL PROVISIONS
Section 4.
(a) FPS, its directors, officers, employees, shareholders and agents shall only be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement that result from willful misfeasance, bad faith, negligence or reckless disregard on the part of FPS in the performance of its obligations and duties under this Agreement.
(b) Any person, even though a director, officer, employee, shareholder or agent of FPS, who may be or become an officer, director, employee or agent of the Trust, shall be deemed when rendering services to such entity or acting on any business of such entity (other than services or business in connection with FPS's duties under the Agreement), to be rendering such services to or acting solely for the Trust and not as a director, officer, employee, shareholder or agent of, or under the control or direction of FPS even though such person may receive compensation from FPS.
(c) Notwithstanding any other provision of this Agreement, the Trust shall indemnify and hold harmless FPS, its directors, officers, employees, shareholders and agents from and against any and all claims, demands, expenses and liabilities (whether with or without basis in fact or law) of any and every nature which FPS may sustain or incur or which may be asserted against FPS by any person by reason of, or as a result of (i) any action taken or omitted to be taken by FPS in good faith, (ii) any action taken or omitted to be taken by FPS in good faith in reliance upon any certificate, instrument, order or stock certificate or other document reasonably believed by FPS to be genuine and signed, countersigned or executed by any duly authorized person, upon the oral or written instruction of an authorized person of the Trust or upon the opinion of legal counsel to the Trust; or (iii) any action taken in good faith or omitted to be taken by FPS in connection with its appointment in reliance upon any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed. Indemnification under this subparagraph shall not apply, however, to actions or omissions of FPS or its directors, officers, employees, shareholders or agents in cases of its or their willful misfeasance, bad faith, negligence or reckless disregard of its or their duties hereunder.
If a claim is made against FPS as to which FPS may seek indemnity under this Section, FPS shall notify the Trust promptly after any written assertion of such claim threatening to institute an action or proceeding with respect thereto and shall notify the Trust promptly of any action commenced against FPS within ten (10) days after FPS shall have been served with a summons or other legal process, giving information as to the nature and basis of the claim. Failure to notify the Trust shall not, however, relieve the Trust from any liability which it may
have on account of the indemnity under this Section 4(c) if the Trust has not been prejudiced in any material respect by such failure.
The Trust and FPS shall cooperate in the control of the defense of any action, suit or proceeding in which FPS is involved and for which indemnity is being provided by the Trust to FPS. The Trust may negotiate the settlement of any action, suit or proceeding subject to FPS's approval, which shall not be unreasonably withheld. FPS shall have the right, but not the obligation, to participate in the defense or settlement of a claim or action, with its own counsel, but any costs or expenses incurred by FPS in connection with, or as a result of, such participation will be borne solely by FPS.
FPS shall have the right to participate in the defense of an action or proceeding and to retain its own counsel, and the reasonable fees and expenses of such counsel shall be borne by the Trust (which shall pay such fees, costs and expenses at least quarterly) if:
(i) FPS has received an opinion of counsel stating that the use of counsel chosen by the Trust to represent FPS would present such counsel with a conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding include both FPS and the Trust, and legal counsel to FPS shall have reasonably concluded that there are legal defenses available to it which are different from or additional to those available to the Trust or which may be adverse to or inconsistent with defenses available to the Trust (in which case the Trust shall not have the right to direct the defense of such action on behalf of FPS); or
(iii) the Trust shall authorize FPS to employ separate counsel at the expense of the Trust. Notwithstanding anything to the contrary herein, it is understood that the Trust shall not, in connection with any action, suit or proceeding or related action, suit or proceeding, be liable under this Agreement for the fees and expenses of more than one firm.
(d) The terms of this Section 4 shall survive the termination of this Agreement.
Section 5. This Agreement may be amended from time to time by a supplemental agreement executed by the Trust and FPS.
Section 6. Except as otherwise provided in this Agreement, any notice or other communication required by or permitted to be given in connection with this Agreement shall be in
writing, and shall be delivered in person or sent by first class mail, postage prepaid, to the respective parties as follows:
If to the Trust: FPS: --------------- --- Metropolitan West Funds FPS Services, Inc. 10880 Wilshire Blvd., Suite 2020 3200 Horizon Drive, P.O. Box 61503 Los Angeles, CA 90024 King of Prussia, PA 19406-0903 Attention: Scott B. Dubchansky Attention: Kenneth J. Kempf |
Chief Executive Officer and Trustee President
Section 7. The Trust represents and warrants to FPS that the execution and delivery of this Agreement by the undersigned officers of the Trust has been duly and validly authorized by resolution of the Board of Trustees of the Trust.
Section 8. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
Section 9. This Agreement shall extend to and shall be binding upon the Parties and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of FPS or by FPS without the written consent of the Trust, authorized or approved by a resolution of their respective Board of Trustees.
Section 10. This Agreement shall be governed by the laws of the State of California and the venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
Section 11. No provision of this Agreement may be amended or modified, in any manner except in writing, properly authorized and executed by FPS and the Trust.
Section 12. If any part, term or provision of this Agreement is held by any court to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid provided that the basic Agreement is not thereby substantially impaired.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement, consisting in its entirety of six typewritten pages, together with Schedules "A" and "B" to be signed by their duly authorized officers, as of the day and year first above written.
Metropolitan West Funds FPS Services, Inc.
- ----------------------- ------------------
- ------------------------------------------ ----------------------------------
By: Scott B. Dubchansky By: Kenneth J. Kempf
Chief Executive Officer and Trustee President
|
SCHEDULE "A"
CUSTODY AGENCY AND ADMINISTRATION FEE SCHEDULE
FOR
Metropolitan West Funds
I. DOMESTIC SECURITIES AND ADRS: (1/12th payable monthly)
.0002 On First $ 50 Million of Average Net Assets .00015 On the Next $150 Million of Average Net Assets .000125 Over $200 Million of Average Net Assets
Minimum monthly fee is $500 per portfolio.
II. CUSTODY DOMESTIC SECURITIES TRANSACTIONS CHARGE: (billed monthly)
Book Entry DTC, Federal Book Entry, PTC $12.00 Physical Securities, Options/Futures $20.00 RICs $24.50 P & I Paydowns $ 7.00 Savings Account $ 3.00 Wires $ 7.00 Check Request $ 6.00 |
A transaction includes buys, sells, maturities or free security movements.
III. WHEN ISSUED, SECURITIES LENDING, INDEX FUTURES:
Should any of these investment vehicles require a separate segregated custody account, a fee of $250 per account per month will apply.
IV. CUSTODY MISCELLANEOUS FEES
Administrative fees incurred in certain local markets will be passed onto the customer with a detailed description of the fees. Fees include income collection, corporate action handling, funds transfer, special local taxes, stamp duties, registration fees, messenger and courier services and other out-of-pocket expenses.
V. OUT-OF-POCKET EXPENSES
The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-pocket expenses, including telephone, postage, overdraft charges, EDGAR filings, Fund/SERV and Networking expenses, telecommunications, special reports, record retention, special transportation costs, copying and sending materials to auditors and/or regulatory agencies, as incurred and approved.
SCHEDULE "B"
Identification of Series
Below are listed the "Series" to which services under this Agreement are to be performed as of the execution date of the Agreement:
"Metropolitan West Funds"
1. Metropolitan West Total Return Bond Fund
2. Metropolitan West Low Duration Bond Fund
3. Metropolitan West Short Term Investment Fund
This Schedule "B" may be amended from time to time by agreement of the Parties.
ADMINISTRATION AGREEMENT
This Agreement, dated as of the day of , 1997, made by and between Metropolitan West Funds, (the "Trust") a business trust operating an open-end, management investment company registered under the Investment Company Act of 1940, as amended (the "Act"), duly organized and existing under the laws of the State of Delaware and FPS Services, -Inc. ("FPS"), a corporation duly organized and existing under the laws of the State of Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate series of shares representing interests in separate investment portfolios (the "Series"), which Series are identified on Schedule "C" attached hereto, and which Schedule "C" may be amended from time to time by mutual agreement of the Trust and FPS; and
WHEREAS, the Parties desire to enter into an agreement whereby FPS will provide certain administration services to the Trust on the terms and conditions set forth in this Agreement; and
WHEREAS, FPS is willing to serve in such capacity and perform such administrative services under the terms and conditions set forth below; and
WHEREAS, the Trust will provide all necessary information to FPS concerning the Series so that FPS may appropriately execute its responsibilities hereunder;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and in exchange of good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the Parties hereto, intending to be legally bound, do hereby agree as follows:
Section 1. Appointment The Trust hereby appoints FPS as administrator and FPS hereby-accepts such appointment. The Trust further agrees to appoint FPS as administrator to any additional Series which, from time to time, may be added to the Trust.
Section 2. Duties and Obligations of FPS
(a) Subject to the succeeding provisions of this section and subject to the direction and control of the Board of Trustees of the Trust, FPS shall provide to each of the Series all administrative services set forth in Schedule "A" attached hereto, which Schedule is incorporated by reference in its entirety into this Agreement. In addition to the obligations set forth in Schedule "A", FPS shall (i) provide its own office space, facilities, equipment and personnel for the performance of its duties under this Agreement; and (ii) take all actions it deems necessary to properly execute the administrative responsibilities of the Trust.
(b) So that FPS may perform its duties under the terms of this Agreement, the Board of Trustees of the Trust shall direct the officers, investment advisor, distributor, legal counsel, independent accountants and custodian of the Trust to cooperate fully with FPS and to provide such information, documents and advice relating to the Trust as is within the possession or knowledge of such persons provided that no such person need provide any information to FPS if to do so would, in the reasoned opinion of counsel to the Trust, result in the loss of any privilege or confidential treatment with respect to such information. In connection with its duties, FPS shall be entitled to rely, and shall be held harmless by the Trust when acting in reasonable reliance upon the instruction, advice or any documents provided by the Trust to FPS by any of the aforementioned persons. All fees charged by any such persons shall be deemed an expense of the Trust.
(c) Any activities performed by FPS under this Agreement shall conform to the requirements of:
(1) the provisions of the Act and the Securities Act of 1933, as amended, and of any rules or regulations in force thereunder;
(2) any other applicable provision of state and federal law;
(3) the provisions of the Trust Instrument of the Trust, as amended from time to time;
(4) any policies and determinations of the Board of Trustees of the Trust; and
(5) the fundamental policies of the Trust as reflected in its registration statement filed pursuant to the Act.
FPS acknowledges that all records that it maintains for the Trust are the property of the Trust and will be surrendered promptly to the Trust upon written request. FPS will preserve, for the periods prescribed under Rule 3 la-2 under the Act, all such records required to be maintained under Rule 31 a- 1 of the Act.
(d) Nothing in this Agreement shall prevent FPS or any officer thereof from acting as administrator for any other person, firm or corporation. While the administrative services supplied to the Trust may be different than those supplied to other persons, firms or corporations, FPS shall provide the Trust equitable treatment in supplying services. The Trust recognizes that it will not receive preferential treatment from FPS as compared with the treatment provided to other FPS clients. FPS agrees to maintain the records and all other information of the Trust in a confidential manner and shall not use such information for any purpose other than the performance of FPS's duties under this Agreement.
Section 3. Allocation of Expenses All costs and expenses of the Trust shall be paid by the Trust including, but not limited to:
a) fees paid to an investment advisor (the ("Advisor");
b) interest and taxes;
c) brokerage fees and commissions;
d) insurance premiums;
e) compensation and expenses of its Trustees who are not affiliated persons of the Advisor;
f) legal, accounting and audit expenses;
g) custodian and transfer agent, or shareholder servicing agent, fees and expenses;
h) fees and expenses incident to the registration of the shares of the Trust under Federal or state securities laws;
i) expenses related to preparing, setting in type, printing and mailing prospectuses, statements of additional information, reports and notices and proxy material to shareholders of the Trust;
j) all expenses incidental to holding meetings of shareholders and Trustees of the Trust;
k) such extraordinary expenses as may arise, including litigation, affecting the Trust and the legal obligations which the Trust may have regarding indemnification of its officers and directors; and
l) fees and out-of-pocket expenses paid on behalf of the Trust by FPS.
Section 4. Compensation of FPS The Trust agrees to pay FPS compensation for its services and to reimburse it for expenses, at the rates and amounts as set forth in Schedule "B" attached hereto, and as shall be set forth in any amendments to such Schedule "B" approved by the Trust and FPS. The Trust agrees and understands that FPS's compensation be comprised of two components and payable on a monthly basis as follows:
(a) an asset based fee calculated on the Trust's total assets subject to a minimum fee calculated on the number of series and classes within each series, which the Trust hereby authorizes FPS to collect by debiting the Trust's custody account for invoices which are rendered for the services performed for the applicable function. The invoices for the services performed will be sent to the Trust after such debiting with the indication that payment has been made; and
(b) reimbursement of any out-of-pocket expenses paid by FPS on behalf of the Trust. which out-of-pocket expenses will be billed to the Trust within the first ten calendar days of the month following the month in which such out-of-pocket expenses were incurred. The Trust agrees to reimburse FPS for such expenses within ten calendar days of receipt of such bill.
For the purpose of determining fees payable to FPS, the value of the Trust's net assets shall be computed at the times and in the manner specified in the Trust's Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Trust seek services or functions in addition to those outlined above or in Schedule "A" attached, a written amendment to this Agreement specifying the additional services and corresponding compensation shall be executed by both FPS and the Trust.
Section 5. Duration
(a) The term of this Agreement shall be for a period of two (2) years, commencing on the date which the Trust's registration statement is declared effective by the U.S. Securities and Exchange Commission ("Effective Date") and shall continue thereafter on a year to year term subject to termination by either Party set forth in (c) below.
(b) The fee schedule set forth in Schedule "B" attached shall be fixed for two (2) years commencing on the Effective Date of this Agreement and shall continue thereafter subject to review and adjustment as determined by the Parties.
(c) After the initial term of this Agreement, the Trust or FPS may give written notice to the other of the termination of this Agreement, such termination to take effect at the time specified in the notice, which date shall not be less than one hundred eighty ( 180) days after the date of receipt of such notice. Upon the effective termination date, the Trust shall pay to FPS such compensation as may be due as of the date of termination and shall likewise reimburse FPS for any out-of-pocket expenses and disbursements reasonably incurred by FPS to such date.
(d) If a successor to any of FPS's duties or responsibilities under this Agreement is designated by the Trust by written notice to FPS in connection with the termination of this Agreement, FPS shall promptly, upon such termination and at the expense of the Trust, transfer all records which are the property of the Trust and shall cooperate in the transfer of such records and its duties and responsibilities under the Agreement.
Section 6. Amendment No provision of this Agreement may be amended or modified, in any manner except by a written agreement properly authorized and executed by FPS and the Trust.
Section 7. Applicable Law This Agreement shall be governed by the laws of the State of California and the exclusive venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
Section 8. Authority of Signatories The Parties represent and warrant to each other that the execution and delivery of this Agreement by the undersigned officer of each Party has been
duly and validly authorized; and, when duly executed, this Agreement will constitute a valid and legally binding enforceable obligation of each Party. The obligations under this Agreement shall be binding upon the assets and property of the Trust and shall not be binding upon any officer or shareholder of the Series individually.
Section 9. Limitation of Liability
(a) FPS, its directors, officers, employees, shareholders and agents shall only be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement that result from willful misfeasance, bad faith, negligence or reckless disregard on the part of FPS in the performance of its obligations and duties under this Agreement.
(b) Any person, even though a director, officer, employee, shareholder or agent of FPS, who may be or become an officer, director, employee or agent of the Trust, shall be deemed when rendering services to such entity or acting on any business of such entity (other than services or business in connection with FPS's duties under the Agreement), to be rendering such services to or acting solely for the Trust and not as a director, officer, employee, shareholder or agent of, or under the control or direction of FPS even though such person may receive compensation from FPS.
(c) Notwithstanding any other provision of this Agreement, the Trust shall indemnify and hold harmless FPS, its directors, officers, employees, shareholders and agents from and against any and all claims, demands, expenses and liabilities (whether with or without basis in fact or law) of any and every nature which FPS may sustain or incur or which may be asserted against FPS by any person by reason of, or as a result of (i) any action taken or omitted to be taken by FPS in good
faith, (ii) any action taken or omitted to be taken by FPS in good faith in reliance upon any certificate, instrument, order or stock certificate or other document reasonably believed by FPS to be genuine and signed, countersigned or executed by any duly authorized person, upon the oral or written instruction of an authorized person of the Trust or upon the opinion of legal counsel to the Trust; or (iii) any action taken in good faith or omitted to be taken by FPS in connection with its appointment in reliance upon any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed. Indemnification under this subparagraph shall not apply, however, to actions or omissions of FPS or its directors, officers, employees, shareholders or agents in cases of its or their willful misfeasance, bad faith, negligence or reckless disregard of its or their duties hereunder.
If a claim is made against FPS as to which FPS may seek indemnity under this Section, FPS shall notify the Trust promptly after any written assertion of such claim threatening to institute an action or proceeding with respect thereto and shall notify the Trust promptly of any action commenced against FPS within ten (10) days after FPS shall have been served with a summons or other legal process, giving information as to the nature and basis of the claim. Failure to notify the Trust shall not, however, relieve the Trust from any liability which it may have on account of the indemnity under this Section 9(c) if the Trust has not been prejudiced in any material respect by such failure.
The Trust and FPS shall cooperate in the control of the defense of any action, suit or proceeding in which FPS's involved and for which indemnity is being provided by the Trust to FPS. The Trust may negotiate the settlement of any action, suit or proceeding subject to FPS's approval, which shall not be unreasonably withheld. FPS shall have the right, but not the
obligation, to participate in the defense or settlement of a claim or action, with its own counsel, but any costs or expenses incurred by FPS in connection with, or as a result of, such participation will be borne solely by FPS.
FPS shall have the right to participate in the defense of an action or proceeding and to retain its own counsel, and the reasonable fees and expenses of such counsel shall be borne by the Trust (which shall pay such fees, costs and expenses at least quarterly) if:
(i) FPS has received an opinion of counsel stating that the use of counsel chosen by the Trust to represent FPS would present such counsel with a conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding include both FPS and the Trust, and legal counsel to FPS shall have reasonably concluded that there are legal defenses available to it which are different from or additional to those available to the Trust or which may be adverse to or inconsistent with defenses available to the Trust (in which case the Trust shall not have the right to direct the defense of such action on behalf of FPS); or
(iii) the Trust shall authorize FPS to employ separate counsel at the expense of the Trust. Notwithstanding anything to the contrary herein, it is understood that the Trust shall not, in connection with any action, suit or proceeding or related action, suit or proceeding, be liable under this Agreement for the fees and expenses of more than one firm.
(d) The terms of this Section 9 shall survive the termination of this Agreement.
Section 10. Notices Except as otherwise provided in this Agreement, any notice or other communication required by or permitted to be given in connection with this Agreement shall be in writing, and shall be delivered in person or sent by first class mail or by overnight delivery, postage prepaid to the respective parties as follows:
If to Metropolitan West Funds: If to FPS: - --------------------------------- ---------- Metropolitan West Funds FPS Services, Inc. 10880 Wilshire Blvd., Suite 2020 3200 Horizon Drive, P.O. Box 61503 Los Angeles, CA 90024 King of Prussia, PA 19406-0903 Attention: Scott B. Dubchansky Attention: Kenneth J. Kempf |
Chief Executive Officer and Trustee President
Section 11. If any part, term or provision of this Agreement is held by any court to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid, provided that the basic agreement is not thereby substantially impaired.
Section 12. This Agreement shall extend to and shall be binding upon the Parties and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of FPS or by FPS without the written consent of the Trust, authorized or approved by a resolution of their respective Boards of Directors or Trustees.
Section 13. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
Section 14. This Agreement shall be governed by the laws of the State of California and the exclusive venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
Section 15. Section Headings Section and paragraph headings are for convenience only and shall not be construed as part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement consisting of eight typewritten pages, together with Schedules "A", "B" and "C," to be signed by their duly authorized officers as of the day and year first above written.
Metropolitan West Funds FPS Services. Inc. - ----------------------- ------------------ - ----------------------------------- -------------------------------- By: Scott B. Dubchansky By: Kenneth J. Kempf Chief Executive Officer and Trustee President |
SCHEDULE "A"
FUND ADMINISTRATION SERVICES
FOR
METROPOLITAN WEST FUNDS
I. Regulatory Compliance
A. Federal Compliance - Investment Company Act of 1940
1. Review, report and renew
a. investment advisory contracts
b. fidelity bond
c. underwriting contracts
d. distribution (12b-1) plans
e. administration contracts
f. accounting contracts
g. custody administration contracts
h. transfer agent and shareholder services
2. Filings
a. N-SAR (semi-annual report)
b. N-1A (prospectus), post-effective amendments
and supplements ("stickers")
c. 24f-2 indefinite registration of shares
d. filing fidelity bond under 17g-1
e. filing shareholder reports under 30(b)2-1
3. Annual up-dates of biographical information and questionnaires for Directors/Trustees and Officers
II. Corporate Business and Shareholder/Public Information
A. Directors/Trustees/Management
1. Preparation of meetings
a. agendas - all necessary items of compliance
b. arrange and conduct meetings
c. prepare minutes of meetings
d. keep attendance records
e. maintain corporate records/ minute book
B. Coordinate Proposals
1. Printers
2. Auditors
3. Literature fulfillment
4. Insurance
C. Maintain Corporate Calendars and Files
D. Release Corporate Information
1. To shareholders
2. To financial and general press
3. To industry publications
a. distributions (dividends and capital gains)
b. tax information
c. changes to prospectus
d. letters from management
e. Funds' performance
4. Respond to:
a. financial press
b. miscellaneous shareholders inquiries
c. industry questionnaires
E. Communications to Shareholders
1. Coordinate printing and distribution of annual,
semi-annual reports, and prospectus
III. Financial and Management Reporting
A. Income and Expenses
1. Monitoring of expense accruals, expense payments and
expense caps
2. Approve and coordinate payment of expenses
3. Establish Funds' operating expense checking account
and perform monthly reconciliation of checking account.
4. Calculation of advisory fee, 12b-1 fee and
reimbursements to Fund (if applicable)
5. Authorize the recording and amortization of
organizational costs and pre-paid expenses (supplied by
advisor), for start-up funds and reorganizations
6. Calculation of average net assets
7. Expense ratios calculated
B. Distributions to Shareholders
1. Calculations of dividends and capital gain
distributions (in conjunction with the Fund and their
auditors)
a. compliance with income tax provisions
b. compliance with excise tax provisions
c. compliance with Investment Company Act of
1940
2. Book/Tax identification and adjustments at required
distribution periods (in conjunction with the Funds
and their auditors)
C. Financial Reporting
1. Liaison between Fund management, independent auditors
and printers for semi-annual and annual shareholder
reports
2. Prepare of semi-annual and annual reports to
shareholders
3. Preparation of semi-annual and annual N-SAR's
(Financial Data)
4. Preparation of Financial Statements for required
SEC Post-Effective filings (if applicable)
5. Preparation of required performance graph (annually)
(based on advisor supplied indices)
D. Subchapter M Compliance (monthly)
1. Asset diversification test
2. Short/short test
E. Other Financial Analyses
1. Upon request from Fund management, other budgeting and
analyses can be constructed to meet the Fund's
specific needs (additional fees may apply)
2. Sales information, portfolio turnover (monthly)
3. Work closely with independent auditors on return of
capital presentation, excise tax calculation
4. Performance (total return) calculation (monthly)
5. 1099 Miscellaneous - prepared and filed for Directors/
Trustees (annual)
6. Analysis of interest derived from various Government
obligations (annual) (if interest income was
distributed in a calendar year)
7. Analysis of interest derived by state (for municipal
bond funds)
8. Review and characterize 1099- Dividend Forms
9. Prepare and coordinate with printer and FPS Account
Management with printing and mailing of 1099 Dividend
Insert cards
F. Review and Monitoring Functions (monthly)
1. Review expense and reclassification entries to ensure
proper update
2. Perform various reviews to ensure accuracy of
Accounting (the monthly expense analysis), and Custody
(review of daily bank statements to ensure accurate
expense movements for expense payments)
3. Review accruals and expenditures (where applicable)
G. Preparation and distribution of monthly operational reports to
management by 10th Business Day
1. Management Statistics (Recap)
a. portfolio summary
b. book gains/losses/per share
c. net income, book income/per share
d. capital stock activity
e. distributions
2. Performance Analysis
a. total return
b. monthly, quarterly, year to date, average
annual returns
3. Expense Analysis
a. schedule
b. summary of due to/from advisor
c. expenses paid
d. expense cap
e. accrual monitoring
f. advisory fee
4. Short-Short Analysis
a. short-short income
b. gross income (components)
5. Portfolio Turnover
a. market value
b. cost of purchases
c. net proceeds of sales
d. average market value
6. Asset Diversification Test
a. gross assets
b. non-qualifying assets
7. Activity Summary
a. shares sold, redeemed and reinvested
b. change in investment
H. Provide rating agencies statistical data as requested
(monthly/quarterly)
I. Standard schedules for Board Package (Quarterly)
1. Activity Summary (III-G-7 from above)
2. Expense analysis
3. Other schedules can be provided (additional fees
may apply)
IV. Blue Sky Administration
A. Sales Data
1. Receive daily sales figures through SUNGARD interface
with Price Waterhouse Blue 2 System.
2. Receive daily sales figures broken down by state from
Charles Schwab (if applicable).
3. Produce daily warning report for sales in excess of
pre-determined percentage.
4. Analysis of all sales data to determine trends within
certain states.
B. Filings
1. Produce and mail the following required filings:
a. Initial Filings - produce all required forms
and follow-up on any comments, including
notification of SEC Effectiveness.
b. Renewals - produce all renewal documents and
mail to states, includes follow-up to ensure
all is in order to continue selling in
states.
c. Sales Reports - produce all relevant sales
reports for the states and complete necessary
documents to properly file sales reports with
states.
d. Annual Report Filings - file copies of all
annual reports with states.
e. Prospectus Filings - file all copies of
Definitive SAI & Prospectuses with the
states.
f. Post-Effective Amendment Filing - file all
Post-Effective Amendments with the states, as
well as, any other required documents.
2. On demand additional states - complete filing for any
states that you would like to add. This includes all
of the items in 1 (A).
3. Amendments to current permits - file in a timely
manner any amendment to registered share amounts.
4. Update and file hard copy of all data pertaining to
individual permits.
C. Consulting and Analysis - We will supply you with the most current fee structure for each state and help you decide what course of action to take in each state to minimize the amount of money spent on Blue Sky Registration.
SCHEDULE "B"
ADMINISTRATION SERVICES FEE SCHEDULE
FOR
METROPOLITAN WEST FUNDS
This Fee Schedule is fixed for a period of two (2) years from the Effective Date as that term is defined in the Agreement.
I. Corporate/Financial Administration
Subject to a minimum annual fee of $55,000 for the initial Series' first class of shares and $12,000 for each additional separate series or class thereof, the Trust agrees to pay FPS each month an asset based fee calculated at the annual rate of:
.0015 On the First $ 50 Million of the Average Net Assets of the Trust; .0010 On the Next $ 50 Million of the Average Net Assets of the Trust; and .0005 Over $100 Million of the Average Net Assets of the Trust
II. Blue Sky Administration
$150 per permit/per state/per year*
* Pursuant to our letter dated March 6, 1997, fees for Blue Sky Administration have been waived.
III. Out-of-Pocket Expenses
The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-pocket expenses, including telephone, postage, overdraft charges, EDGAR filings, Fund/SERV and Networking expenses, telecommunications, special reports, record retention, special transportation costs, copying and sending materials to auditors and/or regulatory agencies, as incurred and approved.*
* FPS will provide the Funds with a $1,000 per quarter credit for out-of-pocket expenses.
SCHEDULE "C"
Identification of Series
Below are listed the Series and Classes of Shares to which services under this Agreement are to be performed as of the Effective Date of this Agreement:
"Metropolitan West Funds"
1. Metropolitan West Total Return Bond Fund
2. Metropolitan West Low Duration Bond Fund
3. Metropolitan West Short Term Investment Fund
This Schedule "C" may be amended from time to time by agreement of the Parties.
ACCOUNTING SERVICES AGREEMENT
This Agreement, dated as of the _____ day of ________________, 1997 made by and between Metropolitan West Funds (the "Trust"), a business trust operating as an open end management investment company registered under the Investment Company Act of 1940, as amended (the "Act"), duly organized and existing under the laws of the State of Delaware and FPS Services, Inc. ("FPS"), a corporation duly organized and existing under the laws of the State of Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate series of shares representing interests in separate investment portfolios (the "Series"), which Series are identified on Schedule "C" attached hereto, and which Schedule "C" may be amended from time to time by mutual agreement of the Trust and FPS; and
WHEREAS, the Trust desires to appoint FPS as Accounting Services Agent to maintain and keep current the books, accounts, records, journals or other records of original entry relating to the business of the Trust (the "Accounts and Records") and to perform certain other functions in connection with such Accounts and Records pursuant to the terms and conditions set forth in this Agreement; and
WHEREAS, FPS is willing to serve in such capacity and perform such functions pursuant to the terms and conditions set forth in this Agreement; and
WHEREAS, the Trust will provide all necessary information concerning the Series to FPS so that FPS may appropriately execute its responsibilities hereunder;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and in exchange of good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the Parties hereto, intending to be legally bound, do hereby agree as follows:
Section 1. Appointment. The Trust hereby appoints FPS as Accounting Services Agent and FPS hereby accepts such appointment. The Trust also agrees to appoint FPS as Accounting Services Agent for any additional Series which, from time to time, may be added to the Trust.
Section 2. Definitions. For purposes of this Agreement:
Oral Instructions shall mean an authorization, instruction, approval, item or set of data, or information of any kind transmitted to FPS in person or by telephone, telegram, telecopy, or other mechanical or documentary means lacking an original signature, by a person or persons reasonably identified to FPS to be a person or persons authorized by a resolution of the Board of Trustees of the Trust, to give such Oral Instructions on behalf of the Trust.
Written Instructions shall mean an authorization, instruction, approval, item or set of data or information of any kind transmitted to FPS in original writing containing an original signature or a copy of such document transmitted by telecopy including transmission of such signature reasonably identified to FPS to be the signature of a person authorized by a resolution of the Board of Trustees of the Trust to give written instructions on behalf of the Trust.
The Trust shall file with FPS a certified copy of each resolution of its Board of Trustees authorizing execution of Written Instructions or the transmittal of Oral Instructions as provided above.
Section 3. To the extent FPS receives the necessary information from the Trust or its agents by Written or Oral Instructions, FPS shall maintain and keep current the following Accounts and Records and any other records required to be kept pursuant to Rule 3 la-1 of the Act relating to the business of the Trust in such form as may be mutually agreed upon between the Trust and FPS:
(a) Net Asset Value Calculation reports
(b) Cash Receipts Journal
(c) Cash Disbursements Journal
(d) Dividends Paid and Payable Schedule
(e) Purchase and Sales Journals - Portfolio Securities
(f) Subscription and Redemption Journals
(g) Security Ledgers - Transaction Report and Tax Lot Holdings Report
(h) Broker Ledger - Commission Report
(i) Daily Expense Accruals
(j) Daily Interest Accruals
(k) Daily Trial Balance
(l) Portfolio Interest Receivable and Income Journal
(m) Portfolio Dividend Receivable and Income Register
(n) Listing of Portfolio Holdings - showing cost, market value and percentage of portfolio comprised of each security.
(o) Average Daily Net assets provided on monthly basis.
The necessary information to perform the above functions and the calculation of the net asset value of the Trust as provided below, is to be furnished by Written or Oral Instructions to FPS each day (in accordance with the time frame identified below) prior to the close of regular trading on the New York Stock Exchange.
Section 4. FPS shall perform the ministerial calculations necessary to
calculate the net asset value for each Series on each day that the New York
Stock Exchange is open for business, in accordance with; (i) the current
Prospectus and Statement of Additional Information for the Trust, and (ii)
procedures with respect thereto approved by the Board of Trustees of the Trust
and supplied in writing to FPS. Portfolio items for which market quotations are
available by FPS's use of an automated financial information service (the
"Service") shall be based on the closing prices of such Service except where the
Trust has given or caused to be given specific Written or Oral Instructions to
utilize a different value subject to the appropriate provisions in the Trust's
Prospectus and Statement of Additional Information then in effect. All of the
portfolio securities shall be given such values as the Trust provides by Written
or Oral Instructions including all restricted securities and other securities
requiring valuation not readily ascertainable solely by such Service subject to
the appropriate provisions in the Trust's Prospectus and Statement of Additional
Information then in effect. FPS shall have no responsibility or liability for;
(i) the accuracy of prices quoted by
such Service; (ii) the accuracy of the information supplied by the Trust, or
(iii) any loss, liability, damage, or cost arising out of any inaccuracy of such
data. FPS shall have no responsibility or duty to include information or
valuations to be provided by the Trust in any computation unless and until it is
timely supplied to FPS in usable form. FPS shall record corporate action
information as received from the custodian of the Trust's assets (the
"Custodian"), the Service or the Trust. FPS shall have no duty to gather or
record corporate action information not supplied by these sources.
FPS will assume no liability for price changes caused by the investment adviser(s), the Custodian, suppliers of security prices and corporate action and dividend information, or any party other than FPS itself.
Section 5. For all purposes under this Agreement, FPS is authorized to act upon receipt of the first of any Written or Oral Instruction it receives from the Trust or its agents on behalf of the Trust. In cases where the first instruction is an Oral Instruction that is not in the form of a document or written record, a confirmatory Written Instruction or Oral Instruction in the form of a document or written record shall be delivered, and in cases where FPS receives an Instruction whether Written or Oral, to enter a portfolio transaction on the records, the Trust shall cause the broker/dealer executing such transaction to send a written confirmation to the Custodian. FPS shall be entitled to rely on the first Instruction received, and for any act or omission undertaken in compliance therewith shall be free of liability and fully indemnified and held harmless by the Trust, provided however, that in the event a Written or Oral Instruction received by FPS is countermanded by a timely received
subsequent Written or Oral Instruction prior to acting upon such countermanded Instruction, FPS shall act upon such subsequent Written or Oral Instruction. The sole obligation of FPS with respect to any follow-up or confirmatory Written Instruction, Oral Instruction in documentary or written form, shall be to make reasonable efforts to detect any such discrepancy between the original Instruction and such confirmation and to report such discrepancy to the Trust. The Trust shall be responsible, at the Trust's expense, for taking any action, including any reprocessing, necessary to correct any discrepancy or error. To the extent such action requires FPS to act, the Trust shall give FPS specific Written Instruction as to the action required.
Section 6. The Trust shall cause the Custodian to forward to FPS a daily statement of cash and portfolio transactions. At the end of each month, the Trust shall cause the Custodian to forward to FPS a monthly statement of portfolio positions, which will be reconciled with the Trust's Accounts and Records maintained by FPS. FPS will report any discrepancies to the Custodian, and report any unreconciled items to the Trust.
Section 7. FPS shall promptly supply daily and periodic reports to the Trust as requested by the Trust and agreed upon by FPS.
Section 8. The Trust shall provide and shall require each of its agents (including the Custodian) to provide FPS as of the close of each business day, or on such other schedule as the Trust determines is necessary, with Written or Oral Instructions (to be delivered to FPS by 11:00 a.m., Eastern time, the next following business day) containing all data and information necessary for FPS to maintain the Trust's Accounts and Records and FPS may conclusively
assume that the information it receives by Written or Oral Instructions is complete and accurate.
Section 9. The Accounts and Records, in the agreed-upon format, maintained by FPS shall be the property of the Trust and shall be made available to the Trust promptly upon request and shall be maintained for the periods prescribed in Rules 3 1 a- I and 31 a-2 under the Act. FPS shall assist the Trust's independent auditors, or upon approval of the Trust, or upon demand, any regulatory body, in any requested review of the Trust's Accounts and Records but shall be reimbursed for all expenses and employee time invested in any such review outside of routine and normal periodic review and audits. Upon receipt from the Trust of the necessary information, FPS shall supply the necessary data for the Trust or an independent auditor's completion of any necessary tax returns, questionnaires, periodic reports to Shareholders and such other reports and information requests as the Trust and FPS shall agree upon from time to time.
Section 10. In case of any request or demand for the inspection of the records of the Trust, FPS shall use its best efforts to notify the Trust and to secure instructions as to permitting or refusing such inspection. FPS may however, exhibit such records to any person in any case where it is advised in writing by its counsel that it may be held liable for failure to do so.
Section 11. FPS and the Trust may from time to time adopt such procedures as agreed upon in writing, and FPS may conclusively assume that any procedure approved by the Trust or directed by the Trust, does not conflict with or violate any requirements of the Trust's
Prospectus, Statement of Additional Information, Trust Instrument or any rule or regulation of any regulatory body or governmental agency. The Trust shall be responsible for notifying FPS of any changes in regulations or rules which might necessitate changes in FPS's procedures, and for working out with FPS such changes.
Section 12. Limitation of Liability
(a) FPS, its directors, officers, employees, shareholders and agents shall only be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement that result from willful misfeasance, bad faith, negligence or reckless disregard on the part of FPS in the performance of its obligations and duties under this Agreement.
(b) Any person, even though a director, officer, employee, shareholder or agent of FPS, who may be or become an officer, director, employee or agent of the Trust, shall be deemed when rendering services to such entity or acting on any business of such entity (other than services or business in connection with FPS's duties under the Agreement), to be rendering such services to or acting solely for the Trust and not as a director, officer, employee, shareholder or agent of, or under the control or direction of FPS even though such person may receive compensation from FPS.
(c) Notwithstanding any other provision of this Agreement, the Trust shall indemnify and hold harmless FPS, its directors, officers, employees, shareholders and agents from and against any and all claims, demands, expenses and liabilities (whether with or without basis in fact or law) of any and every nature which FPS may sustain or incur or which
may be asserted against FPS by any person by reason of, or as a result of (i) any action taken or omitted to be taken by FPS in good faith, (ii) any action taken or omitted to be taken by FPS in good faith in reliance upon any certificate, instrument, order or stock certificate or other document reasonably believed by FPS to be genuine and signed, countersigned or executed by any duly authorized person, upon the oral or written instruction of an authorized person of the Trust or upon the opinion of legal counsel to the Trust; or (iii) any action taken in good faith or omitted to be taken by FPS in connection with its appointment in reliance upon any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed. Indemnification under this subparagraph shall not apply, however, to actions or omissions of FPS or its directors, officers, employees, shareholders or agents in cases of its or their willful misfeasance, bad faith, negligence or reckless disregard of its or their duties hereunder.
If a claim is made against FPS as to which FPS may seek indemnity under this Section, FPS shall notify the Trust promptly after any written assertion of such claim threatening to institute an action or proceeding with respect thereto and shall notify the Trust promptly of any action commenced against FPS within ten (10) days after FPS shall have been served with a summons or other legal process, giving information as to the nature and basis of the claim. Failure to notify the Trust shall not, however, relieve the Trust from any liability which it may have on account of the indemnity under this Section 12(c) if the Trust has not been prejudiced in any material respect by such failure.
The Trust and FPS shall cooperate in the control of the defense of any action, suit or ~ proceeding in which FPS is involved and for which indemnity is being provided by the Trust to FPS. The Trust may negotiate the settlement of any action, suit or proceeding subject to FPS's approval, which shall not be unreasonably withheld. FPS shall have the right, but not the obligation, to participate in the defense or settlement of a claim or action, with its own counsel, but any costs or expenses incurred by FPS in connection with, or as a result of, such participation will be borne solely by FPS.
FPS shall have the right to participate in the defense of an action or proceeding and to retain its own counsel, and the reasonable fees and expenses of such counsel shall be borne by the Trust (which shall pay such fees, costs and expenses at least quarterly) if:
(i) FPS has received an opinion of counsel stating that the use of counsel chosen by the Trust to represent FPS would present such counsel with a conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding include both FPS and the Trust, and legal counsel to FPS shall have reasonably concluded that there are legal defenses available to it which are different from or additional to those available to the Trust or which may be adverse to or inconsistent with defenses available to the Trust (in which case the Trust shall not have the right to direct the defense of such action on behalf of FPS); or
(iii) the Trust shall authorize FPS to employ separate counsel at the expense of the Trust. Notwithstanding anything to the contrary herein, it is understood that the Trust
shall not, in connection with any action, suit or proceeding or related action, suit or proceeding, be liable under this Agreement for the fees and expenses of more than one firm.
(d) The terms of this Section 12 shall survive the termination of this Agreement.
Section 13. All financial data provided to, processed by, and reported by FPS under this Agreement shall be stated in United States dollars. FPS's obligation to convert, equate or deal in foreign currencies or values extends only to the accurate transposition of information received from the various pricing and informational services into FPS's Investment Accounting System.
Section 14. The Trust agrees to pay FPS compensation for its services and to reimburse it for expenses, at the rates and amounts as set forth in Schedule "B" attached hereto, and as shall be set forth in any amendments to such Schedule "B" approved by the Trust and FPS. The Trust agrees and understands that FPS's compensation be comprised of two components and payable on a monthly basis as follows:
(i) an asset based fee calculated on the Trust's total assets. subject to a minimum fee, which the Trust hereby authorizes FPS to collect by debiting the Trust's custody account for invoices which are rendered for the services performed for the applicable function. The invoices for the services performed will be sent to the Trust after such debiting with the indication that payment has been made. And,
(ii) reimbursement of any reasonable out-of-pocket expenses paid by FPS on behalf of the Trust, which out-of-pocket expenses will be billed to the Trust within the first ten calendar days of the month following the month in which such out-of-pocket expenses
were incurred. The Trust agrees to reimburse FPS for such expenses within ten calendar days of receipt of such bill.
For the purpose of determining fees payable to FPS, the value of the Series' net assets shall be computed at the times and in the manner specified in the Series' Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Trust seek services or functions in addition to those outlined above or in Schedule "A" attached, a written amendment to this Agreement specifying the additional services and corresponding compensation shall be executed by both FPS and the Trust.
Section 15. Nothing contained in this Agreement is intended to or shall require FPS, in any capacity hereunder, to perform any functions or duties on any holiday, day of special observance or any other day on which the New York Stock Exchange is closed. Functions or duties normally scheduled to be performed on such days shall be performed on, and as of, the next succeeding business day on which the New York Stock Exchange is open. Notwithstanding the foregoing, FPS shall compute the net asset value of each Series on each day required pursuant to (i) Rule 22c- 1 promulgated under the Investment Company Act of 1940, as amended, and (ii) the Trust's Prospectus and Statement of Additional Information then in effect.
Section 16.
(a) The term of this Agreement shall be for a period of two (2) years, commencing on the date which the Trust's registration statement is declared effective by the U.S. Securities
and Exchange Commission ("Effective Date") and shall continue thereafter on a year to year term subject to termination by either Party as set forth in (c) below.
(b) The fee schedule set forth in Schedule "B" attached shall be fixed for (2) years commencing on the Effective Date of this Agreement and shall continue thereafter subject to its review, adjustment or termination as set forth in section (c) below.
(c) After the initial term of this Agreement, the Trust or FPS may give written notice to the other of the termination of this Agreement, such termination to take effect at the time specified in the notice, which date shall not be less than one hundred eighty (180) days after the date of receipt of such notice. Upon the effective termination date, the Trust shall pay to FPS such compensation as may be due as of the date of termination and shall likewise reimburse FPS for any out-of-pocket expenses and disbursements reasonably incurred by FPS to such date.
(d) If a successor to any of FPS's duties or responsibilities under this Agreement is designated by the Trust by written notice to FPS in connection with the termination of this Agreement, FPS shall promptly, upon such termination and at the expense of the Trust, transfer all accounts and required records which belong to the Trust and shall cooperate in the transfer of such records, and its duties and responsibilities under the Agreement.
Section 17. Except as otherwise provided in this Agreement, any notice or other communication required by or permitted to be given in connection with this Agreement shall be in writing, and shall be delivered in person or sent by first class mail, postage prepaid to the respective parties as follows:
If to the Trust: If to FPS: - --------------- --------- Metropolitan West Funds FPS Services, Inc. 10880 Wilshire Blvd., Suite 2020 3200 Horizon Drive, P.O. Box 61503 Los Angeles, CA 90024 King of Prussia, PA 19406-0903 Attention: Scott B. Dubchansky Attention: Kenneth J. Kempf, |
Chief Executive Officer and Trustee President
Section 18. This Agreement may be amended from time to time by supplemental agreement executed by the Trust and FPS and the compensation stated in Schedule "B" attached hereto may be adjusted accordingly as mutually agreed upon.
Section 19. The Parties represent and warrant to each other that the execution and delivery of this Agreement by the undersigned officer of each Party has been duly and validly authorized; and, when duly executed, this Agreement will constitute a valid and legally binding enforceable obligation of each Party.
Section 20. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
Section 21. This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of FPS or by FPS without the written consent of the Trust, authorized or approved by a resolution of its respective Boards of Directors and Trustees.
Section 22. This Agreement shall be governed by the laws of the State of Califonia and the exclusive venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
Section 23. No provision of this Agreement may be amended or modified, in any manner except by a written agreement properly authorized and executed by FPS and the Trust.
Section 24. If any part, term or provision of this Agreement is held by any court to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement consisting of eleven typewritten pages, together with Schedules "A", "B" and "C", to be signed by their duly authorized of ficers as of the day and year first above written.
Metropolitan West fund FPS Services, Inc.
- ---------------------- ------------------
_______________________________________ _________________________________
By: Scott B. Dubchansky, By: Kenneth J.Kempf, President
Chief Executive Officer and Trustee
|
SCHEDULE "A"
FUND ACCOUNTING AND PORTFOLIO VALUATION SERVICES
TO BE PERFORMED ON BEHALF OF
METROPOLITAN WEST FUNDS
Daily Accounting Services
1) Calculate Net Asset Value ("NAV"):
o Update the daily market value of securities held by
the Fund using FPS's standard agents for pricing U.S.
equity and bond securities. The U.S. equity pricing
services are Reuters, Inc. Muller Data Corporation,
J.J. Kenny Co., Inc. and Interactive Data Corporation
(IDC). Muller Data, Telerate Systems, Inc., J.J.
Kenny Co., Inc. and IDC are used for bond and money
market prices/yields. Bloomberg is available and used
for price research.
o Enter limited number of manual prices supplied by
Metropolitan West Asset Management and/or broker.
o Prepare NAV proof sheet. Review components of change
in NAV for reasonableness.
o Review variance reporting on-line and in hard copy
for price changes in individual securities using
variance levels established by Metropolitan West
Asset Management. Verify US dollar security prices
exceeding variance levels by notifying Metropolitan
West Asset Management and pricing sources of noted
variances.
o Review for ax-dividend items indicated by pricing
sources; trace to Fund's general ledger for
agreement.
o Communicate required pricing information (NAY) to
Metropolitan West Asset Management, Transfer Agent
and, electronically, to NASDAQ.
2) Complete Daily Dividend Requirements:
o Calculate net investment income available for
distribution daily.
o Calculate daily distribution rate based on
outstanding settled shares.
o Supply Transfer Agent and Metropolitan West Asset
Management with distribution rates.
3) Determine and Report Cash Availability to Fund by Approximately 9. 30 AM Eastern Time:
o Receive daily cash and transaction statements from
the Custodian by 8:30 AM Eastern time.
o Receive previous day shareholder activity reports
from the Transfer Agent by 8:30 AM Eastern time.
o Fax hard copy Cash Availability calculations with all
details to Metropolitan West Asset Management.
o Supply Metropolitan West Asset Management with 3-day
cash projection report.
o Prepare and complete daily bank cash reconciliations
including documentation of any reconciling items and
notify the custodian and Metropolitan West Asset
Management.
4) Reconcile and Record All Daily Expense Accruals
o Accrue expenses based on budget supplied by
Metropolitan West Asset Management either as
percentage of net assets or specific dollar amounts.
o If applicable, monitor expense limitations
established by Metropolitan West Asset Management.
o If applicable, accrue daily amortization of
Organizational expense.
o If applicable, complete daily accrual of 1 2b-1
expenses.
5) Verify and Record All Daily Income Accruals for Debt Issues:
o Review and verify all system generated Interest and
Amortization reports.
o Establish unique security codes for bond issues to
permit segregated Trial Balance income reporting.
6) Monitor Domestic Securities Held for Cash Dividends. corporate
actions and capital changes such as splits. mergers.
spin-offs. etc. and process appropriately.
o Monitor electronically received information from
Muller Data for all domestic securities.
o Review current daily security trades for dividend
activity.
o Interface with Custodian to monitor timely collection
and postings of corporate actions, dividends and
interest.
7) Enter All Security Trades on Investment Accounting System
(IAS) based on written instructions from the Fund's advisor.
o Review system verification of trade and interest
calculations.
o Verify settlement through statements supplied by the
Custodian.
o Maintain security ledger transaction reporting.
o Maintain tax lot holdings.
o Determine realized gains or losses on security
trades.
o Provide complete broker commission reporting.
8) Enter All Fund Share Transactions on IAS:
o Process activity identified on reports supplied by
the Transfer Agent.
o Verify settlement through statements supplied by the
Custodian.
o Reconcile to the FPS Services' Transfer Agent report
balances.
9) Prepare and Reconcile/Prove Accuracy of the Daily Trial
Balance (listing all asset, liability, equity, income and
expense accounts)
o Post manual entries to the general ledger.
o Post custodian bank activity.
o Post shareholder and security transactions.
o Post and verify system generated activity, i.e.
income and expense accruals.
o Prepare general ledger net cash proof used in NAV
calculation.
10) Review and Reconcile with Custodian Statements:
o Verify all posted interest, dividends, expenses, and
shareholder and security payments/receipts, etc.
(Discrepancies will be reported to and resolved by
the Custodian.)
o Post all cash settlement activity to the Trial
Balance.
o Reconcile to ending cash balance accounts.
o Clear IAS subsidiary reports with settled amounts.
o Track status of past due items and failed trades
handled by the Custodian.
11) Submission of Daily Accounting Reports to Metropolitan West
Asset Management. (Additional reports readily available.)
o Trial Balance.
o Portfolio Valuation (listing inclusive of holdings,
costs, market values, unrealized
appreciation/depreciation and percentage of portfolio
comprised of each security).
o NAV Calculation Report with Daily Distribution Rates.
o Cash Availability and 3-day Cash Projection Report.
Monthly Accounting Services
1) Full Financial Statement Preparation (automated Statements of Assets and Liabilities, of Operations and of Changes in Net Assets) and submission to Metropolitan West Asset Management by 1 0th business day.
2) Submission o f Monthly Automated IAS Reports to Metropolitan
West Asset Management.
o Security Purchase/Sales Journal
o Interest and Maturity Report
o Brokers Ledger (Commission Report)
o Security Ledger Transaction Report with Realized
Gains/Losses
o Security Ledger Tax Lot Holdings Report
o Additional reports available upon request
3) Reconcile Accounting Asset Listing to Custodian Asset Listing:
o Report any security balance discrepancies to the
Custodian/Metropolitan West Asset Management.
4) Provide Monthly Analysis and Reconciliation of Additional
Trial Balance Accounts such as:
o Security cost and realized gains/losses
o Interest/dividend receivable and income
o Payable/receivable for securities purchased and sold
o Payable/receivable for fund shares; issued and
redeemed
o Expense payments and accruals analysis
5) If Appropriate Prepare and Submit to Metropolitan West Asset
Management (additional fees may apply)
o SEC yield reporting (non-money market funds with
domestic and ADR securities only).
o Income by state reporting.
o Standard Industry Code Valuation Report.
o Alternative Minimum Tax Income segregation schedule.
Annual (and Semi-Annual) Accounting Services
1) Assist and supply auditors with schedules supporting securities and share holder transactions, income and expense accruals, etc. during the year in accordance with standard audit assistance requirements.
2) Provide NSAR Reporting (Accounting Questions): If applicable, answer the following items: 2,2B,20,21,22,23,28,30A,31,32,35, 36,37,43,53,55,62,63,64B,71,72,73,74,75 and 76
ACCOUNTING SERVICES BASIC ASSUMPTIONS
FOR
METROPOLITAN WEST ASSET MANAGEMENT
The Accounting Fees as set forth in Schedule "B" are based on the following assumptions..
To
the extent these assumptions are inaccurate or requirements change, fee revisions may be necessary.
Basic Assumptions:
1) Sub-Chapter "M" compliance reporting shall be maintained by FPS Services as FundAdministrator.
2) It is assumed that the Low Duration Bond and Short Term Investment portfolio assetcomposition will be primarily fixed income securities. The Total Return portfolio would have a 60% equity and 40% bond security mix. Trading activity is expected to be approximately 100 trades per month per portfolio.
3) The Funds have a tax year-end which coincides with its fiscal year-end. No additional accounting requirements are necessary to identify or maintain book-tax differences. This proposal does not include providing security tax accounting which differs from its book accounting.
4) The Funds foresee no difficulty in using FPS's standard current pricing services for US equity, bond and AD securities. We currently use Reuters, Muller Data or Interactive Data Corporation (ID) for U.S. equities and listed ADR's. Muller Data Corporation, J.J.Kenny Co., Inc., Telerate Systems, Inc. and IDC are used for bonds and money market issues. Bloomberg is also available for price research and backup.
It is assumed that ASU will work closely with the Metropolitan West Asset Management to ensure the accuracy of the Funds' NAV and to obtain the most satisfactory pricing sources and specific methodologies prior to the actual start-up date. We would propose that the Funds establish clear cut security variance procedures to minimize NAV miscalculations.
5) To the extent the Funds require daily security prices (limited in number) from specific brokers for U.S. securities, these manual prices will be obtained by the Funds' Investment Advisor and faxed to ASU by
approximately 4:00 PM Eastern time for inclusion in the NAV calculations. Metropolitan West Asset Management will supply ASU with the appropriate pricing contacts for these manual quotes.
6) ASU will supply daily Portfolio Valuation Reports to the Funds' Investment Advisor or manager identifying current security positions, original/amortized cost, security market values and changes in unrealized appreciation/depreciation.
It will be the responsibility of the Funds' Investment Advisor to review these reports and to promptly notify ASU of any possible problems, trade discrepancies. incorrect security prices and corporate action/capital change information that could result in a misstated Fund NAV.
7) The Funds do not expect to invest in Open-end Regulated Investment Company's (RIC's), Futures, Swaps, Hedges, Derivatives or Foreign (non-US dollar denominated) Securities and Currency. To the extent these investment strategies should change, additional fees will apply after the appropriate procedural discussions have taken place between ASU and Fund management. (Two weeks advance notice is required should the Fund commence trading in these investments.)
8) It is assumed for all debt issues that the Investment Advisor will supply ASU with critical income information such as accrual methods, interest payment frequency details, coupon payment dates, floating rate reset dates, and complete security descriptions with issue types and CUSIP numbers. If applicable, for proper income accrual accounting, ASU will look to the Funds' Investment Advisor to supply the yield to maturity and related cash flow schedules for any mortgage/asset-backed securities held in the Fund.
9) With respect to Mortgage/Asset-Backed securities including GNMA's, FHLMC's, FNMA's, CMO's, ARM's, the Fund shall direct the Custodian, or a Metropolitan West Asset Management supplied source, to provide ASU with current principal repayment factors on a timely basis in accordance with the appropriate securities' schedule. Income accrual adjustments (to the extent necessary) based upon initial estimates will be completed by ASU when actual principal/income payments are collected by the Custodian and reported to ASU.
10) To the extent applicable, ASU will maintain on a daily basis US dollar denominated qualified covered call options and index options reporting on the daily Trial Balance and value the respective options and underlying positions.
This proposal does not provide for tax classifications if they are required. (If the Funds commence investment in domestic options or designated hedges, two weeks advance notice is required to clarify operational procedures between ASU and the Investment Advisor.)
11) To the extent that the Funds should establish a Line of Credit in segregated accounts with the Custodian for temporary administrative purposes, and/or leveraging hedging the portfolio, it is not the responsibility under this proposal for ASU to complete the appropriate paperwork/monitoring for segregation of assets and adequacy of collateral. The Funds shall direct the Investment Advisor to execute such responsibilities. ASU will, however, reflect appropriate Trial Balance account entries and interest expense accrual charges on the daily Trial Balance adjusting as necessary at month-end.
12) If the Funds commence participation in Security Lending, Leveraging, or Short Sales within their portfolio securities, additional fees will apply. (Two weeks advance notice to ASU is required should the Funds desire to participate in the above.)
13) The Funds shall direct the Investment Advisor or FPS Services as Administrator to supply ASU with portfolio specific expense accrual procedures and monitor the expense accrual balances for adequacy based on outstanding liabilities monthly. The Administrator will promptly communicate to ASU any adjustments needed.
14) Specific deadlines shall be met and complete information shall be supplied by the Funds in order to minimize any settlement problems, NAV miscalculations or income accrual adjustments.
The Funds shall direct the Investment Advisor to provide to ASU Trade Authorization Forms, with the appropriate officer's signature on all security trades placed by the Fund no later than 12:30 PM Eastern time on settlement/value date for short term money market securities issues (assuming that trade date equals settlement date); and by 11:00 AM Eastern time on trade date plus one for non-money market securities. Receipt by ASU of trade information within these identified deadlines may be via telex, fax, or online system access. The Investment Advisor will communicate all trade information directly to the FPS Custody Administrator. The Advisor and/or FPS's Custody Administrator will supply ASU with the trade details in accordance with the above stated deadlines.
The Funds shall direct the Investment Advisor to include all information required by ASU; including CUSIP numbers and/or ticker symbols for all US
dollar denominated -trades on the Trade Authorization, telex or on-line support. ASU will supply the Investment Advisor with recommended trade ticket documents to minimize receipt of incomplete information. ASU will not be responsible for NAV changes that result from incomplete trade information.
15) To the extent the Funds utilize Purchases In-Kind (U.S. dollar denominated securities only) as a method for shareholder subscriptions, ASU will provide the Funds with procedures to properly handle and process securities in-kind. Should the Fund prefer procedures other than those provided by ASU, additional fees may apply. Discussions should take place at least two weeks in advance between ASU and the Fund to clarify the appropriate In-Kind operational procedures to be followed.
16) It is assumed that the Funds' Investment Advisor or FPS Services as Administrator will complete the applicable performance and rate of return calculations as required by the SEC for the Funds.
17) We would establish mutually agreed upon amortization procedures and accretion requirements for debt issues held by the Fund prior to commencement of operations. Adjustments for financial statements regarding any issues with Original Issue Discount (OID) are not included under this agreement. The Fund shall direct its independent auditors to complete the necessary OID adjustments for financial statements and/or tax reporting.
18) The Funds are not currently expected to issue separate classes of shares. To the extent they do so, additional fees will be negotiated.
19) The fees reflected assume FPS Services will supply Transfer Agency and Custody Administration Services for the Funds.
SCHEDULE "B"
FUND ACCOUNTING AND PORTFOLIO VALUATION Services FEE SCHEDULE
FOR
METROPOLITAN WEST FUNDS
This Fee Schedule is fixed for a period of two (2) years from the Effective Date as that term is defined in the Agreement.
The Accounting Fees as set forth below are stated and offered subject to the "Basic Assumptions" as set forth in Schedule "A. " To the extent that those assumptions are inaccurate or requirements change, fee revisions may be necessary.
I. ANNUAL FEE SCHEDULE Per Domestic Portfolio: U.S. Dollar Denominated Securities only (1/12th payable monthly):
$25,000 Minimum to $ 20 Million of Average Net Assets .0003 On Next $ 30 Million of Average Net Assets .0002 On Next $ 50 Million of Average Net Assets .0001 Over $100 Million of Average Net Assets
II PRICING SERVICES QUOTATION FEE: Specific costs will be identified based upon options selected by Metropolitan West Asset Management and will be billed monthly.
FPS does not currently pass along the charges for the U.S. equity prices supplied by Muller Data. Should the Fund invest in security types other than domestic equities supplied by Muller, the following fees would apply.
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Security Types Muller Data Interactive Data J.J. Kenny Co., Inc.*
Corp.* Corp.*
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Government Bonds $ .50 $ .50 $ .25 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Mortgage-Backed (evaluated, seasoned, closing) .50 .50 .25 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Corporate Bonds (short and long term) .50 .50 .25 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
U.S. Municipal Bonds (short and long term) .55 .80 .50 (b)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
CMO's/ARM's/ABS 1.00 .80 1.00 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Convertible Bonds .50 .50 1.00 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
High Yield Bonds .50 .50 1.00 (a)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Mortgage-Backed Factors (per Issue per Month 1.00 n/a n/a
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
U.S. Equities (d) .15 n/a
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
U.S. Options n/a .15 n/a
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Domestic Dividends & Capital Changes (per (d) 3.50 n/a
Issue per Month)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Foreign Securities .50 .50 n/a
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Foreign Securities Dividends & Capital Changes 2.00 4.00 n/a
(per Issue per Month)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
Set-up Fees n/a n/a (e) .25 (c)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
All Added Items n/a n/a .25 (c)
- ------------------------------------------------ ---------------------- ---------------------- ----------------------
* Based on current Vendor costs, subject to change. Costs are quoted based on
individual security CUSIP/identifiers and are per issue per day.
(a) $35.00 per day minimum (b) $25.00 per day minimum
(a) $35.00 per day minimum
(b) $25.00 per day minimum
(c) $ 1.00, if no CUSIP
(d) At no additional cost to FPS clients
(e) Interactive Data also charges monthly transmission costs and disk storage
charges.
|
A) Futures and Currency Forward Contracts $2.00 per Issue per Day
B) TelerateSystems, Inc.* (if applicable) *Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected by Metropolitan We' Asset Management and will be billed monthly.
C) Reuters, Inc.* *Based on current vendor costs, subject to change.
FPS does not currently pass along the charges for the domestic security prices supplied by Reuters, Inc.
D) Municipal Market Data* *Based on current vendor costs, subject to change.
Specific costs will be identified based upon options selected by Metropolitan West Asset Management and will be billed monthly.
III. SEC YIELD CALCULATION: (if applicable) Provide up to 12 reports per year to reflect the yield calculations for non-money mark funds required by the SEC, $1,000 per year per Fund. Daily SEC yield reporting is available at $3,000 per year per Fund (US dollar denominated securities only).
IV. OUT-OF-POCKET EXPENSES The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-pocket expenses, including telephone, postage, overdraft charges, EDGAR filings, Fund/SERV and Networking expenses, telecommunications, special reports, record retention, special transportation costs, copying and sending materials to auditors and/or regulatory agencies, as incurred and approved.
V. ADDITIONAL SERVICES To the extent the Funds commence using investment techniques such as Futures, Security Lending, Swaps, Leveraging, Short Sales, Derivatives, Precious Metals, or foreign trading (non U.S. dollar denominated securities and currency), additional fees will apply. Activities of a non-recurring nature such as shareholder inkinds, fund consolidations, mergers or reorganizations will be subject to negotiation. To the extent that the Funds should decide to issue multiple/separate classes of shares, additional fees will apply. Any additional/enhanced services, programming requests, or reports will be quoted upon request.
SCHEDULE C
Identification of Series
Below are listed the "Series" to which services under this Agreement are to be performed as of the execution date of the Agreement:
"Metropolitan West Funds"
1. Metropolitan West Total Return Bond Fund
2. Metropolitan West Low Duration Bond Fund
3. Metropolitan West Short Term Investment Fund
This Schedule "C" may be amended from time to time by agreement of the Parties.
TRANSFER AGENT SERVICES AGREEMENT
This Agreement, dated as of the __ day of __________, 1997, made by and between Metropolitan West Funds, (the "Trust") a business trust operating as an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "Act"), duly organized and existing under the laws of the State of Delaware and FPS Services, Inc. ("FPS"), a corporation duly organized and existing under the laws of the State of Delaware (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Trust is authorized by its Trust Instrument to issue separate series of shares representing interests in separate investment portfolios (the "Series"), which Series are identified on Schedule "C" attached hereto and which Schedule "C" may be amended from time to time by mutual agreement of the Trust and FPS; and
WHEREAS, the Trust desires to retain FPS to perform share transfer agency, redemption and dividend disbursing services as set forth in this Agreement and in Schedule "A" attached hereto, and to perform certain other functions in connection with these duties; and
WHEREAS, FPS is registered with the Securities and Exchange Commission as a Transfer Agent as required under Section 17A(c) of the Securities Exchange Act of 1934, as amended; and
WHEREAS, FPS is willing to serve in such capacity and perform such functions upon the terms and conditions set forth below; and
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and in exchange of good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the Parties hereto, intending to be legally bound, do hereby agree as follows:
Section 1. The terms as defined in this Section wherever used in this Agreement, or in any amendment or supplement hereto, shall have the meanings herein specified unless the context otherwise requires.
Shareholders shall mean the registered owners of the shares of the Series in accordance with the share registry records maintained by FPS for the Trust.
Shares shall mean the issued and outstanding shares of the Series.
Signature Guarantee shall mean the guarantee of signatures by an "eligible guarantor institution" as defined in rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. Eligible guarantor institutions include banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations. Broker-dealers guaranteeing signatures must be members of a clearing corporation or maintain net capital of at least $100,000. Signature guarantees will be accepted from any eligible guarantor institution which participates in a signature guarantee program.
Oral Instruction shall mean an authorization, instruction, approval, item or set of data, or information of any kind transmitted to FPS in person or by telephone, telegram, telecopy or other mechanical or documentary means lacking original signature, by a person or persons reasonably identified to FPS to be a person or persons so authorized by a resolution of the Board of Trustees of the Trust.
Written Instruction shall mean an authorization, instruction, approval, item or set of data or information of any kind transmitted to FPS in an original writing containing an original signature or a copy of such document transmitted by telecopy including transmission of such signature reasonably identified to FPS to be the signature of a person or persons so authorized by a resolution of the Board of Trustees of the Trust to give Written Instructions to FPS.
TRANSFER AGENCY SERVICES
Section 2. FPS shall make original issues of Shares in accordance with this Agreement and with the Trust's Prospectus and Statement of Additional Information then in effect, upon the written request of the Trust, and upon being furnished with (i) a certified copy of a resolution or resolutions of the Board of Trustees of the Trust authorizing such issue; (ii) an opinion of counsel as to the validity of such Shares; and (iii) necessary funds for the payment of any original issue tax applicable to such Shares.
Section 3. Transfers of Shares shall be registered and new Shares issued by FPS upon redemption of outstanding Shares, (i) in the form deemed by FPS to be properly endorsed for transfer, (ii) with all necessary endorser's signatures guaranteed pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, and accompanied by, (iii) such assurances as FPS shall deem necessary or appropriate to evidence the genuineness and effectiveness of each necessary endorsement, and (iv) satisfactory evidence of compliance with all applicable laws relating to the payment or collection of taxes.
Section 4. In registering transfers, FPS may rely upon the applicable commercial code or any other applicable law which, in the written opinion of counsel (a copy of which shall previously have been furnished to the Trust), protect FPS and the Trust in not requiring complete documentation, in registering transfer without inquiry into adverse claims, in delaying registration for purposes of such inquiry, or in refusing registration where in its judgment an adverse claim requires such refusal.
Section 5. With respect to confirmed trades received by FPS from a registered representative of an NASD member, FPS shall periodically notify the Trust of the current status of outstanding confirmed trades. FPS is authorized to cancel confirmed trades which have been outstanding for thirty (30) days. Upon such cancellation, FPS shall instruct the accounting agent
to adjust the books of the Trust accordingly. FPS will not accept telephone purchases directly from shareholders.
Section 6. FPS will maintain stock registry records in the usual form in which it will note the issuance, transfer and redemption of Shares. FPS is responsible to provide reports of Share purchases, redemptions, and total Shares outstanding on the next business day after each net asset valuation. FPS is authorized to keep records, which will be part of the stock transfer records, in which it will note the names and registered address of Shareholders and the number of Shares and fractions thereof owned by them.
Section 7. In addition to the duties and functions above-mentioned, FPS will perform the usual duties and functions of a stock transfer agent for an investment company as listed in Schedule "A" attached hereto. FPS may rely conclusively and act without further investigation upon any list, instruction, certification, authorization or other instrument or paper reasonably believed by FPS in good faith, to be genuine and unaltered, and to have been signed, countersigned, or executed by duly authorized person or persons, or upon the instructions of any officer of the Trust or upon the advice of counsel for the Trust or for FPS. FPS may record any transfer of Shares which it reasonably believes to have been duly authorized or may refuse to record any transfer of Shares if in good faith FPS deems such refusal necessary in order to avoid any liability either of the Trust or FPS. The Trust agrees to indemnify and hold harmless FPS from and against any and all losses, costs, claims, and liability which it may suffer or incur by reason of such reliance or acting or refusing to act. FPS shall maintain and reconcile all operating bank accounts necessary to facilitate all transfer agency processes; including, but not limited to, distribution disbursements, redemptions and payment clearance accounts.
Section 8. In the event of any request or demand for the inspection of the Share records of the Series is received, FPS shall use its best efforts to notify the Trust and to secure instructions
as to permitting or refusing such inspection. FPS may, however, exhibit such records to any person in any case where it is advised by its counsel that it may be held liable for failure to do so.
ISSUANCE OF SHARES
Section 9. Prior to the daily determination of net asset value in accordance with the Series' Prospectus and Statement of Additional Information, FPS shall process all purchase orders received since the last determination of the Series' net asset value.
FPS shall calculate daily the amount available for investment in Shares at the net asset value determined by the Series' pricing agent as of the close of regular trading on the New York Stock Exchange, the number of Shares and fractional Shares to be purchased and the net asset value to be deposited with the Trust's custodian bank (the "Custodian"). FPS shall place a purchase order daily with the appropriate Series for the proper number of Shares and fractional Shares to be purchased and confirm such number to the Trust, in writing.
Section 10. Share certificates will not be issued in conjunction with the sale of Shares.
Section 11. FPS, having made the calculations provided for above, shall thereupon pay over the net asset value of Shares purchased to the Custodian. The proper number of Shares and fractional Shares shall then be issued daily and credited by FPS to the Shareholder Registration Records. The Shares and fractional Shares purchased for each Shareholder will be credited by FPS to that Shareholder's separate account. FPS shall mail to each Shareholder a confirmation of each purchase, with copies to the Trust, if requested. Such confirmations will show the prior Share balance, the new Share balance, the amount invested and the price paid for the newly purchased Shares.
REDEMPTIONS
Section 12. FPS shall, prior to the daily determination of net asset value in accordance with the Series' Prospectus and Statement of Additional Information, process all requests from Shareholders to redeem Shares and determine the number of Shares required to be redeemed to
make monthly payments, automatic payments or the like. Thereupon, FPS shall advise the Trust of the total number of Shares available for redemption and the number of Shares and fractional Shares requested to be redeemed. FPS shall furnish the Trust with an appropriate confirmation of the redemption and process the redemption by filing with the Custodian an appropriate statement and make the proper distribution and application of the redemption proceeds in accordance with the Series' Prospectus and Statement of Additional Information then in effect. The stock registry books recording outstanding Shares, the shareholder registration records and the individual account of the Shareholder shall be properly debited.
Section 13. The proceeds of redemption shall be remitted by FPS by check mailed to the Shareholder at the Shareholder's registered address or wired to an authorized bank account in accordance with the Series' Prospectus and Statement of Additional Information then in effect.
For the purposes of redemption of Shares which have been purchased within 15 days of a redemption request, the Trust shall provide FPS, from time to time, with Written Instructions concerning the time within which such requests may be honored.
DIVIDENDS
Section 14. The Trust shall notify FPS of the date of each dividend declaration or capital gains distribution. In addition, the Trust shall provide to FPS five business days' prior written notice of the record date for determining the Shareholders entitled to payment. The per-share payment amount of any dividend or capital gain shall be determined by the Trust and communicated to FPS.
Section 15. On or before each payment date, the Trust will notify FPS of the total amount of the dividend or distribution currently payable. FPS will, on the designated payment date, automatically reinvest all dividends in additional Shares except in cases where Shareholders have elected to receive distribution in cash, in which case FPS will mail distribution checks to the
Shareholders for the proper amounts payable to them from monies transferred by the Custodian to FPS for that purpose.
FEES
Section 16. The Trust agrees to pay FPS compensation for its services and to reimburse it for expenses, at the rates and amounts as set forth in Schedule "B" attached hereto, and as shall be set forth in any amendments to such Schedule "B" approved by the Trust and FPS. The Trust agrees and understands that FPS's compensation will be comprised of two components, payable on a monthly basis, as follows:
(i) an annual shareholder Account Maintenance Fee calculated by multiplying the monthly average number of accounts for Class A Shares and Class D Shares of the Trust by one twelfth (1/12th) the respective account fee as stated in Schedule "B", subject to a minimum fee per class, which the Trust hereby authorizes FPS to collect by debiting the Trust's custody account for invoices which are rendered for the services performed for the applicable function. The invoices for the services performed will be sent to the Trust after such debiting with the indication that payment has been made; and
(ii) reimbursement of any reasonable out-of-pocket expenses paid by FPS on behalf of the Trust, which out-of-pocket expenses will be billed to the Trust within the first ten calendar days of the month following the month in which such out-of-pocket expenses were incurred. The Trust agrees to reimburse FPS for such expenses within ten calendar days of receipt of such bill.
For the purpose of determining fees payable to FPS, the value of the Series' net assets shall be computed at the times and in the manner specified in the Series' Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Trust seek services or functions in addition to those outlined above or in Schedule "A" attached, a written amendment to this Agreement
specifying the additional services and corresponding compensation shall be executed by both FPS and the Trust.
GENERAL PROVISIONS
Section 17. FPS shall maintain records (which may be part of the stock transfer records) in connection with the issuance and redemption of Shares, and the disbursement of dividends and dividend reinvestments, in which will be noted the transactions effected for each Shareholder and the number of Shares and fractional Shares owned by each Shareholder. FPS agrees to make available upon request and to preserve for the periods prescribed in Rule 31a-2 under the Act, any records relating to services provided under this Agreement which are required to be maintained by Rule 31a-1 under the Act.
Section 18. In addition to the services as Transfer Agent and dividend disbursing agent set forth above, FPS may perform other services for the Trust as agreed upon from time to time, including but not limited to, preparation of and mailing Federal Tax Information Forms and mailing semi-annual reports to shareholders of the Trust.
Section 19. Nothing contained in this Agreement is intended to or shall require FPS in any capacity hereunder, to perform any functions or duties on any holiday, day of special observance or any other day on which the New York Stock Exchange is closed. Functions or duties normally scheduled to be performed on such days shall be performed on, and as of, the next business day on which the New York Stock Exchange is open.
Section 20. Limitation of Liability
(a) FPS, its directors, officers, employees, shareholders and agents shall only be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement that result from willful misfeasance, bad faith, negligence or reckless disregard on the part of FPS in the performance of its obligations and duties under this Agreement.
(b) Any person, even though a director, officer, employee, shareholder or agent of FPS, who may be or become an officer, director, employee or agent of the Trust, shall be deemed when rendering services to such entity or acting on any business of such entity (other than services or business in connection with FPS's duties under the Agreement), to be rendering such services to or acting solely for the Trust and not as a director, officer, employee, shareholder or agent of, or under the control or direction of FPS even though such person may receive compensation from FPS.
(c) Notwithstanding any other provision of this Agreement, the Trust shall indemnify and hold harmless FPS, its directors, officers, employees, shareholders and agents from and against any and all claims, demands, expenses and liabilities (whether with or without basis in fact or law) of any and every nature which FPS may sustain or incur or which may be asserted against FPS by any person by reason of, or as a result of (i) any action taken or omitted to be taken by FPS in good faith; (ii) any action taken or omitted to be taken by FPS in good faith in reliance upon any certificate, instrument, order or stock certificate or other document reasonably believed by FPS to be genuine and signed, countersigned or executed by any duly authorized person, upon the oral or written instruction of an authorized person of the Trust or upon the opinion of legal counsel to the Trust; or (iii) any action taken in good faith or omitted to be taken by FPS in connection with its appointment in reliance upon any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed. Indemnification under this subparagraph shall not apply, however, to actions or omissions of FPS or its directors, officers, employees, shareholders or agents in cases of its or their willful misfeasance, bad faith, negligence or reckless disregard of its or their duties hereunder.
If a claim is made against FPS as to which FPS may seek indemnity under this Section, FPS shall notify the Trust promptly after any written assertion of such claim threatening to institute an action or proceeding with respect thereto and shall notify the Trust promptly of any
action commenced against FPS within ten (10) days after FPS shall have been served with a summons or other legal process, giving information as to the nature and basis of the claim. Failure to notify the Trust shall not, however, relieve the Trust from any liability which it may have on account of the indemnity under this Section 20(c) if the Trust has not been prejudiced in any material respect by such failure.
The Trust and FPS shall cooperate in the control of the defense of any action, suit or proceeding in which FPS is involved and for which indemnity is being provided by the Trust to FPS. The Trust may negotiate the settlement of any action, suit or proceeding subject to FPS's approval, which shall not be unreasonably withheld. FPS shall have the right, but not the obligation, to participate in the defense or settlement of a claim or action, with its own counsel, but any costs or expenses incurred by FPS in connection with, or as a result of, such participation will be borne solely by FPS.
FPS shall have the right to participate in the defense of an action or proceeding and to retain its own counsel, and the reasonable fees and expenses of such counsel shall be borne by the Trust (which shall pay such fees, costs and expenses at least quarterly) if:
(i) FPS has received an opinion of counsel stating that the use of counsel chosen by the Trust to represent FPS would present such counsel with a conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding include both FPS and the Trust, and legal counsel to FPS shall have reasonably concluded that there are legal defenses available to it which are different from or additional to those available to the Trust or which may be adverse to or inconsistent with defenses available to the Trust (in which case the Trust shall not have the right to direct the defense of such action on behalf of FPS); or
(iii) the Trust shall authorize FPS to employ separate counsel at the expense of the Trust. Notwithstanding anything to the contrary herein, it is understood that the Trust shall not, in connection with any action, suit or proceeding or related action, suit or proceeding, be liable under this Agreement for the fees and expenses of more than one firm.
(d) The terms of this Section 20 shall survive the termination of this Agreement.
Section 21. FPS is authorized, upon receipt of Written Instructions from the Trust, to make payment upon redemption of Shares without a signature guarantee. The Trust hereby agrees to indemnify and hold FPS, its successors and assigns, harmless of and from any and all expenses, damages, claims, suits, liabilities, actions, demands, losses whatsoever arising out of or in connection with a payment by FPS upon redemption of Shares pursuant to Written Instructions and without a signature guarantee.
Section 22.
(a) The term of this Agreement shall be for a period of two (2) years, commencing on the date which the Trust's registration statement is declared effective by the U.S. Securities and Exchange Commission ("Effective Date") and shall continue thereafter on a year to year term subject to termination by either Party as set forth in (c) below.
(b) The fee schedule set forth in Schedule "B" attached shall be fixed for two (2) years commencing on the Effective Date of this Agreement and shall continue thereafter subject to review and adjustment as determined by the Parties.
(c) After the initial term of this Agreement, the Trust or FPS may give written notice to the other of the termination of this Agreement, such termination to take effect at the time specified in the notice, which date shall not be less than one hundred eighty (180) days after the date of receipt of such notice. Upon the effective termination date, the Trust shall pay to FPS such compensation as may be due as of the date of termination and shall likewise reimburse FPS for any out-of-pocket expenses and disbursements reasonably incurred by FPS to such date.
(d) If a successor to any of FPS's duties or responsibilities under this Agreement is designated by the Trust by written notice to FPS in connection with the termination of this Agreement, FPS shall promptly, upon such termination and at the expense of the Trust, transfer all required records which are the property of the Trust and shall cooperate in the transfer of such records, and its duties and responsibilities under the Agreement.
Section 23. The Trust shall file with FPS a certified copy of each resolution of its Board of Trustees authorizing the execution of Written Instructions or the transmittal of Oral Instructions, as provided in Section 1 of this Agreement.
Section 24. This Agreement may be amended from time to time by a supplemental agreement executed by the Trust and FPS.
Section 25. Except as otherwise provided in this Agreement, any notice or other communication required by or permitted to be given in connection with this Agreement shall be in writing, and shall be delivered in person or sent by first class mail, postage prepaid, to the respective parties as follows:
If to the Trust: If to FPS:
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Metropolitan West Funds FPS Services, Inc.
10880 Wilshire Blvd., Suite 2020 3200 Horizon Drive, P.O. Box 61503
Los Angeles, CA 90024 King of Prussia, PA 19406-0903
Attention: Scott B. Dubchansky Attention: Kenneth J. Kempf
Chief Executive Officer and Trustee President
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Section 26. Authority of Signatories The Parties represent and warrant to each other that the execution and delivery of this Agreement by the undersigned officer of each Party has been duly and validly authorized; and, when duly executed, this Agreement will constitute a valid and legally binding enforceable obligation of each Party. The obligations under this Agreement shall be binding upon the assets and property of the Trust and shall not be binding upon any officer or shareholder of the Series individually.
Section 27. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.
Section 28. This Agreement shall extend to and shall be binding upon the Parties and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of FPS or by FPS without the written consent of the Trust, authorized or approved by a resolution of their respective Boards of Directors or Trustees.
Section 29. This Agreement shall be governed by the laws of the State of California and the exclusive venue of any action arising under this Agreement shall be Montgomery County, Commonwealth of Pennsylvania.
Section 30. No provision of this Agreement may be amended or modified, in any manner except in writing, properly authorized and executed by FPS and the Trust.
Section 31. If any part, term or provision of this Agreement is held by any court to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid, provided that the basic agreement is not thereby substantially impaired.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement consisting in its entirety, of eleven typewritten pages, together with Schedules "A," "B" and "C," to be signed by their duly authorized officers as of the day and year first above written.
Metropolitan West Funds FPS Services. Inc.
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By: Scott B. Dubchansky By: Kenneth J. Kempf
Chief Executive Officer and Trustee President
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SCHEDULE "A"
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TRANSFER AGENT/SHAREHOLDER SERVICES
FOR
METROPOLITAN WEST FUNDS
The following is a list of Services to be provided under this Agreement:
I. - Shareholder File Services
1. Establish new accounts and enter demographic data into shareholder base. Includes in-house processing and NSCC - FundSERV - Networking transmissions.
2. Create Customer Information File (CIF) to link accounts within the Fund and across funds within the Fund Group. Facilitates account maintenance, lead tracking, quality control, household mailings and combined statements.
3. 100% quality control of new account information including verification of initial investment.
*4. Systematic linkage of shareholder accounts with exact matches on SSN and address for the purpose of consolidated account history reporting. Periodic production of laser printed combined statements.
*5. Production of household mailing labels which enable the Fund to do special mailings to each address in the Fund Group rather than each account.
6. Maintain account and customer file records based on shareholder request and routine quality review.
7. Maintain tax ID certification and NRA records for each account, including backup withholding.
8. Provide written confirmation of address changes.
9. Produce shareholder statements for daily activity, dividends, on-request, third party and periodic mailings.
*10. Produce shareholder lists, labels and ad hoc reports to Fund management as requested.
11. Automated processing of dividends and capital gains with daily, monthly, quarterly or annual distributions. Payment options include reinvestment, directed payment to another fund, cash via mail, Fed wire or ACH.
12. Image all applications, account documents, data changes, correspondence, monetary transactions, and other pertinent shareholder documents.
II. - Shareholder Services
1. Provide quality service through a staff of highly trained NASD licensed customer service personnel, including phone, research and correspondence representatives.
2. Answer shareholder calls: provide routine account information, transaction details including direct and wire purchases, redemptions, exchanges systematic withdraws, pre-authorized drafts, FundSERV and wire order trades, problem solving and process telephone transactions.
3. Silent monitoring of shareholder calls by the phone supervisor to ensure exceptional customer service.
4. Record and maintain tape recordings of all shareholder calls for a six month period.
5. Phone Supervisor produces daily management reports of shareholder calls which track volumes, length of calls, average wait time and abandoned call rates to ensure quality service.
6. Phone representatives are thoroughly trained through in house training programs on the techniques of providing Exceptional Customer Service.
7. Customer inquiries received by letter or telephone are thoroughly researched by a correspondence team member. These inquiries include such items as account/customer file information, complete historical account information, stop payments on checks, transaction details and lost certificates.
III. - Investment Processing
1. Initial investment (checks or Fed wires).
2. Subsequent investments (checks or Fed wires) processed through lock box.
3. Pre-authorized investments (PAD) through ACH system.
4. Government allotments through ACH system.
5. Prepare and process telephone purchase transactions.
*6. NSCC - Fund/SERV trades.
IV. - Redemption Processing
1. Process letter redemption requests.
2. Process telephone redemption transactions.
3. Establish Systematic Withdrawal file and process automated transactions on monthly basis.
4. Issue checkbooks and process checkbook redemption through agent bank.
5. Redemption proceeds distributed to shareholder by check, Fed wire or ACH processing.
*6. Provide NSCC - Fund/SERV trade processing.
V. - Exchange & Transfer Processing
1. Process legal transfers.
2. Issue and cancel certificates.
3. Replace certificates through surety bonds (separate charge to shareholder).
4. Process exchange transactions (letter and telephone requests).
5. Process ACATS transfers.
VI. - Retirement Plan Services
1. Fund sponsored IRAs offered using Semper Trust Company as custodian.
Services include:
a. Contribution processing
b. Distribution processing
c. Apply rollover transactions
d. Process Transfer of Assets
e. Letters of Acceptance to prior custodians
f. Notify IRA holders of 70 `f: requirements
g. Calculate Required Minimum Distributions (RMD)
h. Maintain beneficiary information file
i. Solicit birth date information
2. Fund sponsored SEP-IRA plans offered using Semper Trust Company as
custodian. Services include those listed under IRAs and:
a. Identification of employer contributions
3. Fund sponsored Qualified plans offered:
a. Plan document available
b. Omnibus/master account processing only
c. Produce annual statements
d. Process contributions
e. Process distributions
f. Process rollover and Transfer of Assets transactions
VII. Settlement & Control
1. Daily review of processed shareholder transactions to assure input was processed correctly. Accurate trade activity figures passed to Fund's Accounting Agent by 10:00 am EST.
2. Preparation of daily cash movement information to be passed to the Fund's Accounting Agent and Custodian Bank by 10:00 a.m. EST for use in determining the Fund's daily cash availability.
3. Prepare a daily share reconcilement which balances the shares on the Transfer Agent system to those on the books of the Fund.
4. Resolve any outstanding share or cash issues that are not cleared by trade date + 2.
5. Process shareholder adjustments to include the proper notification of any booking entries needed, as well as any necessary cash movement.
6. Settlement and review of the Fund's declared dividends and capital
gains to include the following:
a. Review record date report for accuracy of shares.
b. Preparation of dividend settlement report after dividend is
posted. Verify the posting date shares, the rate used and the
NAV price of reinvest date to ensure dividend was posted
properly.
c. Distribute copies to the Fund's Accounting Agent.
d. Preparation of the checks prior to being mailed.
e. Sending of any dividends via wires if requested.
f. Preparation of cash movement sheets for the cash portion of the
dividend payout on payable date.
7. Placement of stop payments on dividend and liquidation checks as well as the issuance of their replacements.
8. Maintain inventory control for dividend check form.
9. Aggregate tax filings for all FPS clients. Monthly deposits to the IRS of all types withheld from shareholder disbursements, distributions and foreign account distributions. Correspond with the IRS concerning any of the above issues.
10. Timely settlement and cash movement for all NSCC/FundSERV activity.
VIII. - Year End Processing
1. Maintain shareholder records in accordance with IRS notices for under-reporting and invalid Tax IDs This includes initiating 31% backup withholding and notifying shareholders of their tax status and the corrective action which is needed.
2. Conduct annual W-9 solicitation of all uncertified accounts. Update account tax status to reflect backup withholding or certified status depending upon responses.
3. Conduct periodic W-8 solicitation of all non-resident alien shareholder accounts. Update account tax status with updated shareholder information and treaty rates for NRA tax.
4. Review IRS Revenue Procedures for changes in transaction and distribution reporting and specifications for the production of forms to ensure compliance.
5. Coordinate year end activity with client. Activities include producing year end statements, scheduling record dates for year dividends and capital gains, production of combined statements and printing of inserts to be mailed with tax forms.
6. Distribute Dividend Letter to Funds for them to sign off on all distributions paid year to date. Dates and rates must be authorized so that they can be used for reporting to the IRS.
7. Coordinate the ordering of form and stock envelopes from vendor in preparation of tax reporting. Review against IRS requirements to ensure accuracy.
8. Prepare form flashes for the microfiche vendor. Test and oversee the production of fiche for year end statements and tax forms.
9. Match and settle tax reporting totals to fund records and on-line data from Investar.
10. Produce forms 1099R, 1099B, 1099Div, 5498, 1042S and year end valuations. Quality assure forms before mailing to shareholders.
11. Monitor IRS deadlines and special events such as cross over dividends and prior year IRA contributions.
12. Prepare IRS magnetic tapes and appropriate forms for the filing of all reportable activity to the Internal Revenue Service.
IX. - Client Services
1. An Account Manager is assigned to each relationship. The Account Manager acts as the liaison between the Fund and the Transfer Agency. Responsibilities include scheduling of events, system enhancement implementation, special promotion/event implementation and follow-up, and constant Fund interaction on daily operational issues.
Specifically:
a. Scheduling of dividends, proxies, report mailings and special
mailings.
b. Coordinate with the Fund the shipment of materials for scheduled
mailings.
c. Liaison between the Fund and support services for preparation of
proofs and eventual printing of statement forms, certificates,
proxy cards, envelopes, etc.
d. Handle all notification to the client regarding proxy tabulation
through the meeting. Coordinate scheduling of materials
including voted cards, tabulation letters, and shareholder list
to be available for the meeting.
e. Order special reports, tapes, discs for special systems requests
received.
f. Implement new operational procedures, i.e., check writing
feature, load discounts, minimum waivers, sweeps, telephone
options, PAD promotions, etc.
g. Coordinate with systems, services and operations, special
events, i.e., mergers, new fund start ups, small account
liquidations, combined statements, household mailings,
additional mail files, etc.
h. Prepare standard operating procedures and review prospectuses
for new start up funds and our current client base. Coordinate
implementation of suggested changes with the Fund.
i. Liaison between the Fund and the Transfer Agency staff regarding
all service and operational issues.
2. Proxy Processing (Currently one free per year)
a. Coordinate printing of cards with vendor.
b. Coordinate mailing of cards with Account Manager and mailroom.
c. Provide daily report totals to Account Manager for client
notification.
d. Preparation of affidavit of mailing documents.
e. Provide one shareholder list.
f. Prepare final tabulation letter.
3. Blue Sky Processing
a. Maintain file with additions, deletions, changes and updates at
the Fund's direction.
b. Provide daily and monthly reports to enable the Fund to do
necessary state filings.
* Separate fees will apply for these services.
DAILY REPORTS
REPORT NUMBER REPORT DESCRIPTION
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-- Daily Activity Register
024 Tax Reporting Proof
051 Cash Receipts and Disbursement Proof
053 Daily Share Proof
091 Daily Gain/Loss Report
104 Maintenance Register
044 Transfer/Certificate Register
056 Blue Sky Warning Report
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MONTHLY REPORTS
SCHEDULE "B"
SHAREHOLDER SERVICES AND TRANSFER AGENT FEE SCHEDULE
FOR
METROPOLITAN WEST FUNDS
This Fee Schedule is fixed for a period of two (2J years from the Effective Date as that term is defined in the Agreement.
I. Transfer Agent and Shareholder Services:
$20.00 per account per year per portfolio Minimum monthly fee - $1,500 per portfolio
II. IRA's, 403(b) Plans, Defined Contribution/Benefit Plans:
Account Maintenance Fee - $12.00 per account per year
(normally charged to participants)
III. Out-of-Pocket-Expenses
The Funds will reimburse FPS Services, Inc. monthly for all reasonable out-of-pocket expenses, including telephone, postage, overdraft charges, EDGAR filings, Fund/SERV and Networking expenses, telecommunications, special reports, record retention, special transportation costs, copying and sending materials to auditors and/or regulatory agencies, as incurred and approved.
SCHEDULE "C"
Identification of Series
Below are listed the "Series" to which services under this Agreement are to be performed as of the execution date of the Agreement:
"Metropolitan West Funds"
1. Metropolitan West Total Return Bond Fund
2. Metropolitan West Low Duration Bond Fund
3 Metropolitan West Short Term Investment Fund
This Schedule "C" may be amended from time to time by agreement of the Parties.
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
The Metropolitan West Funds:
We consent to (a) the use in this Pre-Effective Amendment No. 2 to Registration Statement No. 333-18737 on Form N-1A of our report on the statements of assets and liabilities of the Metropolitan West Total Return Bond Fund and the Low Duration Bond Fund (the "Funds") of the Metropolitan West Funds (the "Trust") as of March 27, 1997 dated March 27, 1997 appearing in Part B, the Statement of Additional Information of such Registation Statement, (b) the reference to us under the heading "General Information" in the Prospectus which is part of such Registration Statement, and (c) the reference to us under the heading "Other Information" in Part B, the Statement of Additional information of such Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 28, 1997
Metropolitan West Funds
10880 Wilshire Blvd., Suite 2020
Los Angeles, California 90024
Ladies and Gentlemen:
The undersigned hereby subscribes for the purchase of _______ shares of beneficial interest (the "Shares") of METROPOLITAN WEST TOTAL RETURN BOND FUND (the "Fund"), a separate series of Metropolitan West Funds (the "Trust"), at $__.___ per share for a total investment of $ _____. In connection with said subscription, the undersigned hereby represents that:
1. There is no present reason to anticipate any change in circumstances or any other occasion or event that would cause the undersigned to sell or redeem the Shares shortly after purchase thereof.
2. There are no argeements or arrangements between the undersigned and the Trust, or any of its officers, trustees, employees or the investment manager of the Fund, or any affiliated persons thereof with respect to the resale, future distribution or redemption of the Shares.
3. The sale of the Shares by the undersigned will be made only by redemption to the Fund and not by a transfer to any third party, without the consent of the Trust.
4. The undersigned is aware that in issuing and selling these Shares, the Fund and the Trust are relying upon the aforementioned representations.
5. The undersigned is fully aware that the organizational expenses of the Fund, including the costs and expenses of registration of the Shares, are being charged to the operations of the Fund over a period of five years, and that if the undersigned redeems any portion of these Shares before the end of said amortization period, the undersigned will reimburse the Fund for the pro rata share of the unamortized organizational expenses (by a reduction of the redemption proceeds) in the same proportion the number of Shares being redeemed bears to the total number of remaining initial Shares acquired by the undersigned hereunder.
METROPOLITAN WEST ASSET MANAGEMENT, LLC
By
Dated: March ___, 1997 --------------------------------
Its
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