AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 2001
SECURITIES ACT REGISTRATION NOS. 333-60561
INVESTMENT COMPANY ACT REGISTRATION NO. 811-08915
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS
(FORMERLY PRUDENTIAL DIVERSIFIED FUNDS)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-1495
GEORGE P. ATTISANO, ESQ.
COPIES TO:
It is proposed that this filing will become effective
(check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph(a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
|
PROSPECTUS OCTOBER 1, 2001
STRATEGIC PARTNERS [LOGO]
ASSET ALLOCATION FUNDS
STRATEGIC PARTNERS
CONSERVATIVE GROWTH FUND
Objective: Seeks Current Income and a Reasonable Level of Capital Appreciation
STRATEGIC PARTNERS
MODERATE GROWTH FUND
Objective: Seeks Capital Appreciation and a Reasonable Level of Current Income
STRATEGIC PARTNERS
HIGH GROWTH FUND
Objective: Seeks Long-Term Capital Appreciation
As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved the Trust's shares nor has the SEC determined that this prospectus is complete or accurate. It is a criminal offense to state otherwise.
Table of Contents
1 Risk/Return Summary
1 Investment Objectives and Principal Strategies
9 Principal Risks
11 Evaluating Performance
14 Fees and Expenses
18 How the Funds Invest
18 Investment Objectives and Policies
23 Other Investments and Strategies
28 Investment Risks
36 How the Trust is Managed
36 Board of Trustees
36 Manager
37 Advisers and Portfolio Managers
40 Distributor
41 Fund Distributions and Tax Issues
41 Distributions
42 Tax Issues
44 If You Sell or Exchange Your Shares
45 How to Buy, Sell and Exchange Shares of the Funds
45 How to Buy Shares
53 How to Sell Your Shares
57 How to Exchange Your Shares
58 Telephone Redemptions and Exchanges
58 Expedited Redemption Privilege
59 Financial Highlights
71 The Strategic Partners Mutual Fund Family
For More Information (Back Cover)
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
This section highlights key information about the investment portfolios (the Funds) of Strategic Partners Asset Allocation Funds, formerly Prudential Diversified Funds (the Trust). Additional information follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives, principal strategies and principal risks for each of the Funds. For more information on the risks associated with the Funds, see "Principal Risks" below. While we make every effort to achieve the investment objective for each Fund, we can't guarantee success.
INTRODUCTION
A study has shown that the greatest impact on long-term investment returns is attributable to an investor's asset allocation decisions (i.e., the mix of stocks, bonds and money market investments) rather than market timing or individual security selection.(1) Many investors do not have the time, the experience or the resources to implement a sound asset allocation strategy on their own. Investors have increasingly looked to mutual funds as a way to diversify their investments.
The Trust is designed for investors who want investment professionals to make their asset allocation decisions. The Trust offers three Funds designed to provide investors with a means to manage their long-term investments prudently in light of their personal investment goals and risk tolerance. Each Fund pursues its investment objective by investing in a mix of equity and fixed- income securities appropriate for a particular type of investor. Each Fund may serve as the cornerstone of a larger investment portfolio.
1 Source: Financial Analysts Journal. May/June 1991: "Determinants of Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert Beebower. Results are based on the 10-year performance records of 82 pension funds. The study updates and supports a similar study done in 1986.
Risk/Return Summary
HOW DO THE FUNDS DIFFER?
Each Fund has a distinct investment objective and is situated differently along the risk/return spectrum.
[RISK RETURN CHART GRAPHIC]
The risk/return balance of each Fund depends upon the proportion of assets it allocates to different types of investments. Of course, higher risk does not always result in higher returns. Historic performance is no guarantee of future results.
Prudential Investments Fund Management LLC (PIFM or the Manager) has developed an asset allocation strategy for the Funds designed to provide a mix of investment types and styles that is appropriate for investors with conservative, moderate and aggressive investment orientations.
STRATEGIC PARTNERS CONSERVATIVE GROWTH FUND (CONSERVATIVE GROWTH FUND) may be appropriate for investors such as those in early retirement, who need to draw income from investments while obtaining a measure of long-term capital growth as a hedge against inflation. The Fund's focus on bonds for stability of principal also makes it suitable for conservative investors seeking income and modest growth, especially those concerned about market volatility.
RISKS
- Market risk
- Style risk
- Credit risk
- Interest rate risk
- Small and medium size company risk
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
STRATEGIC PARTNERS MODERATE GROWTH FUND (MODERATE GROWTH FUND) may be appropriate for investors looking for a balance of long-term capital growth and current income (e.g., investors in their 50s who are saving on a regular basis for retirement and who plan to retire in their early to mid 60s). The Fund offers a diversified approach to equities for long-term growth, but will normally maintain a substantial component of fixed-income securities to provide current income and a measure of stability.
RISKS
- Market risk
- Style risk
- Small and medium size company risk
- Foreign market risk
- Credit risk
- Interest rate risk
STRATEGIC PARTNERS HIGH GROWTH FUND (HIGH GROWTH FUND) may be appropriate for investors seeking long-term capital growth. In addition, investors who already have a diversified portfolio may find this allocation suitable as an additional growth component (e.g., investors in their 20s, 30s or 40s who are saving for retirement and who plan to retire in their early to mid 60s).
RISKS
- Market risk
- Style risk
- Foreign market risk
- Small and medium size company risk
An investor can choose any of these three Funds, depending on his or her financial situation, personal investment objectives, investment horizon and level of risk tolerance.
HOW ARE THE FUNDS MANAGED?
The Manager has contracted with several highly regarded subadvisers (called Advisers) to manage the assets of each Fund. Each Adviser manages a portion of a Fund's assets, focusing on a particular type and style of
Risk/Return Summary
investing. The Manager monitors the performance of each Fund's Advisers and allocates the Fund's assets among its Advisers.
The Manager believes that its asset allocation strategy and multi-Adviser approach will enhance the performance of the Funds and reduce their volatility. First, the Manager has identified a select group of proven, experienced Advisers. Although each Adviser will focus the management of its Fund segment on a particular type and style of investing, the Manager believes that the combined efforts of several Advisers will result in prudently diversified Funds. Secondly, the Manager believes that, at any given time, certain investment types and styles will generate higher returns than others. Accordingly, the Manager believes that diversifying each Fund among a variety of investment types and styles will reduce volatility.
CONSERVATIVE GROWTH FUND
The Fund's investment objective is to seek to provide CURRENT INCOME and a reasonable level of CAPITAL APPRECIATION. This means that we seek investments that will pay income and investments that will increase in value. The Fund seeks to achieve its objective by investing in a diversified portfolio of fixed-income and equity securities. The table identifies the Fund's Advisers and the Fund segments they manage.
----------------------------------------------------------------------------------------
TARGET
ALLOCATION OF PRIMARY
ADVISER FUND'S ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
Jennison Associates LLC 15% Equities Growth-oriented, focusing
(Jennison) on large-cap stocks
Jennison 15% Equities Value-oriented, focusing
on large-cap stocks
Franklin Advisers, Inc. 5% Equities Growth-oriented, focusing
(Franklin) on small-cap and mid-cap
stocks
The Dreyfus Corporation 5% Equities Value-oriented, focusing
(Dreyfus) on small-cap and mid-cap
stocks
Pacific Investment Management 40% Fixed Income High-quality debt
Company LLC (PIMCO) instruments
Prudential Investment 20% Fixed Income High-yield debt, including
Management, Inc. (formerly junk bonds and emerging
The Prudential Investment market debt
Corporation) (PIM)
----------------------------------------------------------------------------------------
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
In response to market developments, the Manager may rebalance the allocation of the Fund's assets or may add or eliminate Fund segments in accordance with the Fund's investment objective and the policies described below.
The Fund will normally invest approximately 60% of its total assets in DEBT
OBLIGATIONS of varying credit quality, including securities issued or guaranteed
by the U.S. GOVERNMENT and its agencies, and debt obligations issued by U.S.
COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS and their agencies. The
Fund may invest in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities and in privately-issued, mortgage-related securities (not
issued or guaranteed by the U.S. government). These investments may include
collateralized mortgage obligations and stripped mortgage-backed securities. We
may also invest in ASSET-BACKED SECURITIES. The debt obligations held by the
Fund will normally have a dollar-weighted average maturity of between 4 and 15
years.
We may invest up to 35% of the Fund's total assets in HIGH-YIELD DEBT OBLIGATIONS--also known as "JUNK BONDS"--which are rated at least B by Standard & Poor's (S&P), Moody's Investors Service (Moody's) or another major rating service, and unrated debt obligations that we believe are comparable in quality. The Fund may continue to hold an obligation even if it is later downgraded or no longer rated.
We may also invest up to 25% of the Fund's total assets in FOREIGN DEBT OBLIGATIONS, including up to 10% of its total assets in debt obligations of issuers in emerging markets.
The Fund will normally invest approximately 40% of its total assets in COMMON STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 15% of its total assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging markets. These securities include American Depositary Receipts (ADRs), American Depositary Shares (ADSs), Global Depositary Receipts (GDRs) and European Depositary Receipts (EDRs), each of which are certificates representing an equity investment in a foreign company.
The foreign debt obligations and foreign stocks held by the Fund will normally be denominated in foreign currencies, including the euro--a multinational currency unit.
Risk/Return Summary
MODERATE GROWTH FUND
The Fund's investment objective is to seek to provide CAPITAL APPRECIATION and a reasonable level of CURRENT INCOME. This means that we seek investments that will increase in value and investments that will pay income. The Fund seeks to achieve its objective by investing in a diversified portfolio of equity and fixed-income securities. The table below identifies the Fund's Advisers and the Fund segments they manage.
--------------------------------------------------------------------------------
TARGET
ALLOCATION OF PRIMARY
ADVISER FUND'S ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
Jennison 20% Equities Growth-oriented, focusing
on large-cap stocks
Jennison 20% Equities Value-oriented, focusing
on large-cap stocks
Franklin 7.5% Equities Growth-oriented, focusing
on small-cap and mid-cap
stocks
Dreyfus 7.5% Equities Value-oriented, focusing
on small-cap and mid-cap
stocks
Lazard Asset Management 10% International Stocks of foreign
(Lazard) Equities companies
PIMCO 20% Fixed Income High-quality debt
instruments
PIM 15% Fixed Income High-yield debt, including
junk bonds and emerging
markets debt
--------------------------------------------------------------------------------
|
In response to market developments, the Manager may rebalance the allocation of the Fund's assets or may add or eliminate Fund segments in accordance with the Fund's investment objective and the policies described below.
The Fund will normally invest approximately 65% of its total assets in COMMON STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 25% of its total assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging markets. These securities include ADRs, ADSs, GDRs and EDRs, each of which are certificates representing an equity investment in a foreign company. The foreign securities held by the Fund normally will be
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
denominated in foreign currencies, including the euro--a multinational currency unit.
The Fund will normally invest approximately 35% of its total assets in DEBT
OBLIGATIONS of varying credit quality, including securities issued or guaranteed
by the U.S. GOVERNMENT and its agencies, and debt obligations issued by U.S.
COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS and their agencies. The
Fund may invest in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities and in privately issued, mortgage-related securities (not
issued or guaranteed by the U.S. government). These investments may include
collateralized mortgage obligations and stripped mortgage-backed securities. We
may also invest in ASSET-BACKED SECURITIES. The debt obligations held by the
Fund will normally have a dollar-weighted average maturity of between 4 and 15
years.
We may invest up to 35% of the Fund's total assets in HIGH-YIELD DEBT OBLIGATIONS--also known as "JUNK BONDS"--which are rated at least B by S&P, Moody's or another major rating service, and unrated debt obligations that we believe are comparable in quality. The Fund may continue to hold an obligation even if it is later downgraded or no longer rated.
We may also invest up to 25% of the Fund's total assets in FOREIGN DEBT OBLIGATIONS, including up to 10% of its total assets in debt obligations of issuers in emerging markets.
Risk/Return Summary
HIGH GROWTH FUND
The Fund's investment objective is to seek to provide long-term CAPITAL APPRECIATION. This means that we seek investments that will increase in value. The Fund seeks to achieve its objective by investing in a diversified portfolio of equity securities. The table below identifies the Fund's Advisers and the Fund segments they manage.
---------------------------------------------------------------------
TARGET
ALLOCATION OF PRIMARY
ADVISER FUND'S ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
Jennison 25% Equities Growth-oriented, focusing
on large-cap stocks
Jennison 25% Equities Value-oriented, focusing
on large-cap stocks
Franklin 15% Equities Growth-oriented, focusing
on small-cap and mid-cap
stocks
Dreyfus 15% Equities Value-oriented, focusing
on small-cap and mid-cap
stocks
Lazard 20% International Stocks of foreign
Equities companies
---------------------------------------------------------------------
|
In response to market developments, the Manager may rebalance the allocation of the Fund's assets or may add or eliminate Fund segments in accordance with the Fund's investment objective and the policies described below.
The Fund will normally invest substantially all of its assets in COMMON STOCKS OF U.S. AND FOREIGN COMPANIES. The Fund may invest up to 35% of its total assets in STOCKS OF FOREIGN COMPANIES, including companies in emerging markets. These securities include ADRs, ADSs, GDRs and EDRs, each of which are certificates representing an equity investment in a foreign company. The foreign securities held by the Fund normally will be denominated in foreign currencies, including the euro--a multinational currency unit.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Like any mutual fund, an investment in a Fund could lose value, and you could lose money. The following summarizes the principal risks of investing in the Funds. Unless otherwise indicated, the following risks apply to each of the Funds.
MARKET RISK FOR COMMON STOCKS
Since the Funds invest in common stocks, there is the risk that the price of a particular stock owned by a Fund could go down. Generally, the stock price of large companies is more stable than the stock price of smaller companies, but this is not always the case. In addition to an individual stock losing value, the value of a market sector or of the equity market as a whole could go down. In addition, different parts of a market can react differently to adverse issuer, market, regulatory, political and economic developments.
SMALL- AND MEDIUM-SIZE COMPANY RISK
Each Fund has segments that are invested in stocks of small- and medium-size companies. These companies usually offer a smaller range of products and services than larger companies. They may also have limited financial resources and may lack management depth. As a result, the prices of stocks issued by small- and medium-size companies tend to fluctuate more than the stocks of larger, more established companies.
STYLE RISK
Since some of the Fund segments focus on either a growth or value style, there is the risk that a particular style may be out of favor for a period of time.
CREDIT RISK
The debt obligations in which the CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS invest are generally subject to the risk that the issuer may be unable to make principal and interest payments when they are due.
MARKET RISK FOR DEBT OBLIGATIONS
Debt obligations are also subject to market risk, which is the possibility that the market value of an investment may move up or down and that its
Risk/Return Summary
movement may occur quickly or unpredictably. Market risk may affect an industry, a sector or the entire market.
INTEREST RATE RISK
Debt obligations with longer maturities typically offer higher yields, but are subject to greater price shifts as a result of interest rate changes than debt obligations with shorter maturities. The prices of debt obligations generally move in the opposite direction to that of market interest rates.
FOREIGN MARKET RISK
Investing in foreign securities involves more risk than investing in securities of U.S. issuers. Foreign markets--especially emerging markets--tend to be more volatile than U.S. markets and are generally not subject to regulatory requirements comparable to those in the U.S. The amount of income available for distribution may be affected by our foreign currency gains or losses and certain hedging activities. In addition, political developments and changes in currency exchange rates may adversely affect the value of a Fund's foreign securities.
OTHER RISKS
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may invest in mortgage-related securities and asset-backed securities, which are subject to prepayment risk. If these securities are prepaid, a Fund may have to replace them with lower-yielding securities. Stripped mortgage-backed securities are generally more sensitive to changes in prepayment and interest rates than other mortgage-related securities.
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may invest in below-investment-grade securities--also known as "junk bonds"--which have a higher risk of default and tend to be less liquid than higher-rated securities. These Funds may also invest in debt obligations of foreign issuers. Investing in foreign securities presents additional risks.
For more detailed information about the risks associated with the Funds, see "How the Funds Invest--Investment Risks."
An investment in a Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how each Fund performs. The following bar charts show each Fund's performance for the last two calendar years of operation. The bar charts and tables below demonstrate the risk of investing in each Fund by showing how returns can change from year to year and by showing how the Fund's average annual total returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Fund will achieve similar results in the future.
CONSERVATIVE GROWTH FUND
ANNUAL RETURN* (Class A shares)
[BAR CHART -- NUMBERS BELOW IN PERCENTAGES]
ANNUAL RETURN
-------------
1999 10.07
2000 3.58
|
BEST QUARTER: 9.12% (4th quarter of 1999) WORST QUARTER: -2.67% (3rd quarter of 1999)
* These annual returns do not include sales charges. If the sales charges were included, the annual returns would be lower than those shown. Without the distribution and service (12b-1) fee waiver, the annual returns would have been lower, too.
The total return of the Fund's Class A shares from 1-1-01 to 6-30-01 was 0.49%.
AVERAGE ANNUAL RETURNS(1) (as of 12-31-00)
1 YR SINCE INCEPTION (11-18-98)
Class A shares -1.60% 5.40%
Class B shares -2.20% 5.87%
Class C shares 0.77% 6.68%
Class Z shares 3.61% 8.19%
S&P 500(2) -9.10% 8.29%
Lipper Average(3) 1.51% 6.83%
|
1 The Fund's returns are after deduction of sales charges and expenses. Without the distribution and service (12b-1) fee waiver for Class A shares, the returns would have been lower.
2 The Standard & Poor's 500 Composite Stock Price Index (S&P 500)--an unmanaged
index of 500 stocks of large U.S. companies--gives a broad look at how stock
prices have performed. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be lower
if they included the effect of sales charges and operating expenses. Source:
Lipper Inc.
3 The Lipper Average is based on the average return of all mutual funds in the Lipper Balanced Funds category and does not include the effect of any sales charges. Again, these returns would be lower if they included the effect of sales charges. Source: Lipper Inc.
Risk/Return Summary
MODERATE GROWTH FUND
ANNUAL RETURN* (Class A shares)
[BAR CHART -- NUMBERS BELOW IN PERCENTAGES]
ANNUAL RETURN
-------------
1999 16.52
2000 0.75
|
BEST QUARTER: 12.96% (4th quarter of 1999) WORST QUARTER: -2.89% (3rd quarter of 1999)
* These annual returns do not include sales charges. If the sales charges were included, the annual returns would be lower than those shown. Without the distribution and service (12b-1) fee waiver, the annual returns would have been lower, too.
The total return of the Fund's Class A shares from 1-1-01 to 6-30-01 was -2.62%.
AVERAGE ANNUAL RETURNS(1) (as of 12-31-00)
1 YR SINCE INCEPTION (11-18-98)
Class A shares -4.28% 7.52%
Class B shares -4.91% 7.98%
Class C shares -1.91% 8.76%
Class Z shares 1.17% 10.43%
S&P 500(2) -9.10% 8.29%
Lipper Average(3) -2.95% 24.67%
|
1 The Fund's returns are after deduction of sales charges and expenses. Without the distribution and service (12b-1) fee waiver for Class A shares, the returns would have been lower.
2 The S&P 500--an unmanaged index of 500 stocks of large U.S. companies--gives a broad look at how stock prices have performed. These returns do not include the effect of any sales charges or operating expenses of a mutual fund. These returns would be lower if they included the effect of sales charges and operating expenses. Source: Lipper Inc.
3 The Lipper Average is based on the average return of all mutual funds in the Lipper Multi-Cap Core Funds category and does not include the effect of any sales charges. Again, these returns would be lower if they included the effect of sales charges. Source: Lipper Inc.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
HIGH GROWTH FUND
ANNUAL RETURN* (Class A shares)
[BAR CHART -- NUMBERS BELOW IN PERCENTAGES]
ANNUAL RETURN
-------------
1999 27.28
2000 -1.97
|
BEST QUARTER: 20.08% (4th quarter of 1999) WORST QUARTER: -4.14% (4th quarter of 2000)
* These annual returns do not include sales charges. If the sales charges were included, the annual returns would be lower than those shown. Without the distribution and service (12b-1) fee waiver, the annual returns would have been lower, too.
The total return of the Fund's Class A shares from 1-1-01 to 6-30-01 was -5.11%.
AVERAGE ANNUAL RETURNS(1) (as of 12-31-00)
1 YR SINCE INCEPTION (11-18-98)
Class A shares -6.87% 11.72%
Class B shares -7.60% 12.41%
Class C shares -4.58% 13.11%
Class Z shares -1.65% 14.81%
S&P 500(2) -9.10% 8.29%
Lipper Average(3) -2.95% 24.67%
|
1 The Fund's returns are after deduction of sales charges and expenses. Without the distribution and service (12b-1) fee waiver for Class A shares, the returns would have been lower.
2 The S&P 500--an unmanaged index of 500 stocks of large U.S. companies--gives a broad look at how stock prices have performed. These returns do not include the effect of any sales charges or operating expenses of a mutual fund. These returns would be lower if they included the effect of sales charges and operating expenses. Source: Lipper Inc.
3 The Lipper Average is based on the average return of all mutual funds in the Lipper Multi-cap Core Funds category and does not include the effect of any sales charges. Again, these returns would be lower if they included the effect of sales charges. Source: Lipper Inc.
Risk/Return Summary
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you buy and hold shares of each share class of the Funds--Classes A, B, C and Z. Each share class has different sales charges--known as loads--and expenses, but represents an investment in the same fund. Class Z shares are available only to a limited group of investors. For more information about which share class may be right for you, see "How to Buy, Sell and Exchange Shares of the Funds."
SHAREHOLDER FEES(1) (paid directly from your investment)
CLASS A CLASS B CLASS C CLASS Z
Maximum sales charge (load) imposed on 5% None 1% None
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) (as a None 5%(2) 1%(3) None
percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions
Redemption fee None None None None
Exchange fee None None None None
|
1 Your broker may charge you a separate or additional fee for purchases and sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by 1% annually to 1% in the fifth and sixth years and 0% in the seventh year. Class B shares convert to Class A shares approximately seven years after purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of purchase.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
ANNUAL FUND OPERATING EXPENSES (deducted from Fund assets)
CLASS A CLASS B CLASS C CLASS Z
CONSERVATIVE GROWTH FUND
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .72% .72% .72% .72%
= Total annual Fund operating expenses 1.77% 2.47% 2.47% 1.47%
- Fee waiver(1) .05% 0% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.72% 2.47% 2.47% 1.47%
|
ANNUAL FUND OPERATING EXPENSES (deducted from Fund assets)
CLASS A CLASS B CLASS C CLASS Z
MODERATE GROWTH FUND
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .54% .54% .54% .54%
= Total annual Fund operating expenses 1.59% 2.29% 2.29% 1.29%
- Fee waiver(1) .05% 0% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.54% 2.29% 2.29% 1.29%
|
ANNUAL FUND OPERATING EXPENSES (deducted from Fund assets)
CLASS A CLASS B CLASS C CLASS Z
HIGH GROWTH FUND
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .64% .64% .64% .64%
= Total annual Fund operating expenses 1.69% 2.39% 2.39% 1.39%
- Fee waiver(1) .05% 0% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.64% 2.39% 2.39% 1.39%
|
1 For the fiscal year ending July 31, 2002, the Distributor of the Funds has contractually agreed to reduce its distribution and service (12b-1) fees for Class A shares to .25 of 1% of the average daily net assets of the Class A shares.
Risk/Return Summary
EXAMPLE
This example will help you compare the fees and expenses of each Fund's different share classes and the cost of investing in each Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that each Fund's operating expenses remain the same. After the first year, the example does not take into consideration any reduction in the Distributor's distribution and service (12b-1) fees for Class A shares. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 YR 3 YRS 5 YRS 10 YRS
CONSERVATIVE GROWTH FUND
Class A shares $666 $1,025 $1,407 $2,476
Class B shares $750 $1,070 $1,416 $2,553
Class C shares $448 $ 862 $1,402 $2,878
Class Z shares $150 $ 465 $ 803 $1,757
|
MODERATE GROWTH FUND Class A shares $649 $ 972 $1,318 $2,291 Class B shares $732 $1,015 $1,325 $2,368 Class C shares $430 $ 808 $1,313 $2,699 Class Z shares $131 $ 409 $ 708 $1,556 |
HIGH GROWTH FUND Class A shares $658 $1,001 $1,367 $2,394 Class B shares $742 $1,045 $1,375 $2,471 Class C shares $440 $ 838 $1,363 $2,799 Class Z shares $142 $ 440 $ 761 $1,669 |
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Risk/Return Summary
You would pay the following expenses on the same investment if you did not sell your shares:
1 YR 3 YRS 5 YRS 10 YRS
CONSERVATIVE GROWTH FUND
Class A shares $666 $1,025 $1,407 $2,476
Class B shares $250 $ 770 $1,316 $2,553
Class C shares $348 $ 862 $1,402 $2,878
Class Z shares $150 $ 465 $ 803 $1,757
|
MODERATE GROWTH FUND Class A shares $649 $ 972 $1,318 $2,291 Class B shares $232 $ 715 $1,225 $2,368 Class C shares $330 $ 808 $1,313 $2,699 Class Z shares $131 $ 409 $ 708 $1,556 |
HIGH GROWTH FUND Class A shares $658 $1,001 $1,367 $2,394 Class B shares $242 $ 745 $1,275 $2,471 Class C shares $340 $ 838 $1,363 $2,799 Class Z shares $142 $ 440 $ 761 $1,669 |
How the Funds Invest
INVESTMENT OBJECTIVES AND POLICIES
CONSERVATIVE GROWTH FUND
The Fund's investment objective is to seek to provide CURRENT INCOME and a reasonable level of CAPITAL APPRECIATION. This means that we seek investments that will pay income and increase in value. The Fund seeks to achieve its objective by investing in a diversified portfolio of fixed-income and equity securities.
MODERATE GROWTH FUND
The Fund's investment objective is to seek to provide CAPITAL APPRECIATION and a reasonable level of CURRENT INCOME. This means that we seek investments that will increase in value, in addition to investments that will pay income. The Fund seeks to achieve its objective by investing in a diversified portfolio of equity and fixed-income securities.
HIGH GROWTH FUND
The Fund's investment objective is to seek to provide long-term CAPITAL APPRECIATION. This means that we seek investments that will increase in value. The Fund seeks to achieve its objective by investing in a diversified portfolio of equity securities.
FIXED-INCOME SEGMENTS
The Conservative Growth and Moderate Growth Funds normally invest approximately
60% and 35%, respectively, of the relevant Fund's total assets in debt
obligations of varying credit quality, including securities issued or guaranteed
by the U.S. GOVERNMENT and its agencies, and debt obligations issued by U.S.
COMPANIES, FOREIGN COMPANIES and FOREIGN GOVERNMENTS and their agencies. PIMCO
and PIM manage the fixed-income segments of these Funds.
Each of these Funds invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S. government entities, including securities issued by the Federal National Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National Mortgage Association (GNMA or "Ginnie Mae"). We may also invest in privately issued, mortgage-related securities (those not issued or guaranteed by the U.S. government). The
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
mortgage-related securities in which each of these Funds may invest may include COLLATERALIZED MORTGAGE OBLIGATIONS and STRIPPED MORTGAGE-BACKED SECURITIES. We may also invest in ASSET-BACKED SECURITIES like automobile loans and credit card receivables.
We may invest up to 35% of each of these Funds' total assets in HIGH YIELD DEBT OBLIGATIONS--also known as "JUNK BONDS"--which are rated at least B by S&P, Moody's or another major rating service, and unrated debt obligations that we believe are comparable in quality.
Each of these Funds can invest up to 25% of its total assets in FOREIGN DEBT OBLIGATIONS, including up to 10% of its total assets in debt obligations of issuers in emerging markets.
The Advisers of each of these Funds' fixed-income segments each focus on a particular type of investing.
PIMCO focuses primarily on INVESTMENT-GRADE DOMESTIC AND FOREIGN DEBT OBLIGATIONS--debt obligations rated at least BBB by S&P, Baa by Moody's, or the equivalent by another major rating service, and unrated debt obligations that PIMCO believes are comparable in quality.
PIM focuses primarily on HIGH-YIELD DOMESTIC AND FOREIGN DEBT OBLIGATIONS,
including junk bonds and debt obligations of issuers from emerging markets.
In choosing debt obligations for each of these Funds, PIMCO and PIM consider economic conditions and interest rate fundamentals and, for foreign debt securities, country and currency selection. PIMCO and PIM also evaluate individual debt securities within each fixed-income sector based upon their relative investment merit. They also consider factors such as yield, duration and potential for price or currency appreciation, as well as credit quality, maturity and risk.
Equity Segments
The Conservative Growth, Moderate Growth and High Growth Funds normally invest approximately 40%, 65% and 100%, respectively, of the relevant Fund's total assets in STOCKS OF U.S. AND FOREIGN COMPANIES. The Conservative Growth, Moderate Growth and High Growth Funds may invest up to 15%, 25% and 35%, respectively, of the relevant Fund's total assets in stocks of companies located in foreign countries, including developing countries. The Funds' foreign securities holdings normally will be denominated in foreign currencies, including the euro--a multinational currency unit. Jennison, Franklin and Dreyfus manage portions of the equity segments of each Fund.
How the Funds Invest
In addition, Lazard selects international equity investments for up to 10% and 20% of the total assets of the Moderate Growth and High Growth Funds, respectively.
Each Fund may also invest in ADRS, ADSS, GDRS and EDRS. ADRs, ADSs, GDRs and EDRs are certificates--usually issued by a bank or trust company--that represent an equity investment in a foreign company. ADRs and ADSs are issued by U.S. banks and trust companies and are valued in U.S. dollars. EDRs and GDRs are issued by foreign banks and trust companies and are usually valued in foreign currencies.
The Advisers of each Fund's equity segments each focus on a particular type and style of investing.
JENNISON focuses on STOCKS OF LARGE COMPANIES, using a GROWTH INVESTMENT STYLE. Jennison selects stocks of companies that it believes will experience earnings growth at a faster rate than that of the U.S. economy in general. Jennison looks for stocks of companies that have demonstrated growth in earnings and sales, high returns on equity and assets, or other strong financial characteristics. Jennison will consider selling a security when it thinks the security has achieved its growth potential, or when Jennison thinks it can find better growth opportunities.
Jennison also focuses on STOCKS OF LARGE COMPANIES, using a VALUE INVESTMENT STYLE. Jennison selects stocks that it believes are undervalued, given the company's earnings, cash flow or asset values. Jennison looks for catalysts that will help unlock inherent value. A number of conditions can warrant the sale of an existing position, including (1) the stock has reached its price target; (2) the company experiences a deterioration of fundamentals in which earnings do not emerge as expected; (3) the catalyst condition for buying the stock no longer exists; or (4) the price of the stock deteriorates from the purchase price without a reasonable explanation.
FRANKLIN focuses on STOCKS OF SMALL AND MEDIUM-SIZE COMPANIES, using a GROWTH INVESTMENT STYLE. Franklin selects stocks of companies that it believes to have potential to rapidly grow revenues, earnings or cash flow. Although Franklin may find these companies in growing industries, its strategy targets companies with sustainable competitive advantages, like unique products or proprietary technology, that may provide these companies with growth opportunities regardless of the growth outlook of the industry. Franklin will consider selling a security when it thinks the security has achieved its growth potential, or when Franklin thinks it can find better growth opportunities.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
DREYFUS focuses on STOCKS OF SMALL AND MEDIUM-SIZE COMPANIES, using a VALUE INVESTMENT STYLE. Dreyfus selects stocks that it believes are undervalued and have an above-average potential to increase in price. Dreyfus looks for stocks that it believes to be undervalued based on the company's sales, earnings, book value and cash flow. Dreyfus generally constructs its Fund segment to resemble the Russell 2000 Value Index, but weights the segment toward the stocks that Dreyfus deems most attractive. Dreyfus will consider selling a stock if it has increased in value to the point where Dreyfus no longer considers it to be undervalued.
With respect to the Moderate Growth and High Growth Funds, LAZARD focuses on STOCKS OF FOREIGN COMPANIES using a VALUE INVESTMENT STYLE. Lazard looks for stocks that it believes to be undervalued based on the company's earnings, cash flow or asset values. Lazard will consider selling a stock if it has increased in value to the point where Lazard no longer considers it to be undervalued.
For more information, see "Investment Risks" and the Statement of Additional Information, "Description of the Funds, Their Investments and Risks." The Statement of Additional Information--which we refer to as the SAI--contains additional information about the Funds. To obtain a copy, see the back cover page of this prospectus.
Although we make every effort to achieve each Fund's objective, we can't guarantee success. Except for certain investment restrictions described in the SAI, the Board of the Trust can change the investment objective and policies of each Fund without obtaining shareholder approval.
CASH MANAGEMENT
To the extent that any segment of the Funds has uninvested assets, PIM will manage these assets until the Adviser responsible for such assets requires them for investment in accordance with the Adviser's investment type or style. PIM will invest such assets primarily in high-quality, short-term money market instruments.
MORTGAGE-RELATED SECURITIES
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each invest in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S. governmental entities or private issuers. These securities are usually pass-through instruments that pay investors a share of all interest and principal payments from
How the Funds Invest
an underlying pool of fixed or adjustable rate mortgages. Mortgage-related securities issued by the U.S. government or its agencies include FNMAs, GNMAs and debt securities issued by the FHLMC. The U.S. government or the issuing agency directly or indirectly guarantees the payment of interest and principal on these securities, but not their value. Private mortgage-related securities that are not guaranteed by U.S. governmental entities generally have one or more types of credit enhancement to ensure timely receipt of payments and to protect against default.
Mortgage pass-through securities include collateralized mortgage obligations, multiclass pass-through securities and stripped mortgage-backed securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by an underlying portfolio of mortgages or mortgage-backed securities that may be issued or guaranteed by a bank or by U.S. governmental entities. A MULTICLASS PASS-THROUGH SECURITY is an equity interest in a trust composed of underlying mortgage assets. Payments of principal and interest on the mortgage assets and any reinvestment income thereon provide the funds to pay debt service on the CMO or to make scheduled distributions on the multiclass pass-through security. A STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental entities or by private institutions. MBS strips take the pieces of a debt security (principal and interest) and break them apart. The resulting securities may be sold separately and may perform differently.
The values of mortgage-backed securities vary with changes in market interest rates, generally, and in yields among various kinds of mortgage- related securities. Such values are particularly sensitive to changes in prepayments of the underlying mortgages. For example, during periods of falling interest rates, prepayments tend to increase as homeowners and others refinance their higher-rate mortgages; these prepayments reduce the anticipated duration of the mortgage-related securities. Conversely, during periods of rising interest rates, prepayments can be expected to decline, which has the effect of extending the anticipated duration at the same time that the value of the securities declines. MBS strips tend to be even more highly sensitive to changes in prepayment and interest rates than mortgage-related securities and CMOs generally.
ASSET-BACKED SECURITIES
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each invest in
ASSET-BACKED DEBT SECURITIES. An asset-backed security is another type of
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
pass-through instrument that pays interest based upon the cash flow of an underlying pool of assets, such as automobile loans and credit card receivables. Unlike mortgage-related securities, asset-backed securities are usually not collateralized.
OTHER INVESTMENTS AND STRATEGIES
In addition to their principal strategies, we may also use the following investment strategies to increase the Funds' returns or protect their assets if market conditions warrant.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high-quality MONEY MARKET INSTRUMENTS. Money market instruments include the commercial paper of U.S. and foreign corporations, obligations of U.S. and foreign banks, certificates of deposit and obligations issued or guaranteed by the U.S. government or its agencies or a foreign government.
The Funds will generally purchase money market instruments in one of the two highest short-term quality ratings of a major rating service. The Funds may also invest in money market instruments that are not rated, but which we believe are of comparable quality to the instruments described above. The High Growth Fund uses money market instruments for cash management purposes only.
U.S. GOVERNMENT SECURITIES
The Funds may invest in DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. Treasury securities have varying interest rates and maturities, but they are all backed by the full faith and credit of the U.S. government.
The Funds may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT and government-related entities. Some of these debt securities are backed by the full faith and credit of the U.S. government, like GNMA obligations. Debt securities issued by other government entities, like obligations of FNMA and SLMA, are not backed by the full faith and credit of the U.S. government. However, these issuers have the right to borrow from the U.S. Treasury to meet their obligations. In contrast, the debt securities of other issuers, like the Farm Credit System, depend entirely upon their own resources to repay their debt.
How the Funds Invest
The U.S. government sometimes "strips" its debt obligations into their component parts: the U.S. government's obligation to make interest payments and its obligation to repay the amount borrowed. These STRIPPED SECURITIES are sold to investors separately. Stripped securities do not make periodic interest payments. They are usually sold at a discount and then redeemed for their face value on their maturity dates. These securities increase in value when interest rates fall and lose value when interest rates rise. However, the value of stripped securities generally fluctuates more in response to interest rate movements than the value of traditional debt obligations. A Fund may try to earn money by buying stripped securities at a discount and either selling them after they increase in value or holding them until they mature.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may temporarily invest up to 100% of a Fund's assets in money market instruments or U.S. government securities. Investing heavily in these securities limits our ability to achieve each Fund's investment objective, but can help to preserve a Fund's assets when securities markets are unstable.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may enter into REVERSE REPURCHASE AGREEMENTS. When a Fund enters into a reverse repurchase agreement, the Fund borrows money on a temporary basis by selling a security with an obligation to repurchase it at an agreed-upon price and time.
The Conservative Growth and Moderate Growth Funds may each enter into DOLLAR ROLLS. When a Fund enters into a dollar roll, the Fund sells securities to be delivered in the current month and repurchases substantially similar (same type and coupon) securities to be delivered on a specified future date by the same party. The Fund is paid the difference between the current sales price and the forward price for the future purchase, as well as the interest earned on the cash proceeds of the initial sale.
REPURCHASE AGREEMENTS
Each Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a security to the Fund and then repurchase it at an agreed-upon price at a stated time. This creates a fixed return for the Fund and is, in effect a loan
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
by the Fund. The High Growth Fund uses repurchase agreements for cash management purposes only.
CONVERTIBLE SECURITIES
Each Fund may also invest in CONVERTIBLE SECURITIES. These are securities--like bonds, corporate notes and preferred stock--that we can convert into the company's common stock or some other equity security.
DERIVATIVE STRATEGIES
We may use a number of alternative investment strategies--including derivatives--to try to improve a Fund's returns. We may use hedging techniques to try to protect a Fund's assets. We cannot guarantee that these strategies will work, that the instruments necessary to implement these strategies will be available or that a Fund will not lose money. The derivatives in which the Funds may invest include FUTURES, OPTIONS AND OPTIONS ON FUTURES. In addition, each Fund may enter into FOREIGN CURRENCY EXCHANGE CONTRACTS and purchase COMMERCIAL PAPER THAT IS INDEXED TO FOREIGN CURRENCY EXCHANGE RATES. Each Fund may also use "CURRENCY HEDGES" to help protect its NAV from declining if a particular foreign currency were to decrease in value against the U.S. dollar.
Derivatives involve costs and can be volatile. With derivatives, the investment adviser tries to predict whether the underlying investment--a security, market index, currency, interest rate or some other benchmark--will go up or down at some future date. We may use derivatives to try to reduce risk or to increase return consistent with a Fund's overall investment objective. The investment adviser will consider other factors (such as cost) in deciding whether to employ any particular strategy or use any particular instrument. Any derivatives we use may not match a Fund's underlying holdings. For more information about these strategies, see the SAI, "Description of the Funds, Their Investments and Risks--Risk Management and Return Enhancement Strategies."
Options. Each Fund may purchase and sell put and call options on securities and currencies traded on U.S. or foreign securities exchanges or on the over- the-counter market. An option is the right to buy or sell securities in exchange for a premium. The options may be on debt securities, aggregates of debt
How the Funds Invest
securities, financial indexes and U.S. government securities. The Funds will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS
Each Fund may purchase and sell financial futures contracts and related options on debt securities, aggregates of debt securities, currencies, financial indexes or U.S. government securities. A FUTURES CONTRACT is an agreement to buy or sell a set quantity of underlying product at a future date or to make or receive a cash payment based on the value of a securities index.
FOREIGN CURRENCY FUTURES CONTRACTS
The Funds also may enter into FOREIGN CURRENCY FORWARD CONTRACTS to protect the value of their assets against future changes in the level of foreign currency exchange rates. A foreign currency forward contract is an obligation to buy or sell a given currency on a future date and at a set price.
ADDITIONAL STRATEGIES
The Funds may also use additional strategies, such as purchasing debt securities on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Fund makes this type of purchase, the price and interest rate are fixed at the time of purchase, but delivery and payment for the debt obligations take place at a later time. The Fund does not earn interest income until the date the debt obligations are delivered.
The CONSERVATIVE GROWTH and MODERATE GROWTH FUNDS may each enter into INTEREST RATE SWAP TRANSACTIONS. In a swap transaction, a Fund and another party "trade" income streams. The swap is done to preserve a return or spread on a particular investment or portion of a Fund or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date.
The Funds also follow certain policies when they BORROW MONEY (each Fund can borrow up to 33 1/3% of the value of its total assets); and HOLD ILLIQUID SECURITIES (each Fund may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions, those without a readily available market and repurchase agreements with maturities longer than seven days).
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
Each Fund is subject to certain other investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI.
PORTFOLIO TURNOVER
As a result of the strategies described above, each Fund may have an annual portfolio turnover rate of over 100%. Portfolio turnover is generally the percentage found by dividing the lesser of portfolio purchases and sales by the monthly average value of the portfolio. High portfolio turnover (100% or more) results in higher brokerage commissions and other transaction costs and can affect a Fund's performance. It can also result in a greater amount of distributions as ordinary income rather than long-term capital gains.
How the Funds Invest
INVESTMENT RISKS
As noted previously, all investments involve risk, and investing in the Funds is no exception. Since a Fund's holdings can vary significantly from broad market indexes, performance of the Funds can deviate from performance of the indexes. This chart outlines the key risks and potential rewards of the Funds' principal strategies and certain other non-principal investments the Funds may make. See, too, "Description of the Funds, Their Investments and Risks" in the SAI.
INVESTMENT TYPE
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
COMMON STOCKS - Individual stocks could - Historically, stocks
lose value have outperformed other
Conservative Growth Fund investments over the
Approximately 40% - The equity markets long term
could go down, resulting
Moderate Growth Fund in a decline in value - Generally, economic
Approximately 65% of a Fund's investments growth leads to higher
corporate profits,
High Growth Fund Up to 100% - Companies that pay which leads to an
dividends may not do so increase in stock
if they don't have prices, known as
profits or adequate capital appreciation
cash flow
- May be a source of
- Changes in economic or dividend income
political conditions,
both domestic and
international may
result in a decline in
the value of a Fund's
investments
-------------------------------------------------------------------------------------
SMALL AND MEDIUM CAPI- - Stocks of smaller - Highly successful
TALIZATION STOCKS companies are more smaller companies can
volatile and may outperform larger ones
Conservative Growth Fund decline more than those
Approximately 10% in the S&P 500
Moderate Growth Fund - Small and medium-size
Approximately 15% companies are more
likely to reinvest
High Growth Fund Approxi- earnings and not pay
mately 30% dividends
- Changes in interest
rates may affect the
securities of small-
and medium-size
companies more than the
securities of larger
companies
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS - A Fund's holdings, - Bonds have generally
share price, yield and outperformed money market
Conservative Growth Fund total return will instruments over the
Approximately 60% fluctuate in response long term with less
to bond market risk than stocks
Moderate Growth Fund movements
Approximately 35% - Most bonds will rise in
- Credit risk--the risk value when interest
that the default of an rates fall
issuer would leave a
Fund with unpaid - A source of regular
interest or princi- interest income
pal. The lower an
instrument's quality, - Generally more secure
the higher its than stocks since
potential volatility companies must pay
their debts before
- Market risk--the risk paying stockholders
that the market value of
an investment may move - Investment-grade
down, sometimes rapidly obligations have a lower
or unpredictably. risk of default
Market risk may affect
an industry, a sector, - Bonds with longer
or the market as a maturity dates typically
whole have higher yields
- Interest rate risk--the - Intermediate-term
value of most bonds securities may be less
will fall when interest susceptible to loss of
rates rise: the longer principal than
a bond's maturity and longer-term securities
the lower its credit
quality, the more its
value typically falls.
It can lead to price
volatility,
particularly for junk
bonds and stripped
securities
|
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
FOREIGN SECURITIES - Foreign markets, - Investors can
economies and political participate in the growth
Conservative Growth Fund systems, particularly of foreign markets and
Up to 25% (foreign debt those in developing invest in companies
obligations only) countries, may not be operating in those
as stable as in the markets
Moderate Growth Fund U.S.
Up to 25% - May profit from
- Currency risk--changing changing value of foreign
High Growth Fund value of foreign currencies
Up to 35% currencies can cause
losses - Opportunities for
diversification
- May be less liquid than
U.S. stocks and bonds - Principal and interest
on foreign government
- Differences in foreign securities may be
laws, accounting stan- guaranteed
dards, public
information, custody
and settlement
practices provide less
reliable information on
foreign investments and
involve more risk
- Investments in emerging
markets securities are
subject to greater
volatility and price
declines
- Not all government
securities are insured or
guaranteed by the
government, but only by
the issuing agency
-------------------------------------------------------------------------------------
U.S. GOVERNMENT - Not all are insured or - Regular interest income
SECURITIES guaranteed by the U.S.
government, but only by - The U.S. government
All Funds the issuing agency guarantees interest and
principal payments on
Percentage varies; - Limits potential for certain securities
Up to 100% on capital appreciation
a temporary basis - Generally more secure
- See market risk than lower quality debt
securities and equity
- See interest rate risk securities
- May preserve a Fund's
assets
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
MONEY MARKET - U.S. government money - May preserve a Fund's
INSTRUMENTS market securities offer assets
a lower yield than
All Funds lower-quality or
longer-term securities
Up to 100% on
a temporary basis - Limits potential for
capital appreciation and
achieving our objective
- See credit risk and
market risk (which are
less of a concern for
money market
instruments)
-------------------------------------------------------------------------------------
MORTGAGE-RELATED - Prepayment risk--the - Regular interest income
SECURITIES risk that the underlying
mortgage may be prepaid - The U.S. government
Conservative Growth and partially or guarantees interest and
Moderate Growth Funds completely, generally principal payments on
during periods of certain securities
Percentage varies usually falling interest rates,
less than 10% which could adversely - May benefit from
affect yield to security interest in real
maturity and could estate collateral
require a Fund to
reinvest in - Pass-through
lower-yielding instruments provide
securities greater diversifica-
tion than direct
- Credit risk--the risk ownership of loans
that the underlying
mortgages will not be
paid by debtors or by
credit insurers or
guarantors of such
instruments. Some
private mortgage
securities are
unsecured or secured by
lower-rated insurers or
guarantors and thus may
involve greater risk
- See market risk and
interest rate risk
|
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
HIGH-YIELD DEBT - Higher credit risk than - May offer higher
SECURITIES (JUNK BONDS) higher-grade debt interest income than
securities higher-grade debt
Conservative Growth and securities and higher
Moderate Growth Funds - Higher market risk than potential gains
higher-grade debt
Up to 35%, usually less securities
than 10%
- More volatile than
higher-grade debt
securities
- May be more illiquid
(harder to value and
sell), in which case
valuation would depend
more on investment
adviser's judgment than
is generally the case
with higher-rated
securities
-------------------------------------------------------------------------------------
ASSET-BACKED - See prepayment risk - Regular interest income
SECURITIES
- The security interest - Prepayment risk is
Conservative Growth and in the underlying generally lower than with
Moderate Growth Funds collateral may not be mortgage-related
as great as with securities
Percentage varies, usually mortgage-related
less than 10% securities - Pass-through
instruments provide
- Credit risk--the risk greater diversifica-
that the underlying tion than direct
receivables will not be ownership of loans
paid by debtors or by
credit insurers or
guarantors of such
instruments. Some
asset-backed securities
are unsecured or
secured by lower-rated
insurers or guarantors
and thus may involve
greater risk
- See market risk
- See interest rate risk
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
DERIVATIVES - The value of - A Fund could make money
derivatives (such as and protect against
All Funds futures and options) losses if the
that are used to hedge investment analysis
Percentage varies, usually a portfolio security is proves correct
less than 10% determined indepen-
dently from that - One way to manage a
security and could Fund's risk/return
result in a loss to a balance is by locking
Fund when the price in the value of an
movement of the deriva- investment ahead of
tive does not correlate time
with a change in the
value of the portfolio - Derivatives that
security involve leverage could
generate substantial
- Derivatives used for gains at low cost
risk management may not
have the intended - May be used to hedge
effects and may result against changes in cur-
in losses or missed rency exchange rates
opportunities
- The other party to a
derivatives contract
could default
- Derivatives can
increase share price
volatility and those
that involve leverage
could magnify losses
- Certain types of
derivatives involve costs
to a Fund, which can
reduce returns
|
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
REVERSE REPURCHASE - May magnify underlying - May magnify underlying
AGREEMENTS investment losses investment gains
All Funds - Investment costs may
exceed potential
Up to 33 1/3%, usually underlying investment
less than 10% gains
DOLLAR ROLLS
Conservative Growth and
Moderate Growth Funds
Up to 33 1/3%, usually
less than 10%
WHEN-ISSUED AND
DELAYED-DELIVERY SECURITIES
All Funds
Percentage varies, usually
less than 10%
-------------------------------------------------------------------------------------
BORROWING - Leverage borrowing for - Leverage may magnify
investments may magnify investment gains
All Funds losses
Up to 33 1/3%, usually - Interest costs and
less than 10% investment fees may
exceed potential
investment gains
-------------------------------------------------------------------------------------
ADJUSTABLE/FLOATING RATE - Value lags value of - Can take advantage of
SECURITIES fixed rate securities rising interest rates
when interest rates
Conservative Growth and change
Moderate Growth Funds
Percentage varies, usually
less than 10%
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Funds Invest
INVESTMENT TYPE (CONT'D)
% OF FUNDS' TOTAL ASSETS RISKS POTENTIAL REWARDS
-------------------------------------------------------------------------------------
STRIPPED SECURITIES - More volatile than - Value rises faster when
securities that have not interest rates fall
Conservative Growth and separated principal and
Moderate Growth Funds interest
Percentage varies, usually - Mortgage-backed
less than 10% stripped securities have
more prepayment and
interest rate risk than
other mortgage-related
securities
-------------------------------------------------------------------------------------
INTEREST RATE SWAPS - Helps protect the - Speculative technique
return on an investment including risk of loss
Conservative Growth and of interest payment
Moderate Growth Funds swapped
Up to 5% of net assets
-------------------------------------------------------------------------------------
ILLIQUID SECURITIES - May be difficult to - May offer a more
value precisely attractive yield or
All Funds potential for growth than
- May be difficult to more widely traded
Up to 15% of net assets sell at the time or price securities
desired
|
How the Trust is Managed
BOARD OF TRUSTEES
The Board of Trustees oversees the actions of the Manager, the Advisers and the Distributor and decides on general policies. The Board also oversees the Trust's officers who conduct and supervise the daily business operations of the Trust.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Trust, PIFM manages the Trust's investment operations and administers its business affairs. PIFM is also responsible for supervising the Trust's Advisers. For the period ended July 31, 2001, the Trust paid to PIFM management fees equal to an annual rate of 0.75% of each Fund's average net assets.
PIFM and its predecessors have served as manager or administrator to investment companies since 1987. As of December 31, 2000, PIFM served as the Manager to all of the Prudential U.S. and offshore investment companies and as investment manager or administrator to closed-end investment companies with aggregate assets of approximately $76 billion.
Subject to the supervision of the Board of Trustees of the Trust, PIFM is responsible for conducting the initial review of prospective Advisers for the Trust. In evaluating a prospective Adviser, PIFM considers many factors, including the firm's experience, investment philosophy and historical performance. PIFM is also responsible for monitoring the performance of the Trust's Advisers.
PIFM and the Trust operate under an exemptive order (the Order) from the Securities and Exchange Commission that generally permits PIFM to enter into or amend agreements with Advisers without obtaining shareholder approval each time. This authority is subject to certain conditions, including the requirement that the Board of Trustees approve any new or amended agreements with Advisers. Shareholders of each Fund still have the right to terminate these agreements for a Fund at any time by a vote of the majority of outstanding shares of that Fund. The Trust will notify shareholders of any new Advisers or material amendments to advisory agreements made pursuant to the Order.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Trust is Managed
ADVISERS AND PORTFOLIO MANAGERS
INTRODUCTION
The Advisers are responsible for the day-to-day management of each Fund segment that they manage, subject to the supervision of PIFM and the Board of Trustees. The Advisers are paid by PIFM, not the Trust.
Each Adviser manages one or more segments of a Fund, focusing on a particular investment type and style. The Manager allocates daily cash inflows (i.e., purchases and reinvested dividends) and outflows (i.e., redemptions and expense items) among the segments of each Fund. By using several Advisers for each Fund, and by periodically rebalancing each Fund in accordance with its asset allocation strategy, the Manager seeks long-term benefits from a balance of different investment disciplines. The Manager believes that, at any given time, certain investment philosophies will be more successful than others and that a combination of different investment approaches may benefit the Funds and help reduce their volatility. Reallocations may result in higher portfolio turnover and correspondingly higher transactional costs. In addition, a Fund may experience wash transactions--where one Adviser buys a security at the same time another Adviser sells it. When this happens, the Fund's position in that security remains unchanged, but the Fund has paid additional transaction costs.
The following sets forth certain information about each of the Advisers.
JENNISON ASSOCIATES LLC
JENNISON is a wholly owned subsidiary of The Prudential Insurance Company of America (Prudential), a major diversified insurance and financial services company. As of December 31, 2000, Jennison managed approximately $81 billion in assets for institutional and mutual fund clients. The address of Jennison is 466 Lexington Avenue, New York, NY 10017. PIM (formerly The Prudential Investment Corporation) served as adviser from each Fund's inception through August 2000 with respect to investments in large-capitalization value stocks.
KATHLEEN A. MCCARRAGHER and MICHAEL A. DEL BALSO have managed the large-capitalization growth equity segments of the Funds since February 1999 and May 2000, respectively.
Ms. McCarragher is a Director and Executive Vice President of Jennison, and is Jennison's Domestic Equity Investment Strategist. Prior to joining Jennison in 1998, Ms. McCarragher was a portfolio manger with Weiss, Peck & Grier L.L.C.
How the Trust is Managed
Mr. Del Balso is a Director and Executive Vice President of Jennison, where he has been part of the investment team since 1972. Mr. Del Balso is also Jennison's Director of Equity Research. He is a member of the New York Society of Security Analysts.
TOM KOLEFAS, CFA and BRADLEY L. GOLDBERG, CFA have managed the large-capitalization value equity segments of the Funds since May 2000 and September 2000, respectively.
Mr. Kolefas has been a Senior Vice President of Jennison since September 2000. Previously, he was a Managing Director and Senior Portfolio Manager of Prudential Global Asset Management. He joined Prudential in May 2000 from Loomis Sayles Co., L.P., where he headed the Large-/Mid-Cap Value Team.
Mr. Goldberg is an Executive Vice President of Jennison, where he also serves as Chairman of the Asset Allocation Committee. Mr. Goldberg joined Jennison in 1974. He is a member of the New York Society of Security Analysts.
PRUDENTIAL INVESTMENT MANAGEMENT, INC.
PIM is a wholly owned subsidiary of Prudential, a major diversified insurance and financial services company. The address of PIM is Prudential Plaza, 751 Broad Street, Newark, NJ 07102.
PIM's High Yield Team, headed by R. CASEY WALSH and PAUL E. APPLEBY, is primarily responsible for overseeing the day-to-day management of the high yield fixed-income segments of the Conservative Growth and Moderate Growth Funds. Messrs. Walsh and Appleby have 18 and 12 years, respectively, of general investment experience. The PIM High Yield Team uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of PIM's Investment Policy Committee and each Fund's investment restrictions and policies. In addition, PIM's Credit Research team of analysts supports the High Yield Team using bottom-up fundamentals, as well as economic and industry trends. As of December 31, 2000, PIM's High Yield Team had $7.3 billion of assets under management.
FRANKLIN ADVISERS, INC.
FRANKLIN is a wholly owned subsidiary of Franklin Resources, Inc., a publicly owned company engaged in the financial services industry through its subsidiaries. Franklin advises 108 domestic and international equity and fixed-
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How the Trust is Managed
income mutual funds in the Franklin Templeton Group of funds. As of July 31, 2001, Franklin and its affiliates managed over $266.6 billion in assets. The address of Franklin is 920 Park Place, San Mateo, CA 94403.
EDWARD B. JAMIESON, MICHAEL MCCARTHY and AIDAN O'CONNELL have managed the small/mid-capitalization growth equity segments of the Funds since their inception. Mr. Jamieson is an Executive Vice President of Franklin and Managing Director of Franklin's equity and high-yield groups and has been with Franklin since 1987. Mr. McCarthy joined Franklin in 1992 and is a Vice President and portfolio manager specializing in research analysis of several technology sectors. Mr. O'Connell is a research analyst specializing in the semiconductor and semiconductor capital equipment industries. Prior to joining Franklin in 1998, Mr. O'Connell was a research and corporate finance associate with Hambrecht & Quist.
THE DREYFUS CORPORATION
DREYFUS is a subsidiary of Mellon Bank Corporation, a broad-based financial services company with a bank at its core. As of July 31, 2001, Dreyfus managed approximately $161.5 billion in assets for both equity and fixed-income mutual funds. The address of Dreyfus is 200 Park Avenue, 8th floor West, New York, NY 10166.
WILLIAM P. RYDELL, CFA and MARK W. SIKORSKI, CFA have managed the small/mid-capitalization value equity segments of the Funds since their inception. Mr. Rydell is a portfolio manager at Dreyfus and is the President and Chief Executive Officer of Mellon Equity Associates LLP. Mr. Rydell has been with the Mellon organization since 1973. Mr. Sikorski is a portfolio manager at Dreyfus and a Vice President of Mellon Equity Associates LLP and joined the Mellon organization in 1996.
LAZARD ASSET MANAGEMENT
LAZARD is a division of Lazard Freres & Co. LLC (Lazard Freres), a New York limited liability company. Lazard provides investment management services to both individual and institutional clients. As of July 31, 2001, Lazard and its global affiliates had approximately $70.4 billion in assets under management. The address of Lazard is 30 Rockefeller Plaza, New York, NY 10112.
HERBERT W. GULLQUIST and JOHN R. REINSBERG have managed the international equity segments of the Moderate Growth and High Growth Funds since their inception. Mr. Gullquist, a Managing Director and Vice
How the Trust is Managed
Chairman of Lazard Freres and Chief Investment Officer of Lazard, has been with Lazard since 1982. Mr. Reinsberg is a Managing Director of Lazard Freres and has been with Lazard since 1992.
PACIFIC INVESTMENT MANAGEMENT COMPANY LLC
PIMCO, a Delaware limited liability company, is a subsidiary of PIMCO Advisors L.P. (PIMCO Advisors). Allianz AG, the majority owner of PIMCO Advisors, is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company holds a minority interest in PIMCO Advisors. PIMCO has specialized in fixed income investing since the firm was established in 1971. As of July 31, 2001, PIMCO had approximately $230 billion of assets under management. The address of PIMCO is 840 Newport Center Drive, Suite 300, Newport Beach, CA 92660.
WILLIAM H. GROSS, Managing Director, Chief Investment Officer and founding member of PIMCO, has, since the inception of the investment-grade segments of the Conservative Growth and High Growth Funds, led a portfolio management team responsible for developing and implementing an investment-grade fixed income investment strategy for each of these segments. CHRIS DIALYNAS, a Managing Director, portfolio manager and a senior member of PIMCO's investment strategy group, has managed the investment-grade fixed-income segments of the Conservative Growth and Moderate Growth Funds since May 2000. Mr. Dialynas has been associated with PIMCO since 1980.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's shares under a Distribution Agreement with the Trust. The Trust has Distribution and Service Plans (the Plans) pursuant to Rule 12b-1 under the Investment Company Act. Under the Plans and the Distribution Agreement, PIMS pays the expenses of distributing the Trust's Class A, B, C and Z shares and provides certain shareholder support services. The Trust pays distribution and other fees to PIMS as compensation for its services for each class of shares other than Class Z. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses" tables.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Fund Distributions and Tax Issues
Investors who buy shares of a Fund should be aware of some important tax issues. For example, each Fund pays DIVIDENDS of ordinary income and distributes realized net CAPITAL GAINS, if any, to shareholders. These distributions are subject to federal income taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement Account (IRA) or some other qualified or tax-deferred plan or account. Dividends and other distributions from a Fund may also be subject to state and local income taxes.
Also, if you sell shares of a Fund for a profit, you may have to pay capital gains taxes on the amount of your profit, again unless you hold your shares in a qualified or tax-deferred plan or account.
The following briefly discusses some of the important federal income tax issues you should be aware of, but is not meant to be tax advice. For tax advice, please speak with your tax adviser.
DISTRIBUTIONS
Each Fund distributes DIVIDENDS of any net investment income to shareholders on a regular basis as shown below.
FUND DIVIDENDS DECLARED AND PAID
CONSERVATIVE GROWTH FUND QUARTERLY
MODERATE GROWTH FUND SEMI-ANNUALLY
HIGH GROWTH FUND ANNUALLY
|
For example, if a Fund owns ACME Corp. stock and the stock pays a dividend, the Fund will pay out a portion of this dividend to its shareholders, assuming the Fund's income is more than its costs and expenses. The dividends you receive from each Fund will be taxed as ordinary income, whether or not they are reinvested in the Fund.
For Funds that invest in foreign securities, the amount of income available for distribution to shareholders will be affected by any foreign currency gains or losses generated by the Fund and cannot be predicted. This fact, coupled with the different tax and accounting treatment of certain currency gains and losses, increases the possibility that distributions, in whole or in part, may be a return of capital to shareholders.
Each Fund also distributes realized net CAPITAL GAINS to shareholders-- typically once a year. Capital gains are generated when a Fund sells its assets for a profit. For example, if a Fund bought 100 shares of ACME Corp. stock
Fund Distributions and Tax Issues
for a total of $1,000 and more than one year later sold the shares for a total of $1,500, the Fund has net long-term capital gains of $500, which it will pass on to shareholders (assuming the Fund's total gains are greater than any losses it may have). Capital gains are taxed differently depending on how long the Fund holds the security. If a security is held more than one year before it is sold, LONG-TERM capital gains generally are taxed at the maximum rate of 20%, but if the security is held one year or less, SHORT-TERM capital gains are taxed at ordinary income rates of up to 39.1% (since July 1, 2001 and 38.6% beginning January 1, 2002). Different rates apply to corporate shareholders.
For your convenience, a Fund's distributions of dividends and capital gains are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to pay the distributions in cash, we will send you a check if your account is with the Transfer Agent. Otherwise, if your account is with a broker, you will receive a credit to your account. Either way, the distributions may be subject to taxes, unless your shares are held in a qualified or tax-deferred plan or account. For more information about automatic reinvestment and other shareholder services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends and capital gains we distributed to you during the prior year. If you own shares of a Fund as part of a qualified or tax-deferred plan or account, your taxes are deferred, so you will not receive a Form 1099. However, you will receive a Form 1099 when you take any distributions from your qualified or tax-deferred plan or account.
Fund distributions are generally taxable to you in the calendar year they are received, except when we declare certain dividends in the fourth quarter and actually pay them in January of the following year. In such cases, the dividends are treated as if they were paid on December 31 of the prior year. Corporate shareholders are generally eligible for the 70% dividends-received deduction for certain dividends.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Fund Distributions and Tax Issues
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your tax identification number and certifications as to your tax status, and you fail to do this, we will withhold and pay to the U.S. Treasury 30.5% (since July 1, 2001, or 30% beginning January 1, 2002) of your distributions and sale proceeds.
If you are subject to backup withholding, we will withhold and pay to the U.S. Treasury 31% of your distributions. Dividends of net investment income and short-term capital gains paid to a nonresident foreign shareholder generally will be subject to a U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Fund just before the record date (the date that determines who receives the distribution), that distribution will be paid to you. As explained above, the distribution may be subject to income or capital gains taxes. You may think you've done well, since you bought shares one day and soon thereafter received a distribution. That is not so because when distributions are paid out, the value of each share of the Fund decreases by the amount of the distribution and the market changes (if any) to reflect the payout. The distribution you receive makes up for the decrease in share value. However, the timing of your purchase does mean that part of your investment came back to you as taxable income.
QUALIFIED AND TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment income and capital gains. Contributions to these plans may also be tax deductible, although distributions from these plans generally are taxable. In the case of Roth IRA accounts, contributions are not tax deductible, but distributions from the plan may be tax-free.
Fund Distributions and Tax Issues
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Fund for a profit, you have REALIZED A CAPITAL GAIN, which is subject to tax, unless you hold shares in a qualified or tax-deferred
plan or account. The amount of tax you pay depends on how long you owned your shares and when you bought them. If you sell shares of a Fund for a loss, you may have a capital loss, which you may use to offset certain capital gains you have.
If you sell shares of a Fund and realize a loss, you will not be permitted to use the loss to the extent you replace the shares (including pursuant to the reinvestment of a dividend) within a 61-day period (beginning 30 days before the sale of the shares). If you acquire shares of a Fund and sell your shares within 90 days, you may not be allowed to include certain charges incurred in acquiring the shares for purposes of calculating gain or loss realized upon the sale of the shares.
Exchanging your shares of a Fund for the shares of another Strategic Partners mutual fund is considered a sale for tax purposes. In other words, it's a "taxable event." Therefore, if the shares you exchanged have increased in value since you purchased them, you have capital gains, which are subject to the taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to buy or sell shares of the Funds for you, call Prudential Mutual Fund Services LLC (PMFS) at (800) 225-1852, or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 8179
PHILADELPHIA, PA 19101
You may purchase shares by check or wire. We do not accept cash or money orders. To purchase by wire, call the number above to obtain an application. After PMFS receives your completed application, you will receive an account number. We have the right to reject any purchase order (including an exchange into a Fund) or suspend or modify a Fund's sale of its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z shares of the Funds, although Class Z shares are available only to a limited group of investors.
Multiple share classes let you choose a cost structure that better meets your needs. With Class A shares, you pay the sales charge at the time of purchase, but the operating expenses each year are lower than the expenses of Class B and Class C shares. With Class B shares, you only pay a sales charge if you sell your shares within six years (that is why it is called a Contingent Deferred Sales Charge or CDSC), but the operating expenses each year are higher than the Class A share expenses. With Class C shares, you pay a 1% front-end sales charge and a 1% CDSC if you sell within 18 months of purchase, but the operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of varying distribution fees. Over time, the fees will increase the cost of
How to Buy, Sell and
Exchange Shares of the Funds
your investment and may cost you more than paying other types of sales charges
- The different sales charges that apply to each share class--Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low front-end sales charge and low CDSC
- Whether you qualify for any reduction or waiver of sales charges
- The fact that, if you are purchasing Class B shares in an amount of $100,000 or more, you should consult with your financial adviser to determine whether other share classes are more beneficial given your circumstances
- The fact that Class B shares automatically convert to Class A shares approximately seven years after purchase
- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Funds' different share classes. The discussion following this chart will tell you whether you are entitled to a reduction or waiver of any sales charges.
-------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the public None 1% of the public None
charge offering price offering
price(2)
Contingent Deferred None If sold during: 1% on sales made None
Sales Charge Year 1 5% within 18 months
(CDSC)(3) Year 2 4% of purchase(2)
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% (.25 1% 1% None
service (12b-1) fees of 1% currently)
shown as a percentage
of average net
assets(4)
-------------------------------------------------------------------------------------
|
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
1 The minimum investment requirements do not apply to certain retirement and employee savings plans and custodial accounts for minors. The minimum initial and subsequent investment for purchases made through the Automatic Investment Plan is $50. For more information, see "Additional Shareholder Services--Automatic Investment Plan."
2 1.01% of the net amount invested.
3 For more information about the CDSC and how it is calculated, see "How to Sell Your Shares--Contingent Deferred Sales Charge (CDSC)."
4 These distribution and service fees are paid from each Fund's assets on a continuous basis. The service fee for Class A, Class B and Class C shares is .25 of 1%. The distribution fee for Class A shares is limited to .30 of 1% (including the .25 of 1% service fee). Class B and Class C shares pay a distribution fee (in addition to the service fee) of .75 of 1%. For the fiscal year ending July 31, 2002, the Distributor of the Funds has contractually agreed to reduce its distribution and service (12b-1) fees for Class A shares to .25 of 1% of the average daily net assets of each Fund's Class A shares.
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge by increasing the amount of your investment. This table shows you how the sales charge decreases as the amount of your investment increases.
--------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
LESS THAN $25,000 5.00% 5.26% 4.75%
$25,000 TO $49,999 4.50% 4.71% 4.25%
$50,000 TO $99,999 4.00% 4.17% 3.75%
$100,000 TO $249,999 3.25% 3.36% 3.00%
$250,000 TO $499,999 2.50% 2.56% 2.40%
$500,000 TO $999,999 2.00% 2.04% 1.90%
$1 MILLION AND ABOVE* none none none
--------------------------------------------------------------------------------
|
* If you invest $1 million or more, you can buy only Class A shares unless you qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
- Invest with an eligible group of related investors
- Buy Class A shares of two or more Strategic Partners mutual funds at the same time
- Use your RIGHTS OF ACCUMULATION, which allow you to combine (1) the value
of Strategic Partners mutual fund shares that you already own, (2) the
value of money market shares you have received for shares of those funds
in an exchange transaction, and (3) the value of the shares you are
purchasing for purposes of determining the applicable sales charge (note:
you must notify the Transfer Agent at the time of
How to Buy, Sell and
Exchange Shares of the Funds
purchase if you qualify for Rights of Accumulation). In addition, if you owned Class A shares of the Funds on September 4, 2001, these shares may help you qualify for subsequent purchases of Class A shares of Prudential mutual funds at reduced sales charges. Class A shares of the Funds purchased after September 4, 2001, however, do not enable you to qualify for reduced sales charges on purchases of Class A shares of Prudential mutual funds.
- Sign a LETTER OF INTENT, stating in writing that you or an eligible group of related investors will purchase a certain amount of shares in a Fund and other Strategic Partners mutual funds within 13 months. If you enter into a Letter of Intent on or after September 4, 2001, the Letter may be satisfied only with shares of Strategic Partners mutual funds (including the Funds). If you entered into a Letter of Intent before September 4, 2001, however, you may satisfy the Letter by purchasing shares of the Funds, Strategic Partners Style Specific Funds and Prudential mutual funds, but not with other Strategic Partners mutual funds.
The Distributor may reallow Class A's sales charge to dealers.
Benefit Plans. Benefit Plans can avoid Class A's initial sales charge if the Benefit Plan has existing assets of at least $1 million or 250 eligible employees or participants. For these purposes, a Benefit Plan is a pension, profit-sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, a deferred compensation or annuity plan under Sections 403(b) and 457 of the Internal Revenue Code, a rabbi trust or a nonqualified deferred compensation plan.
Mutual Fund Programs. Waivers are also available to investors in certain programs sponsored by brokers, investment advisers and financial planners who have agreements with the Funds' Distributor relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places Fund trades and charges its clients a management, consulting or other fee for its services; or
- Mutual fund "supermarket" programs where the sponsor links its client's accounts to a master account in the sponsor's name and the sponsor charges a fee for its services.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
Broker-dealers, investments advisors or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in a Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class.
Other Types of Investors. Other investors pay no sales charge, including certain officers, employees or agents of the Manager and its affiliates, investment advisers of Strategic Partners mutual funds and registered representatives and employees of brokers that have entered into a dealer agreement with the Distributor. To qualify for a reduction or waiver of the sales charge, you must notify the Transfer Agent or your broker at the time of purchase. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares without the initial sales charge.
Investment of Redemption Proceeds from Other Investment Companies. The initial sales charge will be waived for purchases of Class C shares if the purchase is made with money from the redemption of shares of any unaffiliated investment company. These purchases must be made within 60 days of the redemption. This waiver is not available to investors who purchase shares directly from the Transfer Agent. If you are entitled to the waiver, you must notify your broker, who may require any supporting documentation they consider appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of a Fund can be purchased by any of the following:
- Any Benefit Plan, as defined above, and certain nonqualified plans, provided the Benefit Plan--in combination with other plans sponsored by the same employer or group of related employers--has at least $50 million in defined contribution assets,
- Current and former Trustees of the Trust, and
- The Manager or an investment adviser or one of their respective affiliates, with an investment of $10 million or more.
How to Buy, Sell and
Exchange Shares of the Funds
In connection with the sale of shares, the Manager, the Distributor or one of their affiliates may pay brokers, financial advisers and other persons a commission of up to 4% of the purchase price for Class B shares, up to 2% of the purchase price for Class C shares and a finder's fee for Class A or Class Z shares from their own resources based on a percentage of the net asset value of shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will automatically convert them into Class A shares without charge. At that time, we will also convert any Class B shares that you purchased with reinvested dividends and other distributions. Since the 12b-1 fees for Class A shares are lower than for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the number of converted Class B shares if the price of the Class A shares is higher than the price of Class B shares. The total dollar value will be the same, so you will not have lost any money by getting fewer Class A shares. We do the conversions quarterly, not on the anniversary date of your purchase. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Conversion Feature--Class B Shares."
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Fund is based on the share value. The share value of a mutual fund--known as the NET ASSET VALUE or NAV--is
determined by a simple calculation:
it's the total value of the Fund
(assets minus liabilities) divided by
the total number of shares outstanding.
For example, if the value of the
investments held by fund XYZ (minus its
liabilities) is $1,000 and there are
100 shares of fund XYZ owned by
shareholders, the price of one share of
the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities
are valued based upon market quotations
or, if not readily available, at fair
value as determined in good faith under
procedures established by the Trust's
Board. Most national newspapers report the NAVs of most mutual funds, which allows investors to check the prices of mutual funds daily. To the extent that a Fund has portfolio securities that are primarily listed on foreign exchanges that trade on days when the Fund does not price its shares, the NAV of the Fund may change on days when shareholders will not be able to purchase or redeem the Fund's shares.
We determine the NAV of our shares once each business day at 4:15 p.m., New York Time, on days that the New York Stock Exchange (NYSE) is open for trading. The NYSE is closed on most national holidays and Good Friday. We do not determine the NAV on days when we have not received any orders to purchase, sell or exchange Fund shares, or when changes in the value of a Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF A FUND?
For Class A and Class C shares, you'll pay the public offering price, which is the NAV next determined after we receive your order to purchase, plus an initial sales charge (unless you're entitled to a waiver). For Class B and Class Z shares, you will pay the NAV next determined after we receive your order to purchase (remember, there are no up-front sales charges for these share classes). Your broker may charge you a separate or additional fee for purchases of shares.
51
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of fund XYZ
will increase.
How to Buy, Sell and
Exchange Shares of the Funds
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax Issues" section, each Fund pays out--or distributes--its net investment income and capital gains to all shareholders. For your convenience, we will automatically reinvest your distributions in the Fund at NAV without any sales charge. If you want your distributions paid in cash, you can indicate this preference on your application, notify your broker or notify the Transfer Agent in writing (at the address below) at least five business days before the date we determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 8159
PHILADELPHIA, PA 19101
Automatic Investment Plan. You can make regular purchases of a Fund for as little as $50 by having the funds automatically withdrawn from your bank or brokerage account at specified intervals.
The PruTector Program. Optional group term life insurance--which protects the value of your Fund investment for your beneficiaries against market declines--is available to Fund investors who initially purchased their shares through Prudential on or before September 4, 2001. This coverage is not available for Fund investors who initially acquired their shares after September 4, 2001. Eligible investors who apply for PruTector coverage after the initial 6-month enrollment period will need to provide satisfactory evidence of insurability. This insurance is subject to other restrictions and is not available in all states. Please note, Strategic Partners Opportunity Funds do not participate in the PruTector Program.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will provide you with monthly or quarterly, semi-annual or annual redemption checks. Remember, sales of Class B and Class C shares may be subject to a CDSC.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
Reports to Shareholders. Every year we will send you an annual report (along with an updated prospectus) and a semiannual report, which contain important financial information about your Fund. To reduce Fund expenses, we will send one annual shareholder report, one semiannual shareholder report and one annual prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of a Fund for cash (in the form of a check, by wire or by electronic deposit to your bank account) at any time, subject to certain restrictions.
When you sell shares of a Fund--also known as redeeming your shares--the price you will receive will be the NAV next determined after the Transfer Agent, the Distributor or your broker receives your order to sell. If your broker holds your shares, your broker must receive your order to sell by 4:15 p.m. New York Time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 8149
PHILADELPHIA, PA 19101
Generally, we will pay you for the shares that you sell within seven days after the Transfer Agent, the Distributor or your broker receives your sell order. If you hold shares through a broker, payment will be credited to your account. If you are selling shares you recently purchased with a check, we may delay sending you the proceeds until your check clears, which can take up to 10 days from the purchase date. You can avoid delay if you purchase shares by wire, certified check or cashier's check. Your broker may charge you a separate or additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of a Fund, or when we may delay paying you the proceeds from a sale. To the extent permitted by the Securities and Exchange Commission, this may happen during unusual market conditions or emergencies when the Fund can't determine the value of its assets or sell its holdings. For more information, see
How to Buy, Sell and
Exchange Shares of the Funds
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you hold your shares directly with the Transfer Agent, you will need to have the signature on your sell order signature guaranteed by an "eligible financial institution" if:
- You are selling more than $100,000 of shares,
- You want the redemption proceeds made payable to someone that is not in our records,
- You want the redemption proceeds sent to some place that is not in our records, or
- You are a business or a trust.
An "eligible financial institution" includes any bank, broker-dealer, or credit union. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within 18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as possible, we will sell amounts representing shares in the following order:
- Amounts representing shares you purchased with reinvested dividends and distributions
- Amounts representing the increase in NAV above the total amount of payments for shares made during the past six years for Class B shares (five years for Class B shares purchased before January 22, 1990) and 18 months for Class C shares (one year for Class C shares purchased before November 2, 1998).
- Amounts representing the cost of shares held beyond the CDSC period (six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not subject to the CDSC, selling them first helps you to avoid--or at least minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that are subject to the CDSC, we will apply the CDSC to amounts representing the cost of shares held for the longest period of time within the applicable CDSC period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
As we noted before in the "Share Class Comparison" chart, the CDSC for Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the fourth and 1% in the fifth and sixth years. The rate decreases on the first day of the month following the anniversary date of your purchase, not on the anniversary date itself. The CDSC is 1% for Class C shares--which is applied to shares sold within 18 months of purchase (or one year for Class C shares purchased before November 2, 1998). For both Class B and Class C shares, the CDSC is calculated using the lesser of the original purchase price or the redemption proceeds. For purposes of determining how long you've held your shares, all purchases during the month are grouped together and considered to have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be calculated from the first day of the month after initial purchase, excluding any time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a trust account, the death or disability of the grantor). This waiver applies to individual shareholders, as well as shares held in joint tenancy, provided the shares were purchased before the death or disability,
- To provide for certain distributions--made without IRS penalty--from a tax-deferred retirement plan, IRA or Section 403(b) custodial account, and
- On certain sales effected through a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
Benefit Plans. The CDSC will be waived for redemptions from Benefit Plans holding shares through a broker for which the broker provides administrative or recordkeeping services.
How to Buy, Sell and
Exchange Shares of the Funds
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser of $250,000 or 1% of the value of a Fund's net assets, we can then give you securities from the Fund's portfolio instead of cash. If you want to sell the securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may sell the rest of your shares (without charging any CDSC) and close your account. We would do this to minimize the Funds' expenses paid by other shareholders. We will give you 60 days' notice, during which time you can purchase additional shares to avoid this action. This involuntary sale does not apply to shareholders who own their shares as part of a 401(k) plan, an IRA or some other qualified or tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may reinvest any of the redemption proceeds in shares of the same Fund and account without paying an initial sales charge. Also, if you paid a CDSC when you redeemed your shares, we will credit your account with the appropriate number of shares to reflect the amount of the CDSC you paid. In order to take advantage of this one-time privilege, you must notify the Transfer Agent or your broker at the time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement plan or account, call your broker or the Transfer Agent for a distribution request form. There are special distribution and income tax withholding requirements for distributions from retirement plans and accounts and you must submit a withholding form with your request to avoid delay. If your retirement plan or account is held for you by your employer or plan trustee, you must arrange for the distribution request to be signed and sent by the plan administrator or trustee. For additional information, see the SAI.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
How to Buy, Sell and
Exchange Shares of the Funds
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of a Fund for shares of the same class in any other Strategic Partners mutual funds, as well as shares of certain money market funds, if you satisfy the minimum investment requirements. For example, you can exchange Class A shares of a Fund for Class A shares of another Strategic Partners mutual fund, but you can't exchange Class A shares for Class B, Class C or Class Z shares. Shares of a Fund also may be exchanged into Special Money Market Fund, Inc. After an exchange, at redemption the CDSC will be calculated from the first day of the month after initial purchase, excluding any time shares were held in a money market fund. We may change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 8157
PHILADELPHIA, PA 19101
There is no sales charge for such exchanges. However, if you exchange--and then sell--Class B shares within approximately six years of your original purchase or Class C shares within 18 months of your original purchase or one year for Class C shares purchased before November 2, 1998, you must still pay the applicable CDSC. If you have exchanged Class B or Class C shares into a money market fund, the time you hold the shares in the money market account will not be counted for purposes of calculating the required holding period for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is considered a sale for tax purposes. Therefore, if the shares you exchange are worth more than the amount that you paid for them, you may have to pay capital gains tax. For additional information about exchanging shares, see the SAI, "Shareholder Investment Account--Exchange Privilege."
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the market--also known as "market timing"--may make it very difficult to manage a Fund's investments. When market timing occurs, a Fund may
How to Buy, Sell and
Exchange Shares of the Funds
have to sell portfolio securities to have the cash necessary to redeem the market timer's shares. This can happen at a time when it is not advantageous to sell any securities, so a Fund's performance may be hurt. When large dollar amounts are involved, market timing can also make it difficult to use long-term investment strategies because we cannot predict how much cash a Fund will have to invest. When, in our opinion, such activity would have a disruptive effect on portfolio management, the Trust reserves the right to refuse purchase orders and exchanges into each Fund by any person, group or commonly controlled account. The decision may be based upon dollar amount, volume or frequency of trading. The Trust will notify a market timer of rejection of an exchange or purchase order. If the Trust allows a market timer to trade Fund shares, it may require the market timer to enter into a written agreement to follow certain procedures and limitations.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Funds at
(800) 225-1852 before 4:15 p.m., New York time. You will receive a redemption or
exchange amount based on that day's NAV.
The Funds' Transfer Agent will record your telephone instructions and request specific account information before redeeming or exchanging shares. A Fund will not be liable if it follows instructions that it reasonably believes are made by the shareholder. If a Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, you may have difficulty in redeeming or exchanging your shares by telephone. If this occurs, you should consider redeeming or exchanging your shares by mail or through your broker.
The telephone redemption and exchange procedures may be modified or terminated at any time. If this occurs, you will receive a written notice from the Funds.
EXPEDITED REDEMPTION PRIVILEGE
If you have selected the Expedited Redemption Privilege, you may have your redemption proceeds sent directly to your bank account. Expedited redemption requests may be made by telephone or letter, must be received by a Fund prior to 4:15 p.m. New York time to receive a redemption amount based on that day's NAV and are subject to the terms and conditions regarding the redemption of shares. For more information, see "Purchase, Redemption and Pricing of Fund Shares--Expedited Redemption Privilege" in the SAI. The Expedited Redemption Privilege may be modified or terminated at any time without notice.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
The financial highlights will help you evaluate each Fund's financial performance. The TOTAL RETURN in each chart represents the rate that a shareholder earned on an investment in that share class of that particular Fund, assuming reinvestment of all dividends and other distributions. The information is for each share class for the periods indicated.
A copy of each Fund's annual report is available, upon request at no charge, as described on the back cover of this prospectus.
CONSERVATIVE GROWTH FUND: CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.06 $10.36 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .37 .37 .19 Net realized and unrealized gain (loss) on investments and foreign currencies (.30) .82 .35 TOTAL FROM INVESTMENT OPERATIONS .07 1.19 .54 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.36) (.37) (.18) Distributions from net realized capital gains (.82) (.12) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (1.18) (.49) (.18) NET ASSET VALUE, END OF PERIOD $9.95 $11.06 $10.36 TOTAL RETURN(2) 1.00% 11.73% 5.34% ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $16,760 $14,514 $ 9,097 Average net assets (000) $15,985 $12,535 $ 6,157 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 1.72% 1.73% 1.92%(3) Expenses, excluding distribution and service (12b-1) fees 1.47% 1.48% 1.67%(3) Net investment income 3.61% 3.46% 2.69%(3) For Class A, B, C and Z shares: Portfolio turnover 334% 244% 180% |
1 Information shown is for the period 11-18-98 (when Class A shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
Financial Highlights
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.05 $10.35 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .29 .29 .14 Net realized and unrealized gain (loss) on investments and foreign currencies (.29) .82 .34 TOTAL FROM INVESTMENT OPERATIONS -- 1.11 .48 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.30) (.29) (.13) Distributions from net realized capital gains (.82) (.12) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (1.12) (.41) (.13) NET ASSET VALUE, END OF PERIOD $9.93 $11.05 $10.35 TOTAL RETURN(2) .34% 10.89% 4.77% ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $62,177 $43,838 $30,235 Average net assets (000) $52,433 $36,574 $19,308 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.47% 2.48% 2.67%(3) Expenses, excluding distribution and service (12b-1) fees 1.47% 1.48% 1.67%(3) Net investment income 2.84% 2.71% 1.94%(3) |
1 Information is shown for the period 11-18-98 (when Class B shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.05 $10.35 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .29 .28 .14 Net realized and unrealized gain (loss) on investments and foreign currencies (.29) .83 .34 TOTAL FROM INVESTMENT OPERATIONS -- 1.11 .48 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.30) (.29) (.13) Distributions from net realized capital gains (.82) (.12) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (1.12) (.41) (.13) NET ASSET VALUE, END OF PERIOD $9.93 $11.05 $10.35 TOTAL RETURN(2) .34% 10.89% 4.77% ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $14,626 $11,301 $14,035 Average net assets (000) $12,763 $12,954 $12,039 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.47% 2.48% 2.67%(3) Expenses, excluding distribution and service (12b-1) fees 1.47% 1.48% 1.67%(3) Net investment income 2.84% 2.63% 1.91%(3) |
1 Information shown is for the period 11-18-98 (when Class C shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
Financial Highlights
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) -------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.05 $10.37 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .38 .35 .21 Net realized and unrealized gain (loss) on investments and foreign currencies (.28) .85 .35 TOTAL FROM INVESTMENT OPERATIONS .10 1.20 .56 -------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.38) (.40) (.19) Distributions from net realized capital gains (.82) (.12) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (1.20) (.52) (.19) NET ASSET VALUE, END OF PERIOD $9.95 $11.05 $10.37 TOTAL RETURN(2) 1.30% 11.84% 5.58% -------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $ 1,432 $ 471 $20,843 Average net assets (000) $ 949 $12,534 $38,460 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 1.47% 1.48% 1.67%(3) Expenses, excluding distribution and service (12b-1) fees 1.47% 1.48% 1.67%(3) Net investment income 3.78% 3.30% 2.89%(3) |
1 Information shown is for the period 11-18-98 (when Class Z shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
MODERATE GROWTH FUND: CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.03 $10.86 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .24 .26 .12 Net realized and unrealized gain (loss) on investments and foreign currencies (.83) 1.25 .83 TOTAL FROM INVESTMENT OPERATIONS (.59) 1.51 .95 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) (.26) (.09) Distributions from net realized capital gains (.60) (.08) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.74) (.34) (.09) NET ASSET VALUE, END OF PERIOD $10.70 $12.03 $10.86 TOTAL RETURN(2) (4.89)% 13.96% 9.47% ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $58,517 $48,786 $20,372 Average net assets (000) $56,627 $34,809 $12,286 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 1.54% 1.49% 1.88%(3) Expenses, excluding distribution and service (12b-1) fees 1.29% 1.24% 1.63%(3) Net investment income 2.18% 2.27% 1.59%(3) For Class A, B, C and Z shares: Portfolio turnover 246% 155% 96% |
1 Information shown is for the period 11-18-98 (when Class A shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based on weighted average shares outstanding during the period.
Financial Highlights
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.01 $10.85 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .16 .17 .06 Net realized and unrealized gain (loss) on investments and foreign currencies (.84) 1.23 .83 TOTAL FROM INVESTMENT OPERATIONS (.68) 1.40 .89 LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.16) (.04) Distributions from net realized capital gains (.60) (.08) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.70) (.24) (.04) NET ASSET VALUE, END OF PERIOD $10.63 $12.01 $10.85 TOTAL RETURN(2) (5.72%) 12.88% 8.99% ------------------------------------------------------------------------------------------- RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $117,664 $99,950 $58,678 Average net assets (000) $109,534 $79,855 $36,645 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.29% 2.24% 2.63%(3) Expenses, excluding distribution and service (12b-1) fees 1.29% 1.24% 1.63%(3) Net investment income 1.43% 1.48% .85%(3) |
1 Information is shown for the period 11-18-98 (when Class B shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based on weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.01 $10.85 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .16 .17 .06 Net realized and unrealized gain (loss) on investments and foreign currencies (.84) 1.23 .83 TOTAL FROM INVESTMENT OPERATIONS (.68) 1.40 .89 LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.16) (.04) Distributions from net realized capital gains (.60) (.08) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.70) (.24) (.04) NET ASSET VALUE, END OF PERIOD $10.63 $12.01 $10.85 TOTAL RETURN(2) (5.72%) 12.88% 8.99% ------------------------------------------------------------------------------------------- RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $34,021 $28,040 $22,375 Average net assets (000) $30,623 $25,835 $18,346 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.29% 2.24% 2.63%(3) Expenses, excluding distribution and service (12b-1) fees 1.29% 1.24% 1.63%(3) Net investment income 1.43% 1.44% .79%(3) |
1 Information shown is for the period 11-18-98 (when Class C shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based on weighted average shares outstanding during the period.
Financial Highlights
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.05 $10.87 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .25 .27 .13 Net realized and unrealized gain (loss) on investments and foreign currencies (.82) 1.27 .84 TOTAL FROM INVESTMENT OPERATIONS (.57) 1.54 .97 LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.28) (.10) Distributions from net realized capital gains (.60) (.08) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.76) (.36) (.10) NET ASSET VALUE, END OF PERIOD $10.72 $12.05 $10.87 TOTAL RETURN(2) (4.75)% 14.18% 9.70% ------------------------------------------------------------------------------------------- RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $ 4,272 $ 1,348 $13,578 Average net assets (000) $ 2,685 $ 4,102 $21,914 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 1.29% 1.24% 1.63%(3) Expenses, excluding distribution and service (12b-1) fees 1.29% 1.24% 1.63%(3) Net investment income 2.39% 2.11% 1.68%(3) |
1 Information shown is for the period 11-18-98 (when Class Z shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based on weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
HIGH GROWTH FUND: CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.95 $11.52 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income --(5) --(5) --(5) Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.27) 2.14 1.52 TOTAL FROM INVESTMENT OPERATIONS (1.27) 2.14 1.52 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends in excess of net investment income -- (.43) -- Distributions from net realized capital gains (.98) (.28) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.98) (.71) -- NET ASSET VALUE, END OF PERIOD $10.70 $12.95 $11.52 TOTAL RETURN(2) (10.09)% 18.99% 15.20% ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $39,528 $35,678 $21,248 Average net assets (000) $39,128 $27,528 $10,442 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution fees and service (12b-1) fees 1.64% 1.54% 1.73%(3) Expenses, excluding distribution fees and service (12b-1) fees 1.39% 1.29% 1.48%(3) Net investment income .02% .01% .02%(3) For Class A, B, C and Z shares: Portfolio turnover 83% 67% 38% |
1 Information shown is for the period 11-18-98 (when Class A shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
5 Less than $.005 per share.
Financial Highlights
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.86 $11.47 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.08) (.09) (.05) Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.25) 2.12 1.52 TOTAL FROM INVESTMENT OPERATIONS (1.33) 2.03 1.47 LESS DISTRIBUTIONS: Distributions in excess of net investment income -- (.36) -- Distributions from net realized capital gains (.98) (.28) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.98) (.64) -- NET ASSET VALUE, END OF PERIOD $10.55 $12.86 $11.47 TOTAL RETURN(2) (10.66)% 18.13% 14.70% ------------------------------------------------------------------------------------------- RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $86,941 $79,793 $41,049 Average net assets (000) $84,949 $60,994 $24,260 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.39% 2.29% 2.48%(3) Expenses, excluding distribution and service (12b-1) fees 1.39% 1.29% 1.48%(3) Net investment income (loss) (.72)% (.71)% (.70)%(3) |
1 Information is shown for the period 11-18-98 (when Class B shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Financial Highlights
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $12.86 $11.47 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.08) (.09) (.05) Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.25) 2.12 1.52 TOTAL FROM INVESTMENT OPERATIONS (1.33) 2.03 1.47 LESS DISTRIBUTIONS: Distributions in excess of net investment income -- (.36) -- Distributions from net realized capital gains (.98) (.28) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.98) (.64) -- NET ASSET VALUE, END OF PERIOD $10.55 $12.86 $11.47 TOTAL RETURN(2) (10.66)% 18.13% 14.70% ------------------------------------------------------------------------------------------ RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------ NET ASSETS, END OF PERIOD (000) $36,507 $31,636 $19,914 Average net assets (000) $35,387 $26,413 $15,204 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 2.39% 2.29% 2.48%(3) Expenses, excluding distribution and service (12b-1) fees 1.39% 1.29% 1.48%(3) Net investment income (loss) (.73)% (.73)% (.75)%(3) |
1 Information shown is for the period 11-18-98 (when Class C shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
Financial Highlights
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers, LLP, whose report was unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 7-31) PER SHARE OPERATING PERFORMANCE(4) 2001 2000 1999(1) ------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.98 $11.56 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income .03 .02 .02 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.26) 2.14 1.54 TOTAL FROM INVESTMENT OPERATIONS (1.23) 2.16 1.56 LESS DISTRIBUTIONS: Dividends in excess of net investment income -- (.46) -- Distributions from net realized capital gains (.98) (.28) -- TOTAL DIVIDENDS AND DISTRIBUTIONS (.98) (.74) -- NET ASSET VALUE, END OF PERIOD $10.77 $12.98 $11.56 TOTAL RETURN(2) (9.74)% 19.23% 15.60% ------------------------------------------------------------------------------------------- RATIOS/ SUPPLEMENTAL DATA ------------------------------------------------------------------------------------------- NET ASSETS, END OF PERIOD (000) $ 3,413 $ 1,318 $36,413 Average net assets (000) $ 2,270 $25,793 $45,999 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 1.39% 1.29% 1.48%(3) Expenses, excluding distribution and service (12b-1) fees 1.39% 1.29% 1.48%(3) Net investment income .23% .12% .21%(3) |
1 Information shown is for the period 11-18-98 (when Class Z shares were first offered) through 7-31-99.
2 Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the period.
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
The Strategic Partners
Mutual Fund Family
Strategic Partners offers a variety of mutual funds designed to meet your individual needs. For information about these funds, contact your financial adviser or call us at (800) 225-1852. Please read the applicable prospectus carefully before you invest or send money.
Strategic Partners Asset Allocation Funds
Strategic Partners Conservative Growth Fund
Strategic Partners Moderate Growth Fund
Strategic Partners High Growth Fund
Strategic Partners Opportunity Funds
Strategic Partners Focused Growth Fund
Strategic Partners New Era Growth Fund
Strategic Partners Focused Value Fund
Strategic Partners Style Specific Funds
Strategic Partners Large Capitalization Growth Fund
Strategic Partners Large Capitalization Value Fund
Strategic Partners Small Capitalization Growth Fund
Strategic Partners Small Capitalization Value Fund
Strategic Partners International Equity Fund
Strategic Partners Total Return Bond Fund
Notes
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Notes
Notes
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Notes
Notes
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS [PHONE ICON] (800) 225-1852
Notes
For More Information
Please read this prospectus before you invest in the Funds and keep it for
future reference. For information or shareholder questions contact
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 8310
PHILADELPHIA, PA 19101
(800) 778-8769
Visit our website at
WWW.STRATEGICPARTNERS.COM
Additional information about the Trust can be obtained without charge and can be
found in the following documents
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during the last fiscal year)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange Commission as follows
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
publicinfo@sec.gov
(The SEC charges a fee to copy documents)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call 1(202) 942-8090
VIA THE INTERNET
on the EDGAR Database at http://www.sec.gov
CUSIP NASDAQ
NUMBERS SYMBOLS
Conservative Growth Fund
Class A: 86276X103 PCGAX
Class B: 86276X202 PBCFX
Class C: 86276X301 PCCFX
Class Z: 86276X400 PDCZF
Moderate Growth Fund
Class A: 86276X889 PAMGX
Class B: 86276X871 DMGBX
Class C: 86276X863 PIMGX
Class Z: 86276X855 PDMZX
High Growth Fund
Class A: 86276X509 PHGAX
Class B: 86276X608 PIHGX
Class C: 86276X707 PHGCX
Class Z: 86276X806 PDHZX
|
Investment Company Act File No. 811-08915
[LOGO] Printed on Recycled Paper
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS
Statement of Additional Information
October 1, 2001
Strategic Partners Asset Allocation Funds (formerly Prudential Diversified Funds) (the Trust) is an open-end, management investment company currently composed of three separate investment portfolios (the Funds) professionally managed by Prudential Investments Fund Management LLC (PIFM or the Manager). Each Fund benefits from discretionary advisory services provided by several highly regarded subadvisers (each, an Adviser, collectively, the Advisers) identified, retained, supervised and compensated by the Manager. The Trust consists of the following three Funds:
- Strategic Partners Conservative Growth Fund (formerly Prudential Diversified Conservative Growth Fund) (the Conservative Growth Fund)
- Strategic Partners Moderate Growth Fund (formerly Prudential Diversified Moderate Growth Fund) (the Moderate Growth Fund)
- Strategic Partners High Growth Fund (formerly Prudential Diversified High Growth Fund) (the High Growth Fund)
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information (SAI) is not a prospectus and should be read in conjunction with the Trust's Prospectus dated October 1, 2001, a copy of which may be obtained at no charge from the Trust upon request at the address or telephone number noted above. The Trust's audited financial statements for the fiscal year ended July 31, 2001 are incorporated in this SAI by reference to the Trust's 2001 annual reports to shareholders (File No. 811-08915). You may obtain a copy of the Trust's annual reports at no charge by request to the Trust at the address or telephone number noted above.
TABLE OF CONTENTS
PAGE
-----
History of the Trust........................................ B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions..................................... B-32
Management of the Trust..................................... B-33
Control Persons and Principal Holders of Securities......... B-38
Investment Advisory and Other Services...................... B-40
Brokerage Allocation and Other Practices.................... B-47
Capital Shares, Other Securities and Organization........... B-50
Purchase, Redemption and Pricing of Fund Shares............. B-51
Shareholder Investment Account.............................. B-62
Net Asset Value............................................. B-66
Taxes, Dividends and Distributions.......................... B-67
Performance Information..................................... B-70
Financial Statements........................................ B-72
Appendix I -- Description of Security Ratings............... I-1
Appendix II -- Historical Performance Data.................. II-1
Appendix III -- General Investment Information.............. III-1
-------------------------------------------------------------------
|
MFSP504B
HISTORY OF THE TRUST
The Trust was organized as a Delaware business trust on July 29, 1998 under the name "Prudential Diversified Funds." On September 4, 2001, the Trust amended its Certificate of Trust, changing its name to "Strategic Partners Asset Allocation Funds."
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
CLASSIFICATION
The Trust is an open-end management investment company. Each of the Funds is classified as a diversified fund.
INVESTMENT STRATEGIES AND RISKS.
The investment objectives of the Funds and the principal investment policies and strategies for seeking to achieve the Funds' objectives are set forth in the Trust's Prospectus. This section provides additional information on the principal investment policies and strategies of the Funds, as well as information on certain non-principal investment policies and strategies. The Funds may not be successful in achieving their respective objectives and you could lose money.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities.
U.S. TREASURY SECURITIES. U.S. Treasury securities include bills, notes, bonds and other debt securities issued by the U.S. Treasury. These instruments are direct obligations of the U.S. government and, as such, are backed by the "full faith and credit" of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND INSTRUMENTALITIES. Securities issued or guaranteed by agencies or instrumentalities of the U.S. government include, but are not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing Administration, Farmers Home Administration and the Export-Import Bank are backed by the full faith and credit of the United States. In the case of securities not backed by the full faith and credit of the United States, the Trust must look principally to the agency 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 commitments. Such securities include obligations issued by the Student Loan Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the U.S. Treasury to meet its obligations, although the U.S. Treasury is under no obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue collateralized mortgage obligations.
STRIPPED U.S. GOVERNMENT SECURITIES. A Fund may invest in component parts of U.S. government securities, namely either the corpus (principal) of such obligations or one of the interest payments scheduled to be paid on such obligations. These obligations may take the form of (1) obligations from which the interest coupons have been stripped; (2) the interest coupons that are stripped; and (3) book-entries at a Federal Reserve member bank representing ownership of obligation components.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND INSTRUMENTALITIES. A Fund may invest in mortgage backed securities and other derivative mortgage products, including those representing an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC certificates where the U.S. government or its agencies or instrumentalities guarantees the payment of interest and principal of these securities. However, these guarantees do not extend to the securities' yield or value, which are likely to vary inversely with fluctuations in interest rates, nor do these guarantees extend to the yield or value of a Fund's shares. See "Mortgage-Backed Securities and Asset Backed Securities" below.
Mortgages backing the securities that may be purchased by a Fund include conventional thirty-year fixed-rate mortgages, graduated payment mortgages, fifteen-year mortgages, adjustable rate mortgages and balloon payment mortgages. A balloon payment mortgage backed security is an amortized mortgage security with installments of principal and interest, the last installment of which is predominantly principal. All of these mortgages can be used to create "pass-through securities." A pass-through security is formed when mortgages are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgages is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an undivided mortgage prepays the remaining principal before the mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. The remaining expected average life of a pool of mortgage loans underlying a mortgage backed security is a prediction of when the mortgage loans will be repaid and is based upon a variety of factors, such as the demographic and geographic characteristics of the borrowers and the mortgaged properties, the length of time that each of the mortgage loans has been outstanding, the interest rates payable on the mortgage loans and the current interest rate environment.
In addition to GNMA, FNMA or FHLMC certificates through which the holder receives a share of all interest and principal payments from the mortgages underlying the certificate, a Fund may also invest in mortgage pass-through securities issued by the U.S. government or its agencies and instrumentalities, commonly referred to as mortgage-backed security strips or MBS strips. MBS strips 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 stripped mortgage security 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 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 payments (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, the Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially adversely affected.
During periods of declining interest rates, prepayment of mortgages underlying mortgage backed securities can be expected to accelerate. When mortgage obligations are prepaid, a Fund reinvests the prepaid amounts in securities, the yields on which reflect interest rates prevailing at that time. Therefore, a Fund's ability to maintain a portfolio of high-yielding mortgage-backed securities will be adversely affected to the extent that prepayments of mortgages are reinvested in securities that have lower yields than the prepaid mortgages. Moreover, prepayments of mortgages that underlie securities purchased at a premium generally will result in capital losses. During periods of rising interest rates, the rate of prepayment of mortgages underlying mortgage-backed securities can be expected to decline, extending the projected average maturity of the mortgage-backed securities. This maturity extension risk may effectively change a security that was considered short- or intermediate-term at the time of purchase into a long-term security. Long-term securities generally fluctuate more widely in response to changes in interest rates than short- or intermediate-term securities.
ZERO COUPON SECURITIES. Zero coupon U.S. government securities are debt obligations that are issued or purchased at a significant discount from face value. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity or the particular interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Zero coupon U.S. government securities do not require the periodic payment of interest. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash. These investments may experience greater volatility in market value than U.S. government securities that make regular payments
of interest. A Fund accrues income on these investments for tax and accounting purposes, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Fund's distribution obligations, in which case the Fund will forego the purchase of additional income producing assets with these funds. Zero coupon U.S. government securities include STRIPS and CUBES, which are issued by the U.S. Treasury as component parts of U.S. Treasury bonds and represent scheduled interest and principal payments on the bonds.
SPECIAL CONSIDERATIONS. Fixed-income U.S. government securities are considered among the most creditworthy of fixed income investments. The yields available from U.S. government securities are generally lower than the yields available from corporate debt securities. The values of U.S. government securities will change as interest rates fluctuate. To the extent U.S. government securities are not adjustable rate securities, these changes in value in response to changes in interest rates generally will be more pronounced. During periods of falling interest rates, the values of outstanding long-term fixed-rate U.S. government securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. Although changes in the value of U.S. government securities will not affect investment income from those securities, they may affect the net asset value of a Fund.
At a time when a Fund has written call options on a portion of its U.S. government securities, its ability to profit from declining interest rates will be limited. Any appreciation in the value of the securities held in the Fund above the strike price would likely be partially or wholly offset by unrealized losses on call options written by a Fund. The termination of option positions under these conditions would generally result in the realization of capital losses, which would reduce a Fund's capital gains distribution. Accordingly, a Fund would generally seek to realize capital gains to offset realized losses by selling portfolio securities. In such circumstances, however, it is likely that the proceeds of such sales would be reinvested in lower yielding securities.
CUSTODIAL RECEIPTS
Each Fund may invest in receipts evidencing the component parts (corpus or coupons) of U.S. government obligations that have not actually been stripped. Such receipts evidence ownership of component parts of U.S. government obligations (corpus or coupons) purchased by a third party (typically an investment banking firm) and held on behalf of the third party in physical or book entry form by a major commercial bank or trust company pursuant to a custody agreement with the third party. These custodial receipts include "Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and "Certificates of Accrual on Treasury Securities" (CATS). Each Fund will not invest more than 5% of its net assets in such custodial receipts.
Custodial receipts held by a third party are not issued or guaranteed by the United States government and are not considered U.S. government securities. Each Fund may also invest in such custodial receipts.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high-quality money market instruments, including commercial paper of a U.S. or non-U.S. company or foreign government securities, certificates of deposit, bankers' acceptances and time deposits of domestic and foreign banks, and obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities. Money market obligations will be generally U.S. dollar denominated. Commercial paper will be rated, at the time of purchase, at least "A-2" by Standard & Poor's (S&P) or "Prime-2" by Moody's Investors Service (Moody's), or the equivalent by another nationally recognized statistical rating organization (NRSRO) or, if not rated, issued by an entity having an outstanding unsecured debt issue rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the equivalent by another NRSRO.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Conservative Growth and Moderate Growth Funds may each invest in corporate and other debt obligations. These debt securities may have adjustable or fixed rates of interest and in certain instances may be secured by assets of the issuer. Adjustable rate corporate debt securities may have features similar to those of adjustable rate mortgage backed securities, but corporate debt securities, unlike mortgage backed securities, are not subject to prepayment risk other than through contractual call provisions that generally impose a penalty for prepayment. Fixed-rate debt securities may also be subject to call provisions.
The market value of fixed-income obligations of the Funds will be affected by general changes in interest rates, which will result in increases or decreases in the value of such obligations. The market value of the obligations held by a Fund can be expected to vary inversely with changes in prevailing interest rates. Investors also should recognize that, in periods of declining interest rates, a Fund's yield will tend to be somewhat higher than prevailing market rates and, in periods of rising interest rates, a Fund's yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to a Fund from the continuous sale of its shares will tend to be invested in instruments producing lower yields than the balance of its portfolio, thereby reducing the Fund's current yield. In periods of rising interest rates, the opposite can be expected to occur. In addition, securities in which a Fund may invest may not yield as high a level of current income as might be achieved by investing in securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by S&P, Moody's and other NRSROs are relative and subjective and are not absolute standards of quality. Although these ratings are initial criteria for selection of portfolio investments, each Adviser will also make its own evaluation of these securities on behalf of a Fund. Among the factors that will be considered are the long-term ability of the issuers to pay principal and interest and general economic trends.
MEDIUM- AND LOWER-RATED SECURITIES. The Conservative Growth and Moderate Growth Funds may each invest in medium- (i.e., rated Baa by Moody's or BBB by S&P or the equivalent by another NRSRO) and lower-rated securities (i.e., rated lower than Baa by Moody's or lower than BBB by S&P or the equivalent by another NRSRO). However, neither Fund will purchase a security rated lower than B by Moody's or S&P or the equivalent by another NRSRO. Securities rated Baa by Moody's or BBB by S&P or the equivalent by another NRSRO, although considered investment grade, possess speculative characteristics, including the risk of default, and changes in economic or other conditions are more likely to impair the ability of issuers of these securities to make interest and principal payments than is the case with respect to issuers of higher-grade bonds.
Generally, medium or lower-rated securities and unrated securities of comparable quality, sometimes referred to as "junk bonds" (i.e., securities rated lower than Baa by Moody's or BBB by S&P or the equivalent by another NRSRO), offer a higher current yield than is offered by higher-rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions and (ii) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-quality bonds. In addition, medium- and lower-rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because medium- and lower-rated securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. The Advisers, under the supervision of the Manager and the Trustees, in evaluating the creditworthiness of an issue whether rated or unrated, take various factors into consideration, which may include, as applicable, the issuer's financial resources, its sensitivity to economic conditions and trends, the operating history of and the community support for the facility financed by the issue, the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories is more volatile than that of higher-quality securities, and the markets in which medium- and lower-rated or unrated securities are traded are more limited than those in which higher-rated securities are traded. The existence of limited markets may make it more difficult for each Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. Moreover, the lack of a liquid trading market may restrict the availability of securities for a Fund to purchase and may also have the effect of limiting the ability of a Fund to sell securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also 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. Also, as the principal value of bonds moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by a Fund may decline proportionately more than a portfolio consisting of higher-rated securities. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher-rated bonds, resulting in a decline in the overall credit quality of the securities held by the Fund and increasing the exposure of the Fund to the risks of lower-rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
Ratings of fixed-income securities represent the rating agency's opinion regarding their credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer's current financial condition may be better or worse than a rating indicates. See Appendix I of this SAI, "Description of Security Ratings."
Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require sale of these securities by the Fund, but the Adviser will consider this event in its determination of whether the Fund should continue to hold the securities.
COMMERCIAL PAPER. Each Fund may invest in commercial paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts.
ADJUSTABLE RATE SECURITIES. The Conservative Growth and Moderate Growth Funds may each invest in adjustable rate securities. Adjustable rate securities are debt securities having interest rates that are adjusted or reset at periodic intervals ranging from one month to three years. The interest rate of an adjustable rate security typically responds to changes in general market levels of interest. The interest paid on any particular adjustable rate security is a function of the index upon which the interest rate of that security is based.
The adjustable rate feature of the securities in which a Fund may invest will tend to reduce sharp changes in a Fund's net asset value in response to normal interest rate fluctuations. As the coupon rates of a Fund's adjustable rate securities are reset periodically, yields of these portfolio securities will reflect changes in market rates and should cause the net asset value of a Fund's shares to fluctuate less dramatically than that of a fund invested in long-term fixed-rate securities. However, while the adjustable rate feature of such securities will tend to limit sharp swings in a Fund's net asset value in response to movements in general market interest rates, it is anticipated that during periods of fluctuations in interest rates, the net asset value of a Fund will fluctuate.
INFLATION-INDEXED BONDS. The Conservative Growth and Moderate Growth Funds may invest in inflation-indexed bonds issued by governmental entities and corporations. Inflation-indexed bonds are
fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Such bonds generally are issued at an interest rate lower than typical bonds, but are expected to retain their principal value over time. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing principal value, which has been adjusted for inflation.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
FOREIGN SECURITIES
The Conservative Growth and Moderate Growth Funds may each invest in foreign equity and debt securities and the High Growth Fund may invest in foreign equity securities, including securities of issuers in emerging market countries.
A Fund's investments in foreign government securities may include debt securities issued or guaranteed, as to payment of principal and interest, by governments, semi-governmental entities, governmental agencies, supranational entities and other governmental entities (collectively, the Government Entities) of countries considered stable by an Adviser. A "supranational entity" is an entity constituted by the national governments of several countries to promote economic development. Examples of such supranational entities include, among others, the World Bank, the European Investment Bank and the Asian Development Bank. Debt securities of "semi-governmental entities" are issued by entities owned by a national, state, or equivalent government or are obligations of a political unit that are not backed by the national government's "full faith and credit" and general taxing powers. Examples of semi-governmental issuers include, among others, the Province of Ontario and the City of Stockholm. Foreign government securities also include mortgage-backed securities issued by foreign government entities including semi-governmental entities.
A Fund may invest in mortgage-backed securities issued or guaranteed by foreign government entities including semi-governmental entities, and Brady Bonds, which are long term bonds issued by government entities in developing countries as part of a restructuring of their commercial loans.
The values of foreign investments are affected by changes in currency rates or exchange control regulations, restrictions or prohibitions on the repatriation of foreign currencies, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations. Costs are also incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions and custody fees are generally higher than those charged in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obligations and could be subject to extended clearance and settlement periods.
CURRENCY RISKS. Because some of the securities purchased by the Funds are denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect a Fund's net asset value; the value of interest earned; gains and losses realized on the sale of securities; and net investment income and capital gain, if any, to be distributed to shareholders by the Fund. If the value of a foreign currency rises against the U.S. dollar, the value of a Fund's assets denominated in that currency will increase; correspondingly, if the value of a foreign currency declines against the U.S. dollar, the value of a Fund's assets denominated in that currency will decrease. Under the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), the Funds are required to separately account for the foreign currency component of gains or losses, which will usually be viewed under the Code as items of ordinary and distributable income or loss, thus affecting the Funds' distributable income.
The exchange rates between the U.S. dollar and foreign currencies are a function of such factors as supply and demand in the currency exchange markets, international balances of payments, governmental
interpretation, speculation and other economic and political conditions. Although the Funds value their assets daily in U.S. dollars, the Funds will not convert their holdings of foreign currencies to U.S. dollars daily. When a Fund converts its holdings to another currency, it may incur conversion costs. Foreign exchange dealers may realize a profit on the difference between the price at which they buy and sell currencies.
SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On January 1, 1999, 11 of the 15 member states of the European Monetary Union introduced the "euro" as a common currency. During a three year transitional period, the euro will coexist with each member state's national currency. By July 1, 2002, the euro is expected to become the sole legal tender of the member states. During the transition period, the Funds will treat the euro as a separate currency from that of any member state.
The adoption by the member states of the euro will eliminate the substantial currency risk among member states and will likely affect the investment process and considerations of the Advisers. To the extent a Fund holds non-U.S. dollar-denominated securities, including those denominated in the euro, the Fund will still be subject to currency risk due to fluctuations in those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member states cannot be determined with certainty at this time. In addition to the effects described above, it is likely that more general short- and long-term ramifications can be expected, such as changes in economic environment and change in behavior of investors, all of which will impact a Fund's investments.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE BACKED SECURITIES -- GENERAL. The Conservative Growth and Moderate Growth Funds may each invest in mortgage backed securities. Mortgage backed securities are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans secured by real property. There are currently three basic types of mortgage backed securities: (1) those issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, such as GNMA, FNMA and FHLMC, described under "U.S. Government Securities" above; (2) those issued by private issuers that represent an interest in or are collateralized by mortgage backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage backed securities without a government guarantee but usually having some form of private credit enhancement. In addition, the Conservative Growth and Moderate Growth Funds may invest in mortgage-related securities issued or guaranteed by foreign, national, state or provincial governmental instrumentalities, including semi-governmental agencies.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities that evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates that the
Funds purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. The GNMA Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (1) fixed rate level payment mortgage loans; (2) fixed rate
graduated payment mortgage loans; (3) fixed rate growing equity mortgage loans;
(4) fixed rate mortgage loans secured by manufactured (mobile) homes; (5)
mortgage loans on multifamily residential properties under construction; (6)
mortgage loans on completed multifamily projects; (7) fixed rate mortgage loans
as to which escrowed funds are used to reduce the borrower's monthly payments
during the early years of the mortgage loans ("buydown" mortgage loans); (8)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
(9) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans
or VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one-to-four family housing units.
FNMA CERTIFICATES. The Federal National Mortgage Association (FNMA) is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act. FNMA provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds for additional lending. FNMA acquires funds to purchase home mortgage loans from many capital market investors that may not ordinarily invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive amounts, representing such holder's pro rata interest in scheduled principal payments and interest payments (at such FNMA Certificate's pass-through rate, which is net of any servicing and guarantee fees on the underlying mortgage loans), and any principal prepayments on the mortgage loans in the pool represented by such FNMA Certificate and such holder's proportionate interest in the full principal amount of any foreclosed or otherwise finally liquidated mortgage loan. The full and timely payment of principal and interest on each FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by the full faith and credit of the U.S. government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (1) fixed rate level payment mortgage loans; (2) fixed rate
growing equity mortgage loans; (3) fixed rate graduated payment mortgage loans;
(4) variable rate California mortgage loans; (5) other adjustable rate mortgage
loans; and (6) fixed rate mortgage loans secured by multifamily projects.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended (the FHLMC Act). Its purpose is to promote development of a nationwide secondary market in conventional residential mortgages. The principal activity of FHLMC consists of the purchase of first lien, conventional, residential mortgage loans and participation interests in such mortgage loans and the resale of the mortgage loans so purchased in the form of mortgage securities, primarily FHLMC Certificates.
FHLMC issues two types of mortgage pass-through securities, mortgage participation certificates (PCs) and guaranteed mortgage certificates (GMCs). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owned on the underlying pool. FHLMC guarantees timely monthly payment of interest on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years.
FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the FHLMC Certificate the timely payment of interest at the rate provided for by such FHLMC Certificate, whether or not received. FHLMC also guarantees to each registered holder of a FHLMC Certificate ultimate collection of all principal on the related mortgage loans, without any offset or deduction, but does not, generally, guarantee the timely payment of scheduled principal. FHLMC may remit the amount due on account of its guarantee of collection of principal at any time after default on an underlying mortgage loan, but not later than 30 days following (1) foreclosure sale, (2) payment of a claim by any mortgage insurer or (3) the expiration of any right of redemption, whichever occurs later, but in any event no later than one year after demand has been made upon the mortgagor for accelerated payment of principal. The obligations of FHLMC under its guarantee are obligations solely of FHLMC and are not backed by the full faith and credit of the U.S. government.
FHLMC Certificates represent a pro rata interest in a group of mortgage loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans underlying the FHLMC Certificates will consist of fixed rate or adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which are secured by first liens on one-to four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may include whole loans, participation interests in whole loans and undivided interests in whole loans and participations comprising another FHLMC Certificate group.
The market value of mortgage securities, like other securities, will generally vary inversely with changes in market interest rates, declining when interest rates rise and rising when interest rates decline. However, mortgage securities, while having comparable risk of decline during periods of rising rates, usually have less potential for capital appreciation than other investments of comparable maturities due to the likelihood of increased prepayments of mortgages as interest rates decline. In addition, to the extent such mortgage securities are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments generally will result in some loss of the holders' principal to the extent of the premium paid. On the other hand, if such mortgage securities are purchased at a discount, an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of income that, when distributed to shareholders, will be taxable as ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities (ARMs) are pass-through mortgage securities collateralized by mortgages with adjustable rather than fixed rates. Generally, ARMs have a specified maturity date and amortize principal over their life. In periods of declining interest rates, there is a reasonable likelihood that ARMs will experience increased rates of prepayment of principal. However, the major difference between ARMs and fixed rate mortgage securities is that the interest rate and the rate of amortization of principal of ARMs can and do change in accordance with movements in a particular, pre-specified, published interest rate index.
The amount of interest on an ARM is calculated by adding a specified amount, the "margin," to the index, subject to limitations on the maximum and minimum interest that can be charged to the mortgagor during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period. Because the interest rate on ARMs generally moves in the same direction as market interest rates, the market value of ARMs tends to be more stable than that of long-term fixed rate securities.
There are two main categories of indexes that serve as benchmarks for periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indexes include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indexes, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index (often related to ARMs issued by FNMA), tend to lag changes in market rate levels and tend to be somewhat less volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND MULTICLASS PASS-THROUGH SECURITIES. CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be collateralized by whole loans or private mortgage pass-through securities (such collateral collectively hereinafter referred to as "Mortgage Assets"). Multiclass pass-through securities are equity interests in a trust composed of Mortgage Assets. Payments of principal and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specific fixed or floating coupon rate and has a stated maturity
or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a CMO series in a number of different ways. Generally, the purpose of the allocation of the cash flow of a CMO to the various classes is to obtain a more predictable cash flow to the individual tranches than exists with the underlying collateral of the CMO. As a general rule, the more predictable the cash flow on a CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on mortgage-backed securities.
A Fund also may invest in, among other things, parallel pay CMOs and Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class that, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PAC Bonds generally require payments of a specified amount of principal on each payment date. PAC Bonds always are parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes.
In reliance on a Securities and Exchange Commission (SEC or Commission) interpretation, a Fund's investments in certain qualifying CMOs, including CMOs that have elected to be treated as REMICs, are not subject to the Investment Company Act of 1940, as amended (the 1940 Act), limitation on acquiring interests in other investment companies. In order to be able to rely on the SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers, that (1) invest primarily in mortgage-backed securities, (2) do not issue redeemable securities, (3) operate under general exemptive orders exempting them from all provisions of the 1940 Act and (4) are not registered or regulated under the 1940 Act as investment companies. To the extent that a Fund selects CMOs or REMICs that do not meet the above requirements, the Fund may not invest more than 10% of its assets in all such entities, may not invest more than 5% of its total assets in a single entity, and may not acquire more than 3% of the voting securities of any single such entity.
STRIPPED MORTGAGE BACKED SECURITIES. Stripped mortgage backed securities or MBS strips are derivative multiclass mortgage securities. In addition to MBS strips issued by agencies or instrumentalities of the U.S. government, a Fund may purchase MBS strips issued by private originators of, or investors in, mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. See "U.S. Government Securities--Mortgage Related Securities Issued or Guaranteed by U.S. Government Agencies and Instrumentalities" above.
ASSET-BACKED SECURITIES. The Conservative Growth and Moderate Growth Funds may each invest in 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, have been securitized in pass-through structures similar to the mortgage pass-through structures or in a pay-through structure similar to the CMO structure. A Fund may invest in these and other types of asset-backed securities that may be developed in the future. Asset-backed securities present certain risks that are not presented by mortgage backed securities. Primarily, these securities do not have the benefit of a security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, the security interests in the underlying automobiles are often not transferred when the pool is created, with the resulting possibility that the collateral could be resold. In general, these types of loans are of shorter average life than mortgage loans and are less likely to have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT. Mortgage backed securities and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors on underlying assets to make payments, those securities may contain
elements of credit support that fall into two categories: (1) liquidity protection and (2) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to seek to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from default seeks to ensure ultimate payment of the obligations on at least a portion of the assets in the pool. This protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk associated with the underlying assets. Delinquencies or losses in excess of those anticipated could adversely affect the return on an investment in a security. A Fund will not pay any additional fees for credit support, although the existence of credit support may increase the price of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE BACKED 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, while slower than expected prepayments will reduce, yield to maturity. Moreover, slower than expected prepayments may effectively change a security that was considered short- or intermediate-term at the time of purchase into a long-term security. Long-term securities generally lead to increased volatility of net asset value because they tend to fluctuate more widely in response to changes in interest rates than short- or intermediate-term securities. A Fund may invest a portion of its assets in derivative mortgage backed securities such as MBS Strips, which are highly sensitive to changes in prepayment and interest rates. Each Adviser will seek to manage these risks (and potential benefits) by diversifying its investments in such securities and, in certain circumstances, through hedging techniques.
In addition, mortgage backed securities that are secured by manufactured (mobile) homes and multi-family residential properties, such as GNMA and FNMA certificates, are subject to a higher risk of default than are other types of mortgage backed securities.
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. Accordingly, amounts available for reinvestment by a Fund are likely to be greater during a period of declining interest rates and, as a result, likely to be reinvested at lower interest rates than 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. During periods of rising interest rates, the rate of prepayment of mortgages underlying mortgage-backed securities can be expected to decline, extending the projected average maturity of the mortgage-backed securities. This maturity extension risk may effectively change a security that was considered short- or intermediate-term at the time of purchase into a long-term security. Long-term securities generally fluctuate more widely in response to changes in interest rates than short- or intermediate-term securities.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is typically a bond, debenture, corporate note, preferred stock or other similar security that may be converted at a stated price within a specified period of time into a specified number of shares of common stock or other equity securities of
the same or a different issuer. Convertible securities are generally senior to common stocks in a corporation's capital structure, but are usually subordinated to similar nonconvertible securities. While providing a fixed income stream (generally higher in yield than the income derivable from a common stock but lower than that afforded by a similar nonconvertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. Convertible securities also include preferred stocks, which technically are equity securities.
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 common 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 common stock. The price of a convertible security tends to increase as the market value of the underlying common 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 common stock of the same issuer.
LOAN PARTICIPATIONS
Each of the Conservative Growth and Moderate Growth Funds may invest up to 5% of its net assets in high quality participation interests having remaining maturities not exceeding one year in loans extended by banks to United States and foreign companies. In a typical corporate loan syndication, a number of lenders, usually banks (co-lenders), lend a corporate borrower a specified sum pursuant to the terms and conditions of a loan agreement. One of the co-lenders usually agrees to act as the agent bank with respect to the loan. The loan agreement among the corporate borrower and the co-lenders identifies the agent bank as well as sets forth the rights and duties of the parties. The agreement often (but not always) provides for the collateralization of the corporate borrower's obligations thereunder and includes various types of restrictive covenants that must be met by the borrower.
The participation interests acquired by a Fund may, depending on the transaction, take the form of a direct or co-lending relationship with the corporate borrower, an assignment of an interest in the loan by a co-lender or another participant, or a participation in the seller's share of the loan. Typically, the Fund will look to the agent bank to collect principal of and interest on a participation interest, to monitor compliance with loan covenants, to enforce all credit remedies, such as foreclosures on collateral, and to notify co-lenders of any adverse changes in the borrower's financial condition or declarations of insolvency. The agent bank in such cases will be qualified to serve as a custodian for a registered investment company such as the Trust. The agent bank is compensated for these services by the borrower pursuant to the terms of the loan agreement.
When a Fund acts as co-lender in connection with a participation interest or when the Fund acquires a participation interest the terms of which provide that the Fund will be in privity with the corporate borrower, the Fund will have direct recourse against the borrower in the event the borrower fails to pay scheduled principal and interest. In cases where the Fund lacks such direct recourse, the Fund will look to the agent bank to enforce appropriate credit remedies against the borrower.
The Funds believe that the principal credit risk associated with acquiring participation interests from a co-lender or another participant is the credit risk associated with the underlying corporate borrower. A Fund may incur additional credit risk, however, when it is in the position of participant rather than a co-lender because it must assume the risk of insolvency of the co-lender from which the participation interest was acquired and that of any person interpositioned between the Fund and the co-lender. However, in acquiring participation interests, the Fund will analyze and evaluate the financial condition of each such co-lender and participant to ensure that the participation interest meets the Fund's high quality standard and will continue to do so as long as it holds a participation. For purposes of a Fund's requirement to maintain diversification for tax purposes, the issuer of a loan participation will be the
underlying borrower. In cases where a Fund does not have recourse directly against the borrower, both the borrower and each agent bank and co-lender interposed between the Fund and the borrower will be deemed issuers of the loan participation for tax diversification purposes.
For purposes of each Fund's fundamental investment restriction against investing 25% or more of its total assets in any one industry, a Fund will consider all relevant factors in determining who is the issuer of a loan participation including the credit quality of the underlying borrower, the amount and quality of the collateral, the terms of the loan participation agreement and other relevant agreements (including any intercreditor agreements), the degree to which the credit of such intermediary was deemed material to the decision to purchase the loan participation, the interest environment, and general economic conditions applicable to the borrower and such intermediary.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements, pursuant to which the seller of a security agrees to repurchase that security from the Fund at a mutually agreed-upon time and at a price in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time the Fund's money is invested in the repurchase agreement. The period of maturity is usually within a day or two of the original purchase, although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time a Fund's money is invested in the repurchase agreement. A Fund's repurchase agreements will be collateralized by U.S. government obligations. A Fund will enter into repurchase transactions only with parties meeting creditworthiness standards approved by a Fund's Adviser. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, a Fund will suffer a loss.
A Fund may participate in a joint repurchase agreement account with other investment companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant to an order of the SEC. On a daily basis, any uninvested cash balances of a Fund may be aggregated with those of such investment companies and invested in one or more repurchase agreements. Each Fund receives the income earned or accrued in the joint account based on the percentage of its investment.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may each enter into reverse repurchase agreements and the Conservative Growth and Moderate Growth Funds may enter into dollar rolls. The proceeds from such transactions will be used for the clearance of transactions or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by a Fund of securities concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on these securities.
Dollar rolls involve sales by a Fund of securities for delivery in the current month and a simultaneous contract to repurchase substantially similar (same type and coupon) securities on a specified future date from the same party. During the roll period, a Fund forgoes principal and interest paid on the securities. A Fund is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash position or a cash equivalent security position that matures on or before the forward settlement date of the dollar roll transaction.
A Fund will segregate with its custodian cash or other liquid assets equal in value to its obligations in respect of reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk that the market value of the securities retained by a Fund may decline below the price
of the securities a Fund has sold but is obligated to repurchase under the agreement. If the buyer of securities under a reverse repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, a Fund's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce a Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar rolls, are speculative techniques involving leverage and are considered borrowings by a Fund for purposes of the percentage limitations applicable to borrowings. See "Borrowing" below.
INTEREST RATE SWAP TRANSACTIONS
The Conservative Growth and Moderate Growth Funds may each enter into interest rate swap transactions. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, for example, an exchange of floating rate payments for fixed-rate payments. A Fund expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date. A Fund intends to use these transactions as a hedge and not as a speculative investment.
Each Fund may enter into either asset-based interest rate swaps or liability-based interest rate swaps, depending on whether it is hedging its assets or its liabilities. A Fund will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with a Fund receiving or paying, as the case may be, only the net amount of the two payments. Since these hedging transactions are entered into for good faith hedging purposes and cash or other liquid assets are segregated, the Manager and the Advisers believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to the borrowing restrictions applicable to each Fund. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or other liquid assets having an aggregate net asset value at least equal to the accrued excess will be segregated by a custodian that satisfies the requirements of the 1940 Act. To the extent that a Fund enters into interest rate swaps on other than a net basis, the amount segregated will be the full amount of a Fund's obligations, if any, with respect to such interest rate swaps, accrued on a daily basis. A Fund will not enter into any interest rate swaps unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one NRSRO at the time of entering into such transaction. If there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreement related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid.
The use of interest rate swaps is highly speculative activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Adviser is incorrect in its forecast of market values, interest rates and other applicable factors, the investment performance of a Fund would diminish compared to what it would have been if this investment technique was never used.
A Fund may only enter into interest rate swaps to hedge its portfolio. Interest rate swaps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rates swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make. This amount will not exceed 5% of a Fund's net assets. If the other party to an interest rate swap defaults, a Fund's risk of loss consists of the net amount of interest payments that a Fund is contractually entitled to receive. Since interest rate swaps are individually negotiated, a Fund expects to achieve an acceptable degree of correlation between its rights to receive interest on its portfolio securities and its rights and obligations to receive and pay interest pursuant to interest rate swaps.
ILLIQUID SECURITIES
Each Fund may hold up to 15% of its net assets in illiquid securities. If a Fund were to exceed this limit, the Adviser would take prompt action to reduce the Fund's holdings in illiquid securities to no more than 15% of its net assets, as required by applicable law. Illiquid securities include repurchase agreements that have a maturity of longer than seven days, certain securities with legal or contractual restrictions on resale (restricted securities) and securities that are not readily marketable in securities markets (either within or outside of the United States).
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the Securities Act), securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that 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 illiquid 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.
In recent years, 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 establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers.
Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act and privately placed commercial paper for which there is a readily available market are treated as liquid only when deemed liquid under procedures established by the Trustees. The Advisers will monitor the liquidity of such restricted securities subject to the supervision of the Trustees. In reaching liquidity decisions, the Advisers will consider, among others, 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 (that is, 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, (a) it must be rated in one of the two highest rating categories by at least two NRSROs, 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 (2) it must not be "traded flat" (i.e., without accrued interest) or in default as to principal or interest. A Fund's investments in Rule 144A securities could have the effect of increasing illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing Rule 144A securities.
The staff of the Commission has taken the position that purchased over-the-counter (OTC) options and the assets used as "cover" for written OTC options are illiquid securities unless the Fund and the counterparty have provided for the Fund, at the Fund's election, to unwind the OTC option. The exercise of such an option ordinarily would involve the payment by the Fund of an amount designated to effect the
counterparty's economic loss from an early termination, but does allow the Fund to treat the assets used as "cover" as "liquid."
When a Fund enters into interest rate swaps on other than a net basis, the entire amount of the Fund's obligations, if any, with respect to such interest rate swaps will be treated as illiquid. To the extent that a Fund enters into interest rate swaps on a net basis, the net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be treated as illiquid. The Funds will also treat non-U.S. government POs and IOs as illiquid securities so long as the staff of the Commission maintains its position that such securities are illiquid.
INVESTMENT COMPANY SECURITIES
The Funds may invest in securities issued by other investment companies that invest in short-term debt securities and that seek to maintain a $1.00 net asset value per share (money market funds). The Funds may also invest in securities issued by other investment companies with similar investment objectives. The Funds may purchase shares of investment companies investing primarily in foreign securities, including so-called "country funds." Country funds have portfolios consisting primarily of securities of issuers located in one foreign country. Securities of other investment companies will be acquired within the limits prescribed by the 1940 Act. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the expenses each Fund bears in connection with its own operations.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Each Fund may each engage in various portfolio strategies, including using derivatives, to seek to reduce certain risks of its investments and to enhance return. A Fund, and thus its investors, may lose money through any unsuccessful use of these strategies. These strategies currently include the use of foreign currency forward contracts, options, futures contracts and options thereon. A Fund's ability to use these strategies may be limited by various factors, such as market conditions, regulatory limits and tax considerations, and there can be no assurance that any of these strategies will succeed. See "Taxes, Dividends and Distributions." If new financial products and risk management techniques are developed, each Fund may use them to the extent consistent with its investment objectives and policies.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES -- GENERAL.
Participation in the options and futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a Fund
would not be subject absent the use of these strategies. A Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
an Adviser's predictions of movements in the direction of the securities,
foreign currency or 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 these strategies include
(1) dependence on the Advisor's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the risk that
the counterparty may be unable to complete the transaction; and (6) 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 a Fund to
sell a portfolio security at a disadvantageous time, due to the need for a Fund
to maintain "cover" or to segregate assets in connection with hedging
transactions.
OPTIONS TRANSACTIONS. A Fund may purchase and write (that is, sell) put and call options on securities, currencies and financial indexes that are traded on U.S. and foreign securities exchanges or in the OTC market to seek to enhance return or to protect against adverse price fluctuations in securities in its portfolio. These options will be on equity securities, debt securities, aggregates of debt securities,
financial indexes (for example, S&P 500) and U.S. government securities. The Funds may also purchase and write put and call options on foreign currencies and foreign currency futures. A Fund may write covered put and call options to attempt to generate additional income through the receipt of premiums, purchase put options in an effort to protect the value of a security that it owns against a decline in market value and purchase call options in an effort to protect against an increase in price of securities or currencies it intends to purchase. A Fund may also purchase put and call options to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the right for a specified period of time to purchase the securities or currency subject to the option at a specified price (the exercise price or strike price). The writer of a call option, in return for the premium, has the obligation, upon exercise of the option, to deliver, depending upon the terms of the option contract, the underlying securities or a specified amount of cash to the purchaser upon receipt of the exercise price. When a Fund writes a call option, the Fund gives up the potential for gain on the underlying securities or currency in excess of the exercise price of the option during the period that the option is open. There is no limitation on the amount of call options a Fund may write.
A put option gives the purchaser, in return for a premium, the right, for a specified period of time, to sell the securities or currency subject to the option to the writer of the put at the specified exercise price. The writer of the put option, in return for the premium, has the obligation, upon exercise of the option, to acquire the securities or currency underlying the option at the exercise price. The Fund might, therefore, be obligated to purchase the underlying securities or currency for more than their current market price.
A Fund will write only "covered" options. A written option is covered if, so long as the Fund is obligated under the option, it (1) owns an offsetting position in the underlying security or currency or (2) segregates cash or other liquid assets, in an amount equal to or greater than its obligation under the option. Under the first circumstance, the Fund's losses are limited because it owns the underlying security; under the second circumstance, in the case of a written call option, the Fund's losses are potentially unlimited. A Fund may only write covered put options to the extent that cover for such options does not exceed 25% of the Fund's net assets. A Fund will not purchase an option if, as a result of such purchase, more than 20% of its total assets would be invested in premiums for options and options on futures.
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a specified period of time, to purchase the securities subject to the option at a specified price (the exercise price or strike price). By writing a call option, the Fund becomes obligated during the term of the option, upon exercise of the option, to deliver the underlying securities or a specified amount of cash to the purchaser against receipt of the exercise price. When a Fund writes a call option, the Fund loses the potential for gain on the underlying securities in excess of the exercise price of the option during the period that the option is open.
The purchaser of a put option has the right, for a specified period of time, to sell the securities subject to the option to the writer of the put at the specified exercise price. By writing a put option, the Fund becomes obligated during the term of the option, upon exercise of the option, to purchase the securities underlying the option at the exercise price. The Fund might, therefore, be obligated to purchase the underlying securities for more than their current market price.
The writer of an option retains the amount of the premium, although this amount may be offset or exceeded, in the case of a covered call option, by an increase and, in the case of a covered put option, by a decline in the market value of the underlying security during the option period.
A Fund may wish to protect certain portfolio securities against a decline in market value at a time when put options on those particular securities are not available for purchase. The Fund may therefore purchase a put option on other carefully selected securities, the values of which the Adviser expects will have a high degree of positive correlation to the values of such portfolio securities. If the Adviser's judgment is correct, changes in the value of the put options should generally offset changes in the value
of the portfolio securities being hedged. If the Adviser's judgment is not correct, the value of the securities underlying the put option may decrease less than the value of the Fund's investments and therefore the put option may not provide complete protection against a decline in the value of the Fund's investments below the level sought to be protected by the put option.
A Fund may similarly wish to hedge against appreciation in the value of debt securities that it intends to acquire at a time when call options on such securities are not available. The Fund may, therefore, purchase call options on other carefully selected debt securities the values of which the Adviser expects will have a high degree of positive correlation to the values of the debt securities that the Fund intends to acquire. In such circumstances the Fund will be subject to risks analogous to those summarized above in the event that the correlation between the value of call options so purchased and the value of the securities intended to be acquired by the Fund is not as close as anticipated and the value of the securities underlying the call options increases less than the value of the securities to be acquired by the Fund.
A Fund may write options on securities in connection with buy-and-write transactions; that is, the Fund may purchase a security and concurrently write a call option against that security. If the call option is exercised, the Fund's maximum gain will be the premium it received for writing the option, adjusted upwards or downwards by the difference between the Fund's purchase price of the security and the exercise price of the option. If the option is not exercised and the price of the underlying security declines, the amount of the decline will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. A Fund may also buy and write straddles (i.e., a combination of a call and a put written on the same security at the same strike price where the same segregated collateral is considered "cover" for both the put and the call). In such cases, a Fund will segregate with its Custodian cash or other liquid assets equivalent to the amount, if any, by which the put is "in-the-money, "i.e., the amount by which the exercise price of the put exceeds the current market value of the underlying security. It is contemplated that a Fund's use of straddles will be limited to 5% of the Fund's net assets (meaning that the securities used for cover or segregated as described above will not exceed 5% of the Fund's net assets at the time the straddle is written). The writing of a call and a put on the same security at the same stock price where the call and put are covered by different securities is not considered a straddle for the purposes of this limit. Buy-and-write transactions using in-the-money call options may be used when it is expected that the price of the underlying security will remain flat or decline moderately during the option period. Buy-and-write transactions using at-the-money call options may be used when it is expected that the price of the underlying security will remain fixed or advance moderately during the option period. A buy-and-write transaction using an out-of-the-money call option may be used when it is expected that the premium received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call option is exercised in such a transaction, the Fund's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Fund's purchase price of the security and the exercise price of the option. If the option is not exercised and the price of the underlying security declines, the amount of the decline will be offset in part, or entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an exchange-traded option that wishes to terminate its obligation may effect a "closing purchase transaction" by buying an option of the same series as the option previously written. (Options of the same series are options with respect to the same underlying security, having the same expiration date and the same strike price.) The effect of the purchase is that the writer's position will be cancelled by the exchange's affiliated clearing organization. Likewise, an investor who is the holder of an exchange-traded option may liquidate a position by effecting a "closing sale transaction" by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, gives its guarantee to every exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counter-party with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies on the dealer from which it has purchased the OTC option to make or take delivery of the securities underlying the option. Failure by the dealer to do so would result in the loss of the premium paid by the Fund as well as the loss of the expected benefit of the transaction. As such, the value of an OTC option is particularly dependent upon the financial viability of the OTC counterparty. The Trustees will approve a list of dealers with which the Funds may engage in OTC options.
Exchange traded options generally have a continuous liquid market while OTC options may not. When a Fund writes an OTC option, it generally will be able to close out the OTC options prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote the OTC option. While the Fund will enter into OTC options only with dealers that agree to, and that are expected to be capable of, entering into closing transactions with the Fund, there can be no assurance that the Fund will be able to liquidate an OTC option at a favorable price at any time prior to expiration. Until the Fund is able to effect a closing purchase transaction in a covered OTC call option the Fund has written, it will not be able to liquidate securities used as cover until the option expires or is exercised or different cover is substituted. In the event of insolvency of the counterparty, the Fund may be unable to liquidate an OTC option. With respect to options written by a Fund, the inability to enter into a closing purchase transaction could result in material losses to the Fund.
OTC options purchased by a Fund will be treated as illiquid securities subject to any applicable limitation on such securities. Similarly, the assets used to "cover" OTC options written by the Fund will be treated as illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC options it writes for a maximum price to be calculated by a formula set forth in the option agreement. The "cover" for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.
Each Fund may write only "covered" options. A call option written by the Fund is "covered" if the Fund owns the security underlying the option or has an absolute and immediate right to acquire that security without additional consideration (or for additional consideration segregated by its Custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds on a share-for-share basis a call on the same security as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written; where the exercise price of the call held is greater than the exercise price of the call written, the Fund will segregate cash or other liquid assets with its Custodian. A put option written by the Fund is "covered" if the Fund holds on a share-for-share basis a put on the same security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written; otherwise the Fund will segregate cash or other liquid assets with its Custodian equivalent in value to the exercise price of the option. This means that so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option or an option to purchase the same underlying securities, having an exercise price equal to or less than the exercise price of the "covered" option, or will segregate with its Custodian for the term of the option cash or other liquid assets having a value equal to or greater than the exercise price of the option. In the case of a straddle written by the Fund, the amount segregated will equal the amount, if any, by which the put is "in-the-money."
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded on any exchange. However, each Fund may purchase and write such options should they commence trading on any exchange and may purchase or write OTC Options on GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, the Fund, as a writer of a covered GNMA call holding GNMA Certificates as "cover" to satisfy its delivery obligation in the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this purpose. Should this occur, the Fund will enter into a closing purchase transaction or will purchase additional GNMA Certificates from the same pool (if obtainable) or replacement GNMA Certificates in the cash market in order to remain covered.
A GNMA Certificate held by a Fund to cover an option position in any but the nearest expiration month may cease to represent cover for the option in the event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. Should this occur, the Fund will no longer be covered, and the Fund will either enter into a closing purchase transaction or replace the GNMA Certificate with a GNMA Certificate that represents cover. When the Fund closes its position or replaces the GNMA Certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be closed out only on an exchange that provides a secondary market for an option of the same series. Although a Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time, and for some exchange-traded options, no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that a Fund would have to exercise its exchange-traded options in order to realize any profit and may incur transaction costs in connection therewith. If a Fund as a covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the following: (1) there may be insufficient trading interest in certain options; (2) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (3) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (4) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (5) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (6) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date, to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures that may interfere with the timely execution of customers' orders.
In the event of the bankruptcy of a broker through which a Fund engages in options transactions, the Fund could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. Similarly, in the event of the bankruptcy of the writer of an OTC option purchased by a Fund, the Fund could experience a loss of all or part of the value of the option. Transactions are entered into by a Fund only with brokers or financial institutions deemed creditworthy by its Adviser.
The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
OPTIONS ON SECURITIES INDEXES. Each Fund may purchase and write call and put options on securities indexes in an attempt to hedge against market conditions affecting the value of securities that a Fund owns or intends to purchase, and not for speculation. Through the writing or purchase of index options, a Fund can achieve many of the same objectives as through the use of options on individual
securities. Options on securities indexes are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike security options, all settlements are in cash and gain or loss depends upon price movements in the market generally (or in a particular industry or segment of the market), rather than upon price movements in individual securities. Price movements in securities that a Fund owns or intends to purchase will probably not correlate perfectly with movements in the level of an index and, therefore, the Fund bears the risk that a loss on an index option would not be completely offset by movements in the price of such securities.
When a Fund writes an option on a securities index, it will be required to deposit with its custodian, and mark-to-market, eligible securities equal in value to 100% of the exercise price in the case of a put, or the contract value in the case of a call. In addition, where a Fund writes a call option on a securities index at a time when the contract value exceeds the exercise price, the Fund will segregate and mark-to-market, until the option expires or is closed out, cash or cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating to transactions in financial futures contracts described below. Also, an option purchased by a Fund may expire worthless, in which case the Fund would lose the premium paid therefor.
RISKS OF OPTIONS ON INDEXES. A Fund's purchase and sale of options on indexes will be subject to risks described above under "Risks of Options Transactions." In addition, the distinctive characteristics of options on indexes create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the index is interrupted. Trading in index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of stocks included in the index. If this occurred, a Fund would not be able to close out options that it had purchased or written and, if restrictions on exercise were imposed, may be unable to exercise an option it holds, which could result in substantial losses to the Fund. It is the policy of each Fund to purchase or write options only on indexes that include a number of stocks sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop in all index option contracts. A Fund will not purchase or sell any index option contract unless and until, in the Adviser's opinion, the market for such options has developed sufficiently that the risk in connection with such transactions is not substantially greater than the risk in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDEXES. Because exercises of index options are settled in cash, a call writer such as a Fund cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific stocks, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. A Fund will write call options on indexes only under the circumstances described herein.
Price movements in a Fund's security holdings probably will not correlate precisely with movements in the level of the index and, therefore, the Fund bears the risk that the price of the securities held by the Fund may not increase as much as the index. In such event, the Fund would bear a loss on the call that is not completely offset by movements in the price of the Fund's security holdings. It is also possible that the index may rise when the Fund's stocks do not rise. If this occurred, the Fund would experience a loss on the call that is not offset by an increase in the value of its portfolio and might also experience a loss in its portfolio. However, because the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite direction as the market would be likely to occur for only a short period or to a small degree.
Unless a Fund has other liquid assets that are sufficient to satisfy the exercise of a call, the Fund would be required to liquidate portfolio securities in order to satisfy the exercise. Because an exercise must be settled within hours after receiving the notice of exercise, if the Fund fails to anticipate an exercise, it may have to borrow from a bank (in amounts not exceeding 33 1/3% of the Fund's total assets) pending settlement of the sale of securities in its portfolio and would incur interest charges thereon.
When a Fund has written a call, there is also a risk that the market may decline between the time the Fund has a call exercised against it, at a price that is fixed as of the closing level of the index on the date of exercise, and the time the Fund is able to sell stocks in its portfolio. As with stock options, the Fund will not learn that an index option has been exercised until the day following the exercise date but, unlike a call on stock where the Fund would be able to deliver the underlying securities in settlement, the Fund may have to sell part of its investment portfolio in order to make settlement in cash, and the price of such securities might decline before they can be sold. This timing risk makes certain strategies involving more than one option substantially more risky with index options than with stock options. For example, even if an index call that the Fund has written is "covered" by an index call held by the Fund with the same strike price, the Fund will bear the risk that the level of the index may decline between the close of trading on the date the exercise notice is filed with the clearing corporation and the close of trading on the date the Fund exercises the call it holds or the time the Fund sells the call that, in either case, would occur no earlier than the day following the day the exercise notice was filed.
If the Fund holds an index option and exercises it before final determination of the closing index value for that day, it runs the risk that the level of the underlying index may change before closing. If such a change causes the exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer. Although the Fund may be able to minimize this risk by withholding exercise instructions until just before the daily cutoff time or by selling rather than exercising an option when the index level is close to the exercise price, it may not be possible to eliminate this risk entirely because the cutoff times for index options may be earlier than those fixed for other types of options and may occur before definitive closing index values are announced.
FUTURES CONTRACTS. Each Fund may enter into futures contracts and related options that are traded on a commodities exchange or board of trade to reduce certain risks of its investments and to attempt to enhance returns, in each case in accordance with regulations of the Commodity Futures Trading Commission (CFTC). The Funds, and thus their investors, may lose money through any unsuccessful use of these strategies.
As a purchaser of a futures contract, a Fund incurs an obligation to take delivery of a specified amount of the obligation underlying the futures contract at a specified time in the future for a specified price. As a seller of a futures contract, the Fund incurs an obligation to deliver the specified amount of the underlying obligation at a specified time in return for an agreed upon price. A Fund may purchase futures contracts on debt securities, aggregates of debt securities, financial indexes and U.S. government securities including futures contracts or options linked to LIBOR. Eurodollar futures contracts are currently traded on the Chicago Mercantile Exchange. They enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund would use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps are linked. See the discussion of "Risks of Options Transactions."
A Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the Adviser anticipates that interest rates may
rise and, concomitantly, the price of the Fund's securities holdings may fall,
the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of contracts. In addition, futures contracts will be bought or sold in order to close out a short or long position in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of securities, the contracts usually are closed out before the settlement date without the making or taking of delivery. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of the specific type of security and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same aggregate amount of the specific type of security and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. There is no assurance that the Fund will be able to enter into a closing transaction.
When a Fund enters into a futures contract it is initially required to deposit with its Custodian, in a segregated account in the name of the broker performing the transaction an "initial margin" of cash or other liquid securities equal to approximately 2-3% of the contract amount. Initial margin requirements are established by the exchanges on which futures contracts trade and may, from time to time, change. In addition, brokers may establish margin deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in securities transactions in that initial margin does not involve the borrowing of funds by a brokers' client but is, rather, a good faith deposit on a futures contract that will be returned to the Fund upon the proper termination of the futures contract. The margin deposits made are marked-to-market daily and the Fund may be required to make subsequent deposits into the segregated account, maintained at its Custodian for that purpose, or cash or U.S. government securities, called "variation margin," in the name of the broker, which are reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Funds may each purchase call and put options on futures contracts that are traded on an exchange and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid), and the writer the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon exercise of the option, the assumption of an offsetting futures position by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account that represents the amount by which the market price of the futures contract at exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract.
A Fund may only write "covered" put and call options on futures contracts. A Fund will be considered "covered" with respect to a call option it writes on a futures contract if the Fund owns the assets that are deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates with its Custodian for the term of the option cash or other liquid assets equal to the fluctuating value of the optioned future. A Fund will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option, or if it segregates with its Custodian for the term of the option cash or other liquid assets at all times equal in value to the exercise price of the put (less any initial margin deposited by the Fund with its Custodian with respect to such option). There is no limitation on the amount of a Fund's assets that can be segregated.
A Fund will purchase options on futures contracts for identical purposes to those set forth above for the purchase of a futures contract (purchase of a call option or sale of a put option) and the sale of a futures contract (purchase of a put option or sale of a call option), or to close out a long or short position in futures contracts. If, for example, the Adviser wished to protect against an increase in interest rates and the resulting negative impact on the value of a portion of its U.S. government securities holdings, it might purchase a put option on an interest rate futures contract, the underlying security that correlates with the portion of the securities holdings the Adviser seeks to hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Fund may purchase or sell futures contracts or purchase related options thereon for bona fide hedging transactions without limit. In addition, a Fund may use futures contracts and options thereon for any other purpose to the extent that the aggregate initial margin and option premium does not exceed 5% of the market value of the Fund. There is no overall limitation on the percentage of the Fund's assets that may be subject to a hedge position. In addition, in accordance with the regulations of the CFTC, the Fund is exempt from registration as a commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A Fund's successful use of futures contracts and related options depends upon the Adviser's ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the price of a futures contract and the price of the securities or currencies being hedged is imperfect and there is a risk that the value of the securities or currencies being hedged may increase or decrease at a greater rate than a specified futures contract resulting in losses to a Fund.
A Fund may sell a futures contract to protect against the decline in the value of securities held by the Fund. However, it is possible that the futures market may advance and the value of securities held in the Fund's portfolio may decline. If this were to occur, the Fund would lose money on the futures contracts and also experience a decline in value in its portfolio securities.
If a Fund purchases a futures contract to hedge against the increase in value of securities it intends to buy, and the value of such securities decreases, then the Fund may determine not to invest in the securities as planned and will realize a loss on the futures contract that is not offset by a reduction in the price of the securities.
In order to assure that a Fund is entering into transactions in futures contracts for hedging purposes as such term is defined by the CFTC, either: (1) a substantial majority (i.e., approximately 75%) of all anticipatory hedge transactions (transactions in which the Fund does not own at the time of the transaction, but expects to acquire, the securities underlying the relevant futures contract) involving the purchase of futures contracts will be completed by the purchase of securities that are the subject of the hedge, or (2) the underlying value of all long positions in futures contracts will not exceed the total value of (a) all short-term debt obligations held by the Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on investments within thirty days; (d) the margin deposited on the contracts; and (e) any unrealized appreciation in the value of the contracts.
If a Fund maintains a short position in a futures contract, it will cover this position by segregating with its Custodian, cash or other liquid assets equal in value (when added to any initial or variation margin on deposit) to the market value of the securities underlying the futures contract. Such a position may also be covered by owning the securities underlying the futures contract, or by holding a call option permitting the Fund to purchase the same contract at a price no higher than the price at which the short position was established.
In addition, if a Fund holds a long position in a futures contract, it will segregate cash or other liquid assets equal to the purchase price of the contract (less the amount of initial or variation margin on deposit) with its Custodian. Alternatively, the Fund could cover its long position by purchasing a put option on the same futures contract with an exercise price as high or higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may move on any day. If the price moves equal the daily limit on successive days, then it may prove impossible to liquidate a futures position until the daily limit moves have ceased. In the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin on open futures positions. In such situations, if the Fund has insufficient cash, it may be disadvantageous to do so. In addition, the Fund may be required to take or make delivery of the instruments underlying futures contracts it holds at a time when it is disadvantageous to do so. The ability to close out options and futures positions could also have an adverse impact on the Fund's ability to hedge its portfolio effectively.
In the event of the bankruptcy of a broker through which a Fund engages in transactions in futures or options thereon, the Fund could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss of all or part of its margin deposits with the broker. Transactions are entered into by the Fund only with brokers or financial institutions deemed creditworthy by the Adviser.
There are risks inherent in the use of futures contracts and options transactions for the purpose of hedging a Fund's securities. One such risk that may arise in employing futures contracts to protect against the price volatility of portfolio securities is that the prices of securities subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the cash prices of the Fund's portfolio securities. Another such risk is that prices of futures contracts may not move in tandem with the changes in prevailing interest rates against which a Fund seeks a hedge. A correlation may also be distorted by the fact that the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity.
Successful use of futures contracts is also subject to the ability of an Adviser to forecast movements in the direction of the market and interest rates and other factors affecting equity securities and currencies generally. In addition, there may exist an imperfect correlation between the price movements of futures contracts purchased by a Fund and the movements in the prices of the securities that are the subject of the hedge. If participants in the futures market elect to close out their contracts through offsetting transactions rather than meet margin deposit requirements, distortions in the normal relationships between the debt securities and futures market could result. Price distortions could also result if investors in futures contracts elect to make or take delivery of underlying securities rather than engage in closing transactions due to the resultant reduction in the liquidity of the futures market. In addition, due to the fact that, from the point of view of speculators, the deposit requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures markets could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of interest rate trends by the Adviser may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to a Fund notwithstanding that the purchase or sale of a futures contract would not result in a loss, as in the instance where there is no movement in the prices of the futures contracts or underlying U.S. government securities.
OPTIONS ON CURRENCIES. Instead of purchasing or selling futures, options on futures or forward currency exchange contracts, the Funds may each attempt to accomplish similar objectives by purchasing put or call options on currencies either on exchanges or in over-the-counter markets or by writing put options or covered call options on currencies. A put option gives a Fund the right to sell a currency at the exercise price until the option expires. A call option gives a Fund the right to purchase a currency at the exercise price until the option expires. Both types of options serve to insure against adverse currency price movements in the underlying portfolio assets designated in a given currency.
RISKS OF OPTIONS ON FOREIGN CURRENCIES. Because there are two currencies involved, developments in either or both countries affect the values of options on foreign currencies. Risks include government actions affecting currency valuation and the movements of currencies from one country to another. The quantity of currency underlying option contracts represent odd lots in a market dominated by transactions between banks; this can mean extra transaction costs upon exercise. Option markets may be closed while round-the-clock interbank currency markets are open, and this can create price and rate discrepancies.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Fund may enter into foreign currency forward contracts to protect the value of its portfolio against future changes in the level of currency exchange rates. A Fund may enter into such contracts on a spot, i.e., cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into a forward contract to purchase or sell currency. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract.
A Fund's dealings in forward contracts will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of a forward contract with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities and accruals of interest or dividends receivable and Fund expenses. Position hedging is (1) the sale of a foreign currency with respect to portfolio security positions denominated or quoted in that currency or in a currency bearing a substantial correlation to the value of that currency (cross-hedge) when the Advisor believes that such currency may decline against the U.S. dollar or (2) the purchase of a foreign currency when the Adviser believes that the U.S. dollar may decline against that foreign currency. Although there are no limits on the number of forward contracts that a Fund may enter into, a Fund may not position hedge with respect to a particular currency for an amount greater than the aggregate market value (determined at the time of making any purchase or sale of foreign currency) of the securities being hedged.
The Funds may each enter into foreign currency forward contracts in several circumstances. 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 dividends 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 such dividend or interest payment, as the case may be. By entering into a forward contract for a fixed amount of dollars, for the purchase or sale of the amount of foreign currency involved in the underlying transactions, a Fund may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. A Fund does not intend to enter into such forward contracts to protect the value of its portfolio securities on a regular or continuous basis. A Fund does not intend to enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's securities holdings or other assets denominated in that currency.
A Fund generally will not enter into a forward contract with a term of greater than one year. At the maturity of a forward contract, the Fund may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a particular portfolio security at the expiration of the forward contract. Accordingly, if a decision is made to sell the security and make delivery of the foreign currency and if the market value of the security is less than the amount of foreign currency that the Fund is obligated to deliver, then it would be necessary for the Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. Should forward contract prices decline during the period between the Fund's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward contract prices increase, the Fund will suffer a loss to the extent that the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
A Fund's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. Of course, a Fund is not required to enter into such transactions with regard to its foreign currency-denominated securities. It also should be recognized that this method of protecting the value of a Fund's securities holdings against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities that are unrelated to exchange rates. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might result should the value of such currency increase.
Although each Fund values its assets daily in terms of U.S. dollars, it does not intend physically to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so 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 (the spread) 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.
An Adviser may use foreign currency hedging techniques, including cross-currency hedges, to attempt to protect against declines in the U.S. dollar value of income available for distribution to shareholders and declines in the net asset value of a Fund's shares resulting from adverse changes in currency exchange rates. For example, the return available from securities denominated in a particular foreign currency would diminish in the event the value of the U.S. dollar increased against such currency. Such a decline could be partially or completely offset by an increase in value of a position hedge involving a foreign currency forward contract to (1) sell the currency in which the position being hedged is denominated, or a currency bearing a substantial correlation to the value of such currency, or (2) purchase either the U.S. dollar or a foreign currency expected to perform better than the currency being sold. Position hedges may, therefore, provide protection of net asset value in the event of a general rise in the U.S. dollar against foreign currencies. However, a cross-currency hedge cannot protect against exchange rates perfectly, and if the Adviser is incorrect in its judgment of future exchange rate relationships, the Fund could be in a less advantageous position than if such a hedge had not been established.
INDEXED COMMERCIAL PAPER. Each Fund may invest in commercial paper that is indexed to certain specific foreign currency exchange rates. The terms of such commercial paper provide that its principal amount is adjusted upwards or downwards (but not below zero) at maturity to reflect changes in the exchange rate between two currencies while the obligation is outstanding. A Fund will purchase such commercial paper with the currency in which it is denominated and, at maturity, will receive interest and principal payments thereon in that currency, but the amount of principal payable by the issuer at maturity
will change in proportion to the change (if any) in the exchange rate between the two specified currencies between the date the instrument is issued and the date the instrument matures. With respect to its investments in this type of commercial paper, a Fund will segregate cash or other liquid assets having a value at least equal to the aggregate principal amount of outstanding commercial paper of this type. While such commercial paper entails the risk of loss of principal, the potential for realizing gains as a result of changes in foreign currency exchange rates enables the Fund to hedge (or cross-hedge) against a decline in the U.S. dollar value of investments denominated in foreign currencies while providing an attractive money market rate of return.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDEXES, FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES. A Fund may write put and call options on stocks only if they are covered, and such options must remain covered so long as the Fund is obligated as a writer. Each Fund will write put options on foreign currencies and futures contracts on foreign currencies for bona fide hedging purposes only if there is segregated with the Fund's Custodian an amount of cash or other liquid assets equal to or greater than the aggregate exercise price of the puts. In addition, each Fund may use futures contracts or related options for non-hedging or speculative purposes to the extent that aggregate initial margin and option premiums do not exceed 5% of the market value of the Fund's assets. A Fund does not intend to purchase options on equity securities or securities indexes if the aggregate premiums paid for such outstanding options would exceed 10% of its total assets.
Except as described below, a Fund will write call options on indexes only if on such date it holds a portfolio of stocks at least equal to the value of the index times the multiplier times the number of contracts. When a Fund writes a call option on a broadly-based stock market index, the Fund will segregate with its Custodian, or pledge to a broker as collateral for the option, cash, other liquid assets or at least one "qualified securities" with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts.
If a Fund has written an option on an industry or market segment index, it will segregate with its Custodian, or pledge to a broker as collateral for the option, at least ten "qualified securities," which are stocks of issuers in such industry or market segment, with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts. Such stocks will include stocks that represent at least 50% of the weighting of the industry or market segment index and will represent at least 50% of the Fund's holdings in that industry or market segment. No individual security will represent more than 15% of the amount so segregated or pledged in the case of broadly-based stock market index options or 25% of such amount in the case of industry or market segment index options.
If at the close of business on any day the market value of such qualified securities so segregated or pledged falls below 100% of the current index value times the multiplier times the number of contracts, the Fund will so segregate or pledge an amount in cash or other liquid assets equal in value to the difference. In addition, when a Fund writes a call on an index that is in-the-money at the time the call is written, the Fund will segregate with its Custodian or pledge to the broker as collateral cash or other liquid assets equal in value to the amount by which the call is in-the-money times the multiplier times the number of contracts. Any amount segregated pursuant to the foregoing sentence may be applied to the Fund's obligation to segregate additional amounts in the event that the market value of the qualified securities falls below 100% of the current index value times the multiplier times the number of contracts. A "qualified security" is an equity security that is listed on a national securities exchange or listed on Nasdaq against which a Fund has not written a stock call option and that has not been hedged by the Fund by the sale of stock index futures. However, if the Fund holds a call on the same index as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is segregated by the Fund in cash or other liquid assets with its Custodian, it will not be subject to the requirements described in this paragraph.
A Fund may engage in futures contracts and options on futures transactions as a hedge against changes, resulting from market or political conditions, in the value of the currencies to which the Fund is subject or to which the Fund expects to be subject in connection with future purchases. A Fund may engage in such transactions when they are economically appropriate for the reduction of risks inherent in the ongoing management of the Fund. A Fund may write options on futures contracts to realize through the receipt of premium income a greater return than would be realized in the Fund's securities holdings alone.
OTHER INVESTMENT STRATEGIES
LENDING OF SECURITIES. Consistent with applicable regulatory requirements, each Fund may lend portfolio securities to brokers, dealers and other financial institutions, provided that such loans are callable at any time by a Fund, and are at all times secured by cash or equivalent collateral (including a line of credit) that is equal to at least 100% of the market value, determined daily, of the loaned securities. The collateral is segregated pursuant to applicable regulations. During the time portfolio securities are on loan, the borrower will pay the Fund an amount equivalent to any dividend or interest paid on such securities and the Fund may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower. A Fund cannot lend more than 33 1/3% of the value of its total assets (including the amount of the loan collateral). The advantage of such loans is that a Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or by a Fund on two business days' notice. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. If the borrower fails to deliver the loaned securities within two days after receipt of notice, a Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by a Fund's Adviser to be creditworthy and when the income that can be earned from such loans justifies the attendant risks. Upon termination of the loan, the borrower is required to return the securities to a Fund. Any gain or loss in the market price during the loan period would inure to a Fund. The creditworthiness of firms to which a Fund lends its portfolio securities will be monitored on an ongoing basis by its Adviser(s) pursuant to procedures adopted and reviewed, on an ongoing basis, by the Trustees.
Since voting or consent rights that accompany loaned securities pass to the borrower, a Fund will follow the policy of calling the loaned securities, in whole or in part as may be appropriate, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on a Fund's investment in such loaned securities. A Fund may pay reasonable finders', administrative and custodial fees in connection with a loan of its securities or may share the interest earned on collateral with the borrower.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase or sell securities on a when-issued or delayed-delivery basis. When-issued or delayed-delivery transactions arise when securities are purchased or sold by a Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. A Fund's Custodian will segregate cash or other liquid assets having a value equal to or greater than the Fund's purchase commitments. The securities so purchased are subject to market fluctuation and no interest accrues to the purchaser during the period between purchase and settlement. At the time of delivery of the securities, the value may be more or less than the purchase price and an increase in the percentage of a Fund's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of a Fund's net asset value.
SHORT SALES. Each Fund may sell a security it does not own in anticipation
of a decline in the market value of that security (i.e., make short sales).
Generally, to complete the transaction, a Fund will borrow the security to make
delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to pay to
the lender any interest that accrues during the period of the loan. To borrow
the security, the Fund may be required to pay a premium that would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Fund replaces the borrowed security, it will
(1) segregate with its Custodian cash or other liquid assets at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current market value of the security sold
short and will not be less than the market value of the security at the time it
was sold short or (2) otherwise cover its short position.
A Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss will be increased, by the amount of any premium or interest paid in connection with the short sale. No more than 5% of the Fund's net assets will be, when added together: (1) deposited as collateral for the obligation to replace securities borrowed to effect short sales and (2) segregated in connection with short sales.
Each Fund may also make short sales against-the-box. A short sale against-the-box is a short sale in which the Fund owns an equal amount of the securities sold short or securities convertible into or exchangeable for, with or without payment of any further consideration, such securities; provided that if further consideration is required in connection with the conversion or exchange, cash or other liquid assets, in an amount equal to such consideration must be segregated for an equal amount of the securities of the same issuer as the securities sold short.
BORROWING. Each Fund may borrow from banks or through dollar rolls or reverse repurchase agreements an amount equal to no more than 33 1/3% of the value of its total assets (calculated when the loan is made) for temporary, extraordinary or emergency purposes, for the clearance of transactions or to take advantage of investment opportunities. Each Fund may pledge its assets to secure these borrowings.
If a Fund borrows to invest in securities, or if a Fund purchases securities at a time when borrowings exceed 5% of its total assets, any investment gains made on the securities in excess of interest paid on the borrowing will cause the net asset value of the shares to rise faster than would otherwise be the case. On the other hand, if the investment performance of the additional securities purchased fails to cover their cost (including any interest paid on the money borrowed) to a Fund, the net asset value of the Fund's shares will decrease faster than would otherwise be the case. This is the speculative characteristic known as "leverage." See "Reverse Repurchase Agreements and Dollar Rolls" above.
If any Fund's asset coverage for borrowings falls below 300%, such Fund will take prompt action (within 3 days) to reduce its borrowings even though it may be disadvantageous from an investment standpoint to sell securities at that time.
SEGREGATED ASSETS
When a Fund is required to segregate assets in connection with certain portfolio transactions, it will designate cash or liquid assets as segregated with the Trust's Custodian, State Street Bank and Trust Company (State Street). "Liquid assets" mean cash, U.S. government securities, equity securities (including foreign securities), debt securities or other liquid, unencumbered assets equal in value to its obligations in respect of potentially leveraged transactions, marked-to-market daily. These include forward contracts, when-issued and delayed delivery securities, futures contracts, written options and
options on futures contracts (unless otherwise covered). If collateralized or otherwise covered, in accordance with Commission guidelines, these will not be deemed to be senior securities.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending investment of proceeds from sales of the Funds' shares, the Funds may invest without limit in money market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks, and obligations issued or guaranteed by the U.S. government, its instrumentalities and its agencies. Commercial paper will be rated, at the time of purchase, at least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by another NRSRO or, if not rated, issued by an entity having an outstanding unsecured debt issue rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the equivalent by another NRSRO. In addition, each Fund may invest without limit in corporate and other debt obligations and in repurchase agreements when its Adviser(s) believes that a temporary defensive position is appropriate.
PORTFOLIO TURNOVER
Portfolio turnover rate is generally the percentage computed by dividing the lesser of portfolio purchases or sales (excluding all securities, including options, whose maturities or expiration date at acquisition were one year or less) by the monthly average value of the long-term portfolio. High portfolio turnover (100% or more) may involve correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by each Fund. See "Brokerage Allocation and Other Practices." In addition, high portfolio turnover may result in increased short-term capital gains, which when distributed to shareholders, are treated as ordinary income. See "Taxes, Dividends, and Distributions." The Conservative Growth and Moderate Funds experienced higher than-expected portfolio turnover during the fiscal year ended July 31, 2001 as a result of investments in dollar rolls. Dollar rolls are described in this SAI under "Description of the Funds, Their Investments and Risks--Reverse Repurchase Agreements and Dollar Rolls."
The portfolio turnover rates for the Funds for the two fiscal years ended July 31, 2001 were as follows:
FUND FYE JULY 31, 2001 FYE JULY 31, 2000
---- ----------------- -----------------
Conservative Growth Fund.................................... 334% 244%
Moderate Growth Fund........................................ 246% 155%
High Growth Fund............................................ 83% 67%
|
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Fund's outstanding voting securities. The term "majority of the
outstanding voting securities" of either the Trust or a particular Fund means,
with respect to the approval of an investment advisory agreement, a distribution
plan or a change in a fundamental investment policy, the vote of the lesser of
(i) 67% or more of the shares of the Trust or such Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Trust or such Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Trust or such Fund.
Each Fund may not:
1. Purchase the securities of any issuer if, as a result, the Fund would fail to be a diversified company within the meaning of the 1940 Act, and the rules and regulations promulgated thereunder, as such statute, rules and regulations are amended from time to time or are interpreted from time to time by the SEC staff (collectively, the 1940 Act Laws and Interpretations) or to the extent that the Fund may be
permitted to do so by exemptive order or similar relief (collectively, with the 1940 Act Laws and Interpretations, the 1940 Act Laws, Interpretations and Exemptions). Each Fund is a "diversified company" as defined in the 1940 Act.
2. Issue senior securities or borrow money or pledge its assets, except as permitted by the 1940 Act Laws, Interpretations and Exemptions.
3. Buy or sell real estate, except that investments in securities of issuers that invest in real estate and investments in mortgage-backed securities, mortgage participations or other instruments supported by interests in real estate are not subject to this limitation, and except that the Fund may exercise rights under agreements relating to such securities, including the right to enforce security interests and to hold real estate acquired by reason of such enforcement until that real estate can be liquidated in an orderly manner.
4. Make loans, except through loans of assets of the Fund or through repurchase agreements, provided that for purposes of this limitation, the acquisition of bonds, debentures, other debt securities or instruments, or participations or other interests therein and investments in government obligations, commercial paper, certificates of deposit, bankers' acceptances or similar instruments will not be considered the making of a loan.
5. Purchase any security if as a result 25% or more of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry, except for temporary defensive purposes, and except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities.
6. Act as 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. Each Fund may purchase restricted securities without limit.
For purposes of investment restriction number 1, each Fund may not purchase any security (other than obligations of the U.S. government, its agencies or instrumentalities) if as a result: (i) with respect to 75% of a Fund's total assets, more than 5% of such assets (determined at the time of investment) would then be invested in securities of a single issuer, or (ii) 25% or more of the Fund's total assets (determined at the time of investment) would be invested in a single industry.
Whenever any fundamental investment policy or investment restriction states a maximum percentage of a Fund's assets, it is intended that if the percentage limitation is met at the time the investment is made, a later change in percentage resulting from changing total or net asset values will not be considered a violation of such policy. However, in the event that any Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt action to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, a Fund will not purchase rights if as a result the Fund would then have more than 5% of its assets (determined at the time of investment) invested in rights.
MANAGEMENT OF THE TRUST
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
Eugene C. Dorsey (74) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now
Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of
Gannett Co., Inc.; past Chairman, Independent
Sector, Washington, D.C. (largest national
coalition of philanthropic organizations);
formerly Chairman of the American Council for
the Arts; formerly Director of the Advisory
Board of Chase Manhattan Bank of Rochester.
|
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
Saul K. Fenster Ph.D. (68) Trustee President, New Jersey Institute of Technology
(since 1978); Commissioner (since 1998) of
the Middle States Association, Commission on
Higher Education; Member (since 1985) of the
New Jersey Commission on Science and
Technology; formerly a director or trustee
(1987-1999) of the New Jersey State Chamber
of Commerce, Society of Manufacturing
Engineering Education Foundation, the
Research and Development Council of New
Jersey, Prosperity, New Jersey, Inc., the
Edison Partnership, National Action Council
for Minorities in Engineering and IDT
Corporation.
* Robert F. Gunia (54) Vice Executive Vice President and Chief
President and Administrative Officer (since June 1999) of
Trustee Prudential Investments; Executive Vice
President and Treasurer (since December 1996)
of PIFM; President (since April 1999) of
Prudential Investment Management Services LLC
(PIMS); Corporate Vice President (since
September 1997) of The Prudential Insurance
Company of America (Prudential); formerly
Senior Vice President (March 1987-May 1999)
of Prudential Securities Incorporated
(Prudential Securities); formerly Chief
Administrative Officer (July 1989-September
1996), Director (January 1989-September 1996)
and Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-December
1996) of Prudential Mutual Fund Management,
Inc. (PMF).
Maurice Holmes (58) Trustee Director of Center for Innovation in Product
Development, Professor of Engineering,
Massachusetts Institute of Technology (since
January 1998); formerly Chief Engineer and
Corporate Vice President, Xerox Corporation
(1972-1997).
Robert E. LaBlanc (67) Trustee President (since 1981) of Robert E. LaBlanc
Associates, Inc. (telecommunications);
formerly General Partner at Salomon Brothers;
and Vice Chairman of Continental Telecom;
Director of Storage Technology Corporation
(since 1979), Chartered Semiconductor
Manufacturing, Ltd., Titan Corporation
(electronics, since 1995), Salient 3
Communications, Inc. (since 1995), Tribune
Company (since 1981) and chartered
Semiconductor Ltd. (Singapore) (since 1998);
Trustee of Manhattan College.
|
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
Douglas H. McCorkindale (66) Trustee Chief Executive Officer (since February 2001),
Chairman (since June 2000) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media); formerly Vice
Chairman (March 1984-May 2000) of Gannett Co.
Inc.; Director of Gannett Co. Inc., Global
Crossing Ltd. and Continental Airlines, Inc.
W. Scott McDonald, Jr., Ph.D. (64) Trustee Vice President (since 1997) of Kaludis
Consulting Group, Inc. (a Sallie Mae company
serving higher education); formerly principal
(1993-1997), Scott McDonald & Associates,
Chief Operating Officer (1991-1995),
Fairleigh Dickinson University, Executive
Vice President and Chief Operating Officer
(1975-1991), Drew University, interim
President (1988-1990), Drew University and
founding director of School, College and
University Underwriters Ltd.
Thomas T. Mooney (59) Trustee President of the Greater Rochester Metro
Chamber of Commerce; formerly Rochester City
Manager; formerly Deputy Monroe County
Executive; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, Executive Service Corps of
Rochester and Monroe County Water Authority.
*David R. Odenath, Jr. (44) President and President (since June 1999) of Prudential
Trustee Investments; Officer in Charge, President,
Chief Executive Officer and Chief Operating
Officer (since June 1999) of PIFM; Senior
Vice President (since June 1999) of
Prudential; formerly Senior Vice President
(August 1993-May 1999) of PaineWebber Group
Inc.
Stephen Stoneburn (58) Trustee President and Chief Executive Officer (since
June 1996) of Quadrant Media Corp.
(publishing); formerly President (June
1995-June 1996) of Argus Integrated Media,
Inc.; Senior Vice President and Managing
Director (January 1993-1995), of Cowles
Business Media and Senior Vice President of
Fairchild Publications, Inc.
Joseph Weber Ph.D. (77) Trustee Vice President, Finance, Interclass
(international corporate learning) since
1991; formerly President, The Alliance for
Learning; Vice President, Member of the Board
of Directors, Member of the Executive and
Operating Committees, Hoffmann-LaRoche Inc.;
Member, Board of Overseers, New Jersey
Institute of Technology; and Trustee and Vice
Chairman Emeritus, Fairleigh Dickinson
University.
Clay T. Whitehead (62) Trustee President (since 1983) of National Exchange
P.O. Box 8090 Inc. (new business development firm).
McLean, VA 22106-8090
|
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE TRUST DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
Judy A. Rice (53) Vice Executive Vice President (since 1999) of
President Prudential Investments; Executive Vice
President (since 1999) of PIFM; formerly
various positions to Senior Vice President
(1992-1999) of Prudential Securities; and
various positions to Managing Director (1975-
1992) of Shearson Lehman Advisors; Governor
of the Money Management Institute; Member of
the Prudential Securities Operating Council
and the National Association for Variable
Annuities.
Grace C. Torres (42) Treasurer and Senior Vice President (since January 2000) of
Principal PIFM; formerly First Vice President (December
Financial and 1996-January 2000) of PIFM and First Vice
Accounting President (March 1993-1999) of Prudential
Officer Securities.
George P. Attisano (46) Secretary Vice President and Corporate Counsel (since
January 2001) of Prudential; Vice President
and Assistant Secretary of PIFM; formerly
Assistant General Counsel (September 2000-
January 2001) of Prudential; formerly
Associate Attorney (April 1998-September
2000) of Kramer Levin Naftalis & Frankel LLP;
Associate Attorney (September 1996-April
1998) of Willkie Farr & Gallagher.
William V. Healey (48) Assistant Vice President and Associate General Counsel
Secretary (since 1998) of Prudential; Executive Vice
President, Secretary and Chief Legal Officer
(since February 1999) of PIFM; Senior Vice
President, Chief Legal Officer and Secretary
(since December 1998) of PIMS; Executive Vice
President, Chief Legal Officer and Secretary
(since February 1999) of Prudential Mutual
Fund Services LLC; Director (since June 1999)
of ICI Mutual Insurance Company; prior to
August 1998, Associate General Counsel of the
Dreyfus Corporation (Dreyfus), a subsidiary
of Mellon Bank, N.A. (Mellon Bank), and an
officer and/or director of various affiliates
of Mellon Bank and Dreyfus.
|
* "Interested" Trustee, as defined in the 1940 Act, by reason of affiliation with Prudential, PIMS or PIFM.
** Unless otherwise indicated, the addresses of the Trustees and Officers is c/o Prudential Mutual Funds, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the Trust's Manager, Advisers and Distributor, decide upon matters of general policy. The Trustees also review the actions of the Trust's officers, who conduct and supervise the daily business operations of the Trust.
The Trustees have adopted a retirement policy that calls for the retirement of Trustees on December 31 of the year in which they reach the age of 75, except that Mr. Weber will retire by December 31, 2002.
Pursuant to the terms of the Management Agreement with the Trust, the Manager pays all compensation of officers and employees of the Trust as well as the fees and expenses of all Trustees of the Trust who are affiliated persons of the Manager.
The Trust pays each of its Trustees who is not an affiliated person of PIFM or any Adviser annual compensation of $5,000 in addition to certain out-of-pocket expenses. The amount of annual compensation paid to each Trustee may change as a result of the introduction of additional funds upon the boards of which the Trustee will be asked to serve.
Trustees may defer their Trustee's fees pursuant to a deferred fee agreement with the Trust. Under the terms of the agreement, deferred Trustees' fees are held by the Trust and are adjusted daily at the rate of return equivalent to the rate of return of 90-day U.S. Treasury bills at the beginning of each calendar quarter or at the daily rate of return of a Prudential mutual fund chosen by the Trustee. The Trust's obligation to make payments of deferred Trustees' fees, together with interest thereon, is a general obligation of the Trust.
The following table sets forth the aggregate compensation paid by the Trust to the Trustees who are not affiliated with the Manager for the fiscal year ended July 31, 2001 and the aggregate compensation paid to such Trustees for service on the Trust's Board and the boards of all other investment companies managed by PIFM (Fund Complex), for the calendar year ended December 31, 2000. Interested Trustees do not receive compensation from the Trust or any fund in the Fund Complex.
COMPENSATION TABLE
TOTAL 2000
COMPENSATION
FROM TRUST
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES
------------------------------------------------------------ ------------ ------------
Eugene C. Dorsey (1)........................................ $4,950 $114,000 (19/47)*
Saul K. Fenster............................................. $4,633 $ 91,700 (27/82)*
Robert F. Gunia (2)......................................... None None None
Maurice Holmes.............................................. $5,750 $ 41,250 (8/24)*
Robert E. LaBlanc........................................... $4,563 $110,000 (22/41)*
Douglas H. McCorkindale (1)................................. $4,425 $110,000 (21/42)*
W. Scott McDonald, Jr....................................... $4,682 $ 91,700 (27/82)*
Thomas T. Mooney (1)........................................ $4,950 $173,000 (32/65)*
David R. Odenath, Jr. (2)................................... None None None
Stephen Stoneburn........................................... $5,750 $110,000 (22/41)*
Joseph Weber................................................ $4,633 $ 73,333 (14/64)*
Clay T. Whitehead........................................... $4,425 $173,000 (35/59)*
|
(1)Although the last column shows the total amount paid to Trustees from the Fund Complex during the calendar year ended December 31, 2000, such compensation was deferred at the election of Trustees under the Fund Complex's deferred compensation plans. Including the applicable rate of return adjustment provided for in the deferred fee agreement, total compensation amounted to approximately $140,010 for Mr. Dorsey, $124,810 for Mr. McCorkindale and $179,810 for Mr. Mooney.
(2)Trustees who are "interested persons" of the Trust do not receive compensation from the Fund Complex, including the Trust.
* Indicates number of funds/portfolios in the Fund Complex (including the Trust) to which aggregate compensation relates.
The Board of Trustees has an Audit Committee, which consists of all of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trust or the Manager (Independent Trustees). This Committee makes recommendations to the full Board of Trustees with respect to the engagement of the independent accountants and reviews with the independent accountants the plan and results of the audit engagement and matters having a material effect upon the Trust's financial operations. This Committee met four times during the fiscal year ended July 31, 2001.
The Board of Trustees also has a Nominating Committee, which also consists of all of the Independent Trustees. This Committee recommends to the Board persons to be nominated for election as Trustees by the Trust's shareholders and selects and proposes nominees for election by the Board
between Annual Meetings. This Committee does not normally consider candidates proposed by shareholders for election as Trustees. This Committee did not meet during the fiscal year ended July 31, 2001.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Trust are eligible to purchase Class Z shares of the Funds, which are sold without either an initial sales charge or contingent deferred sales charge to a limited group of investors.
As of August 31, 2001, the Trustees and officers of the Trust, as a group, owned less than 1% of the outstanding shares of beneficial interest of the Funds.
As of August 31, 2001, the owners, directly or indirectly, of more than 5% of the outstanding shares of beneficial interest of any Fund were as follows:
CONSERVATIVE GROWTH FUND
NAME ADDRESS CLASS SHARES/%
---- ------- ----- --------
Prudential Trust Company Attn PMFS Coordinator A 307,270/18.4%
FBO PRU - DC CLIENTS 30 Scranton Office Park
Moosic PA 18507
First Clearing Corporation 6671 Wells Avenue C 130,302/8.8%
A/C 4661-3525 Loomis CA 95650
Mr Steven E Katonis
Mrs Sharon M Katonis Co-TTEES
Prudential Trust Company Attn PMFS Coordinator Z 27,068/18.3%
FBO PRU - DC 30 Scranton Office Park
Moosic PA 18507
Prudential Securities C/F 185 Hamilton Pl Z 7,887/5.3%
Ms Patricia A Biancardo East Windsor NJ 08520-5702
IRA DTD 04/22/98
Edward Coyle & 19 Hialeah Dr Z 23,753/16.1%
Diane J Coyle TEN COM Colts Neck NJ 07722-1252
Prudential Securities C/F 266 Wagon Wheel Way Z 11,077/7.5%
Sid Silverstein Canton NC 28716-9654
IRA DTD 04/08/85
Prul Defined Contribution Attn PMFS Coordinator Z 20,418/13.8%
SVCS 30 Scranton Office Park
FBO Pru-DC Clients Moosic PA 18507
|
MODERATE GROWTH FUND
NAME ADDRESS CLASS SHARES/%
---- ------- ----- --------
Prudential Trust Company Attn PMFS Coordinator A 1,491,044/27.0%
FBO PRU - DC CLIENTS 30 Scranton Office Park
Moosic PA 18507
Prudential Trust Company 140 York Road A 844,960/15.3%
FBO Bryner Chevrolet, Inc Jenkintown PA 19046
First Clearing Corporation 6361 Buckskin Lane C 377,101/11.8%
A/C 1045-4146 Roseville CA 95747
Mr Reinhardt Adler
IRA DTD 02/07/00
|
NAME ADDRESS CLASS SHARES/%
---- ------- ----- --------
Mr Joseph Ingrassia & 563 Park Shore Dr Z 26,769/5.4%
Mrs Mary Ingrassia JT TEN Naples FL 34103-3558
Ethel Duffy 20 89th St Apt 3E Z 27,793/5.6%
Brooklyn NY 11209-5521
CLC Family LP 88 Caramel Rd Z 44,312/9.0%
C/O Catherine Consalvas Commack NY 11725-1000
Patrick Consalvas
Gardner M Bishop Inc Att Michael Whelan Z 44,618/9.0%
399 Knollwood Rd
White Plains NY 10603-1931
|
HIGH GROWTH FUND
NAME ADDRESS CLASS SHARES/%
---- ------- ----- --------
Pru Defined Contribution SVCS Attn PMFS Coordinator A 251,510/7.1%
FBO Pru-DC Qualified Clients 30 Scranton Office Park
Moosic PA 18507
Prudential Trust Company Attn PMFS Coordinator A 493,137/14.0%
FBO PRU - DC Clients 30 Scranton Office Park
Moosic PA 18507
Mrs Elinor Fisher 90 Broad St Z 25,198/8.1%
Flemington NJ 08822-1602
Pru Defined Contribution Attn: PMFS Coordinator Z 18,456/6.0%
Svcs 30 Scranton Office Park
FBO PRU - DC Qualified Moosic PA 18507
Clients
Prudential Securities C/F 9 Renwick Ave Z 34,970/11.3%
Douglas Byrnes MD Huntington NY 11743-3044
IRA DTD 03/01/88
Prudential Trust Company Attn PMFS Coordinator Z 46,577/15.0%
FBO PRU - DC Clients 30 Scranton Office Park
Moosic PA 18507
Dr Neil Nepola TTEE 217 Rose Ave Z 27,751/8.9%
Dr Neil Nepola Staten Island NY 10306-2918
Mpp/PS Plan DTD 12/28/84
FBO Dr Neil Nepola
|
As of August 31, 2001, Prudential Securities was record holder for other beneficial owners of the following shares of beneficial interest outstanding and entitled to vote in each Fund:
FUND SHARES/%
---- --------
Conservative Growth Fund
Class A................................................... 577,932/34.8%
Class B................................................... 2,713,200/42.6%
Class C................................................... 1,188,830/80.2%
Class Z................................................... 93,573/63.3%
Moderate Growth Fund
Class A................................................... 1,466,072/26.6%
Class B................................................... 5,256,869/47.5%
Class C................................................... 2,444,631/76.6%
Class Z................................................... 457,366/92.5%
|
FUND SHARES/%
---- --------
High Growth Fund
Class A................................................... 1,440,220/40.9%
Class B................................................... 3,963,410/47.8%
Class C................................................... 2,978,002/85.7%
Class Z................................................... 238,559/76.9%
|
In the event of any meetings of shareholders, Prudential Securities will forward, or cause the forwarding of, proxy materials to beneficial owners for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGER AND ADVISERS
The manager of the Trust is Prudential Investments Fund Management LLC (PIFM or the Manager), 100 Mulberry Street, Gateway Center Three, Newark, New Jersey 07102-4077. PIFM serves as manager to all of the other investment companies that, together with the Trust, comprise the Prudential mutual funds. PIFM is a wholly-owned subsidiary of the Prudential Insurance Company of America. See "How the Trust is Managed -- Manager" in the Prospectus. As of December 31, 2000 PIFM served as the investment manager to all of the Prudential U.S. and offshore investment companies, and as manager or administrator to closed-end investment companies with assets of approximately $76 billion. According to the Investment Company Institute, as of December 31, 2000, the Prudential mutual funds comprised the 23rd largest family of mutual funds in the United States.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), an affiliate of PIFM, serves as the transfer and disbursing agent for the Prudential Mutual Funds and, in addition, provides customer service, recordkeeping and management and administration services to qualified plans.
Pursuant to the Management Agreement with the Trust (the Management Agreement), PIFM, subject to the supervision of the Trustees and in conformity with the stated policies of the Trust, manages both the investment operations of the Trust and the composition of the Trust's Funds, including the purchase, retention, disposition and loan of securities and other assets. The Manager also reviews the performance of all Advisers, and makes recommendations to the Trustees with respect to the retention and renewal of contracts. In connection therewith, PIFM is obligated to keep certain books and records of the Trust. PIFM also administers the Trust's corporate affairs and, in connection therewith, furnishes the Trust with office facilities, together with those ordinary clerical and bookkeeping services that are not being furnished by State Street, the Trust's custodian (the Custodian), and PMFS. The management services of PIFM for the Trust's are not exclusive under the terms of the Management Agreement and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee at an annual rate equal to 0.75% of each Fund's average daily net assets. The fee is computed daily and payable monthly. The Management Agreement also provides that, in the event the expenses of the Trust (including the fees of PIFM, but excluding interest, taxes, brokerage commissions, distribution fees and litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Trust's business) for any fiscal year exceed the lowest applicable annual expense limitation established and enforced pursuant to the statutes or regulations of any jurisdiction in which the Trust's shares are qualified for offer and sale, the compensation due to PIFM will be reduced by the amount of such excess. Reductions in excess of the total compensation payable to PIFM will be paid by PIFM to the Trust. No jurisdiction currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust, PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Trust's personnel except the fees and expenses of Trustees who are not affiliated persons of PIFM or any Adviser;
(b) all expenses incurred by PIFM or by the Trust in connection with managing the ordinary course of the Trust's business, other than those assumed by the Trust as described below; and
(c) the fees payable to each Adviser pursuant to the subadvisory agreements between PIFM and each Adviser (the Advisory Agreements).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons with PIFM or
the Advisers, (c) the fees and certain expenses of the Custodian and Transfer
Agent, including the cost of providing records to the Manager in connection with
its obligation of maintaining required records of the Trust and of pricing the
Trust's shares, (d) the charges and expenses of legal counsel and independent
accountants for the Trust, (e) brokerage commissions and any issue or transfer
taxes chargeable to the Trust in connection with its securities transactions,
(f) all taxes and corporate fees payable by the Trust to governmental agencies,
(g) the fees of any trade associations of which the Trust may be a member, (h)
the cost of share certificates representing shares of the Trust, (i) the cost of
fidelity and liability insurance, (j) certain organization expenses of the Trust
and the fees and expenses involved in registering and maintaining registration
of the Trust and of its shares with the Commission and the states including the
preparation and printing of the Trust's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Trustees meetings and of
preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders and
(l) litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business.
The Management Agreement provides that PIFM will not be liable for any error of judgment or for any loss suffered by the Trust in connection with the matters to which the Management Agreement relates, except a loss resulting from willful misfeasance, bad faith, gross negligence or reckless disregard of duty. The Management Agreement provides that it will terminate automatically if assigned (as defined in the 1940 Act), and that it may be terminated without penalty by either party upon not more than 60 days' nor less than 30 days' written notice. The Management Agreement will continue in effect for a period of more than two years from the date of execution only so long as such continuance is specifically approved at least annually in conformity with the 1940 Act. As discussed in the Prospectus, PIFM employs each Adviser under a "manager-of-managers" structure that allows PIFM to replace the Adviser or amend the Advisory Agreement without seeking shareholder approval.
For the two fiscal years ended July 31, 2001 and the fiscal period from November 18, 1998 (commencement of operations) to July 31, 1999, PIFM received the following management fees.
YEAR ENDED YEAR ENDED PERIOD ENDED
FUND JULY 31, 2001 JULY 31, 2000 JULY 31, 1999
---- ------------- ------------- -------------
Conservative Growth Fund................................... $ 615,975 $ 558,132 $398,032
Moderate Growth Fund....................................... $1,496,013 $1,084,509 $467,338
High Growth Fund........................................... $1,213,003 $1,055,456 $502,514
|
As noted in the Prospectus, subject to the supervision and direction of the Manager and, ultimately, the Trustees, each Adviser manages the securities held by a particular segment of a Fund in accordance with the Fund's stated investment objectives and policies, makes investment decisions for that Fund segment and places orders to purchase and sell securities on behalf of that Fund segment.
Each Advisory Agreement provides that it will terminate in the event of its assignment (as defined in the 1940 Act) or upon the termination of the Management Agreement. Each Advisory Agreement may be terminated by the Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each Advisory Agreement provides that it will continue in effect for a period of more than two years from its execution only so long as such continuance is specifically approved at least annually in accordance with the requirements of the 1940 Act. As discussed in the Prospectus, PIFM employs each Adviser under a
"manager-of-managers" structure that allows PIFM to replace the Adviser or amend the Advisory Agreement without seeking shareholder approval.
The Manager and the Trust operate under an exemptive order from the Commission that permits the Manager, subject to certain conditions, to enter into or amend Advisory Agreements without obtaining shareholder approval each time. On October 1, 1998 the sole shareholder of the Trust voted affirmatively to give the Trust this ongoing authority. With Board approval, the Manager is permitted to replace Advisers or employ additional Advisers for the Funds, change the terms of the Funds' Advisory Agreements or enter into a new Advisory Agreement with an existing Adviser after events that cause an automatic termination of the old Advisory Agreement with that Adviser. Shareholders of a Fund continue to have the right to terminate an Advisory Agreement for the Fund at any time by a vote of the majority of the outstanding voting securities of the Fund. Shareholders will be notified of any Adviser changes or other material amendments to Advisory Agreements that occur under these arrangements.
The Manager pays the Advisers the fees set forth below for their services with respect to each Fund. The Advisers perform all administrative functions associated with serving as Adviser to a Fund. Subject to the supervision and direction of the Manager and, ultimately, the Trustees, each Adviser is responsible for managing the securities held by a particular Fund segment in accordance with the Fund's stated investment objective and policies, making investment decisions for that Fund segment, placing orders to purchase and sell securities on behalf of that Fund segment, and performing various administrative duties.
For the two fiscal years ended July 31, 2001 and the fiscal period from November 18, 1998 (commencement of operations) to July 31, 1999, PIFM paid the following subadvisory fees to the Advisers:
CONSERVATIVE GROWTH FUND
ANNUALIZED PERCENTAGE OF YEAR ENDED YEAR ENDED PERIOD ENDED
ADVISER AVERAGE NET ASSETS JULY 31, 2001 JULY 31, 2000 JULY 31, 1999
------- ----------------------------------- ------------- ------------- -------------
Jennison Associates LLC .30% with respect to first $300
(Jennison)............. million; .25% for amounts in excess
of $300 million $ 71,066 $ 36,353 $ 24,831
Prudential Investment
Management, Inc.
(PIM).................. .375%(1) $ 63,813 $215,857 $143,931
Franklin Advisers, Inc.
(Franklin) ............ .50% $ 20,047 $ 20,433 $ 13,286
The Dreyfus Corporation
(Dreyfus).............. .45% $ 19,016 $ 16,327 $ 11,857
Pacific Investment
Management Company LLC
(PIMCO)................ .25% $ 78,839 $ 70,114 $ 50,867
-------- -------- --------
Total subadvisory fees $252,781 $359,084 $244,772
======== ======== ========
|
1 Prior to January 1, 2000, PIM was reimbursed by PIFM for its reasonable costs and expenses.
MODERATE GROWTH FUND
ANNUALIZED PERCENTAGE OF YEAR ENDED YEAR ENDED PERIOD ENDED
ADVISER AVERAGE NET ASSETS JULY 31, 2001 JULY 31, 2000 JULY 31, 1999
------- --------------------------------------- ------------- ------------- -------------
Jennison................. .30% with respect to first $300
million; .25% for amounts in excess of
$300 million $300,276 $ 89,778 $ 37,590
PIM...................... .375%(1) $122,622 $377,617 $166,390
Franklin................. .50% $ 71,645 $ 58,047 $ 23,871
Dreyfus.................. .45% $ 69,698 $ 47,247 $ 21,088
Lazard Asset Management
(Lazard)............... .40% $ 79,203 $ 56,695 $ 24,789
PIMCO.................... .25% $ 95,690 $ 66,410 $ 29,847
-------- -------- --------
Total subadvisory fees $865,319 $695,794 $303,575
======== ======== ========
|
1 Prior to January 1, 2000, PIM was reimbursed by PIFM for its reasonable costs and expenses.
HIGH GROWTH FUND
ANNUALIZED PERCENTAGE OF YEAR ENDED YEAR ENDED PERIOD ENDED
ADVISER AVERAGE NET ASSETS JULY 31, 2001 JULY 31, 2000 JULY 31, 1999
------- --------------------------------------- ------------- ------------- -------------
Jennison................. .30% with respect to first $300
million; .25% for amounts in excess of
$300 million $235,893 $106,426 $ 50,033
PIM...................... .375%(1) $ 22,099 $371,262 $130,651
Franklin................. .50% $108,486 $113,176 $ 49,538
Dreyfus.................. .45% $120,617 $ 89,086 $ 44,482
Lazard................... .40% $125,957 $109,307 $ 52,446
-------- -------- --------
Total subadvisory fees $624,113 $789,257 $327,150
======== ======== ========
|
1 Prior to January 1, 2000, PIM was reimbursed by PIFM for its reasonable costs and expenses.
PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor), Gateway Center Three, 100 Mulberry Street, 14th Floor, Newark, New Jersey 07102-4077, acts as the distributor of the shares of the Trust. See "How the Trust is Managed -- Distributor" in the Prospectus.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act and a distribution agreement (the Distribution Agreement), the Distributor incurs the expenses of distributing each Fund's Class A, Class B and Class C shares, respectively. The Distributor also incurs the expenses of distributing the Funds' Class Z shares under the Distribution Agreement with the Trust, none of which are reimbursed by or paid for by the Trust. See "How the Trust is Managed -- Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account servicing fees paid to, or on account of, brokers or financial institutions that have entered into agreements with the Distributor, advertising expenses, the cost of printing and mailing prospectuses to potential investors and indirect and overhead costs of the Distributor associated with the sale of Fund shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Trust is obligated to pay distribution and/or service fees to the Distributor as compensation for its distribution and service activities, not as reimbursement for specific expenses incurred. If the Distributor's expenses exceed its distribution and service fees, the Trust will not be obligated to pay any additional expenses. If the Distributor's expenses are less than such distribution and service fees, it will retain its full fees and realize a profit.
The distribution and/or service fees may also be used by the Distributor to compensate on a continuing basis brokers in consideration for the distribution, marketing, administrative and other services and activities provided by brokers with respect to the promotion of the sale of each Fund's shares and the maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, each Fund may pay the Distributor for its distribution-related expenses with respect to Class A shares at an annual rate of up to .30 of 1% of the average daily net assets of the Class A shares. The Class A Plan provides that (1) up to .25 of 1% of the average daily net assets of the Class A shares may be used to pay for personal service and/or the maintenance of shareholder accounts (service fee) and (2) total distribution fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of the Class A shares. The Distributor has contractually agreed to limit its distribution and service (12b-1) fees payable under the Class A Plan to .25 of 1% of the average daily net assets of the Class A shares for the fiscal year ending July 31, 2002. The Distributor also receives an initial sales charge from shareholders.
The table below sets forth the payments received by the Distributor under the Class A Plan, the amount spent by the Distributor in distributing Class A shares and the amount of initial sales charges received by the Distributor in connection with the sale of Class A shares for the fiscal year ended July 31, 2001.
DISTRIBUTION FEES RECEIVED AMOUNT SPENT INITIAL SALES
FUND BY DISTRIBUTOR DISTRIBUTING CLASS A SHARES CHARGES
---- -------------------------- --------------------------- -------------
Conservative Growth Fund............ $ 39,961 $30,300 $ 85,100
Moderate Growth Fund................ $141,568 $51,700 $231,900
High Growth Fund.................... $ 97,820 $74,800 $190,100
|
The amounts spent by the Distributor in distributing Class A shares was primarily for the payment of account servicing fees to financial advisers and other persons who sell Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, each Fund pays the Distributor for its distribution-related expenses with respect to Class B and Class C shares at an annual rate of 1% of the average daily net assets of each of the Class B and Class C shares. The Class B and Class C Plans provide for the payment to the Distributor of (1) an asset-based sales charge of .75 of 1% of the average daily net assets of each of the Class B and Class C shares, respectively, and (2) a service fee of .25 of 1% of the average daily net assets of each of the Class B and Class C shares. The service fee is used to pay for personal service and/or the maintenance of shareholder accounts. The Distributor also receives contingent deferred sales charges from certain redeeming shareholders and, with respect to Class C shares, an initial sales charge.
CLASS B PLAN. For the fiscal year ended July 31, 2001, the Distributor received the distribution fees paid by the Funds and the proceeds of contingent deferred sales charges paid by investors on the redemption of Class B shares as set forth below:
APPROXIMATE
CONTINGENT
AMOUNT OF DEFERRED
FUND DISTRIBUTION FEE SALES CHARGES
---- ---------------- -------------
Conservative Growth Fund.................................... $ 524,334 $135,900
Moderate Growth Fund........................................ $1,095,338 $231,900
High Growth Fund............................................ $ 849,490 $182,900
|
For the fiscal year ended July 31, 2001, it is estimated that the Distributor spent approximately the following amounts in connection with the distribution of the Funds' Class B shares:
PRINTING AND MAILING COMPENSATION TO COMMISSION
PROSPECTUSES BROKER/DEALERS FOR PAYMENTS TO TOTAL
TO OTHER THAN COMMISSIONS TO FINANCIAL AMOUNT
CURRENT REPRESENTATIVES AND ADVISERS OF OVERHEAD SPENT BY
FUND SHAREHOLDERS OTHER EXPENSES* PRUDENTIAL SECURITIES COSTS* DISTRIBUTOR
---- -------------------- ------------------- --------------------- -------- -----------
Conservative Growth
Fund............... $ 6,300 $724,300 $162,200 $246,300 $1,139,100
Moderate Growth
Fund............... $17,100 $959,600 $333,800 $488,100 $1,798,600
High Growth Fund..... $20,400 $579,600 $283,600 $402,300 $1,285,900
|
*Includes (a) the expenses of operating the branch offices of Prudential Securities and Prusec in connection with the sale of Fund shares, including lease costs, the salaries and employee benefits of operations and sales support personnel, utility costs, communication costs and the costs of stationery and supplies, (b) the cost of client sales seminars, (c) expenses of mutual fund sales coordinators to promote the sale of Fund shares and (d) other incidental expenses relating to branch promotion of Fund sales.
CLASS C. PLAN. For the fiscal year ended July 31, 2001, the Distributor received the distribution fees paid by the Funds under the Class C Plan, initial sales charges, and the proceeds of contingent deferred sales charges paid by investors on the redemption of shares as set forth below:
APPROXIMATE
APPROXIMATE CONTINGENT
AMOUNT OF INITIAL SALES DEFERRED
FUND DISTRIBUTION FEE CHARGES SALES CHARGES
---- ---------------- ------------- -------------
Conservative Growth Fund.............................. $127,635 $ 47,400 $ 7,000
Moderate Growth Fund.................................. $306,226 $125,200 $19,100
High Growth Fund...................................... $353,869 $132,900 $20,500
|
For the fiscal year ended July 31, 2001, it is estimated that the Distributor spent approximately the following amounts in connection with the distribution of the Funds' Class C shares:
PRINTING AND MAILING COMPENSATION TO COMMISSION
PROSPECTUSES BROKER/DEALERS FOR PAYMENTS TO TOTAL
TO OTHER THAN COMMISSIONS TO FINANCIAL AMOUNT
CURRENT REPRESENTATIVES AND ADVISERS OF OVERHEAD SPENT BY
FUND SHAREHOLDERS OTHER EXPENSES* PRUDENTIAL SECURITIES COSTS* DISTRIBUTOR
---- -------------------- ------------------- --------------------- -------- -----------
Conservative Growth
Fund.................. $1,500 $4,100 $100,700 $28,400 $134,600
Moderate Growth Fund.... $4,600 $5,100 $242,900 $59,600 $312,200
High Growth Fund........ $8,300 $2,400 $277,900 $84,200 $372,800
|
Distribution expenses attributable to the sale of Class A, Class B or Class C shares of each Fund will be allocated to each such class based upon the ratio of sales of each such class to the sales of Class A, Class B and Class C shares of that Fund other than expenses allocable to a particular class. The distribution fee and sales charge of one class will not be used to subsidize the sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year, provided that each such continuance is approved at least annually by a vote of the Board of Trustees, including a majority vote of the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the Class A, Class B and Class C Plan or in any agreement related to the Plans (the Rule 12b-1 Trustees), cast in person at a meeting called for the purpose of voting on such continuance. The Plans
may each be terminated at any time, without penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority of the outstanding shares of the applicable class on not more than 60 days', nor less than 30 days', written notice to any other party to the Plans. The Plans may not be amended to increase materially the amounts to be spent for the services described therein without approval by the shareholders of the applicable class, and all material amendments are required to be approved by the Board of Trustees in the manner described above. Each Plan will automatically terminate in the event of its assignment. The Trust will not be obligated to pay expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Trustees will review at least quarterly a written report of the distribution expenses incurred on behalf of each class of shares of the Trust by the Distributor. The report will include an itemization of the distribution expenses and the purposes of such expenditures. In addition, as long as the Plans remain in effect, the selection and nomination of Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the Distributor to the extent permitted by applicable law against certain liabilities under the Securities Act.
In addition to distribution and service fees paid by each Fund under the Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may make payments to dealers (including Prudential Securities) and other persons who distribute shares of the Trust (including Class Z shares). Such payments may be calculated by reference to the net asset value of shares sold by such persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and subsidize all or a portion of the operating expenses of the Trust. In addition, the Distributor has contractually agreed to waive a portion of its distribution fees for the Class A shares as described above. Fee waivers and subsidies will increase a Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit aggregate initial sales charges, deferred sales charges and asset-based sales charges to 6.25% of total gross sales of each class of shares of each Fund. In the case of Class B shares, interest charges equal to the prime rate plus one percent per annum may be added to the 6.25% limitation. Sales from the reinvestment of dividends and distributions are not required to be included in the calculation of the 6.25% limitation. The annual asset-based sales charge with respect to Class B and Class C shares of a Fund may not exceed .75 of 1%. The 6.25% limitation applies to each Fund rather than on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of total gross sales of any class, all sales charges on shares of that class would be suspended.
OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the portfolio securities of the Trust and cash and in that capacity maintains certain financial and accounting books and records pursuant to an agreement with the Trust. Subcustodians provide custodial services for the Trust's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Ave. South Iselin, New Jersey 08853, serves as the transfer and dividend disbursing agent of the Trust. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency services to the Trust, including the handling of shareholder communications, the processing of shareholder transactions, the maintenance of shareholder account records, payment of dividends and distributions and related functions. For these services, PMFS receives an annual fee of $10.00 per shareholder account, a new account set-up fee of $2.00 for
each manually-established account and a monthly inactive zero balance account fee of $0.20 per shareholder account. PMFS is also reimbursed for its out-of-pocket expenses, including but not limited to postage, stationery, printing, allocable communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as the Trust's independent accountants, and in that capacity audits the annual financial statements of the Trust.
CODES OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics. In addition, the Manager, the Advisers and the Distributor have each adopted a Code of Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Trust. However, the protective provisions of the Codes prohibit certain investments and limit such personnel from making investments during periods when the Trust is making such investments. The Codes are on public file with, and are available from, the Commission.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures contracts and options thereon for the Funds, the selection of brokers, dealers and futures commission merchants to effect the transactions and the negotiation of brokerage commissions, if any. For purposes of this section, the term "Manager" includes the Advisers. Broker-dealers may receive negotiated brokerage commissions on transactions in portfolio securities, including options, futures, and options on futures transactions and the purchase and sale of underlying securities upon the exercise of options. On foreign securities exchanges, commissions may be fixed. Orders may be directed to any broker, dealer or futures commission merchant including, to the extent and in the manner permitted by applicable law, Prudential Securities, one of the Advisers or an affiliate thereof (an affiliated broker). Brokerage commissions on United States securities, options and futures exchanges or boards of trade are subject to negotiation between the Manager and the broker or futures commission merchant.
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. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain money market instruments and U.S. government agency securities may be purchased directly from an issuer, in which case no commissions or discounts are paid. No Fund will deal with an affiliated broker in any transaction in which an affiliated broker acts as principal. Thus, it will not deal in the over-the-counter market with Prudential Securities acting as market maker, and it will not execute a negotiated trade with an affiliated broker if execution involves an affiliated broker acting as principal with respect to any part of the Fund's order.
In placing orders for portfolio securities of a Fund, the Manager's overriding objective is to obtain the best possible combination of price and efficient execution. The Manager seeks to effect each transaction at a price and commission that provides the most favorable total cost or proceeds reasonably attainable under the circumstances. The factors that the Manager may consider in selecting a particular broker, dealer or futures commission merchant (firms) are the Manager's knowledge of negotiated commission rates currently available and other current transaction costs; the nature of the portfolio transaction; the size of the transaction; the desired timing of the trade; the activity existing and expected in the market for the particular transaction; confidentiality; the execution, clearance and settlement capabilities of the firms; the availability of research and research related services provided through such firms; the Manager's knowledge of the financial stability of the firms; the Manager's knowledge of actual or apparent operational problems of firms; and the amount of capital, if any, that would be contributed by firms executing the transaction. Given these factors, a Fund may pay transaction costs in excess of that which another firm might have charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to portfolio transactions, relevant factors taken into consideration are whether that firm has furnished research and research-related products and/or services, such as research reports, research compilations, statistical and economic data, computer data bases, quotation equipment and services, research-oriented computer software, hardware and services, reports concerning the performance of accounts, valuations of securities, investment related periodicals, investment seminars and other economic services and consultants. Such services are used in connection with some or all of the Manager's investment activities; some of such services, obtained in connection with the execution of transactions for one investment account, may be used in managing other accounts, and not all of these services may be used in connection with a Fund.
The Manager maintains an internal allocation procedure to identify those firms who have provided it with research and research-related products and/or services, and the amount that was provided, and to endeavor to direct sufficient commissions to them to ensure the continued receipt of those services that the Manager believes provide a benefit to the Funds and its other clients. The Manager makes a good faith determination that the research and/or service is reasonable in light of the type of service provided and the price and execution of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best interests of a Fund or its other clients, including Prudential, the Manager may, but is under no obligation to, aggregate the transactions in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the transactions, as well as the expenses incurred in the transaction, will be made by the Manager in the manner it considers to be most equitable and consistent with its fiduciary obligations to its clients. The allocation of orders among firms and the commission rates paid are reviewed periodically by the Trust's Board of Trustees. Portfolio securities may not be purchased from any underwriting or selling syndicate of which an affiliated broker, during the existence of the syndicate, is a principal underwriter (as defined in the 1940 Act), except in accordance with rules of the Commission. This limitation, in the opinion of the Trust, will not significantly affect any Fund's ability to pursue its present investment objective. However, in the future in other circumstances, a Fund may be at a disadvantage because of this limitation in comparison to other funds with similar objectives but not subject to such limitations.
Subject to the above considerations, an affiliated broker may act as a securities broker or futures commission merchant for the Funds. In order for an affiliated broker or Prudential Securities (or any affiliate) to effect any portfolio transactions for the Funds, the commissions, fees or other remuneration received by the affiliated broker must be reasonable and fair compared to the commissions, fees or other remuneration paid to other firms in connection with comparable transactions involving similar securities or futures contracts being purchased or sold on an exchange or board of trade during a comparable period of time. This standard would allow the affiliated broker to receive no more than the remuneration that would be expected to be received by an unaffiliated firm in a commensurate arm's-length transaction. Furthermore, the Board of Trustees of the Trust, including a majority of the non-interested Trustees, has adopted procedures that are reasonably designed to provide that any commissions, fees or other remuneration paid to the affiliated broker are consistent with the foregoing standard. In accordance with Section 11(a) of the Securities Exchange Act of 1934, as amended, Prudential Securities may not retain compensation for effecting transactions on a national securities exchange for the Trust unless the Trust has expressly authorized the retention of such compensation. Prudential Securities must furnish to the Trust at least annually a statement setting forth the total amount of all compensation retained by Prudential Securities from transactions effected for the Trust during the applicable period. Brokerage and futures transactions with Prudential Securities (or any affiliate) are also subject to such fiduciary standards as may be imposed upon Prudential Securities (or such affiliate) by applicable law.
The table below sets forth certain information concerning the payment of commissions by the Funds, including the commissions paid to Prudential Securities or any affiliate of the Trust or the Advisers for the two fiscal years ended July 31, 2001 and the fiscal period from November 18, 1998 (commencement of operations) to July 31, 1999.
CONSERVATIVE GROWTH FUND MODERATE GROWTH FUND
-------------------------------------- --------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
2001 2000 1999 2001 2000 1999
---------- ---------- ------------ ---------- ---------- ------------
Total brokerage commissions paid by the
Fund....................................... $84,465 $21,448 $44,000 $308,133 $113,057 $80,300
Total brokerage commissions paid to
Prudential Securities or affiliates of the
Trust or the Advisers...................... $ 5 $ 282 $ 1,000 $ 30 $ 0 $ 0
Percentage of total brokerage commissions
paid to Prudential Securities or affiliates
of the Trust or the Advisers............... 0% 1.0% 2.3% 0.0% 0% 0%
Percentage of the aggregate dollar amount of
portfolio transactions involving the
payment of commissions through Prudential
Securities or affiliates of the Trust or
the Advisers............................... 0% 0% 0.2% 0% 0% 0%
|
HIGH GROWTH FUND
--------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, JULY 31,
2001 2000 1999
---------- ---------- ------------
Total brokerage commissions paid by the
Fund....................................... $371,540 $183,802 $119,128
Total brokerage commissions paid to
Prudential Securities or affiliates of the
Trust or the Advisers...................... $ 30 $ 1,068 $ 1,122
Percentage of total brokerage commissions
paid to Prudential Securities or affiliates
of the Trust or the Advisers............... 0.0% 0.6% 0.9%
Percentage of the aggregate dollar amount of
portfolio transactions involving the
payment of commissions through Prudential
Securities or affiliates of the Trust or
the Advisers............................... 0% 0% 0.5%
|
The Trust is required to disclose the Funds' holdings of securities of the Trust's regular brokers and dealers (as defined in Rule 10b-1 under the 1940 Act) and their parents as of July 31, 2001. As of that date, each Fund held securities of the following brokers and dealers:
CONSERVATIVE GROWTH
VALUE OF HOLDINGS
NAME AS OF JULY 31, 2001 DEBT/EQUITY
---- ------------------- -----------
JP Morgan Chase...................................... 38,970 Equity
Merrill Lynch, Pierce, Fenner & Smith, Inc. ......... 233,232 Equity
Morgan Stanley....................................... 191,424 Equity
Lehman Brothers, Inc. ............................... 187,200 Equity
Goldman, Sachs & Co. ................................ 149,688 Equity
Bear, Stearns & Co., Inc. ........................... 300,223 Debt
Morgan Stanley....................................... 2,941,000 Debt
Greenwich Capital Markets, Inc. ..................... 2,340,000 Debt
Salomon Smith Barney, Inc. .......................... 1,894,000 Debt
|
MODERATE GROWTH
VALUE OF HOLDINGS
NAME AS OF JULY 31, 2001 DEBT/EQUITY
---- ------------------- -----------
Deutsche Bank & Co. ................................. 2,250,621 Debt
Morgan Stanley Dean Witter & Co. .................... 5,958,000 Debt
Greenwich Capital Markets, Inc. ..................... 5,858,000 Debt
Salomon Smith Barney, Inc. .......................... 4,821,379 Debt
Citigroup, Inc. ..................................... 1,762,371 Equity
Lehman Brothers Holdings, Inc. ...................... 612,000 Equity
Goldman Sachs Group, Inc. ........................... 465,696 Equity
JP Morgan Chase & Co. ............................... 116,910 Equity
Merrill Lynch & Co., Inc. ........................... 694,272 Equity
Morgan Stanley Dean Witter & Co. .................... 580,254 Equity
|
HIGH GROWTH
VALUE OF HOLDINGS
NAME AS OF JULY 31, 2001 DEBT/EQUITY
---- ------------------- -----------
Deutsche Bank & Co. ................................ 1,125,763 Debt
Morgan Stanley Dean Witter & Co. ................... 3,060,000 Debt
Greenwich Capital Markets, Inc. .................... 3,060,000 Debt
Salomon Smith Barney, Inc. ......................... 2,476,237 Debt
Citigroup, Inc. .................................... 1,631,825 Equity
Lehman Brothers Holdings, Inc. ..................... 612,000 Equity
Goldman Sachs Group, Inc. .......................... 415,800 Equity
JP Morgan Chase & Co. .............................. 108,250 Equity
Merrill Lynch & Co., Inc. .......................... 640,032 Equity
Morgan Stanley Dean Witter & Co. ................... 526,416 Equity
|
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Trust is authorized to issue an unlimited number of shares of beneficial interest, $.001 par value per share divided into three series (the Funds). Each Fund is divided into four classes, designated Class A, Class B, Class C and Class Z shares. Each class of shares represents an interest in the same assets of the Fund and is identical in all respects except that (1) each class is subject to different sales charges and distribution and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect performance, (2) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (3) each class has a different exchange privilege, (4) only Class B shares have a conversion feature and (5) Class Z shares are offered exclusively for sale to a limited group of investors. In accordance with the Trust's Agreement and Declaration of Trust, the Trustees may authorize the creation of additional series and classes within such series, with such preferences, privileges, limitations and voting and dividend rights as the Trustees may determine. The voting rights of the shareholders of a series or class can be modified only by the vote of shareholders of that series or class.
Shares of the Trust, when issued, are fully paid, nonassessable, fully transferable and redeemable at the option of the holder. Shares are also redeemable at the option of the Trust under certain circumstances. Each share of each class is equal as to earnings, assets and voting privileges, except as noted above, and each class of shares (with the exception of Class Z shares, which are not subject to any distribution or service fees) bears the expenses related to the distribution of its shares. Except for the conversion feature applicable to the Class B shares, there are no conversion, preemptive or other subscription rights. In the event of liquidation, each share of a Fund is entitled to its portion of all of the Fund's assets after all debt and expenses of the Fund have been paid. Since Class B and Class C shares generally bear higher distribution expenses than Class A shares, the liquidation proceeds to shareholders of those classes are likely to be lower than to Class A shareholders and to Class Z shareholders, whose shares are not subject to any distribution and/or service fees.
The Trust does not intend to hold annual meetings of shareholders unless otherwise required by law. The Trust will not be required to hold meetings of shareholders unless, for example, the election of Trustees is required to be acted on by shareholders under the 1940 Act. Shareholders have certain rights, including the right to call a meeting upon the vote of 10% of the Fund's outstanding shares for the purpose of voting on the removal of one or more Trustees or to transact any other business.
Under the Agreement and Declaration of Trust, the Trustees may authorize the creation of additional series of shares (the proceeds of which would be invested in separate, independently managed portfolios with distinct investment objectives and policies and share purchase, redemption and net asset value procedures) with such preferences, privileges, limitations and voting and dividend rights as the Trustees may determine. All consideration received by the Trust for shares of any additional series, and all assets in which such consideration is invested, would belong to that series (subject only to the rights of creditors of that series) and would be subject to the liabilities related thereto.
The Trustees have the power to alter the number and the terms of office of the Trustees, provided that at all times at least a majority of the Trustees have been elected by the shareholders of the Trust. The voting rights of shareholders are not cumulative, so that holders of more than 50 percent of the shares voting can, if they choose, elect all Trustees being selected, while the holders of the remaining shares would be unable to elect any Trustees.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of a Fund may be purchased at a price equal to the next determined net asset value (NAV) per share plus a sales charge that, at the election of the Investor, may be imposed either (i) at the time of purchase (Class A or Class C shares) or (ii) on a deferred basis (Class B and Class C shares). Class Z shares of the Funds are offered to a limited group of investors at NAV without any sales charges. See "How to Buy, Sell and Exchange Shares of the Funds" in the Prospectus.
PURCHASE BY WIRE
For an initial purchase of shares of a Fund by wire, you must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. PMFS will request the following information: your name, address, tax identification number, class election, dividend distribution election, amount being wired and wiring bank. You should then give instructions to your bank to transfer funds by wire to State Street Bank and Trust Company, Boston, Massachusetts, Custody and Shareholder Services Division, Attention: Strategic Partners Asset Allocation Funds, specifying on the wire the account number assigned by PMFS and your name and identifying the Fund and class in which you are investing (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the calculation of NAV (4:15 P.M., New York time) on a business day, you may purchase shares of a Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street directly and should be sure that the wire specifies Strategic Partners Asset Allocation Funds, the Fund in which you would like to invest, Class A, Class B, Class C or Class Z shares and your name and individual account number. It is not necessary to call PMFS to make subsequent purchase orders utilizing federal funds. The minimum amount that may be invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3) other acquisitions of portfolio securities that (a) meet the investment objective and policies of the Fund, (b) are liquid and not subject to restrictions on resale, (c) have a value that is readily ascertainable via listing on or trading in a recognized United States or international exchange or market, and (d) are approved by the Adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Trust and the Distributor, the Distributor sells Class A shares at net asset value plus a maximum front-end sales charge of 5%, Class C shares* of each Fund with a front-end sales charge of 1%, and Class B* and Class Z shares at NAV. Using the NAV of each Fund at July 31, 2001, the maximum offering price of the Funds' shares is as follows:
CONSERVATIVE MODERATE HIGH
GROWTH GROWTH GROWTH
FUND FUND FUND
------------ -------- ------
CLASS A
Net asset value and redemption price per Class A share..... $ 9.95 $10.70 $10.70
Maximum sales charge (5% of offering price)................ .52 .56 .56
------ ------ ------
Maximum offering price to public........................... $10.47 $11.26 $11.26
====== ====== ======
CLASS B
Net asset value, offering price and redemption price per
Class B share*........................................... $ 9.93 $10.63 $10.55
====== ====== ======
|
CONSERVATIVE MODERATE HIGH
GROWTH GROWTH GROWTH
FUND FUND FUND
------------ -------- ------
CLASS C
Net asset value and redemption price per Class C share*.... $ 9.93 $10.63 $10.55
Sales charge (1% of offering price)........................ .10 .11 .11
------ ------ ------
Offering price to public................................... $10.03 $10.74 $10.66
====== ====== ======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share............................................ $ 9.95 $10.72 $10.77
====== ====== ======
|
* Class B and Class C shares are subject to a contingent deferred sales charge on certain redemptions. See "How to Buy, Sell and Exchange Shares of the Funds -- How to Sell Your Shares -- Contingent Deferred Sales Charge" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of purchase best suits your individual circumstances and is based on the each Fund's current fees and expenses:
If you intend to hold your investment in the Fund for less than 4 years and do not qualify for a reduced sales charge on Class A shares, since Class A shares are subject to an initial sales charge of 5% and Class B shares are subject to a CDSC of 5% that declines to zero over a 6 year period, you should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less than 5 years, and do not qualify for a reduced sales charge on Class A shares, you should consider purchasing Class B or Class C shares over Class A shares. This is because the initial sales charge plus the cumulative annual distribution-related fee on Class A shares would exceed those of the Class B and Class C shares if you redeem your investment during this time period. In addition, more of your money would be invested initially in the case of Class C shares, because of the relatively low initial sales charge, and all of your money would be invested initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should consider purchasing Class A shares over either Class B or Class C shares. This is because the maximum sales charge plus the cumulative annual distribution-related fee on Class A shares would be less than those of the Class B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more advantageous for you to purchase Class A shares over either Class B or Class C shares regardless of how long you intend to hold your investment. See "Reduction and Waiver of Initial Sales Charge -- Class A Shares" below. However, unlike Class B shares, you would not have all of your money invested initially because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you purchase Class B or Class C shares, you would have to hold your investment for more than 6 years in the case of Class B shares and for more than 5 years in the case of Class C shares for the higher cumulative annual distribution-related fee on those shares plus, in the case of Class C shares, the 1% initial sales charge to exceed the initial sales charge plus the cumulative annual distribution-related fees on Class A shares. This does not take into account the time value of money, which further reduces the impact of the higher Class B or Class C distribution-related fee on the investment, fluctuations in NAV, the effect of the return on the investment over this period of time or redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
Benefit Plans. Class A shares may be purchased at NAV, without payment of an initial sales charge, by pension, profit-sharing or other employee benefit plans qualified under Section 401 of the Internal Revenue Code, deferred compensation or annuity plans under Sections 401(a), 403(b) and 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation plans (collectively, Benefit Plans), provided that the Benefit Plan has existing assets of at least $1 million or 250 eligible employees or participants. Class A shares may be purchased at NAV by participants who are repaying loans made from such plans to the participant.
Other Waivers. In addition, Class A shares may be purchased at NAV, without the initial sales charge through the Distributor or the Transfer Agent, by:
- officers of the Trust,
- employees of the Distributor, Prudential Securities, PIFM and their subsidiaries and members of the families of such persons who maintain an "employee related" account at Prudential Securities or the Transfer Agent,
- employees of Advisers of the Funds, provided that purchases at NAV are permitted by such person's employer,
- Prudential, employees and special agents of Prudential and its subsidiaries and all persons who have retired directly from active service with Prudential or one of its subsidiaries,
- registered representatives and employees of brokers who have entered into a selected dealer agreement with the Distributor, provided that purchases at NAV are permitted by such person's employer,
- real estate brokers, agents and employees of real estate brokerage companies affiliated with the Prudential Real Estate Affiliates who maintain an account at Prudential Securities, Prusec or with the Transfer Agent,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund that
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
- investors in Individual Retirement Accounts, provided the purchase is made in a directed rollover to such Individual Retirement Account or with the proceeds of a tax-free rollover of assets from a Benefit Plan for which Prudential provides administrative or recordkeeping services and further provided that such purchase is made within 60 days of receipt of the Benefit Plan distribution,
- orders placed by broker-dealers, investment advisers or financial planners who have entered into an agreement with the Distributor, who place trades for their own accounts or the accounts of their clients and who charge a management, consulting or other fee for their services (for example, mutual fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or financial planners who place trades for customer accounts if the accounts are linked to the master account of such broker-dealer, investment adviser or financial planner and the broker-dealer, investment adviser or financial planner charges the clients a separate fee for its services (for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring fee-based programs (such as mutual fund "wrap" or asset allocation programs and mutual fund "supermarket" programs) may offer their clients more than one class of shares in a Fund in connection with different pricing options of their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales charges, at the time of the sale, either the Transfer Agent must be notified directly by the investor or the Distributor must be notified by the broker facilitating the transaction at the time of the sale that such sale qualifies for the reduced or waived sales charge. The reduction or waiver will be granted subject to confirmation of your entitlement. No initial sales charges are imposed upon Class A shares acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or eligible group of related investors purchases Class A shares of a Fund concurrently with Class A shares of other Strategic Partners mutual funds, the purchases may be combined to take advantage of the reduced sales charges applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of the Funds -- Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the following:
- an individual,
- the individual's spouse, their children and their parents,
- the individual's and spouse's Individual Retirement Account (IRA),
- any company controlled by the individual (a person, entity or group that holds 25% or more of the outstanding voting securities of a company will be deemed to control the company, and a partnership will be deemed to be controlled by each of its general partners),
- a trust created by the individual, the beneficiaries of which are the individual, his or her spouse, parents or children,
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account created by the individual or the individual's spouse, and
- one or more employee benefit plans of a company controlled by an individual.
In addition, an eligible group of related Fund investors may include an employer or group of related employers and one or more qualified retirement plans of such employer or employers. An employer controlling, controlled by or under common control with another employer is deemed related to that employer.
The Transfer Agent, the Distributor or your broker must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investor's holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply to individual participants in any retirement or group plans.
If you held shares of a Fund on September 4, 2001, these shares will continue to qualify towards reduced sales charges on subsequent purchases of Class A shares of Prudential mutual funds. If you acquired shares of a Fund after September 4, 2001, however, these shares will not count toward reduced sales charges on subsequent purchases of Class A shares of Prudential mutual funds. See "How to Buy, Sell and Exchange Shares of the Funds -- How to Buy Shares -- Step 2: Choose a Share Class -- Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an eligible group of related investors) who enter into a written Letter of Intent providing for the purchase, within a thirteen-month period, of shares of a Fund and shares of other Strategic Partners mutual funds. Retirement and group plans may not enter into a letter of intent.
For purposes of the letter of intent, all shares of the Funds and shares of other Prudential mutual funds (excluding money market funds other than those acquired pursuant to the exchange privilege) that were previously purchased and are still owned are also included in determining the applicable reduction. However, the value of shares held directly with the Transfer Agent or its affiliates, and through your broker will not be aggregated to determine the reduced sales charge.
A letter of intent permits an investor to establish a total investment goal to be achieved by any number of investments over a thirteen-month period. Each investment made during the period will receive the reduced sales charge applicable to the amount represented by the goal, as if it were a single investment. Escrowed shares totaling 5% of the dollar amount of the letter of intent will be held by the Transfer Agent in the name of the investor. The effective date of a Letter of Intent may be back-dated up to 90 days, in order that any investments made during this 90-day period, valued at the investor's cost, can be applied to the fulfillment of the letter of intent goal.
The letter of intent does not obligate the investor to purchase, nor the Trust to sell, the indicated amount. In the event the letter of intent goal is not satisfied within the thirteen-month period, the purchaser is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charge actually paid. Such payment may be made directly to the Distributor or, if not paid, the Distributor will liquidate sufficient escrowed shares to obtain such difference. Investors electing to purchase Class A shares of the Funds pursuant to a letter of intent should carefully read such letter of intent.
The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investor's holdings.
If you entered into a Letter of Intent before September 4, 2001, you may satisfy the Letter only by purchasing shares of Prudential mutual funds, the Funds and Strategic Partners Style Specific Funds, but not with other Strategic Partners mutual funds.
CLASS B AND CLASS C SHARES
The offering price of Class B shares is the NAV next determined following receipt of an order in proper form by the Transfer Agent, your Dealer or the Distributor. Class C shares are sold with an initial sales charge of 1%. Redemptions of Class B and Class C shares may be subject to CDSC. See "Sale of Shares -- Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions at the time of sale of up to 4% of the purchase price of Class B shares to brokers, financial advisers and other persons who sell Class B shares. This facilitates the ability of the Funds to sell the Class B shares without an initial sales charge being deducted at the time of purchase. The Distributor anticipates that it will recoup its advancement of sales commissions from the combination of the CDSC and the distribution fee. See "How the Trust is Managed -- Distributor." In connection with the sale of Class C shares, the Distributor will pay at the time of the sale, from its own resources, brokers, financial advisers and other persons who distribute Class C shares, a sales commission of up to 2% of the purchase price.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
Benefit Plans. Benefit Plans may purchase Class C shares at NAV, without the initial sales charge.
Investment of Redemption Proceeds from Other Investment Companies. Investors may purchase Class C shares at NAV, without the initial sales charge, with the proceeds from the redemption of shares of any unaffiliated registered investment company that were not held through an account with any Prudential affiliate. Such purchases must be made within 60 days of the redemption. This waiver is not available to investors who purchase shares directly from the Transfer Agent. You must notify your broker if you are entitled to this waiver and provide your broker with such supporting documentation as it may deem appropriate.
CLASS Z SHARES
Class Z shares of the Funds currently are available for purchase by the following categories of investors:
- pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which a Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
- participants in any fee-based program or trust program sponsored by an affiliate of the Distributor that includes mutual funds as investment options and for which a Fund is an available option;
- current and former Trustees of the Trust; and
- the Manager or an Adviser or any of their affiliates with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor or one of their affiliates may pay brokers, financial advisers and other persons who distribute shares a finder's fee, from its own resources, based on a percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION
Reduced sales charges also are available through rights of accumulation, under which an investor or an eligible group of related investors, as described above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the value of their existing holdings of shares of the Funds and shares of other Prudential mutual funds (excluding money market funds, other than those acquired pursuant to the exchange privilege) to determine the reduced sales charge. Rights of accumulation may be applied across the classes of shares of Strategic Partners mutual funds. However, the value of shares held directly with the Transfer Agent and through your broker will not be aggregated to determine the reduced sales charge. The value of existing holdings for purposes of determining the reduced sales charge is calculated using the maximum offering price (NAV plus maximum sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investor's holdings. Rights of accumulation are not available to individual participants in retirement or group plans.
SALES OF SHARES
You can redeem your shares at any time for cash at the NAV next determined after the redemption request is received in proper form (in accordance with procedures established by the Transfer Agent in connection with investors' accounts) by the Transfer Agent, the Distributor or your broker. In certain cases, however, redemption proceeds will be reduced by the amount of any applicable CDSC, as described below. See "Contingent Deferred Sales Charge" below. If you are redeeming your shares through a broker, your broker must receive your sell order before a Fund computes its NAV for that day (that is, 4:15 P.M., New York time) in order to receive that day's NAV. Your dealer will be responsible for furnishing all necessary documentation to the Distributor and may charge you for its services in connection with redeeming shares of a Fund.
If you hold shares in non-certificate form, a written request for redemption signed by you exactly as the account is registered is required. If you hold certificates, the certificates must be received by the
Transfer Agent, the Distributor or your broker in order for the redemption
request to be processed. If redemption is requested by a corporation,
partnership, trust or fiduciary, written evidence of authority acceptable to the
Transfer Agent must be submitted before such request will be accepted. All
correspondence and documents concerning redemptions should be sent to the Trust
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 8149, Philadelphia, PA 19101, to the Distributor
or to your broker.
EXPEDITED REDEMPTION PRIVILEGE. By electing the Expedited Redemption Privilege, you may arrange to have redemption proceeds sent to your bank account. The Expedited Redemption Privilege may be used to redeem shares in an amount of $200 or more, except if an account for which an expedited redemption is requested has a net asset value of less than $200, the entire account will be redeemed. Redemption proceeds in the amount of $1,000 or more will be remitted by wire to your bank account at a domestic commercial bank that is a member of the Federal Reserve system. Redemption proceeds of less than $1,000 will be mailed by check to your designated bank account. Any applicable contingent deferred sales charge will be deducted from the redemption proceeds. Expedited redemption requests may be made by telephone or letter, must be received by your Fund prior to 4:15 p.m., New York time, to receive a redemption amount based on that day's NAV and are subject to the terms and conditions as set forth in the Prospectus regarding redemption of shares. For more information, see "How to Buy, Sell and Exchange Shares of the Funds -- Telephone Redemptions or Exchanges" in the Prospectus. The Expedited Redemption Privilege may be modified or terminated at any time without notice. To receive further information, shareholders should contact the Transfer Agent at (800) 225-1852.
SIGNATURE GUARANTEE. If the proceeds of the redemption (i) exceed $100,000, (ii) are to be paid to a person other than the shareholder, (iii) are to be sent to an address other than the address on the Transfer Agent's records, or (iv) are to be paid to a corporation, partnership, trust or fiduciary, the signature(s) on the redemption request or stock power must be signature guaranteed by an "eligible guarantor institution." An "eligible guarantor institution" includes any bank, dealer, or credit union. The Transfer Agent reserves the right to request additional information from, and make reasonable inquiries of, any eligible guarantor institution.
Payment for shares presented for redemption will be made by check within seven days after receipt by the Transfer Agent, the Distributor or your broker of the certificate and written request, except as indicated below. If you hold shares through a broker, payment for shares presented for redemption will be credited to your account at your broker, unless you indicate otherwise. Such payment may be postponed or the right of redemption suspended at times (a) when the New York Stock Exchange is closed for other than customary weekends and holidays, (b) when trading on such Exchange is restricted, (c) when an emergency exists as a result of which disposal by a Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for a Fund fairly to determine the value of its net assets, or (d) during any other period when the SEC, by order, so permits; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities from the investment portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the Commission. Securities will be readily marketable and will be valued in the same manner as in a regular redemption. See "Sales of Shares" above. If your shares are redeemed in kind, you would incur transaction costs in converting the assets into cash. The Trust, however, has elected to be governed by Rule 18f-1 under the 1940 Act, under which each Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Funds, the Trustees may redeem all of the shares of any shareholder, other than a shareholder that is an IRA or other qualified or tax-deferred retirement plan or account, whose account has a net asset value of less than $500 due to a redemption. The Trust will give such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously exercised the repurchase privilege, you may reinvest any portion or all of the proceeds of such redemption in shares of the same Fund and account at the NAV next determined after the order is received, which must be within 90 days after the date of the redemption. Any CDSC paid in connection with such redemption will be credited (in shares) to your account. (If less than a full repurchase is made, the credit will be on a pro rata basis.) You must notify the Transfer Agent, either directly or through the Distributor or your broker, at the time the repurchase privilege is exercised to adjust your account for the CDSC you previously paid. Thereafter, any redemptions will be subject to the CDSC applicable at the time of the redemption. See "Contingent Deferred Sales Charge" below. Exercise of the repurchase privilege will generally not affect federal tax treatment of any gain realized upon redemption. However, if the redemption was made within a 30 day period of the repurchase and if the redemption resulted in a loss, some or all of the loss, depending on the amount reinvested, may not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales charge or CDSC declining from 5% to zero over a six-year period. Class C shares redeemed within 18 months of purchase (one year in the case of shares purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted from the redemption proceeds and reduce the amount paid to you. The CDSC will be imposed on any redemption that reduces the current value of your Class B or Class C shares to an amount that is lower than the amount of all payments by you for shares during the preceding six years, in the case of Class B shares, and 18 months, in the case of Class C shares (one year for Class C shares purchased before November 2, 1998). A CDSC will be applied on the lesser of the original purchase price or the current value of the shares being redeemed. Increases in the value of your shares or shares acquired through reinvestment of dividends or distributions are not subject to a CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month will be aggregated and deemed to have been made on the last day of the month. The CDSC will be calculated from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to redemption of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
First..................................................... 5.0%
Second.................................................... 4.0%
Third..................................................... 3.0%
Fourth.................................................... 2.0%
Fifth..................................................... 1.0%
Sixth..................................................... 1.0%
Seventh................................................... None
|
In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in NAV above the total amount of payments for the purchase of Class B shares made during the preceding six years and 18 months for Class C shares (one year for Class C shares bought before November 2, 1998); then of amounts representing the cost of shares held
beyond the applicable CDSC period; and finally, of amounts representing the cost of shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a cost of $1,000. Subsequently, you acquired 5 additional Class B shares through dividend reinvestment. During the second year after the purchase you decide to redeem $500 of your investment. Assuming at the time of the redemption the NAV had appreciated to $12 per share, the value of your Class B shares would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the value of the reinvested dividend shares and the amount that represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of 4% (the applicable rate in the second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain, or increase the loss, as the case may be, on the amount recognized on the redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. The CDSC will be waived in the case of a redemption following the death or disability of a shareholder or, in the case of a trust account, following the death or disability of the grantor. The waiver is available for total or partial redemptions of shares owned by a person, either individually or in joint tenancy, at the time of death or initial determination of disability, provided that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in connection with certain distributions made without penalty under the Internal Revenue Code from a qualified or tax-deferred retirement plan, an IRA or Section 403(b) custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(2) in the case of an individual retirement account (IRA) (including a Roth IRA), a lump-sum or other distribution after attaining age 59 1/2 or a periodic distribution based on life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump-sum or other distribution after attaining age 59 1/2; and
(4) a tax-free return of an excess contribution or plan distributions following the death or disability of the shareholder, provided that the shares were purchased prior to death or disability.
The waiver does not apply in the case of a tax-free rollover or transfer of assets, other than one following a separation from service (that is, following voluntary or involuntary termination of employment or following retirement). Under no circumstances will the CDSC be waived on redemptions resulting from the termination of a tax-deferred retirement plan, unless such redemptions otherwise qualify for a waiver as described above. Shares purchased with amounts used to repay a loan from such plans on which a CDSC was not previously deducted will thereafter be subject to a CDSC without regard to the time such amounts were previously invested. In the case of a 401(k) plan, the CDSC will also be waived upon the redemption of shares purchased with amounts used to repay loans made from the account to the participant and from which the CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain redemptions effected through a Systematic Withdrawal Plan. On an annual basis, up to 12% of the total dollar amount subject to the CDSC may be redeemed without charge. The Transfer Agent will calculate the total amount available for this waiver annually on the anniversary date of your purchase. The CDSC will be waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by Trustees of the Fund.
You must notify the Trust's Transfer Agent either directly or through your broker at the time of redemption, that you are entitled to waiver of the CDSC and provide the Transfer Agent or your broker with such supporting documentation as it may deem appropriate. The waiver will be granted subject to
confirmation of your entitlement. In connection with these waivers, the Transfer Agent will require you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ -----------------------------------------------
Death A certified copy of the shareholder's death
certificate or, in the case of a trust, a
certified copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
Disability -- An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder is permanently disabled. In the
impairment that can be expected to result in case of a trust, a copy of the trust agreement
death or to be of long-continued and indefinite identifying the grantor will be required. The
duration. letter must also indicate the date of
disability.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the
shareholder is over age 59 and is taking a
normal distribution -- signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason for
the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/ trustee on company
letterhead indicating the amount of the excess
and whether or not taxes have been paid.
|
The Transfer Agent reserves the right to request such additional documents as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES
Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans holding shares through a broker for which the broker provides administrative or recordkeeping services.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. Conversions will be effected at relative net asset value without the imposition of any additional sales charge.
Since each Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares (excluding
shares acquired through the automatic reinvestment of dividends and other
distributions) eligible to convert to Class A shares (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(1) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (2) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B shares in your account on any conversion date are the result of multiple purchases at different NAVs per share, the number of Eligible Shares calculated as described above will generally be either more or less than the number of shares actually purchased approximately seven years before such conversion date. For example, if 100 shares were initially purchased at $10 per share (for a total of $1,000) and a second purchase of 100 shares was subsequently made at $11 per share (for a total of $1,100), 95.24 shares would convert approximately seven years from the initial purchase (that is, $1,000 divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to modify the formula for determining the number of Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class B shares, the per share NAV of the Class A shares may be higher than that of the Class B shares at the time of conversion. Thus, although the aggregate dollar value will be the same, you may receive fewer Class A shares than Class B shares converted.
For purposes of calculating the applicable holding period for conversions, all payments for Class B shares during a month will be deemed to have been made on the last day of the month, or for Class B shares acquired through exchange, or a series of exchanges, on the last day of the month in which the original payment for purchases of such Class B shares was made. For Class B shares previously exchanged for shares of a money market fund, the time period during which such shares were held in the money market fund will be excluded. For example, Class B shares held in a money market fund for one year would not convert to Class A shares until approximately eight years from purchase. For purposes of measuring the time period during which shares are held in a money market fund, exchanges will be deemed to have been made on the last day of the month. Class B shares acquired through exchange will convert to Class A shares after expiration of the conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of opinions of counsel or rulings of the Internal Revenue Service (1) that the dividends and other distributions paid on Class A, Class B, Class C and Class Z shares will not constitute "preferential dividends" under the Internal Revenue Code and (2) that the conversion of shares does not constitute a taxable event. The conversion of Class B shares into Class A shares may be suspended if such opinions or rulings are no longer available. If conversions are suspended, Class B shares of the Fund will continue to be subject, possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Trust shares, a Shareholder Investment Account is established for each investor under which a record of the shares held is maintained by the Transfer Agent. If a stock certificate is desired, it must be requested in writing for each transaction. Certificates are issued only for full shares and may be redeposited in the Shareholder Investment Account at any time. There is no charge to the investor for issuance of a certificate. The Trust makes available to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are automatically reinvested in full and fractional shares of the relevant Fund. An investor may direct the Transfer Agent in writing not less than five full business days prior to the record date to have subsequent dividends or distributions sent in cash rather than reinvested. In the case of recently purchased shares for which registration instructions have not been received on the record date, cash payment will be made directly to the dealer. Any shareholder who receives a cash payment representing a dividend or distribution may reinvest such dividend or distribution at NAV by returning the check to the Transfer Agent within 30 days after the payment date. The reinvestment will be made at the NAV next determined after receipt of the check by the
Transfer Agent. Shares purchased with reinvested dividends or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Trust makes available to its shareholders the Exchange Privilege. This privilege allows shareholders to exchange their shares of each Fund for shares of other Strategic Partners mutual funds, or one or more specified money market funds, subject in each case to the minimum investment requirements of such funds. Shares of such other Strategic Partners mutual funds may also be exchanged for shares of the Funds. All exchanges are made on the basis of the relative NAV next determined after receipt of an order in proper form. An exchange will be treated as a redemption and purchase for tax purposes.
It is contemplated that the exchange privilege may be applicable to new mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone exchanges on your initial application form or by written notice to the Transfer Agent and hold shares in non-certificate form. Thereafter, you may call the Trust at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except holidays, between the hours of 8:00 A.M. and 8:00 P.M., New York time. For your protection and to prevent fraudulent exchanges, your telephone call will be recorded and you will be asked to provide your personal identification number. A written confirmation of the exchange transaction will be sent to you. Neither the Trust nor its agents will be liable for any loss, liability or cost that results from acting upon instructions reasonably believed to be genuine under the foregoing procedures. All exchanges will be made on the basis of the relative NAV of the two funds next determined after the request is received in good order. The Exchange Privilege is available only in states where the exchange may legally be made.
If you hold certificates, the certificates must be returned in order for the shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA 19101.
In periods of severe market or economic conditions the telephone exchange of shares may be difficult to implement and you should make exchanges by mail by writing to Prudential Mutual Fund Services LLC at the address noted above.
CLASS A. Shareholders of a Fund may exchange their Class A shares for Class A shares of the other Strategic Partners mutual funds and shares of Special Money Market Fund, Inc. No fee or sales load will be imposed upon the exchange.
CLASS B AND CLASS C. Shareholders of the Trust may exchange their Class B and Class C shares of a Fund for Class B and Class C shares, respectively, of other Strategic Partners mutual funds and shares of Special Money Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be payable upon the redemption of the Class B and Class C shares acquired as a result of the exchange. The applicable sales charge will be that imposed by the fund in which shares were initially purchased and the purchase date will be deemed to be the date of the initial purchase, rather than the date of the exchange.
Class B and Class C shares of a Fund may also be exchanged for Class B and Class C shares, respectively, of an eligible money market fund without imposition of any CDSC at the time of exchange. Upon subsequent redemption from such money market fund or after re-exchange into the Fund, such shares will be subject to the CDSC calculated without regard to the time such shares were held in the money market fund. In order to minimize the period of time in which shares are subject to a CDSC, shares exchanged out of the money market fund will be exchanged on the basis of their remaining holding periods, with the longest remaining holding periods being exchanged first. In measuring the time period shares are held in a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month. Thus, if shares are exchanged into a Fund from a money market fund during the month (and are held in the Fund at the end of the month), the entire month will be included in the CDSC holding period. Conversely, if shares are exchanged into a money market fund prior to the last day of the month (and are held in the money market fund on the last day of the month), the entire month will be excluded from the CDSC holding period. For purposes of calculating the seven year holding period applicable to the Class B conversion feature, the time period during which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class B or Class C exchange privilege, a shareholder may again exchange those shares (and any reinvested dividends and distributions) for Class B or Class C shares, respectively, of a Fund without subjecting such shares to any CDSC. Shares of any fund participating in the Class B or Class C exchange privilege that were acquired through reinvestment of dividends or distributions may be exchanged for Class B or Class C shares, respectively, of other funds without being subject to any CDSC.
CLASS Z. Class Z shares of a Fund may be exchanged for Class Z shares of other Strategic Partners mutual funds. Please note, however, that Strategic Partners Style Specific Funds does not currently offer Class Z shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed amount of dollars in shares at set intervals. An investor buys more shares when the price is low and fewer shares when the price is high. The average cost per share is lower than it would be if a constant number of shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to save for a major expenditure, such as the purchase of a home, or to finance a college education. The cost of a year's education at a four-year college today averages around $22,500 at a private college and around $10,600 at a public university. Assuming these costs increase at a rate of 7% a year, as has been projected, the cost of one year at a private college could reach $44,300 and over $21,000 at a public university in 10 years.(1)
The following chart shows how much you would need in monthly investments to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years................................ $ 105 $ 158 $ 210 $ 263
20 Years................................ 170 255 340 424
15 Years................................ 289 438 578 722
10 Years................................ 547 820 1,093 1,366
5 Years................................ 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
|
(1) Source information concerning the costs of education at public and private universities is available from The College Board Annual Survey of Colleges. Average costs for private institutions include tuition, fees, room and board for the 1998-1999 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly compounding). This example is for illustrative purposes only and is not intended to reflect the performance of an investment in shares of the Funds. The investment return and principal value of an investment will fluctuate so that an investor's shares may be worth more or less than their original cost when redeemed.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically invested in shares of a Fund by authorizing his or her bank account or brokerage account to be debited to invest specified dollar amounts in shares of the Fund. The investor's bank must be a member of the Automatic Clearing House System.
Further information about this program and an application form can be obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the Distributor, the Transfer Agent or your broker. The systematic withdrawal plan provides for monthly, or quarterly, semi-annual or annual redemption checks in any amount, except as provided below, up to the value of the shares in the shareholder's account. Systematic withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum account value applies, (2) systematic withdrawals may not be for less than $100 and (3) the shareholder must elect to have all dividends and/or distributions automatically reinvested. See "Automatic Reinvestment of Dividends or Distributions" above.
The Transfer Agent, the Distributor or the applicable dealer acts as an agent for the shareholder in redeeming sufficient full and fractional shares to provide the amount of the systematic withdrawal. The systematic withdrawal plan may be terminated at any time, and the Distributor reserves the right to initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Systematic withdrawals should not be considered as dividends, yield or income. If systematic withdrawals continuously exceed reinvested dividends and distributions, the shareholder's original investment will be correspondingly reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the sales charges applicable to
(1) the purchase of Class A and Class C shares and (2) the withdrawal of Class B
and Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the plan, particularly if used in
connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including 401(k) plans, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, and the administration, custodial fees and other details are
available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult with their own legal counsel and/or tax adviser with respect to the establishment and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An IRA permits the deferral of federal income tax on income earned in the account until the earnings are withdrawn. The following chart represents a comparison of the earnings in a personal savings account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 39.6% federal income tax bracket and shows how much more retirement income can accumulate within an IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
10 years $26,165 $31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
|
(1 )The chart is for illustrative purposes only and does not represent the performance of the Funds or any specific investment. It shows taxable versus tax-deferred compounding for the periods and on the terms indicated. Earnings in a traditional IRA account will be subject to tax when withdrawn from the account. Distributions from a Roth IRA that meet the conditions required under the Internal Revenue Code will not be subject to tax upon withdrawal from the account.
NET ASSET VALUE
Each Fund's net asset value per share or NAV is determined by subtracting its liabilities from the value of its assets and dividing the remainder by the number of outstanding shares. NAV is calculated separately for each class. Each Fund will compute its NAV at 4:15 p.m., New York time, on each day the New York Stock Exchange (NYSE) is open for trading except on days on which no orders to purchase, sell or redeem Fund shares have been received or days on which changes in the value of the Fund's portfolio securities do not affect NAV. In the event the NYSE closes early on any business day, the NAV of a Fund's shares will be determined at a time between such closing and 4:15 p.m., New York time. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the 1940 Act, the Board of Trustees is responsible for determining in good faith the fair value of securities of each Fund. In accordance with procedures adopted by the Board of Trustees, the value of investments listed on a securities exchange and Nasdaq National Market System securities (other than options on stock and stock indexes) are valued at the last sale price on such exchange or system on the day of valuation or, if there was no sale on such day, the mean between the last bid and asked prices on such day, or at the bid price on such day in the absence of an asked price. Corporate bonds (other than convertible debt securities) and U.S. government securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed by the Manager in consultation with the Adviser to be over-the-counter, are valued on the basis of valuations provided by an independent pricing agent or principal market maker that uses information with respect to transactions in bonds, quotations from bond dealers, agency ratings, market transactions in comparable securities and various relationships between securities in determining value. Convertible debt securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed by the Manager in consultation with the Adviser to be over-the-counter, are valued at the mean between the last reported bid and asked prices (or the last bid price in the absence of an asked price) provided by more than one principal market maker. Options on stock and stock indexes traded on an exchange are valued at the mean between the most recently quoted bid and asked prices on the respective exchange and futures contracts and options thereon are valued at their last sale prices as of the close of trading on the applicable commodities exchange or board of trade or, if there was no sale on the applicable commodities exchange or board of trade on such day, at the mean between the most recently quoted bid and asked prices on such exchange or board of trade or at the last bid price in the absence of an asked price. Quotations of foreign securities in a foreign currency are converted to U.S. dollar equivalents at the current rate obtained from a recognized bank or dealer and forward currency forward contracts are valued at the current cost of covering or offsetting such contracts. Should an extraordinary event that is likely to affect the value of the security occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors determined in good faith by the Adviser under procedures established by and under the general supervision of the Trust's Board of Trustees.
Securities or other assets for which reliable market quotations are not readily available or for which the pricing agent or principal market maker does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Manager or Adviser (or Valuation Committee or Board of Trustees) does not represent fair value, are valued by the Valuation Committee or Board of Trustees in consultation with the Manager or Adviser including its portfolio manager, traders, and its research and credit analysts, on the basis of the following factors: cost of the security, transactions in comparable securities, relationships among various securities and such other factors, as may be determined by the Manager, Adviser, Board of Trustees or Valuation Committee to materially affect the value of the security. Short-term debt securities are valued at cost, with interest accrued or discount amortized to the date of maturity, if their original maturity was 60 days or less, unless this is determined by the Board of Trustees not to represent fair value. Short-term securities with remaining maturities of more than 60 days, for which market quotations are readily available, are valued at their current market quotations as supplied by an independent pricing agent or more than one principal market maker.
Although the legal rights of each class of shares are substantially identical, the different expenses borne by each class will result in different NAVs and dividends. NAV is calculated separately for each class. The NAVs of Class B and Class C shares will generally be lower than the NAV of Class A shares as a result of the larger distribution-related fee to which Class B and Class C shares are subject. The NAV of Class Z shares will generally be higher than the NAV of Class A, Class B or Class C shares as a result of the fact that the Class Z shares are not subject to any distribution or service fee. It is expected, however, that the NAV of the four classes will tend to converge immediately after the recording of dividends, if any, that will differ by approximately the amount of the distribution and/or service fee expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL
Each Fund has elected to be, and intends to remain qualified for treatment as, a regulated investment company under Subchapter M of the Internal Revenue Code. This status relieves each Fund (but not its shareholders) from paying federal income tax on income and gains that are distributed to shareholders, and permits distributions of net capital gains of a Fund (i.e., the excess of net long-term capital gains over net short-term capital losses) to be treated as long-term capital gains of the shareholders, regardless of how long shares in the Fund are held. Net capital gains of each Fund that are available to shareholders will be computed by taking into account any applicable capital loss carryforward. The Conservative Growth Fund has a capital loss carryforward as of July 31, 2001 of approximately $17,574, which expires in 2009.
Qualification for treatment as a regulated investment company requires, among other things, that (a) each Fund derive at least 90% of its gross income (without reduction for losses from the sale or other disposition of securities or foreign currencies) from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income, including, but not limited to, gains from options, futures and forward contracts, derived with respect to its business of investing in securities or those currencies on such securities or foreign currencies; (b) each Fund diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the 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 value 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); and (c) each Fund distribute to its
shareholders at least 90% of its net investment income and net short-term gains (i.e., the excess of net short-term capital gains over net long-term capital losses) in each year.
Distributions of net investment income and net short-term capital gains will be taxable to the shareholder at ordinary income rates regardless of whether the shareholder receives such distributions in additional shares or in cash. To the extent a Fund's income is derived from certain dividends received from domestic corporations, a portion of the dividends paid to corporate shareholders of the Fund will be eligible for the 70% dividends received deduction. Distributions of net capital gains, if any, are taxable as long-term capital gains regardless of how long the investor has held his or her shares. However, if a shareholder holds shares in a Fund for not more than six months, then any loss recognized on the sale of such shares will be treated as long-term capital loss to the extent any distribution on the shares was treated as long-term capital gain. Shareholders will be notified annually by the Trust as to the federal tax status of distributions made by a Fund of the Trust. A 4% nondeductible excise tax will be imposed on a Fund of the Trust to the extent a Fund does not meet certain distribution requirements by the end of each calendar year. Distributions may be subject to additional state and local taxes. Any distributions of net investment income or net short-term capital gains made to a foreign shareholder will generally be subject to U.S. withholding tax of 30% (or a lower treaty rate if applicable to such shareholder). See "Fund Distributions and Tax Issues" in the Prospectus.
ORIGINAL ISSUE DISCOUNT
A Fund may purchase debt securities that contain original issue discount. Original issue discount that accrues in a taxable year is treated as income earned by the Fund and therefore is subject to the distribution requirements of the Internal Revenue Code. Because the original issue discount income earned by the Fund in a taxable year may not be represented by cash income, the Fund may have to dispose of other securities and use the proceeds to make distributions to satisfy the Internal Revenue Code's distribution requirements.
OPTIONS AND FUTURES TRANSACTIONS
In addition, under the Internal Revenue Code, special rules apply to the treatment of certain options and futures contracts ("Section 1256 contracts"). At the end of each year, such investments held by a Fund will be required to be "marked-to-market" for federal income tax purposes; that is, treated as having been sold at market value. Sixty percent of any gain or loss recognized on these "deemed sales" and on actual dispositions of Section 1256 contracts will be treated as long-term capital gain or loss, and the remainder will be treated as short-term capital gain or loss.
CURRENCY FLUCTUATIONS
Gains or losses attributable to fluctuations in exchange rates that 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 ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gain or loss. These gains or losses, referred to under the Internal Revenue Code as "Section 988" gains or losses, increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Fund's net capital gain. If Section 988 losses exceed other investment company taxable income during a taxable year, distributions made by the Fund during the year would be characterized as a return of capital to shareholders, reducing each shareholder's basis in their shares.
FOREIGN WITHHOLDING
Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Income tax treaties may reduce or eliminate such taxes. It is
impossible to determine in advance the effective rate of foreign tax to which a Fund will be subject, since the amount of the Fund's assets to be invested in various countries is not known. It is not anticipated that any Fund will qualify to pass-through to the shareholders the ability to claim as a foreign tax credit the foreign taxes paid by a Fund.
BACKUP WITHHOLDING
With limited exceptions, each Fund is required to withhold federal income tax at the rate of up to 31% of all taxable distributions payable to shareholders who fail to provide the Trust with their correct taxpayer identification number or to make required certification or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Any amounts withheld may be credited against a shareholder's federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANIES
Each Fund may, from time to time, invest in passive foreign investment companies (PFICs). A PFIC is a foreign corporation that, in general, meets either of the following tests: (a) at least 75% of its gross income is passive or (b) an average of at least 60% of its assets produce, or are held for the production of, passive income. If a Fund acquires and holds stock in a PFIC beyond the end of the year of its acquisition, the Fund will be subject to federal income tax on a portion of any "excess distribution" received on the stock or on any gain from disposition of the stock (collectively, PFIC income), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in the Fund's investment company taxable income and, accordingly, will not be taxable to it to the extent that income is distributed to its shareholders. Each Fund may make a "mark-to-market" election with respect to any marketable stock it holds of a PFIC. If the election is in effect, at the end of a Fund's taxable year, the Fund will recognize the amount of gains, if any, as ordinary income with respect to PFIC stock. No ordinary loss will be recognized on PFIC stock, except to the extent of gains recognized in prior years. Alternatively, a Fund, if it meets certain requirements, may elect to treat any PFIC in which it invests as a "qualified electing fund," in which case, in lieu of the foregoing tax and interest obligation, the Fund will be required to include in income each year its pro rata share of the qualified electing Fund's annual ordinary earnings and net capital gain, even if they are not distributed to the Fund; those amounts would be subject to the distribution requirements applicable to the Fund described above.
OTHER TAXATION
Distributions may also be subject to state, local and foreign taxes depending on each shareholder's particular situation. The foregoing summarizes certain additional tax considerations generally affecting the Funds and their shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussions here and in the Prospectus are not intended as a substitute for careful tax planning. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Trust.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Trust may from time to time advertise the average annual total return of a Fund. Average annual total return is determined separately for Class A, Class B, Class C and Class Z Shares.
Average annual total return is computed according to the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
|
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or deferred sales charges but does not take into account any federal or state income taxes that may be payable upon redemption.
Below are the average annual total returns for each Fund's share classes for the periods ended July 31, 2001.
SINCE
1 YEAR INCEPTION 11/18/98
------ ------------------
Conservative Growth Fund
Class A................................................... -4.05% 4.60%
Class B................................................... -4.66 4.82
Class C................................................... -1.66 5.45
Class Z................................................... 1.30 6.85
Moderate Growth Fund
Class A................................................... -9.56% 4.53%
Class B................................................... -10.44 4.62
Class C................................................... -7.40 5.25
Class Z................................................... -4.67 6.78
High Growth Fund
Class A................................................... -14.52% 6.04%
Class B................................................... -15.13 6.33
Class C................................................... -12.44 6.93
Class Z................................................... -9.74 8.42
|
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a Fund. A Fund's aggregate total return figures represent the cumulative change in the value of an investment in the Fund for the specified period and are computed by the following formula:
Where: P = a hypothetical initial payment of $1,000. |
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state income taxes that may be payable upon redemption or any applicable initial or contingent deferred sales charges.
Below are the aggregate total returns for each Fund's share classes for the period ended July 31, 2001.
SINCE
1 YEAR INCEPTION 11/18/98
------ -------------------
Conservative Growth Fund
Class A................................................... 1.00% 18.87%
Class B................................................... 0.34 16.58
Class C................................................... 0.34 16.58
Class Z................................................... 1.30 19.61
Moderate Growth Fund
Class A................................................... -4.89% 18.65%
Class B................................................... -5.72 15.98
Class C................................................... -5.72 15.98
Class Z................................................... -4.67 19.40
High Growth Fund
Class A................................................... -10.09% 23.25%
Class B................................................... -10.66 21.05
Class C................................................... -10.66 21.05
Class Z................................................... -9.74 24.41
|
ADVERTISING. Advertising materials for a Fund may include biographical information relating to its portfolio manager(s), and may include or refer to commentary by the Fund's portfolio manager(s) concerning investment style, investment discipline, asset growth, current or past business experience, business capabilities, political, economic or financial conditions and other matters of general interest to investors. Advertising materials for a Fund also may include mention of Prudential, its affiliates and subsidiaries, and reference the assets, products and services of those entities.
From time to time, advertising materials for the Fund may include information concerning retirement and investing for retirement, may refer to the approximate number of Fund shareholders and may refer to Lipper rankings or Morningstar ratings, other related analysis supporting those ratings, other industry publications, business periodicals and market indexes. In addition, advertising materials may reference studies or analyses performed by the manager or its affiliates. Advertising materials for sector funds, funds that focus on market capitalizations, index funds and international/global funds may discuss the potential benefits and risks of that investment style. Advertising materials for fixed income funds may discuss the benefits and risks of investing in the bond market including discussions of credit quality, duration and maturity.
A Fund also may include comparative performance information in advertising or marketing the Fund's shares. Such performance information may include data from Lipper, Inc., Morningstar Publications, Inc., other industry publications, business periodicals and market indexes. Set forth below is a chart that compares the performance of different types of investments over the long-term with the rate of inflation.(1)
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/1925-12/31/2000)
[BAR CHART]
Common Stocks 11.1% Long-Term Gov't. Bonds 5.3% Inflation 3.1% |
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended July 31, 2001, incorporated in this SAI by reference to the Trust's 2001 annual reports to shareholders (File No. 811-8915), have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on authority of said firm as experts in auditing and accounting. You may obtain a copy of the Funds' annual reports at no charge by request to the Trust by calling (800) 225-1852, or by writing to the Trust at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
APPENDIX I
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA have the highest rating assigned by S&P to a debt obligation. 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 bonds 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.
BB and B -- Debt rated BB and B is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB represents a lower degree of speculation than B. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
BB, B, CCC, CC and C -- Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
C -- The rating C typically is applied to debt subordinated to senior debt which is assigned an actual or implied CCC- rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is being paid.
D -- Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be 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 these 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.
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 sometime 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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through B. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Standard & Poor's commercial paper ratings are current assessments of the likelihood of timely payment of debt considered short-term in the relevant market.
A-1 -- The A-1 designation indicates that the degree of safety regarding timely payment is very strong.
A-2 -- Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated A-1.
A-3 -- Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime rating categories.
APPENDIX II -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. The information has not been independently verified by the Manager.
The following chart shows the long-term performance of various asset classes and the rate of inflation.
Source: Ibbotson Associates. Used with permission. All rights reserved. This chart is for illustrative purposes only and is not indicative of the past, present or future performance of any asset class or any Prudential or Strategic Partners mutual fund.
Generally, stock returns are due to capital appreciation and the reinvestment of any gains. Bond returns are due to reinvesting interest. Also, stock prices are usually more volatile than bond prices over the long term. Small stock returns for 1926-1989 are those of stocks comprising the 5th quintile of the New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in a variety of industries. It is often used as a broad measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond portfolio with a maturity of roughly 20 years. Treasury bill returns are for a one-month bill. Treasuries are guaranteed by the government as to the timely payment of principal and interest; equities are not. Inflation is measured by the consumer price index (CPI).
II-1
Set forth below is historical performance data relating to various sectors of the fixed-income securities markets. The chart shows the historical total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds, U.S. high yield bonds and world government bonds on an annual basis from 1990 through 2000. The total returns of the indices include accrued interest, plus the price changes (gains or losses) of the underlying securities during the period mentioned. The data is provided to illustrate the varying historical total returns and investors should not consider this performance data as an indication of the future performance of the Funds or of any sector in which the Funds invest.
All information relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. Such information has not been verified. The figures do not reflect the operating expenses and fees of a mutual fund. See "Risk/Return Summary-Fees and Expenses" in the prospectus. The net effect of the deduction of the operating expenses of a mutual fund on these historical total returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
YEAR
--------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- -----
U.S. Government
Treasury Bonds(1) 8.5% 15.3% 7.2% 10.7% (3.4%) 18.4% 2.7% 9.6% 10.0% (2.56%) 13.52%
U.S. Government
Mortgage
Securities(2) 10.7% 15.7% 7.0% 6.8% (1.6%) 16.8% 5.4% 9.5% 7.0% 1.86% 11.16%
U.S. Investment Grade
Corporate Bonds(3) 7.1% 18.5% 8.7% 12.2% (3.9%) 22.3% 3.3% 10.2% 8.6% (1.96%) 9.39%
U.S. High Yield
Bonds(4) (9.6%) 46.2% 15.8% 17.1% (1.0%) 19.2% 11.4% 12.8% 1.6% 2.39% (5.86%)
World Government
Bonds(5) 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%) 5.3% (5.07%) (2.63%)
Difference between
highest and lowest
returns percent 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46% 19.10%
|
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150 public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that includes over 600 15- and 30-year fixed-rate mortgage-backed securities of GNMA, FNMA and FHLMC.
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated issues and include debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies or international agencies. All bonds in the index have maturities of at least one year. Source: Lipper Inc.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds issued by various foreign governments or agencies, excluding those in the U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All bonds in the index have maturities of at least one year.
II-2
This chart shows the growth of a hypothetical $10,000 investment made in the stocks representing the S&P 500 Stock Index with and without reinvested dividends.
Source: Lipper Inc. Used with permission. All rights reserved. This chart is used for illustrative purposes only and is not intended to represent the past, present or future performance of any Prudential or Strategic Partners mutual fund. Common stock total return is based on the Standard & Poor's 500 Composite Stock Price Index, a market-value-weighted index made up of 500 of the largest stocks in the U.S. based upon their stock market value. Investors cannot invest directly in indexes.
This chart illustrates the performance of major world stock markets for the period from December 31, 1985 through December 31, 2000. It does not represent the performance of any Prudential or Strategic Partners mutual fund.
[BAR GRAPH]
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR
WORLD STOCK MARKETS
-------------------------------------
Sweden 19.12
Hong Kong 17.63
Spain 17.30
Netherland 16.96
France 16.08
Belgium 15.65
USA 15.08
Switzerland 14.91
Europe 14.44
U.K. 14.30
Denmark 13.93
Sing/Mlysia 11.55
Germany 11.09
Canada 10.71
Italy 10.49
Australia 10.09
Norway 8.23
Japan 6.55
Austria 5.70
|
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of 12/31/00. Used with permission. Morgan Stanley Country indexes are unmanaged indexes which include those stocks making up the largest two-thirds of each country's total stock market capitalization. Returns reflect the reinvestment of all distributions. This chart is for illustrative purposes only and is not indicative of the past, present or future performance of any specific investment. Investors cannot invest directly in stock indexes.
II-3
[PIE GRAPH]
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 19.0 TRILLION
Canada 2.4% U.S. 50.6% Europe 33.6% Pacific Basin 13.4% |
Source: Morgan Stanley Capital International, December 31, 2000. Used with permission. This chart represents the capitalization of major world stock markets as measured by the Morgan Stanley Capital International (MSCI) World Index. The total market capitalization is based on the value of approximately 1577 companies in 22 countries (representing approximately 60% of the aggregate market value of the stock exchanges). This chart is for illustrative purposes and does not represent the allocation of any Prudential or Strategic Partners mutual fund.
II-4
The chart below shows the historical volatility of general interest rates as measured by the long U.S. Treasury Bond.
Source: Ibbotson Associates. Used with permission. All rights reserved. This chart illustrates the historical yield of the long-term U.S. Treasury Bond from 1926-2000. Yields represent that of an annually renewed one-bond portfolio with a remaining maturity of approximately 20 years. This chart is for illustrative purposes and should not be construed to represent the yields of any Prudential or Strategic Partners mutual fund.
II-5
APPENDIX III -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance. Asset allocation among different types of securities within an overall investment portfolio helps to reduce risk and to potentially provide stable returns, while enabling investors to work toward their financial goal(s). Asset allocation is also a strategy to gain exposure to better performing asset classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing "balance" to an overall portfolio and potentially achieving more stable returns. Owning a portfolio of securities mitigates the individual risks (and returns) of any one security. Additionally, diversification among types of securities reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As interest rates fluctuate, the value of a bond (or a bond portfolio) will increase or decrease. Longer term bonds are generally more sensitive to changes in interest rates. When interest rates fall, bond prices generally rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond portfolio) to interest rate changes. It measures the weighted average maturity of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest rate payments. Duration is expressed as a measure of time in years -- the longer the duration of a bond (or a bond portfolio), the greater the impact of interest rate changes on the bond's (or the bond portfolio's) price. Duration differs from effective maturity in that duration takes into account call provisions, coupon rates and other factors. Duration measures interest rate risk only and not other risks, such as credit risk and, in the case of non-U.S. dollar denominated securities, currency risk. Effective maturity measures the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing -- buying securities when prices are low and selling them when prices are relatively higher -- may not work for many investors because it is impossible to predict with certainty how the price of a security will fluctuate. However, owning a security for a long period of time may help investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment returns. Compounding is the effect of continuous investment on long-term investment results, by which the proceeds of capital appreciation (and income distributions, if elected) are reinvested to contribute to the overall growth of assets. The long-term investment results of compounding may be greater than that of an equivalent initial investment in which the proceeds of capital appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility which, for a mutual fund, depicts how widely the returns varied over a certain period of time. When a fund has a high standard deviation, its range of performance has been very wide, implying greater volatility potential. Standard deviation is only one of several measures of a fund's volatility.
III-1
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Certificate of Trust.(1)
(2) Amendment to Certificate of Trust dated August 26, 1999.*
(3) Amendment to Certificate of Trust dated September 4, 2001*
(4) Agreement and Declaration of Trust.(1)
(5) Amendment No. 1 to Agreement and Declaration of Trust.(2)
(b) By-Laws.(1)
(c) In response to this item, Registrant incorporates by
reference the following provisions from its Agreement and
Declaration of Trust and By-Laws, filed herewith as Exhibit
a(1) and Exhibit (b), defining rights of the Trust's
shareholders: Articles III and V of Agreement and
Declaration of Trust; Article III of By-Laws.
(d) (1) Management Agreement between Registrant and Prudential
Investments Fund Management LLC (PIFM).(3)
(2) Subadvisory Agreement between PIFM and Pacific Investment
Management Company (PIMCO) with respect to the Conservative
Growth Fund dated May 5, 2000.*
(3) Subadvisory Agreement between PIFM and PIMCO with respect to
the Moderate Growth Fund dated May 5, 2000.*
(4) Subadvisory Agreement between PIFM and Lazard Asset
Management (Lazard) with respect to the Moderate Growth
Fund.(3)
(5) Subadvisory Agreement between PIFM and Lazard with respect
to the High Growth Fund.(3)
(6) Subadvisory Agreement between PIFM and The Dreyfus
Corporation (Dreyfus) with respect to the Conservative
Growth Fund.(3)
(7) Subadvisory Agreement between PIFM and Dreyfus with respect
to the Moderate Growth Fund.(3)
(8) Subadvisory Agreement between PIFM and Dreyfus with respect
to the High Growth Fund.(3)
(9) Subadvisory Agreement between PIFM and Franklin Advisers,
Inc. (Franklin) with respect to the Conservative Growth
Fund.(3)
(10) Subadvisory Agreement between PIFM and Franklin with respect
to the Moderate Growth Fund.(3)
(11) Subadvisory Agreement between PIFM and Franklin with respect
to the High Growth Fund.(3)
(12) Subadvisory Agreement between PIFM and Prudential Investment
Management, Inc. (formerly The Prudential Investment
Corporation) (PIM) with respect to the Conservative Growth
Fund.(3)
(13) Subadvisory Agreement between PIFM and PIM with respect to
the Moderate Growth Fund.(3)
(14) Subadvisory Agreement between PIFM and PIM with respect to
the High Growth Fund.(3)
(15) Subadvisory Agreement between PIFM and Jennison Associates
LLC (Jennison) with respect to the Conservative Growth
Fund.(3)
(16) Subadvisory Agreement between PIFM and Jennison with respect
to the Moderate Growth Fund.(3)
(17) Subadvisory Agreement between PIFM and Jennison with respect
to the High Growth Fund.(3)
(18) Amendment to Subadvisory Agreement between PIFM and PIM with
respect to each Fund dated November 19, 1999.*
(e) (1) Distribution Agreement between Registrant and Prudential
Investment Management Services LLC (PIMS).(3)
(2) Form of Selected Dealer Agreement(3)
(f) Not applicable.
(g) (1) Custodian Contract between Registrant and State Street Bank
and Trust Company.(3)
(2) Amendment to Appendix A to Custodian Contract dated October
5, 1998.(3)
|
(3) Amendment to Custodian Contract dated February 22, 1999.(3)
(4) Amendment to Custodian Contract dated July 17, 2001.(4)
(h) (1) Transfer Agency and Service Agreement between Registrant and Prudential Mutual Fund Services, Inc.
(PMFS).(3)
(2) Amendment to Transfer Agency and Services Agreement between Registrant and PMFS dated August 24, 1999.*
(i) Opinion of Morris, Nichols, Arsht & Tunnell dated September 25, 2001.*
(j) Consent of independent accountants.*
(l) Purchase Agreement.(3)
(m) (1) Distribution and Service Plan for Class A shares.(1)
(2) Distribution and Service Plan for Class B shares.(1)
(3) Distribution and Service Plan for Class C shares.(1)
(n) Rule 18f-3 Plan.(1)
(p) (1) Amended Code of Ethics of Registrant dated September 19, 2001.*
(2) Amended Code of Ethics of PIM, PIFM and PIMS dated September 19, 2001.*
(3) Code of Ethics of Jennison.(5)
(4) Code of Ethics of PIMCO.(6)
(5) Code of Ethics of Lazard dated August 15, 2000.(7)
(6) Code of Ethics of Dreyfus dated July 2000.*
(7) Code of Ethics of Franklin dated February 2000.*
(q) Powers of attorney for Eugene C. Dorsey, Saul K. Fenster, Ph.D., Robert F. Gunia, Maurice F. Holmes,
Robert E. LaBlanc, Douglas H. McCorkindale, W. Scott McDonald, Jr., Thomas T. Mooney, David R. Odenath,
Jr., Stephen Stoneburn, Grace C. Torres, Joseph Weber, Ph.D. and Clay T. Whitehead.*
|
(1) Incorporated by reference to Registrant's initial Registration Statement on Form N-1A, filed with the Securities and Exchange Commission (SEC) on August 4, 1998 (File No. 333-60561).
(2) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 filed with the SEC on September 17, 1998 (File No. 333-60561).
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 4 filed with the SEC on October 7, 1999 (File No. 333-60561).
(4) Incorporated by reference to Exhibit (g)(3) to Post-Effective Amendment No.
23 to the Registration Statement on Form N-1A of Prudential Natural
Resources Fund, Inc. filed on July 31, 2001 (File No. 33-15166).
(5) Incorporated by reference to Exhibit (p)(2) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A of Strategic Partners Series filed on March 27, 2000 (File No. 333-95849).
(6) Incorporated by reference to Exhibit (p)(9) to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A of The Target Portfolio Trust filed on May 1, 2000 (File No. 33-50476).
(7) Incorporated by reference to Exhibit (p)(5) to Post-Effective Amendment No.
6 to the Registration Statement on Form N-1A of Target Funds filed on
October 31, 2000 (File No. 333-82621).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940, as amended (the 1940 Act), and pursuant to Article VII of the Agreement and Declaration of Trust (Exhibit (a)(2)) to the Registration Statement) and Article XI of the Trust's By-Laws (Exhibit (b) to
the Registration Statement), officers, trustees, employees and agents of Registrant will not be liable to Registrant, any stockholder, officer, director, employee, agent or other person for any action or failure to act, except for bad faith, willful misfeasance, gross negligence or reckless disregard of duties, and those individuals may be indemnified against liabilities in connection with Registrant, subject to the same exceptions. Section 3817 of the Delaware Business Trust Act permits indemnification of trustees who acted in good faith and reasonably believed that the conduct was in the best interest of Registrant. As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of Registrant may be indemnified against liabilities which it may incur, except liabilities arising from bad faith, gross negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the Securities Act), may be permitted to trustees, officers and controlling persons of Registrant pursuant to the foregoing provisions or otherwise, Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1940 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person of Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against Registrant by such trustee, officer or controlling person in connection with the shares being registered, 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 1940 Act and will be governed by the final adjudication of such issue.
Registrant has purchased an insurance policy insuring its officers and trustees against liabilities, and certain costs of defending claims against such officers and trustees, to the extent such officers and trustees are not found to have committed conduct constituting willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. The insurance policy also insures Registrant against the cost of indemnification payments to officers and trustees under certain circumstances.
Section 8 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibits (d)(2) through
(d)(20) to the Registration Statement) limit the liability of PIFM and each
Adviser, respectively, to liabilities arising from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under the
agreements.
Registrant hereby undertakes that it will apply the indemnification provisions of its By-Laws and the Distribution Agreement in a manner consistent with Release No. 11330 of the SEC under the 1940 Act as long as the interpretation of Section 17(h) and 17(i) of such Act remain in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) PIFM
See "How the Trust is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information (SAI) constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in Schedules A and D of Form ADV of PIFM as currently on file with the SEC, as most recently amended (File No. 801-31104).
The business and other connections of PIFM's directors and principal executive officers are set forth below. Except as otherwise indicated, the address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102.
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
David R. Odenath, Jr. ......... Officer in Charge, Officer in Charge, President, Chief
President, Chief Executive Officer and Chief Operating
Executive Officer and Officer, PIFM; Executive Vice
Chief Operating Officer President, The Prudential Insurance
Company of America (Prudential)
Catherine A. Brauer............ Executive Vice President Executive Vice President, PIFM
John L. Carter................. Executive Vice President Executive Vice President, PIFM
Robert F. Gunia................ Executive Vice President Executive Vice President and Chief
and Treasurer Administrative Officer, PIFM; Vice
President, Prudential; President, PIMS
William V. Healey.............. Executive Vice Executive Vice President, Chief Legal
President, Chief Legal Officer and Secretary, PIFM; Vice
Officer and Secretary President and Associate General
Counsel, Prudential; Senior Vice
President, Chief Legal Officer and
Secretary, PIMS
Marc S. Levine................. Executive Vice President Executive Vice President, PIFM
Judy A. Rice................... Executive Vice President Executive Vice President, PIFM
Ajay Sawhney................... Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel.............. Executive Vice President Executive Vice President, PIFM
|
(b) Jennison
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to Jennison's directors and executive officers is included in its Form ADV filed with the SEC (File No. 801-5608), as most recently amended, the relevant text of which is incorporated herein by reference.
(c) PIM
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to PIM's directors and executive officers is included in its Form ADV filed with the SEC (File No. 801-22808), as most recently amended, the relevant text of which is incorporated herein by reference.
(d) Lazard
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to the general members of Lazard Freres & Co. LLC is included in its Form ADV filed with the SEC (File No. 801-6568), as most recently amended, the relevant text of which is incorporated herein by reference.
(e) Franklin
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to Franklin's directors and executive officers is included in its Form ADV filed with the SEC (File No. 801-26292), as most recently amended, the relevant text of which is incorporated herein by reference.
(f) PIMCO
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to PIMCO's directors and executive officers is included in its Form ADV filed with the SEC (File No. 801-48187), as most recently amended, the relevant text of which is incorporated herein by reference.
(g) Dreyfus
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory and Other Services" in the SAI constituting Part B of this Registration Statement.
Information as to Dreyfus's directors and executive officers is included in its Form ADV filed with the SEC (File No. 801-8147), as most recently amended, the relevant text of which is incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) PIMS
PIMS is distributor for Cash Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND Tax-Free Fund, Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential California Municipal Fund, Prudential Equity Fund, Inc., Prudential Europe Growth Fund, Inc., Prudential's Gibraltar Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential Sector Funds, Inc., Prudential Short-Term Corporate Bond Fund, Inc., Prudential Small Company Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Funds, Prudential Tax Managed Small-Cap Fund, Inc., Prudential Total Return Bond Fund, Inc., Prudential 20/20 Focus Fund. Prudential U.S. Emerging Growth Fund, Inc., Prudential Value Fund, Prudential World Fund, Inc., Special Money Market Fund, Inc., The Prudential Investment Portfolios, Inc., Strategic Partners Asset Allocation Funds, Strategic Partners Opportunity Funds, Strategic Partners Style Specific Funds and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate Accounts, The Prudential Variable Contract Account-2, The Prudential Variable Contract Account-10, The Prudential Variable Contract Account-11, The Prudential Variable Contract Account-24, The Prudential Variable Contract G1-2, The Prudential Discovery Select Group Variable Contract Account, The Pruco Life Flexible Premium Variable Annuity Account, The Pruco Life of New Jersey Flexible Premium Variable Annuity Account, The Prudential Individual Variable Contract Account and the Prudential Qualified Individual Variable contract Account.
(b) Information concerning the directors and officers of PIMS is set forth below.
POSITIONS AND POSITIONS AND
NAME(1) OFFICES WITH UNDERWRITER OFFICES WITH REGISTRANT
------- ------------------------ -----------------------
Stuart A. Abrams...................... Senior Vice President and Chief None
Compliance Officer
213 Washington St.
Newark, NJ
07102
Margaret Deverell..................... Vice President and Chief None
213 Washington St. Financial Officer
Newark, NJ
07102
Robert F. Gunia....................... President Vice President
and Trustee
William V. Healey..................... Senior Vice President, Secretary Assistant Secretary
and Chief Legal Officer
Bernard B. Winograd................... Executive Vice President None
|
(c) Registrant has no principal underwriter who is not an affiliated person of Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, Registrant, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
194 Wood Ave., South Iselin, NJ 08853. Documents required by Rules 31a-1(b)(4),
(5), (6), (7), (9), (10) and (11), 31a-1(d), and 31a-1(f) will be kept at 100
Mulberry Street, Gateway Center Three, Newark, New Jersey 07102-4077 and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Trust is Managed -- Manager", "How the Trust is Managed -- Advisers and Portfolio Managers" and "How the Trust is Managed -- Distributor" in the Prospectus and the caption "Investment Advisory and Other Services" in the SAI, constituting Parts A and B, respectively, of this Post-Effective Amendment to the Registration Statement, Registrant is not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, Registrant certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark and State of New Jersey, on the 28th day of September, 2001.
STRATEGIC PARTNERS ASSET ALLOCATION
FUNDS
/s/ DAVID R. ODENATH, JR. -------------------------------------- |
David R. Odenath, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EUGENE C. DORSEY* Trustee September 28, 2001
---------------------------------------------------
Eugene C. Dorsey
/s/ SAUL K. FENSTER* Trustee September 28, 2001
---------------------------------------------------
Saul K. Fenster
/s/ ROBERT GUNIA* Vice President and Trustee September 28, 2001
---------------------------------------------------
Robert Gunia
/s/ MAURICE F. HOLMES* Trustee September 28, 2001
---------------------------------------------------
Maurice F. Holmes
/s/ ROBERT E. LABLANC* Trustee September 28, 2001
---------------------------------------------------
Robert E. LaBlanc
/s/ DOUGLAS H. MCCORKINDALE* Trustee September 28, 2001
---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY* Trustee September 28, 2001
---------------------------------------------------
Thomas T. Mooney
|
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID R. ODENATH, JR.* President and Trustee September 28, 2001
---------------------------------------------------
David R. Odenath, Jr.
/s/ STEPHEN STONEBURN* Trustee September 28, 2001
---------------------------------------------------
Stephen Stoneburn
/s/ W. SCOTT MCDONALD, JR.* Trustee September 28, 2001
---------------------------------------------------
W. Scott McDonald, Jr.
/s/ JOSEPH WEBER* Trustee September 28, 2001
---------------------------------------------------
Joseph Weber
/s/ CLAY T. WHITEHEAD* Trustee September 28, 2001
---------------------------------------------------
Clay T. Whitehead
/s/ GRACE C. TORRES* Treasurer and Principal September 28, 2001
--------------------------------------------------- Financial and Accounting
Grace C. Torres Officer
*/s/ GEORGE P. ATTISANO, as attorney-in-fact September 28, 2001
---------------------------------------------------
George P. Attisano
|
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
(a) (2) Amendment to Certificate of Trust dated August 26, 1999.
(3) Amendment to Certificate of Trust dated September 4, 2001.
(d)(18) Amendment to Subadvisory Agreement between PIFM and PIM with
respect to each Fund dated November 19, 1999.
(h) (2) Amendment to Transfer Agency and Service Agreement between
Registrant and PMFS dated August 24, 1999.
(i) Opinion and consent of Morris, Nichols, Arsht & Tunnel dated
September 25, 2001.
(j) Consent of independent accountants.
(p) (1) Amended Code of Ethics of Registrant dated September 19,
2001.
(2) Amended Code of Ethics of PIM, PIFM and PIMS dated September
19, 2001.
(6) Code of Ethics of Dreyfus dated July 2000.
(7) Code of Ethics of Franklin dated February 2000.
(q) Powers of attorney for Eugene C. Dorsey, Saul K. Fenster,
Ph.D., Robert F. Gunia, Maurice F. Holmes, Robert E.
LaBlanc, Douglas H. McCorkindale, W. Scott McDonald, Jr.,
Thomas T. Mooney, David R. Odenath, Jr., Stephen Stoneburn,
Grace C. Torres, Joseph Weber, Ph.D. and Clay T. Whitehead.
|
EXHIBIT (a)(2)
AMENDMENT NO. 2
TO
CERTIFICATE OF TRUST
OF
PRUDENTIAL DIVERSIFIED FUNDS
This Amendment No. 2 to the Certificate of Trust (the "Certificate") of Prudential Diversified Funds (the "Trust") is being executed as of August 25, 1999, for the purpose of amending the terms of the Certificate, as originally filed in the Office of the Secretary of the State of Delaware on July 29, 1998, to clarify the inter-series limitation on liability within the Trust.
NOW, THEREFORE, the undersigned do hereby certify as follows:
1. The Certificate is hereby amended by changing current paragraph No. 4 to read in its entirety as follows:
"Series Trust. Notice is hereby given that pursuant to Section 3804 of the Delaware Business Trust Act, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series of the Trust shall be enforceable against the assets of such series only and not against the assets of any other series or of the Trust generally or any other series thereof, and, otherwise provided in the governing instrument of the Trust, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other series thereof shall be enforceable against the assets of such series. The Trust is a registered investment company under the Investment Company Act of 1940, as amended."
2. This Amendment No. 2 to the Certificate shall become effective immediately.
3. Except as amended pursuant to the foregoing paragraphs, the Certificate is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the undersigned, being Trustees of the Trust, have duly executed this Amendment No. 2 to the Certificate as of the day and year first above written.
/s/ Eugene C. Dorsey -------------------- Eugene C. Dorsey /s/ Douglas H. McCorkindale --------------------------- Douglas H. McCorkindale /s/ Thomas T. Mooney -------------------- Thomas T. Mooney /s/ John R. Strangfeld ---------------------- John R. Strangfeld |
EXHIBIT (a)(3)
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
PRUDENTIAL DIVERSIFIED FUNDS
This Certificate of Amendment to Certificate of Trust is being executed as of September 4, 2001 for the purpose of amending the Certificate of Trust of Prudential Diversified Funds (the "Trust") filed with the Secretary of State of the State of Delaware on September 4, 2001 pursuant to the Delaware Business Trust Act, 12 Del. C. Section 3801 et seq. (the "Act").
The undersigned hereby certifies as follows:
1. The name of the Trust is Prudential Diversified Funds.
2. The amendment to the Certificate of Trust of the Trust set forth below (the "Amendment") has been duly authorized by the Board of Trustees of the Trust.
The First Article of the Certificate of Trust of the Trust is hereby amended in its entirety to read as follows:
"1. Name. The name of the business trust formed hereby is Strategic Partners Asset Allocation Funds."
3. This Certificate of Amendment to the Certificate of Trust of the Trust shall become effective immediately upon filing with the Office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, being a trustee of the Trust, has duly executed this Certificate of Amendment as of the day and year first above written.
TRUSTEE:
/s/ Robert F. Gunia ------------------- Robert F. Gunia |
Exhibit (d)(18)
AMENDMENT TO SUBADVISORY AGREEMENT
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH FUND
PRUDENTIAL DIVERSIFIED MODERATE GROWTH FUND
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND
AMENDMENT made as of this 19th day of November, 1999, between Prudential Investments Fund Management LLC ("PIFM"), and The Prudential Investment Corporation ("PIC").
WHEREAS, PIFM, either itself or as successor to Prudential Investments Fund Management, Inc., and PIC have entered into a Subadvisory Agreement dated November 12, 1998 (collectively, the "Agreement") with each of Prudential Diversified Conservative Growth Fund, Prudential Diversified Moderate Growth Fund and Prudential Diversified High Growth Fund (the "Funds"), with respect to the management of the Funds; and
WHEREAS, the Agreement provides that PIC shall provide investment advisory services to each Fund, subject to oversight by PIFM; and
WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the compensation to be paid by PIFM to PIC for services provided by PIC pursuant to the Agreement.
NOW, THEREFORE, for and in consideration of the continuation of the Agreement for its current term, and other good and valuable consideration, PIFM and PIC hereby amend the Agreement to provide for the compensation to be paid by PIFM to PIC as described on the attached schedule, effective as of January 1, 2000, for the same term, including renewals, as the Agreement and upon the same terms and conditions as described in the Agreement.
IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the day and year first above written.
PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION
By: /s/ Robert F. Gunia By: /s/ John R. Strangfeld, Jr.
------------------- ---------------------------
Robert F. Gunia John R. Strangfeld, Jr.
Executive Vice President Chief Executive Officer
|
COMPENSATION SCHEDULE
Fund Name Contractual Compensation
Mgmt Fee to PGAM
------------ -------------
Domestic Equity
EQUITY FUNDS
Prudential 20/20 Focus Fund* 0.75% 0.375%
Prudential Balanced Fund 0.65% 0.325%
Prudential Developing Markets Fund -Developing Markets Equity Fund 1.25% 0.625%
Prudential Developing Markets Fund -Latin America Equity Fund 1.25% 0.625%
Prudential Diversified Conservative Growth Fund* 0.75% 0.375%
Prudential Diversified Moderate Growth Fund* 0.75% 0.375%
Prudential Diversified High Growth Fund* 0.75% 0.375%
Prudential Distressed Securities Fund, Inc. 0.75% 0.375%
Prudential Emerging Growth Fund, Inc. 0.60% 0.300%
Prudential Equity Fund, Inc. .50% to $500 mil 0.250%
.475% next $500 mil 0.226%
.45% over 1 bil 0.203%
Prudential Equity Income Fund .60% to $500 mil 0.300%
.50% next $500 mil 0.238%
.475% next $500 mil 0.214%
.45% over 1.5 bil 0.191%
Prudential Bond Market Index Fund 0.25% 0.125%
Prudential Europe Index Fund 0.40% 0.200%
Prudential Pacific Index Fund 0.40% 0.200%
Prudential Small Cap Index Fund 0.30% 0.195%
Prudential Stock Index Fund 0.30% 0.150%
Prudential Active Balanced Fund 0.65% 0.325%
Prudential Mid-Cap Value Fund 0.70% 0.350%
Prudential Natural Resources Fund 0.75% 0.375%
Prudential Real Estate Securities Fund 0.75% .45% to $250 mil
.40% next $250 mil
.35% next $250 mil
.30% over $750 mil
Prudential Financial Services Fund 0.75% 0.375%
Prudential Health Sciences Fund* 0.75% 0.375%
Prudential Technology Fund 0.75% 0.375%
Prudential Utility Fund .60% to $250 mil 0.300%
.50% next $500 mil 0.238%
.45% next $750 mil 0.203%
.40% next $500 mil 0.170%
.35% next $2 bil 0.140%
.325% next $2 bil 0.122%
.30% over $6 bil 0.105%
Prudential Small-Cap Quantum Fund, Inc. 0.60% 0.390%
Prudential Small Company Value Fund, Inc. 0.70% 0.455%
Prudential Tax-Managed Equity Fund 0.65% 0.325%
|
Prudential World Fund, Inc., Global Series 0.75% 0.375%
Prudential Europe Growth Fund 0.75% 0.375%
Prudential Global Genesis Fund 1.00% 0.500%
Prudential Pacific Growth Fund 0.75% 0.375%
TAXABLE FIXED INCOME FUNDS
Prudential Diversified Bond Fund, Inc. 0.50% 0.250%
Prudential Global Limited Maturity Fund, Inc. 0.55% 0.275%
Prudential Government Income Fund, Inc. .50% to $3 bil 0.250%
.35% over $3 bil 0.166%
Prudential Government Securities Trust Short Intermediate Term Series 0.40% 0.200%
The High Yield Income Fund, Inc. 0.70% 0.350%
Prudential High Yield Fund, Inc. .50% to $250 mil 0.250%
.475% next $500 mil 0.226%
.45% next $750 mil 0.203%
.425% next $500 mil 0.181%
.40% next $500 mil 0.160%
.375% next $500 mil 0.141%
.35% over $3 bil 0.123%
Prudential High Yield Total Return Fund, Inc. 0.65% 0.325%
Prudential Intermediate Global Income Fund, Inc. 0.75% 0.375%
Prudential International Bond Fund, Inc. .75% to 1 bil 0.375%
.70% over 1 bil 0.333%
Prudential Structured Maturity Fund, Inc. 0.40% 0.200%
Prudential Global Total Return Fund, Inc. .75% to $500 mil 0.375%
.70% next $500 mil 0.333%
.65% over $1 bil 0.293%
TAX-EXEMPT FIXED INCOME FUNDS
Prudential California Municipal Fund - California Series 0.50% 0.250%
Prudential California Municipal Fund - California Income 0.50% 0.250%
Prudential National Municipals Fund, Inc. .50% to $250 mil 0.250%
.475% next $250 mil 0.226%
.45% next $500 mil 0.203%
.425% next $250 mil 0.181%
.40% next $250 mil 0.160%
.375% over $1.5 bil 0.141%
Prudential Municipal Bond Fund - High Income Series .50% to 1 bil 0.250%
.45% over 1 bil 0.214%
Prudential Municipal Bond Fund - Insured Series .50% to 1 bil 0.250%
.45% over 1 bil 0.214%
Prudential Municipal Series Fund - Florida Series 0.50% 0.250%
Prudential Municipal Series Fund - Massachusetts Series 0.50% 0.250%
Prudential Municipal Series Fund - New Jersey Series 0.50% 0.250%
Prudential Municipal Series Fund - New York Series 0.50% 0.250%
Prudential Municipal Series Fund - North Carolina Series 0.50% 0.250%
Prudential Municipal Series Fund - Ohio Series 0.50% 0.250%
Prudential Municipal Series Fund - Pennsylvania Series 0.50% 0.250%
MONEY MARKET FUNDS
Command Money Fund .50% to $500 mil 0.250%
.425% next $500 mil 0.191%
|
.375% next $500 mil 0.150%
.35% over $1.5 bil 0.123%
Command Government Money Market Fund .40% to $1 bil 0.200%
.375% over $1 bil 0.169%
Command Tax-Free Fund .50% to $500 mil 0.250%
.425% next $500 mil 0.191%
.375% over $1bil 0.150%
Prudential Government Securities Trust - Money Market Series .40% to $1 bil 0.200%
.375% next $500 mil 0.169%
.35% over $1.5 bil 0.140%
Prudential Government Securities Trust - U.S. Treasury Money Market Series 0.40% 0.200%
Prudential Institutional Liquidity Portfolio, Inc. 0.20% 0.100%
Prudential Tax-Free Money Market Fund, Inc. .50% to $750 mil 0.250%
.425% next $750 mil 0.191%
.375% over $1.5 bil 0.150%
Prudential California Municipal Fund - California Money Market Series 0.50% 0.250%
Prudential MoneyMart Assets, Inc. Fund .50% to $50 mil 0.250%
.30% over $50 mil 0.135%
Prudential Municipal Series Fund - Connecticut Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - Massachusetts Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - New Jersey Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - New York Money Market Series 0.50% 0.250%
Prudential Special Money Fund - Money Market Series 0.50% 0.250%
Cash Accumulated Trust Fund: Liquid Assets 0.07% 0.035%
Cash Accumulated Trust Fund: National Money Market .39% to $1 bil 0.195%
.375% next $500 mil 0.169%
.35% next $500 mil 0.140%
.325% over $2 bil 0.114%
|
* Compensation to PGAM based on Prudential advised assets only.
EXHIBIT (h)(2)
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between Prudential Diversified Funds (the "Fund") and Prudential Mutual Fund Services LLC ("PMFS") is entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and Service Agreement (the "Agreement") pursuant to which PMFS serves as transfer agent, dividend disbursing agent and shareholder servicing agent for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the Fund's agreement to pay transfer agency account fees and expenses for beneficial owners holding shares through omnibus accounts maintained by The Prudential Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the Agreement, and other good and valuable consideration, Article 8 of the Agreement is amended by adding the following Section:
8.04 PMFS may enter into agreements with Prudential or any subsidiary or affiliate of Prudential whereby PMFS will maintain an omnibus account and the Fund will reimburse PMFS for amounts paid by PMFS to Prudential, or such subsidiary or affiliate, in an amount not in excess of the annual maintenance fee for each active beneficial shareholder account as if each beneficial shareholder account were maintained by PMFS on the Fund's records, subject to the fee schedule attached hereto as Schedule A. Prudential, its subsidiary or affiliate, as the case may be, shall maintain records relating to each beneficial shareholder account that underlies the omnibus account maintained by PMFS.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written.
PRUDENTIAL DIVERSIFIED FUNDS ATTEST:
By: /s/ John R. Strangfeld By: /s/ David F. Connor
---------------------- -------------------
John R. Strangfeld David F. Connor
President Secretary
|
PRUDENTIAL MUTUAL FUND SERVICES LLC
By: /s/ Brian W. Henderson
----------------------
Brian W. Henderson
President
|
Exhibit (i)
[Letterhead of Morris, Nichols, Arsht and Tunnell]
September 25, 2001
Strategic Partners Asset Allocation Funds
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
Re: Strategic Partners Asset Allocation Funds
Ladies and Gentlemen:
We have acted as special Delaware counsel to Strategic Partners Asset Allocation Funds, a Delaware business trust (the "Trust"), in connection with certain matters relating to the formation of the Trust and the proposed issuance of Shares of the Trust pursuant to and as described in Post-Effective Amendment No. 8 to Registration Statement No. 333-60561 under the Securities Act of 1933 (including the Prospectus and Statement of Additional Information forming a part thereof) on Form N-1A of the Trust to be filed with the Securities and Exchange Commission on or about the date hereof (the "Registration Statement"). Capitalized terms used herein and not otherwise herein defined are used as defined in the Agreement and Declaration of Trust of the Trust dated July 29, 1998 (the "Governing Instrument").
In rendering this opinion, we have examined and relied on copies of the following documents, each in the form provided to us: the Certificate of Trust of the Trust as filed in the Office of the Secretary of State of the State of Delaware (the "State Office") on July 29, 1998 (the "Certificate"); Amendment No. 1 to the Certificate of Trust of the Trust as filed in the State Office on September 3, 1998 reflecting the change in the name of the Trust from Prudential Diversified Series to Prudential Diversified Funds; Amendment No. 2 to the Certificate of Trust of the Trust as filed in the State Office on April 10, 2000 relating to the limitation on liabilities of Series of the Trust; the Certificate of Amendment to the Certificate of Trust of the Trust as filed in the State Office on September 4, 2001 reflecting the change in the name of the Trust from Prudential Diversified Funds to Strategic Partners Asset Allocation Funds; the Governing Instrument; the By-laws of the Trust; the Notification of Registration Filed Pursuant to Section 8(a) of the Investment Company Act of 1940 on Form N-8A of the Trust filed with the Securities and Exchange Commission on August 4, 1998; the Registration Statement; a Unanimous Written Consent of the Board of Trustees of the Trust dated July 29, 1998 (the "Consent" and, together with the Governing
Strategic Partners Asset Allocation Funds
September 25, 2001
Instrument, the By-laws of the Trust and the Registration Statement, the "Operative Documents"); and a certification of good standing of the Trust obtained as of a recent date from the State Office. In such examinations, we have assumed the genuineness of all signatures, the conformity to original documents of all documents submitted to us as copies or drafts of documents to be executed, and the legal capacity of natural persons to complete the execution of documents. We have further assumed for the purpose of this opinion: (i) the due adoption, authorization, execution and delivery by, or on behalf of, each of the parties thereto of the above-referenced resolutions, instruments, certificates and other documents, and of all documents contemplated by the Operative Documents to be executed by investors acquiring Shares; (ii) the payment of consideration for Shares, and the application of such consideration, as provided in the Operative Documents, and compliance with the other terms, conditions and restrictions set forth in the Operative Documents in connection with the issuance of Shares (including, without limitation, the taking of all appropriate action by the Trustees to designate Series of Shares and the rights and preferences attributable thereto as contemplated by the Governing Instrument); (iii) that appropriate notation of the names and addresses of, the number of Shares held by, and the consideration paid by, Shareholders will be maintained in the appropriate registers and other books and records of the Trust in connection with the issuance, redemption or transfer of Shares; (iv) that no event has occurred subsequent to the filing of the Certificate that would cause a termination or reorganization of the Trust under Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the activities of the Trust have been and will be conducted in accordance with the terms of the Governing Instrument and the Delaware Business Trust Act, 12 Del. C. ss.ss. 3801 et seq. (the "Delaware Act"); and (vi) that each of the documents examined by us is in full force and effect and has not been amended, supplemented or otherwise modified, except as herein referenced. We have not reviewed any documents other than those identified above in connection with this opinion, and we have assumed that there are no other documents that are contrary to or inconsistent with the opinions expressed herein. No opinion is expressed herein with respect to the requirements of, or compliance with, federal or state securities or blue sky laws. Further, we have not participated in the preparation of the Registration Statement or any other offering documentation relating to the Trust or the Shares and we assume no responsibility for their contents. As to any facts material to our opinion, other than those assumed, we have relied without independent investigation on the above-referenced documents and on the accuracy, as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to matters of Delaware law, it is our opinion that:
1. The Trust is a duly formed and validly existing business trust in good standing under the laws of the State of Delaware.
2. When the Shares are issued to Shareholders in accordance with the terms, conditions, requirements and procedures and for the consideration set forth in the Operative Documents, the Shares will constitute legally issued, fully paid and non-assessable Shares of beneficial interest in the Trust
Strategic Partners Asset Allocation Funds
September 25, 2001
3. Under the Delaware Act and the terms of the Governing Instrument, each Shareholder of the Trust, in such capacity, will be entitled to the same limitation of personal liability as that extended to stockholders of private corporations for profit organized under the general corporation law of the State of Delaware; provided, however, that we express no opinion with respect to the liability of any Shareholder who is, was or may become a named Trustee of the Trust. Neither the existence nor exercise of the voting rights granted to Shareholders under the Governing Instrument will, of itself, cause a Shareholder to be deemed a trustee of the Trust under the Delaware Act. Notwithstanding the foregoing or the opinion expressed in paragraph 2 above, we note that, pursuant to Section 5 of Article IV of the Governing Instrument, the Trustees have the power to cause Shareholders, or Shareholders of a particular Series, to pay certain custodian, transfer, servicing or similar agent charges by setting off the same against declared but unpaid dividends or by reducing Share ownership (or by both means).
We hereby consent to the filing of a copy of this opinion with the Securities and Exchange Commission with the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Except as provided in this paragraph, the opinion set forth above is expressed solely for the benefit of the addressee hereof in connection with the matters contemplated hereby and may not be relied upon for any other purpose or by any other person or entity without our prior written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated September 21, 2001, relating to the financial statements and financial highlights which appears in the July 31, 2001 Annual Report to Shareholders of Strategic Partners Asset Allocation Funds (consisting of Strategic Partners Conservative Growth Fund, Strategic Partners Moderate Growth Fund and Strategic Partners High Growth Fund), which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights", "Other Service Providers" and "Financial Statements" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
September 26, 2001
EXHIBIT (p)(1)
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
AMENDED AND RESTATED AS OF SEPTEMBER 19, 2001
1. PURPOSES
The Code has been adopted by the Board of Trustees of the Fund, in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF INVESTMENT COMPANY SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the receipt of unusual investment opportunities, perquisites, or gifts of more than a de minimis value from persons doing or seeking business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with
respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2) by an investment company, if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud such registered investment company;
(2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or
(4) To engage in any manipulative practice with respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/ Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or a Subadviser, if any, of the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular
functions or duties, makes, participates in, or obtains current or pending information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of a Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by such Subadviser or unit or subdivision thereof. A list of such registered investment companies will be maintained by the Compliance Officer.
(f) "Compliance Officer" means the person or persons (including his or her designees) designated by the Manager, the Adviser/Subadviser, or Principal Underwriter, respectively, as having responsibility for compliance with the requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Trustee" means a Trustee of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act.
An interested Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Trustee for purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders; (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security; and (c) certain other individuals as designated by the Compliance Officer.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Mutual Fund Code of Ethics and Personal Securities Trading Committee" or "Committee" means a specified group of Business Unit, Compliance, and Human Resources executives responsible for interpreting and administering the Code, including but not limited to, reviewing violations of the Code and determining any sanctions or other disciplinary actions that may be deemed appropriate. In addition, the Committee may waive and or modify violations and sanctions or other disciplinary actions at its discretion when deemed appropriate by the Committee. The Committee will review such violations in consultation with legal counsel. A list of such Committee members shall be maintained by the Compliance Officer.
(m) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund.
(n) "Private placement" means a limited offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act.
(o) "Profits" means any total or partial gain realized from a securities transaction or group of transactions as defined by the Mutual Fund Code of Ethics and Personal Securities Trading Committee ("Committee").
(p) "Security" will have the meaning set forth in Section 2(a)(36)
of the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income
Security, a Security having the same issuer, maturity, coupon and rating.
(q) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons, except that Access Persons covered by more than one Code of Ethics meeting the requirements of Rule 17j-1 may be governed by the provisions of such other Code of Ethics and report all transactions pursuant to the terms of such other Code of Ethics provided that such Code was reviewed and approved by the Board of Trustees of the Fund. The Compliance Officer shall ensure that each Access Person subject to this Code receives a copy of the Code. The Compliance Officer will maintain a list of all Access Persons who are currently, and within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
The prohibitions described below will only apply to a transaction in a security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership.
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement without prior approval.
(i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; provided, however, that this prohibition shall not apply to Disinterested Trustees except if they have actual knowledge
of trading by any fund in the Complex.
This prohibition shall also not apply to Access Persons of the Manager, Principal Underwriter, and Adviser/Subadviser who do not, in the ordinary course of fulfilling his or her official duties, have access to current or pending information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day trading operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed period are not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex.
A "pending `buy' or `sell' order" exists when a decision to purchase or sell a Security has been made and communicated. However, this prohibition shall not apply to a "pending `buy `or `sell' order" in the same or an equivalent security in a broad based index fund.(1)
(ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after a Fund in the same Complex trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. This prohibition shall not apply to purchases and sales executed in a broad based index fund.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above,
Profits realized on such trades will be
(1) A list of such Funds shall be maintained by the Compliance Officer.
promptly required to be disgorged to the Fund or a charitable organization approved by the Committee.
(iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures described in Section 6 below and without prior knowledge of trading by any Fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent Security within any 60 calendar day period. If trades are effected during the proscribed period, Profits realized on such trades will be promptly required to be disgorged to the Fund or a charitable organization approved by the Committee.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. This prohibition does not apply to Disinterested Trustees.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by
any Fund in the Complex, subject to preclearance and the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the Complex at the discretion of the Compliance Officer. This prohibition does not apply to Disinterested Trustees.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club. This prohibition does not apply to Disinterested Trustees.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
(f) Any equity Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 500 shares or less in the aggregate, if (i) the Access Person has no prior knowledge of activity in such security by any fund in the Complex and (ii) the issuer is listed on The New York Stock Exchange or has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based index.(2)
(i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to purchase or sell Securities of the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed by the close of business on the day in which preclearance is granted; provided, however that approved orders for Securities traded in foreign markets may be executed within two (2) business days from the date preclearance is granted. If any order is not
(2) A list of such indices will be maintained by the Compliance Officer.
timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Trustees shall report to the Secretary of the Fund the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Trustee has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security only if such Disinterested Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Trustee of the Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Trustee is not required to make a report with respect to transactions effected in any account over which such Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Trustee which is managed on a discretionary basis by a person other than such Trustee and with respect to which such Trustee does not in fact influence or control such transactions. The Secretary of the Fund shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such
confirmations and statements contain all the information required by Section 7.
b. hereof and are furnished within the time period required by such section.
The Compliance Officer will periodically review the personal investment activity of all Access Persons (including Disinterested Trustees with respect to Securities transactions reported pursuant to Section 7 above) and holdings reports of all Access Persons.
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing which would be considered excessive in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service
would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
13. CODE VIOLATIONS AND SANCTIONS
All violations of the Code will be reviewed by the Committee. The Committee will determine any sanctions or other disciplinary actions that may be deemed appropriate. All material violations and corresponding sanctions and/or disciplinary action will be reported to the Board of Trustees of the Fund on a quarterly basis. The Board of Trustees may take action as it deems appropriate, in addition to any action previously taken by the Committee.
14. REVIEW BY THE BOARD OF TRUSTEES
The Board of Trustees will be provided with an annual report which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and
Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is required.
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Trustees or Officers of the Fund since they are deemed
not to constitute Access Persons or Advisory Persons as defined in paragraphs
(e)(1) and (2) of Rule 17j-1.
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit, whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time.
Exhibit (p)(2)
PRUDENTIAL INVESTMENT MANAGEMENT, INC.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter, referred to as the "Fund"), the Manager, the Adviser/Subadviser, and the Principal Underwriter in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF INVESTMENT COMPANY SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the
receipt of unusual investment opportunities, perquisites, or gifts of more than a de minimis value from persons doing or seeking business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2) by an investment company, if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud such registered investment company;
(2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or
(4) To engage in any manipulative practice with respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or a Subadviser, if any, of the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains current or pending information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of a Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by such Subadviser or unit or subdivision thereof. A list of such registered investment companies will be maintained by the Compliance Officer.
(f) "Compliance Officer" means the person or persons (including his or her designees) designated by the Manager, the Adviser/Subadviser, or Principal Underwriter, respectively, as having responsibility for compliance with the requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Director/Trustee for purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders; (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security; and (c) certain other individuals as designated by the Compliance Officer.
(k) "Manager" means Prudential Investments Fund Management,
LLC.
(l) "Mutual Fund Code of Ethics and Personal Securities Trading Committee" or "Committee" means a specified group of Business Unit, Compliance, and Human Resources executives responsible for interpreting and administering the Code, including but not limited to, reviewing violations of the Code and determining any sanctions or other disciplinary actions that may be deemed appropriate. In addition, the Committee may waive and or modify violations and sanctions or other disciplinary actions at its discretion when deemed appropriate by the Committee. The Committee will review such violations in consultation with legal counsel. A list of such Committee members shall be maintained by the Compliance Officer.
(m) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund.
(n) "Private placement" means a limited offering that is exempt
from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act.
(o) "Profits" means any total or partial gain realized from a securities transaction or group of transactions as defined by the Mutual Fund Code of Ethics and Personal Securities Trading Committee ("Committee").
(p) "Security" will have the meaning set forth in Section 2(a)(36) of the Act, except that it will not include shares of registered open-end investment companies, direct obligations of the Government of the United States, , short-term debt securities which are "government securities" within the meaning of Section 2(a)(16) of the Act, bankers' acceptances, bank certificates of deposit, commercial paper and such other money market instruments as are designated by the Compliance Officer. For purposes of the Code, an "equivalent Security" is one that has a substantial economic relationship to another Security. This would include, among other things, (1) a Security that is exchangeable for or convertible into another Security, (2) with respect to an equity Security, a Security having the same issuer (including a private issue by the same issuer) and any derivative, option or warrant relating to that Security and (3) with respect to a fixed-income Security, a Security having the same issuer, maturity, coupon and rating.
(q) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons, except that Access Persons covered by more than one Code of Ethics meeting the requirements of Rule 17j-1 may be governed by the provisions of such other Code of Ethics and report all transactions pursuant to the terms of such other Code of Ethics provided that such Code was reviewed and approved by the Board of Directors/Trustees of the Fund. The Compliance Officer shall ensure that each Access Person subject to this Code receives a copy of the Code. The Compliance Officer will maintain a list of all Access Persons who are currently, and
within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES The Prohibitions described below will only apply to a transaction in a security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership.
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement without prior approval.
(i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; provided, however, that this prohibition shall not apply to Disinterested Directors/Trustees except if they have actual knowledge of trading by any fund in the Complex.
This prohibition shall also not apply to Access Persons of the Manager, Principal Underwriter, and Adviser/Subadviser who do not, in the ordinary course of fulfilling his or her official duties, have access to current or pending information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day trading operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed period are not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase or sell a Security has been made and communicated. However, this prohibition shall not apply to a "pending `buy `or `sell' order" in the same or an equivalent security in a broad based index fund.(1)
(ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after a Fund in the same Complex trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. This prohibition shall not apply to purchases and sales executed in a broad based index fund.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, Profits realized on such trades will be promptly required to be
disgorged to the Fund or a charitable organization approved by the
Committee.
(iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures described in Section 6 below and without prior knowledge of trading by any Fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
(1) A list of such Funds shall be maintained by the Compliance Officer.
Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent Security within any 60 calendar day period. If trades are effected during the proscribed period, Profits realized on such trades will be promptly required to be disgorged to the Fund or a charitable organization approved by the Committee.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. This prohibition does not apply to Disinterested Directors/Trustees.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by any Fund in the Complex, subject to preclearance and the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the Complex at the discretion of the Compliance Officer. This prohibition does not apply to Disinterested Directors/Trustees.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club. This prohibition does not apply to Disinterested Directors/Trustees.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any fund in the Complex and
(ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based index.(2)
(2) A list of such indices will be maintained by the Compliance Officer.
(i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to purchase or sell Securities of the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed by the close of business on the day in which preclearance is granted; provided, however that approved orders for Securities traded in foreign markets may be executed within two (2) business days from the date preclearance is granted. If any order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the Fund or the Compliance Officer the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Director/Trustee has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security only if such Disinterested Director/Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Director/Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is not required to make a report with respect to transactions effected in any account over which such Director/Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Director/Trustee which is managed on a discretionary basis by a person other than such Director/Trustee and with respect to which such Director/Trustee does not in fact influence or control such transactions. The Secretary of the Fund or the Compliance Officer shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any
direct or indirect Beneficial Ownership in the Security to which the report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such confirmations and statements contain all the information required by Section 7. b. hereof and are furnished within the time period required by such section.
The Compliance Officer will periodically review the personal investment activity of all Access Persons (including Disinterested Directors/Trustees with respect to Securities transactions reported pursuant to Section 7 above) and holdings reports of all Access Persons.
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Directors/Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing which would be considered excessive in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other
procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
13. CODE VIOLATIONS AND SANCTIONS
All violations of the Code will be reviewed by the Committee. The Committee will determine any sanctions or other disciplinary actions that may be deemed appropriate. All material violations and corresponding sanctions and/or disciplinary action will be reported to the Board of Directors/Trustees of the Fund on a quarterly basis. The Board of Directors/Trustees may take action as it deems appropriate, in addition to any action previously taken by the Committee.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is required.
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors or officers who are not Directors/Trustees or Officers of the Fund since they are deemed not to constitute Access Persons or Advisory Persons as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit, whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time.
Exhibit (p)(6)
[MELLON LOGO]
CODE OF CONDUCT
[CONDUCT GRAPHIC]
[MELLON LOGO]
July 2000
Dear Mellon Financial Employee:
To achieve our goal of being the best performing financial services company, all of us at Mellon must reflect on our company's long history of integrity, teamwork and excellence. Our ability to seize new opportunities and meet future challenges rests on these Shared Values, which are the underpinning of our reputation for honorable conduct.
Since 1869, when Judge Thomas Mellon first opened the doors of Mellon Bank, our employees have steadfastly abided by the highest ethical, legal and moral standards. Mellon's Code of Conduct has been updated over the years to reflect changing times, but its basic premise has remained unchanged: Clear professional and personal guidelines will help you make decisions that preserve Mellon's reputation consistent with your own high standards of integrity.
The continued success of our business depends on our making decisions based on complete knowledge and sound judgment. By adhering to the guidelines in this Code of Conduct, you will help us be the best in all that we do. Thank you for your cooperation on this and for all your many contributions to our success.
Sincerely yours,
/s/ Martin G. McGuinn Martin G. McGuinn CHAIRMAN AND CHIEF EXECUTIVE OFFICER |
CONTENTS
Page #
INTRODUCTION .......................................................... 1
YOUR RESPONSIBILITIES ................................................. 2
OBEYING LAWS AND REGULATIONS .......................................... 2-4
Criminal Laws ..................................................... 2-3
Anticompetitive Activities ........................................ 3
Illegal Use of Corporate Funds .................................... 3-4
Equal Employment Opportunity Laws ................................. 4
Drug Free Workplace ............................................... 4
AVOIDING CONFLICTS OF INTEREST ........................................ 4-8
Investment Decisions .............................................. 5
Investments That Require Approval ............................. 5
Self-Dealing ...................................................... 5
Monitoring Outside Activities ..................................... 5
Limiting Outside Employment ................................... 5
Purchasing Real Estate ........................................ 6
Accepting Honoraria ........................................... 6
Accepting Fiduciary Appointments .............................. 6
Participating in Civic Affairs ................................ 6
Serving as an Outside Director or Officer ..................... 6-7
Participating in Political Activities ......................... 7
Dealing With Customers and Suppliers .............................. 7
Gifts and Entertainment ....................................... 7-8
Borrowing From Customers ...................................... 8
Giving Advice to Customers .................................... 8
Legal Advice .............................................. 8
Tax and Investment Advice ................................. 8
Recommending Professional Services ................................ 8
RESPECTING CONFIDENTIAL INFORMATION ................................... 9-10
Types of Confidential Information ................................. 9
Information Obtained From Business Relations .................. 9
Mellon Financial Information .................................. 9
Mellon Examination Information ................................ 9
Mellon Proprietary Information ................................ 9
Electronic Information Systems ................................ 10
Information Security Systems .................................. 10
Computer Software ............................................. 10
Insider Information ........................................... 10
RULES FOR PROTECTING CONFIDENTIAL INFORMATION ......................... 11-12
Limited Communication to Outsiders ................................ 11
Corporate Use Only ................................................ 11
Other Customers ................................................... 11
Notification of Confidentiality ................................... 11
Prevention of Eavesdropping ....................................... 11
Data Protection ................................................... 11
Confidentiality Agreements ........................................ 11
Contact With the Public ........................................... 11
Supplemental Procedures ........................................... 11
"Chinese Wall" Policy ............................................. 12
TERMINATION OF EMPLOYMENT ............................................. 12
|
INTRODUCTION
Today's financial services marketplace is filled with a host of new challenges, changes and opportunities. Amidst these changes, one constant guides Mellon Financial Corporation and all of its employees and will continue to be central to all that we do: the mandate for integrity.
Only by conducting ourselves and our business in accordance with the highest standards of legal, ethical and moral integrity can we achieve our vision of excellence and our goals for the future.
This Code of Conduct will familiarize you with the general guidelines of professional conduct expected from employees in their interactions with customers, prospective customers, competitors, suppliers, the communities we serve and one another. As Mellon employees, we can settle for nothing less than full adherence to the Code.
Please read the Code carefully and retain it for your records. From time to time, you may be asked to certify in writing that you have followed the Code, so be sure you understand it. Appropriate officers should periodically reinforce the importance of the Code to their employees, pointing out provisions of particular relevance.
The penalty for violating any provision of this Code may be disciplinary action up to and including dismissal. In addition, all violations of criminal laws applicable to Mellon's businesses are required to be and will be reported to the appropriate authorities for prosecution.
Although the Code provisions generally have worldwide applicability, some sections of the Code may conflict with the laws or customs of the countries in which Mellon operations are located. However, the Code may be amended for operations outside the United States only with the approval of the Legal Department.
If you have any questions about this Code, ask your supervisor or consult the Legal Department. If you suspect a violation of the Code of Conduct, contact the General Counsel or Manager of Corporate Compliance. All communications will be handled in a confidential manner.
TERMS FREQUENTLY USED IN THE CODE ARE DEFINED AS FOLLOWS:
- APPROPRIATE OFFICER -- head of the affected group, department or subsidiary
- APPROVAL -- formal, written consent
- BANK -- any bank or savings and loan association subsidiary, direct or indirect, of Mellon Financial Corporation
- SECURITIES TRADING POLICY -- Mellon Financial Corporation's Securities Trading Policy
- CORPORATION -- Mellon Financial Corporation
- EMPLOYEE -- any employee of Mellon Financial Corporation or any of its subsidiaries
- GENERAL COUNSEL -- General Counsel of Mellon Financial Corporation
- MANAGER OF CORPORATE COMPLIANCE -- Manager of Corporate Compliance of Mellon Financial Corporation
- MELLON -- Mellon Financial Corporation and all its wholly- or majority-owned subsidiaries and affiliates
YOUR RESPONSIBILITIES
As an employee, your personal conduct should reflect the highest professional standards of behavior. You are obliged to monitor your personal and professional affairs so as not to discredit yourself or Mellon. You should treat all persons fairly. Everyone, including our competitors, has a right to expect you will act with complete honesty, integrity, and fairness. When, on behalf of Mellon, you purchase a product or service, you should do so on the basis of quality and price. No code of conduct can anticipate every situation. Common sense and good judgment are required in responding to a situation that may not seem to be specifically covered by the Code and in recognizing when to seek advice regarding application of the Code. Your behavior at work reflects Mellon's ethics, so you are expected to:
- obey all laws and regulations that apply to Mellon's business;
- avoid activities that could create conflicts of interest or even the appearance of conflicts of interest with Mellon; and
- respect the confidentiality of Mellon business information and information about those with whom Mellon has business relationships.
Details of the above obligations are presented in the remainder of this Code of Conduct. Remember, these standards and examples serve as guidelines.
Mellon has established the Questionable Activities Hotline (800 234-MELN Ext. 4-8477) so employees may call to report suspected violations of the Code or criminal activity involving Mellon. Calls may be made anonymously.
OBEYING LAWS AND REGULATIONS
Numerous national, state and local laws of the United States and other countries apply to Mellon. As an employee, you are expected to conduct all business dealings according to these laws. Violating any of them could subject you and/or Mellon to criminal and civil penalties. If you have questions about these laws or how they apply to particular situations, ask your supervisor or consult the Legal Department.
Mellon management should be informed of matters which might adversely affect the reputation of Mellon, including investigations by any governmental agency. You must be completely candid and cooperative in dealing with Mellon attorneys and auditors.
CRIMINAL LAWS
A number of criminal laws apply to Mellon employees. Examples of activities prohibited by these laws are:
- corruptly accepting or soliciting anything of value (except your salary or other compensation paid by Mellon) intending to be influenced or rewarded in connection with Mellon's business or in return for confidential information (see page 7, "Dealing With Customers and Suppliers");
- intentionally failing to make currency transactions filings and other reports required by the Bank Secrecy Act;
- knowingly engaging in a financial transaction involving the proceeds of an illegal activity (i.e., money laundering);
- stealing, embezzling or misapplying Mellon funds or assets;
- using threats, physical force or other unauthorized means to collect money;
- issuing unauthorized obligations (such as certificates of deposit, notes or mortgages) or recording false entries;
- using Corporate funds or assets to finance campaigns for political office;
- lending trust funds to a Mellon officer, director or employee;
- certifying a check drawn on an account with insufficient funds;
OBEYING LAWS AND REGULATIONS (cont.)
- making a loan or giving a gift to a bank examiner who has the authority to examine a Mellon Bank or its affiliates;
- misusing federal records and documents;
- using a computer to gain unauthorized access to Mellon records of a customer;
- knowing that a criminal offense has been committed and helping the criminal avoid capture or punishment;
- making false reports to government officials; and
- using software in knowing violation of a licensing agreement.
If you are arrested, indicted, or convicted of any criminal offense involving theft, dishonesty, or breach of trust or other type of offense which may affect your employment status, you must notify your manager promptly.
ANTICOMPETITIVE ACTIVITIES
The Sherman Antitrust Act prohibits any combination, conspiracy or agreement among competitors to restrict or prevent competition. A specific violation of this Act could be a formal or informal agreement between you and a Mellon competitor to fix prices, allocate markets, allocate customers or refuse to deal with particular suppliers or customers.
If you are in contact with Mellon's competitors, you must avoid any agreements with them (or even circumstances that might give the appearance of such agreements) relating to how Mellon conducts its business. You should be especially careful at social or professional gatherings and at trade association meetings where discussions or exchanges of information relating to competitive matters could occur.
Mellon strongly encourages employees to promote the sale of all of the various Mellon products and services. "Cross-selling" of Mellon products and services is an extremely valuable tool for increasing Mellon's revenues. However, employees should be aware that the Federal Bank Holding Company Act Amendments of 1970 and antitrust laws prohibit Mellon from participating in certain "tying arrangements." A tying arrangement is one in which a seller places conditions on a sale, or the terms of a sale, of a product or service that obligates a buyer to purchase a separate product or service. For example, you may not extend credit conditioned on a customer's rental of a Bank safe deposit box. You must be sure that you do not require customers to participate in prohibited tying arrangements.
The prohibitions against tying arrangements in the Federal Bank Holding Company Act Amendments of 1970 do not apply to certain traditional banking practices such as requiring a compensating balance in connection with a loan.
Questions concerning tying arrangements or other antitrust laws should be directed to the Legal Department.
ILLEGAL USE OF CORPORATE FUNDS
The purpose of any transaction that relates to Corporate funds or assets must be revealed and recorded at the time of the transaction. As an employee, you may not participate in any of the activities listed below.
- You may not establish or maintain secret or unrecorded funds.
- You may not engage in any transaction knowing that part of an anticipated payment is to be used for unlawful or improper purposes.
- You may not record or participate in recording incorrect, fictitious or misleading entries in Mellon's books or records.
- You may not use Corporate funds or assets for political contributions in connection with federal elections. A number of states also have laws restricting the use of corporate funds or assets in connection with state elections. Corporate assets include your time during regular working hours, Mellon equipment and supplies, office space, clerical help and advertising facilities.
- You may not make any payment for an expressed purpose on Mellon's behalf to any individual who you know intends to use the money for a different purpose.
OBEYING LAWS AND REGULATIONS (cont.)
- You may not make Corporate or personal payments of cash or other items of value to political candidates, government officials or businesses that are designed to influence the judgment or actions of the recipients in connection with any Mellon activity. Indeed, many jurisdictions, including Massachusetts, put stringent limitations on entertainment of government officials. It is not prohibited under U.S. law, however, to make payments to foreign government employees with essentially ministerial or clerical duties to induce an act or decision not involving discretion. Examples of such "facilitating" payments include payments to expedite shipments through customs, payments to obtain adequate police protection and payments to place transcontinental telephone calls.
Questions concerning the permissibility of any of the above kinds of payments, which may raise issues under foreign as well as U.S. laws, should be directed to the Legal Department.
EQUAL EMPLOYMENT OPPORTUNITY LAWS
Various federal, state and local equal employment opportunity (EEO) laws apply to Mellon. Some prohibit certain kinds of discrimination in hiring, training, determining promotions, etc.; others require Affirmative Action (AA). All employment decisions are to be made in a manner consistent with applicable laws. Mellon strongly supports the principles of these laws, and you are expected to comply with them. You should address any questions concerning Mellon's EEO policy, Mellon's policy prohibiting sexual harassment or Mellon's AA policy to the Legal Department or the Corporate EEO/AA Director in the Human Resources Department.
DRUG FREE WORKPLACE
The illegal possession, use, purchase, transfer or sale of narcotics or other controlled substances on Mellon owned or controlled property, in Mellon owned or leased vehicles, during performance of Mellon business or at Mellon sponsored events is strictly prohibited. Any of these activities are grounds for disciplinary action, up to and including termination of employment. Mellon will cooperate with the appropriate law enforcement agencies with respect to such acts. Employees are required to become thoroughly familiar with our Drug and Alcohol Control Policy (CPP-504-4).
AVOIDING CONFLICTS OF INTEREST
In business, a conflict of interest is generally defined as a single person or entity having two or more interests that are inconsistent. You should not cause Mellon or yourself to have a conflict of interest. You should be particularly sensitive to situations involving family or household members. In your case, a conflict of interest occurs when you allow any interest, activity or influence outside of Mellon to:
- influence your judgment when acting on behalf of Mellon;
- compete against Mellon in any business activity;
- divert business from Mellon;
- diminish the efficiency with which you perform your regular duties;
- harm or impair Mellon's financial or professional reputation; or
- benefit you at the expense of Mellon.
As an employee, you are not permitted to participate in any activity that causes a conflict of interest or gives the appearance of a conflict of interest. Areas frequently involved in conflicts of interest and examples of prohibited activities are described below.
If you believe that you have, or may be perceived to have, a conflict of interest, you must disclose that conflict in writing to the Manager of Corporate Compliance. The Manager of Corporate Compliance must keep copies of all such disclosures.
AVOIDING CONFLICTS OF INTEREST (cont.)
INVESTMENT DECISIONS
Because your investments can lead to conflicts of interest, you must be familiar with, and comply with, the investment guidelines contained in the Securities Trading Policy, which contains restrictions and pre-clearance and reporting requirements for various types of securities transactions, including publicly traded securities. The Securities Trading Policy also contains special requirements for dealings in Mellon securities. In addition, certain types of investments must be reviewed individually.
INVESTMENTS THAT REQUIRE APPROVAL
In addition to the requirements contained in the Securities Trading Policy, you are required to obtain approval from the Manager of Corporate Compliance:
- before you invest in a business enterprise if you have responsibilities for, or have decision-making responsibilities regarding, providing services to, or purchasing goods and services from, that business enterprise on behalf of Mellon; or
- to hold an investment in a business enterprise if you are assigned responsibility for, or have decision-making responsibilities regarding, providing services to, or purchasing goods or services from, that business enterprise on Mellon's behalf after you have made your investment.
SELF-DEALING
To further avoid conflicts of interest, you are restricted from becoming involved in certain business dealings with Mellon. As an employee, you are prohibited from:
- directly or indirectly buying assets from (other than assets being offered to the public or employees generally), or selling assets to, Mellon or any account for which Mellon acts as a fiduciary unless you have prior consent from the appropriate officer or you have court or regulatory approval, as required;
- representing Mellon in any activity (whether an internal Mellon activity or a transaction between Mellon and a third party) requiring your judgment or discretion which affects a person or organization in which you have a material interest, financial or otherwise. For example, you are prohibited from representing Mellon in lending money to a relative or close personal friend because it might impair or appear to impair your professional judgment or the performance of your duties, or from giving credit approval to loans made by an employee who is your spouse because it might impact your spouse's incentive compensation or performance appraisal; and
- representing any non-Mellon company in any transaction with Mellon that involves the exercise of discretion by either party.
MONITORING OUTSIDE ACTIVITIES
As an employee, you are expected to avoid any outside interest or activity that will interfere with your duties. Generally, your outside interests or activities should not:
- significantly encroach on time or attention you devote to your duties;
- adversely affect the quality of your work;
- compete with Mellon's activities;
- involve any significant use of Mellon's equipment, facilities or supplies;
- imply Mellon's sponsorship or support (for example, through the use of Mellon stationery for personal purposes); or
- adversely affect the reputation of Mellon.
LIMITING OUTSIDE EMPLOYMENT
While an employee, you may not accept outside employment as a representative who prepares, audits or certifies statements or documents pertinent to Mellon's business.
In addition, you must obtain approval from the Manager of Corporate Compliance before you accept employment as a broker, contractor or agent who engages in real estate transactions such as negotiating and selling mortgages for others, appraising property or collecting rents; or as an attorney, tax or investment counselor, or insurance broker or agent.
AVOIDING CONFLICTS OF INTEREST (cont.)
PURCHASING REAL ESTATE
Because certain subsidiaries of the Corporation are engaged in real estate activities, any real estate transaction you make must be scrutinized to make certain it is not competitive with Mellon activities.
Unless you receive prior approval from the Manager of Corporate Compliance, or the purchase is made in a public auction in which Mellon is not competing, you should not directly or indirectly:
- purchase commercial real estate from, or sell it to, a current or known potential Mellon customer;
- purchase any real estate with a mortgage on which Mellon is foreclosing or on which you know Mellon is planning to foreclose; or
- bid on or purchase any real estate that you know Mellon is considering or is likely to consider purchasing.
ACCEPTING HONORARIA
Neither you nor any member of your immediate family may accept cash honoraria for your public speaking or writing services on Mellon's behalf. If a cash honorarium is tendered, you should donate it to the Mellon Bank Foundation, request that it be donated to a charity of your choice, or turn it over to the Finance Department. You may accept noncash honoraria of modest value (not to exceed $100). You also may accept reimbursement of related expenses subject to the approval of the Manager of Corporate Compliance. You should check with the Tax Group to ensure proper tax treatment.
ACCEPTING FIDUCIARY APPOINTMENTS
A fiduciary appointment is an appointment as an administrator, executor, guardian, custodian for a minor, trustee or managing agent. Unless you are acting on behalf of a member of your family or you have obtained approval from the Manager of Corporate Compliance, you may not accept a fiduciary or co-fiduciary appointment. You also may not act as a deputy or co-tenant of a safe deposit box, or act as agent or attorney-in-fact (including signer or co-owner) on a customer's account.
Even if you are acting on behalf of a family member or receive approval to act as fiduciary or co-fiduciary, you are expected to follow these guidelines:
- avoid any representations that you are performing (or have access to) the same professional services that are performed by a Bank;
- do not accept a fee for acting as co-fiduciary with a Bank unless you receive approval from the board of directors of that Bank; and
- do not permit your appointment to interfere with the time and attention you devote to your job responsibilities.
PARTICIPATING IN CIVIC AFFAIRS
You are encouraged to take part in charitable, educational, fraternal or other civic affairs, as long as such affairs do not interfere or conflict with your responsibilities at Mellon. However, you should review the requirements of "Serving as an Outside Director or Officer" (see below) as they may apply to your participation in civic affairs. You should not imply Mellon's sponsorship or support of any outside event or organization without the approval of the Chief Executive Officer of your entity or the Chief Executive Officer's delegate.
SERVING AS AN OUTSIDE DIRECTOR OR OFFICER
In view of the potential conflicts of interest and the possible liability for both you and Mellon, you are urged to be cautious when considering service as an officer, general partner or director of any non-Mellon entity. Before agreeing to such service, you should review and comply with the Corporate Policy on Outside Directorships and Offices (CPP-805-1), which requires approvals to hold certain outside offices and directorships. Approvals granted under this Policy do not constitute requests by Mellon to serve, nor do they carry with them indemnification.
While you are serving as an officer, general partner or director of an outside entity, you should:
- not attempt to influence or take part in any vote or decision that may lead to the use of a Mellon product or service by the outside entity, or result in the conferring of some specific benefit to Mellon by the outside entity, and see that the outside entity's records reflect your abstention;
AVOIDING CONFLICTS OF INTEREST (cont.)
- relinquish any responsibility you may have for any Mellon relationship with the outside entity;
- be satisfied that the outside entity conducts its affairs lawfully, ethically and in accordance with prudent management and financial practices; and
- comply with the annual approval requirements in the Corporate Policy on Outside Directorships and Offices (CPP-805-1).
Any employee serving as a treasurer of a public organization-such as a school district, borough or other similar governmental entity-must consult the Legal Department for further guidelines.
PARTICIPATING IN POLITICAL ACTIVITIES
Mellon encourages you to keep informed concerning political issues and candidates and to take an active interest in political affairs. If you do participate in any political activity, however, you may not act as a representative of Mellon unless you are specifically authorized in writing to do so by the Chief Executive Officer of the Corporation.
As explained in "Obeying Laws and Regulations" on page 3, it is unlawful to use Corporate funds or assets in connection with federal elections, and many states also restrict the use of corporate funds or assets in connection with state elections. In accordance with applicable laws, however, Mellon may establish political action committees for lawful participation in the political process. The use of Corporate funds or assets in connection with state elections may not be made without prior approval of the Legal Department.
Hospitality toward public officials should never be such that it could tend to compromise, or give the appearance of compromising, the honesty or integrity of the public official or Mellon. Hospitality should be extended with the expectation that it will become public knowledge and should be extended in compliance with all applicable laws and regulations.
DEALING WITH CUSTOMERS AND SUPPLIERS
In your dealings with customers and suppliers, situations sometimes occur that may create a conflict of interest or the appearance of a conflict of interest. To avoid such conflicts, Corporate policies were developed in the areas listed below.
GIFTS AND ENTERTAINMENT
Under the Bank Bribery Act, you may not offer or accept gifts or other items of value under circumstances intended to influence you, a customer or supplier in conducting business. Items of value include money, securities, business opportunities, goods, services, discounts on goods or services, entertainment, food or drink (see page 2, "Obeying Laws and Regulations"). Employees of NASD members should check NASD rules, which in some instances are more restrictive. Under the Bank Bribery Act, you may not:
- solicit for yourself or for a third party (other than Mellon) anything of value from anyone in return for any Mellon business, service or confidential information;
- give cash gifts to, or accept cash gifts from, a customer, supplier or person to whom you refer business;
- use your position at Mellon to obtain anything of value from a customer, supplier or person to whom you refer business;
- accept gifts under a will or trust instrument of a customer unless you have the prior approval of the Manager of Corporate Compliance; or
- except as provided below, accept anything of value (other than earned salary, wages and fees) from anyone in connection with Mellon business.
The business practices listed below do not create the risk of corruption or breach of trust to Mellon and are permissible. Accordingly, you may accept:
- gifts, gratuities, amenities or favors based on obvious family or personal relationships (such as those between an employee's parents, children or spouse) where the circumstances make it clear that those relationships-rather than Mellon business-are the motivating factors;
AVOIDING CONFLICTS OF INTEREST (cont.)
- meals, refreshments, travel arrangements or accommodations, or entertainment of reasonable value and in the course of a meeting or other occasion held for business discussions, provided that the expenses would be paid by Mellon as a reasonable business expense;
- loans from other banks or financial institutions on customary terms to finance proper and usual employee activities (such as home mortgage loans), except where prohibited by law;
- advertising or promotional material, such as pens, pencils, note pads, key chains, calendars and similar items having a value of less than $100;
- discounts or rebates on merchandise or services that do not exceed those available to other customers;
- gifts that have a value of less than $100 and are related to commonly recognized events or occasions, such as a promotion, conference, sports outing, new job, wedding, retirement or holiday; or
- civic, charitable, educational or religious organization awards for recognition of service and accomplishment.
If you receive or anticipate receiving something of value from a supplier, customer or person to whom you refer business in a situation that is not specifically permitted by the Code, you must notify the Manager of Corporate Compliance in writing of the circumstances. You may not accept the item (or must return it if you have already received it) unless you receive approval from the Manager of Corporate Compliance. The Manager of Corporate Compliance will approve or deny requests based upon the reasonableness of the circumstances and whether the circumstances pose a threat to Mellon's integrity. The Manager of Corporate Compliance will maintain copies or records of all requests and responses.
Entertainment, gifts or prizes given to customers or suppliers by employees should be appropriate for the circumstances and constitute necessary and incidental Mellon business expenses. If you seek reimbursement from Mellon for business expenses, it is your responsibility to see that your expense diary is accurate and reflects only appropriate business expenses. In dealing with employees of other banks or bank holding companies, you should be aware that gifts or prizes given to those employees are subject to the Bank Bribery Law, and that the Bank Bribery Law applies to both givers and recipients.
BORROWING FROM CUSTOMERS
You are not permitted to borrow from, or lend your personal funds to, Mellon customers, brokers or suppliers. Credit transactions in customers' normal course of business and on regular terms (for example, transacting business with a recognized lending institution or charging items at a department store) are not included in this restriction.
GIVING ADVICE TO CUSTOMERS
Unless your regular Corporate duties specifically permit, you may not give legal, tax or investment advice to customers.
Legal Advice -- You may be asked by a customer to make a statement regarding the legal implications of a proposed transaction. You cannot give legal advice to customers. Be sure, therefore, that nothing you say might be interpreted as legal advice.
Tax and Investment Advice -- You may not advise customers on matters concerning tax problems, tax return preparation or investment decisions.
RECOMMENDING PROFESSIONAL SERVICES
Customers and others may ask your help to find qualified professional people or firms. Unless you name several candidates without indicating favoritism, you may not recommend attorneys, accountants, insurance brokers or agents, stock brokers, real estate agents, etc., to customers, employees or others. Under no circumstances may you make a recommendation if you expect to benefit.
RESPECTING CONFIDENTIAL INFORMATION
As an employee, you may have knowledge, reports or statements about Mellon's business or possess confidential information about the private or business affairs of Mellon's customers and suppliers. You should assume that all information about Mellon business or the private or business affairs of Mellon's customers (including applicants and former customers) or suppliers is confidential and you should treat that information as privileged and hold it in the strictest confidence.
Confidential information is to be used only for Corporate purposes. Under no circumstances may you use such information for personal gain or pass it on to any person outside Mellon, including family or friends, or even to other employees who do not need such information to perform their jobs or to provide services to or for Mellon. All employees must comply with Mellon's Consumer Privacy Policies and applicable privacy laws and regulations.
TYPES OF CONFIDENTIAL INFORMATION
Although it is impossible to provide an exhaustive list of information that should remain confidential, the following are examples of the general types of confidential information that employees might receive in the ordinary course of carrying out their job responsibilities.
INFORMATION OBTAINED FROM BUSINESS RELATIONS
You may possess confidential information about those with whom Mellon has business relations. If released, such information could have a significant effect on their operations, their business reputations or the market price of their securities. Disclosing such information could expose both you and Mellon to liability for damages. Customer information should not be released to third parties without customer authorization except as approved by the Legal Department.
MELLON FINANCIAL INFORMATION
Financial information about Mellon is confidential unless it has been published in reports to shareholders or has been made otherwise available to the public. It is the policy of the Corporation to disclose all material Corporate information to the public in such a manner that all those who are interested in the Corporation and its securities have equal access to the information. Except as required by law or approved by the Finance Department, financial information is not to be released to any person or organization. If you have any questions about disclosing financial information, contact the head of the Finance Department.
MELLON EXAMINATION INFORMATION
Virtually all Mellon entities are periodically reviewed by regulatory examiners. Certain reports made by those regulatory agencies are the property of those agencies and are strictly confidential. Giving information from those reports to anyone not officially connected with Mellon is a criminal offense.
MELLON PROPRIETARY INFORMATION
Certain nonfinancial information developed by Mellon-such as business plans, customer lists, methods of doing business, computer software, source codes, databases and related documentation-is valuable information that is proprietary and confidential. You are not to disclose it to anyone outside Mellon or to anyone inside Mellon who does not have a need to know such information. This obligation survives your employment with Mellon. Employees are prohibited from using Corporate time, resources and assets (including Mellon proprietary information) for personal gain. Mellon has proprietary rights in any materials, products or services that you create which relates to your work at Mellon, that use Mellon resources (equipment, etc.) or that are created during your regular work hours. You must disclose such materials, products or services to Mellon.
RESPECTING CONFIDENTIAL INFORMATION (cont.)
ELECTRONIC INFORMATION SYSTEMS
E-mail (internal and external), voice mail and communications systems are intended for Mellon business use only. Messages and information contained on these systems are subject, at Mellon's sole discretion, to access, monitoring, review and/or disclosure by authorized Mellon personnel with or without notice, at any time. You should not expect messages sent on these systems to be treated as private or confidential. Employees may not use e-mail systems to (1) bypass financial transaction documentation requirements; (2) send inappropriate, harassing or offensive messages; (3) solicit; or (4) deliberately distribute any program or virus that could be destructive to hardware, software, or files on any computer. You should also limit the transmission of highly sensitive information on these systems. Messages created in these systems should be in compliance with the Corporate Policy on Document Creation and Retention (CPP-111-2). For more detailed information on use of these systems, see the Corporate Policies on Use of Electronic Mail (CPP-111-3); Use of Mellon's E-Mail Network for Internal Communications (CPP-111-3(A)); Use of Mellon's E-Mail Network for External Communications (CPP-111-3(B)); and Access to Electronic Information (CPP-111-4). Additionally, Mellon provides employees access to both the Internet and Intranet (Mellon's internal Internet system) as a resource to obtain Mellon organizational or business related information. Your use of the Internet and Intranet is subject, at Mellon's sole discretion, to access, monitoring, review and/or disclosure by authorized Mellon personnel with or without notice, at any time, and should not be viewed as private or confidential. For more detailed information on use of the Internet and Intranet, see the Corporate Policy on Internet/Intranet Access and Use (CPP-204-2).
INFORMATION SECURITY SYSTEMS
If you have access to Mellon information systems, you are responsible for taking precautions necessary to prohibit unauthorized entry to the system. You should safeguard your passwords or other means of entry.
COMPUTER SOFTWARE
Computer software is to be used on Mellon business only and must be used in accordance with the terms of the licensing agreement. No copying of software is permitted except in accordance with the licensing agreement.
INSIDER INFORMATION
Insider information is material nonpublic information relating to securities issued by any corporation. Information is considered "material" if it is important enough to affect the judgment of investors about whether to buy, sell or hold stock, or to influence the market price of the stock.
The courts have ruled that insider information about securities must be made public before anyone possessing it can trade or recommend the purchase or sale of the securities concerned. Under federal and state securities laws, you, Mellon and the person who receives the information could be held legally responsible for misusing insider information.
Obviously, the insider information rule is very difficult to apply in given circumstances. Employees must be extremely cautious in discussing Corporate information with any person outside of Mellon or in using information obtained at Mellon in making personal investment decisions. If you have any doubts about whether or not an item is insider information or whether or not it has been or should be revealed, consult the Legal Department.
RULES FOR PROTECTING CONFIDENTIAL INFORMATION
The following are some basic rules to follow to protect confidential information.
LIMITED COMMUNICATION TO OUTSIDERS
Confidential information should not be communicated to anyone outside Mellon, except consistent with Mellon's policies on communicating such information.
CORPORATE USE ONLY
Confidential information should be used only for Corporate purposes. Under no circumstances may an employee use it, directly or indirectly, for personal gain or for the benefit of any outside party who is not entitled to such information.
OTHER CUSTOMERS
Where appropriate, customers should be made aware that employees will not disclose to them other customers' confidential information or use the confidential information of one customer for the benefit of another.
NOTIFICATION OF CONFIDENTIALITY
When confidential information is communicated to any person, either inside or outside Mellon, they should be informed of the information's confidential nature and the limitations on its further communication.
PREVENTION OF EAVESDROPPING
Confidential matters should not be discussed in public or in places, such as in building lobbies, restaurants or elevators, where persons may overhear. Precautions, such as locking materials in desk drawers overnight, stamping material "Confidential" and delivering materials in sealed envelopes, should be taken with written materials to ensure they are not read by unauthorized persons.
DATA PROTECTION
Data stored on personal computers and diskettes should be properly secured to ensure it is not accessed by unauthorized persons. Access to computer files should be granted only on a need-to-know basis. At a minimum, employees should comply with applicable Mellon policies on electronic data security.
CONFIDENTIALITY AGREEMENTS
Confidentiality agreements to which Mellon is a party must be complied with in addition to, but not in lieu of, this Policy. Confidentiality agreements that deviate from commonly used forms should be reviewed in advance by the Legal Department.
CONTACT WITH THE PUBLIC
All contacts with institutional shareholders or securities analysts about Mellon must be made through the Investor Relations Division of the Finance Department. All contacts with the media and all speeches or other public statements made on behalf of Mellon or about Mellon's businesses must be cleared in advance by Corporate Affairs. All media inquiries should be directed to Corporate Affairs. In speeches and statements not made on behalf of Mellon, care should be taken to avoid any implication that Mellon endorses the views expressed.
SUPPLEMENTAL PROCEDURES
Mellon entities, departments, divisions and groups should establish their own supplemental procedures for protecting confidential information, as appropriate. These procedures may include:
- establishing records retention and destruction policies;
- using code names;
- limiting the staffing of confidential matters (for example, limiting the size of working groups and the use of temporary employees, messengers and word processors); and
- requiring written confidentiality agreements for certain employees.
Any supplemental procedures should be used only to protect confidential information and not to circumvent appropriate report and recordkeeping requirements.
RULES FOR PROTECTING CONFIDENTIAL INFORMATION (cont.)
"CHINESE WALL" POLICY
To facilitate compliance with the prohibition on trading in securities while in possession of insider information, diversified financial services organizations, including Mellon, have adopted "Chinese Wall" policies. The Chinese Wall separates the business units or employees likely to receive insider information from the business units or employees that trade in securities or provide investment advice.
Mellon's Chinese Wall Policy (CPP-903-2(C)) establishes rules restricting the flow of information within Mellon to investment personnel; procedures to be used by investment personnel to obtain information from other departments or divisions of Mellon Banks or from other Mellon subsidiaries; and procedures for reporting the receipt of material nonpublic information by investment personnel.
You must know this policy, particularly if you work in an area that handles investment decisions or if you supply or might be asked to supply information to employees in such areas. Under no circumstances should you receive or pass on information that may create a conflict of interest or interfere with a fiduciary obligation of Mellon.
TERMINATION OF EMPLOYMENT
You must return all property of Mellon immediately before or upon termination of employment. This includes all forms of Mellon proprietary information; all hard-copy and computer files; customer lists; personal computer hardware and software; statistical analysis, product pricing, various formulas and models; identification cards; keys and access cards; and other confidential information. In addition, you may not retain copies of any such property. You must also return cellular or car phones, pagers, laptop computers and any other equipment that Mellon made available to facilitate performance of your job.
NOTES
[MELLON LOGO]
Corporate Compliance
www.mellon.com
Exhibit (p)(6)
[MELLON LOGO]
SECURITIES TRADING POLICY
[GRAPHIC]
[MELLON LOGO]
July 2000
Dear Mellon Financial Employee:
At Mellon, we take great pride in our transformation over the years from a regional bank to a global financial services company. Our growth makes us better able to meet customers' changing needs, gives us greater stability during any unexpected economic downturn and affords us the opportunity to be the best performing financial services company.
This diversity of our businesses also makes us a complex organization, which is why it's more important than ever that you clearly understand Mellon's Securities Trading Policy. Mellon has long maintained strict policies regarding securities transactions, all with the same clear-cut objective: to establish and demonstrate our compliance with the high standards with which we conduct our business.
If you are new to Mellon, please take the time to fully understand the Policy and consult it whenever you are unsure about appropriate actions. If you have seen the Policy previously, I urge you to renew your understanding of the entire document and its implications for you. Only by strict adherence to the Policy can we ensure that our well-deserved reputation for integrity is preserved.
Sincerely yours,
/s/ Martin G. McGuinn |
Martin G. McGuinn
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TABLE OF CONTENTS
Page #
INTRODUCTION ..................................................... 1
CLASSIFICATION OF EMPLOYEES ...................................... 2
Insider Risk Employees ..................................... 2
Investment Employees ....................................... 2-3
Access Decision Makers ..................................... 3
Other Employees ............................................ 3
Consultants, Independent Contractors and Temporary Employees 3
PERSONAL SECURITIES TRADING PRACTICES ............................ 4-45
SECTION ONE - APPLICABLE TO INSIDER RISK EMPLOYEES
Quick Reference - Insider Risk Employees ................... 4
Standards of Conduct for Insider Risk Employees ............ 5-9
Restrictions on Transactions in Mellon Securities .......... 10-12
Restrictions on Transactions in Other Securities ........... 12-15
Protecting Confidential Information ........................ 16-18
SECTION TWO - APPLICABLE TO INVESTMENT EMPLOYEES
Quick Reference - Investment Employees ..................... 19
Standards of Conduct for Investment Employees .............. 20-25
Restrictions on Transactions in Mellon Securities .......... 26-28
Restrictions on Transactions in Other Securities ........... 28-31
Protecting Confidential Information ........................ 32-34
Special Procedures for Access Decision Makers .............. 34
SECTION THREE - APPLICABLE TO OTHER EMPLOYEES
Quick Reference - Other Employees .......................... 35
Standards of Conduct for Other Employees ................... 36-37
Restrictions on Transactions in Mellon Securities .......... 37-39
Restrictions on Transactions in Other Securities ........... 39-42
Protecting Confidential Information ........................ 43-45
GLOSSARY
Definitions ................................................ 46-52
Exhibit A - Sample Letter to Broker ........................ 53
|
INTRODUCTION
The Securities Trading Policy (the "Policy") is designed to reinforce Mellon Financial Corporation's ("Mellon's") reputation for integrity by avoiding even the appearance of impropriety in the conduct of Mellon's business. The Policy sets forth procedures and limitations which govern the personal securities transactions of every Mellon employee.
Mellon and its employees are subject to certain laws and regulations governing personal securities trading. Mellon has developed this Policy to promote the highest standards of behavior and ensure compliance with applicable laws.
Employees should be aware that they may be held personally liable for any improper or illegal acts committed during the course of their employment, and that "ignorance of the law" is not a defense. Employees may be subject to civil penalties such as fines, regulatory sanctions including suspensions, as well as criminal penalties.
Employees outside the United States are also subject to applicable laws of foreign jurisdictions, which may differ substantially from US law and which may subject such employees to additional requirements. Such employees must comply with applicable requirements of pertinent foreign laws as well as with the provisions of the Policy. To the extent any particular portion of the Policy is inconsistent with foreign law, employees should consult the General Counsel or the Manager of Corporate Compliance.
Any provision of this Policy may be waived or exempted at the discretion of the Manager of Corporate Compliance. Any such waiver or exemption will be evidenced in writing and maintained in the Audit & Risk Review Department.
Employees must read the Policy and must comply with it. Failure to comply with the provisions of the Policy may result in the imposition of serious sanctions, including but not limited to disgorgement of profits, dismissal, substantial personal liability and referral to law enforcement agencies or other regulatory agencies. Employees should retain the Policy in their records for future reference. Any questions regarding the Policy should be referred to the Manager of Corporate Compliance or his/her designee.
CLASSIFICATION OF EMPLOYEES
The Policy is applicable to all employees of Mellon and all of its
subsidiaries which are more than 50% owned by Mellon. This
includes all full-time, part-time, benefited and non-benefited,
exempt and non-exempt, domestic and international employees. It
does not include consultants and contract or temporary employees,
nor employees of subsidiaries which are 50% or less owned by
Mellon. Although the Policy provisions generally have worldwide
applicability, some sections of the Policy may conflict with the laws
or customs of the countries in which Mellon operations are located.
The Policy may be amended for operations outside the United States
only with the approval of the Manager of Corporate Compliance.
Employees are engaged in a wide variety of activities for Mellon.
In light of the nature of their activities and the impact of federal
and state laws and the regulations thereunder, the Policy imposes
different requirements and limitations on employees based on the
nature of their activities for Mellon. To assist employees in complying
with the requirements and limitations imposed on them in light of
their activities, employees are classified into one of four categories:
Insider Risk Employee, Investment Employee, Access Decision Maker
and Other Employee. Appropriate requirements and limitations are
specified in the Policy based upon an employee's classification.
Business line management, in conjunction with the Manager of
Corporate Compliance, will determine the classification of each
employee based on the following guidelines. Employees should
confirm their classification with their Preclearance Compliance
Officer or the Manager of Corporate Compliance.
INSIDER RISK EMPLOYEE You are considered to be an Insider Risk Employee if, in the normal
conduct of your Mellon responsibilities, you are likely to receive or
be perceived to possess or receive, material nonpublic information
concerning Mellon's commercial credit or corporate finance cus-
tomers. This will typically include certain employees in the credit,
lending and leasing businesses, certain members of the Audit & Risk
Review, and Legal Departments, and all members of the Senior
Management Committee who are not Investment Employees.
INVESTMENT EMPLOYEE You are considered to be an Investment Employee if, in the normal
conduct of your Mellon responsibilities, you are likely to receive or
be perceived to possess or receive, material nonpublic information
concerning Mellon's trading in securities for the accounts of others,
and/or if you provide investment advice.
|
CLASSIFICATION OF EMPLOYEES
INVESTMENT EMPLOYEE This will typically include:
(cont.)
- certain employees in fiduciary securities sales and trading,
investment management and advisory services, investment
research and various trust or fiduciary functions;
- an employee of a Mellon entity registered under the Investment
Advisers Act of 1940 who is also an "Access Person" as defined
by Rule 17j-1 of the Investment Company Act of 1940 (see
glossary); and
- any member of Mellon's Senior Management Committee who,
as part of his/her usual duties, has management responsibility for
fiduciary activities or routinely has access to information about
customers' securities transactions.
ACCESS DECISION MAKER (ADM) A person designated as such by the Investment Ethics Committee.
Generally, this will be portfolio managers and research analysts who
make recommendations or decisions regarding the purchase or sale
of equity, convertible debt, and non-investment grade debt securities
for mutual funds and other managed accounts. See further details in
the Access Decision Maker edition of the Policy.
OTHER EMPLOYEE You are considered to be an Other Employee if you are an employee
of Mellon Financial Corporation or any of its direct or indirect
subsidiaries who is not an Insider Risk Employee, Investment
Employee, or an ADM.
CONSULTANTS, INDEPENDENT Managers should inform consultants, independent contractors and
CONTRACTORS AND TEMPORARY temporary employees of the general provisions of the Policy (such as
EMPLOYEES the prohibition on trading while in possession of material nonpublic
information), but generally they will not be required to preclear
trades or report their personal securities holdings. If one of these
persons would be considered an Insider Risk Employee, Investment
Employee or Access Decision Maker if the person were a Mellon
employee, the person's manager should advise the Manager of
Corporate Compliance who will determine whether such individual
should be subject to the preclearance and reporting requirements of
the Policy.
|
PERSONAL SECURITIES TRADING PRACTICES
SECTION ONE - APPLICABLE TO INSIDER RISK EMPLOYEES
QUICK REFERENCE - INSIDER RISK EMPLOYEES
SOME THINGS YOU MUST DO
DUPLICATE STATEMENTS & CONFIRMATIONS -- Instruct your broker, trust account manager or other entity through which you have a securities trading account to send directly to MANAGER OF CORPORATE COMPLIANCE, MELLON FINANCIAL CORPORATION, PO BOX 3130, PITTSBURGH, PA 15230-3130:
- Trade confirmations summarizing each transaction
- Periodic statements
Exhibit A of this Policy can be used to notify your broker. This applies to all accounts in which you have a beneficial interest. (See Glossary)
PRECLEARANCE -- Before initiating a securities transaction, written preclearance must be obtained from the Manager of Corporate Compliance. This can be done by completing a Preclearance Request Form and:
- delivering the request to the Manager of Corporate Compliance, AIM 151-4340,
- faxing the request to (412) 234-1516, or
- contacting the Manager of Corporate Compliance for other available notification options.
Preclearance Request Forms can be obtained from Corporate Compliance (412) 234-1661. If preclearance approval is received the trade must be executed before the end of the 3rd business day (with the date of approval being the 1st business day), at which time the preclearance approval will expire.
SPECIAL APPROVALS
- Acquisition of securities in a Private Placement must be precleared by the employee's Department/ Entity head and the Manager of Corporate Compliance.
- Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship.
SOME THINGS YOU MUST NOT DO
MELLON SECURITIES -- The following transactions in Mellon securities are prohibited for all Mellon Employees:
- Short sales
- Purchasing and selling or selling and purchasing within 60 days
- Purchasing or selling during a blackout period
- Margin purchases or options other than employee options.
NON-MELLON SECURITIES -- New investments in financial services organizations are prohibited for certain employees only-see page 13.
OTHER RESTRICTIONS are detailed throughout Section One.
READ THE POLICY!
EXEMPTIONS
Preclearance is NOT required for:
- Purchases or sales of municipal bonds, non- financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures, index securities, securities issued by investment companies, commercial paper; CDs; bankers' acceptances; repurchase agreements; and direct obligations of the government of the United States.
- Transactions in any account over which the employee has no direct or indirect control over the investment decision making process.
- Transactions that are non-volitional on the part of an employee (such as stock dividends).
- Changes in elections under Mellon's 401(k) Retirement Savings Plan.
- An exercise of an employee stock option administered by Human Resources.
- Automatic reinvestment of dividends under a DRIP or Automatic Investment Plan. (Optional cash purchases under a DRIP or Direct Purchase Plan do require preclearance.)
- Sales of securities pursuant to tender offers and sales or exercises of "Rights" (see page 7).
QUESTIONS?
(412) 234-1661
This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions.
PERSONAL SECURITIES TRADING PRACTICES
STANDARDS OF CONDUCT FOR INSIDER RISK EMPLOYEES
Because of their particular responsibilities, Insider Risk Employees are
subject to preclearance and personal securities reporting requirements,
as discussed below.
Every Insider Risk Employee must follow these procedures or risk seri-
ous sanctions, including dismissal. If you have any questions about
these procedures you should consult the Manager of Corporate
Compliance. Interpretive issues that arise under these procedures
shall be decided by, and are subject to the discretion of, the Manager
of Corporate Compliance.
CONFLICT OF INTEREST No employee may engage in or recommend any securities transac-
tion that places, or appears to place, his or her own interests above
those of any customer to whom financial services are rendered,
including mutual funds and managed accounts, or above the
interests of Mellon.
MATERIAL NONPUBLIC INFORMATION No employee may engage in or recommend a securities transaction,
for his or her own benefit or for the benefit of others, including
Mellon or its customers, while in possession of material nonpublic
information regarding such securities. No employee may communi-
cate material nonpublic information to others unless it is properly
within his or her job responsibilities to do so.
BROKERS Trading Accounts -- All Insider Risk Employees are encouraged to
conduct their personal investing through a Mellon affiliate brokerage
account. This will assist in the monitoring of account activity on an
ongoing basis in order to ensure compliance with the Policy.
PERSONAL SECURITIES TRANSACTIONS Trading Accounts -- All Insider Risk Employees are required to instruct
REPORTS their broker, trust account manager or other entity through which they
have a securities trading account to submit directly to the Manager
of Corporate Compliance copies of all trade confirmations and statements
relating to each account of which they are a beneficial owner
regardless of what, if any, securities are maintained in such accounts.
Thus, for example, even if the brokerage account contains only
mutual funds or other exempt securities as that term is defined by the
Policy and the account has the capability to have reportable
securities traded in it, the Insider Risk Employee maintaining such
an account must arrange for duplicate account statements and trade
confirmations to be sent by the broker to the Manager of Corporate
Compliance. An example of an instruction letter to a broker is
in Exhibit A.
|
PERSONAL SECURITIES TRADING PRACTICES
PRECLEARANCE FOR PERSONAL All Insider Risk Employees must notify the Manager of Corporate
SECURITIES TRANSACTIONS Compliance in writing and receive preclearance before they engage
in any purchase or sale of a security. Insider Risk Employees should
refer to the provisions under "Beneficial Ownership" on page 15,
which are applicable to these provisions.
All requests for preclearance for a securities transaction shall be
submitted by completing a Preclearance Request Form which can
be obtained from the Manager of Corporate Compliance.
The Manager of Corporate Compliance will notify the Insider Risk
Employee whether the request is approved or denied, without
disclosing the reason for such approval or denial.
Notifications may be given in writing or verbally by the Manager
of Corporate Compliance to the Insider Risk Employee. A record of
such notification will be maintained by the Manager of Corporate
Compliance. However, it shall be the responsibility of the Insider
Risk Employee to obtain a written record of the Manager of Corporate
Compliance's notification within 24 hours of such notification. The
Insider Risk Employee should retain a copy of this written record.
As there could be many reasons for preclearance being granted or
denied, Insider Risk Employees should not infer from the preclearance
response anything regarding the security for which preclearance
was requested.
Although making a preclearance request does not obligate an Insider
Risk Employee to do the transaction, it should be noted that:
- preclearance requests should not be made for a transaction that
the Insider Risk Employee does not intend to make.
- preclearance authorization will expire at the end of the third
business day after it is received. The day authorization is granted
is considered the first business day.
- Insider Risk Employees should not discuss with anyone else,
inside or outside Mellon, the response they received to a
preclearance request. If the Insider Risk Employee is preclearing as
beneficial owner of another's account, the response may be dis-
closed to the other owner.
- Good Until Canceled/Stop Loss Orders ("Limit Orders") must be
precleared, and security transactions receiving preclearance
authorization must be executed before the preclearance expires.
At the end of the three-day preclearance authorization period,
any unexecuted Limit Order must be canceled or a new
preclearance authorization must be obtained.
|
PERSONAL SECURITIES TRADING PRACTICES
EXEMPTIONS FROM REQUIREMENT Preclearance by Insider Risk Employees is not required for the
TO PRECLEAR following transactions:
- Purchases or sales of Exempt Securities (direct obligations of the
government of the United States; high quality short-term debt
instruments; bankers' acceptances; CDs; commercial paper;
repurchase agreements; and securities issued by open-end
investment companies);
- Purchases or sales of municipal bonds, closed-end mutual funds;
non-financial commodities (such as agricultural futures, metals,
oil, gas, etc.), currency futures, financial futures, index futures
and index securities;
- Purchases or sales effected in any account over which an
employee has no direct or indirect control over the investment
decision making process (e.g., discretionary trading accounts).
Discretionary trading accounts may only be exempted from
preclearance procedures, when the Manager of Corporate
Compliance, after a thorough review, is satisfied that the account
is truly discretionary;
- Transactions that are non-volitional on the part of an employee
(such as stock dividends);
- The sale of Mellon stock received upon the exercise of an
employee stock option if the sale is part of a "netting of shares"
or "cashless exercise" administered by the Human Resources
Department (for which the Human Resources Department will
forward information to the Manager of Corporate Compliance);
- Changes to elections in the Mellon 401(k) plan;
- Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of securities, to the extent such
rights were acquired from such issuer;
- Sales of rights acquired from an issuer, as described above;
and/or
- Sales effected pursuant to a bona fide tender offer.
GIFTING OF SECURITIES Insider Risk Employees desiring to make a bona fide gift of securities
or who receive a bona fide gift, including an inheritance, of securities
do not need to preclear the transaction. However, Insider Risk
Employees must report such bona fide gifts to the Manager of
Corporate Compliance. The report must be made within 10 days of
making or receiving the gift and must disclose the following informa-
tion: the name of the person receiving (giving) the gift, the date of the
transaction, and the name of the broker through which the transac-
tion was effected. A bona fide gift is one where the donor does not
receive anything of monetary value in return. An Insider Risk
Employee who purchases a security with the intention of making a
gift must preclear the purchase transaction.
|
PERSONAL SECURITIES TRADING PRACTICES
DRIPs, DPPs AND AIPs Certain companies with publicly traded securities establish:
- Dividend Reinvestment Plans (DRIPs) -- These permit shareholders
to have their dividend payments channeled to the purchase of
additional shares of such company's stock. An additional benefit
offered to DRIP participants is the right to buy additional shares
by sending in a check before the dividend reinvestment date
("optional cash purchases").
- Direct Purchase Plans (DPPs) - These allow purchasers to buy
stock by sending a check directly to the issuer, without using a
broker.
- Automatic Investment Plans (AIPs) - These allow purchasers to set
up a plan whereby a fixed amount of money is automatically
deducted from their checking account each month and used to
purchase stock directly from the issuer.
Participation in a DRIP, DPP or AIP is voluntary.
Insider Risk Employees who enroll in a DRIP or AIP are not required
to preclear enrollment, the periodic reinvestment of dividend payments
into additional shares of company stock through a DRIP, or
the periodic investments through an AIP.
Insider Risk Employees must preclear all optional cash purchases
through a DRIP and all purchases through a DPP. Insider Risk
Employees must also preclear all sales through a DRIP, DPP or AIP.
RESTRICTED LIST The Manager of Corporate Compliance will maintain a list (the
"Restricted List") of companies whose securities are deemed
appropriate for implementation of trading restrictions for Insider
Risk Employees. The Restricted List will not be distributed outside of
the office of Corporate Compliance. From time to time, such trading
restrictions may be appropriate to protect Mellon and its Insider Risk
Employees from potential violations, or the appearance of violations,
of securities laws. The inclusion of a company on the Restricted List
provides no indication of the advisability of an investment in the
company's securities or the existence of material nonpublic
information on the company. Nevertheless, the contents of the
Restricted List will be treated as confidential information to avoid
unwarranted inferences.
To assist the Manager of Corporate Compliance in identifying compa-
nies that may be appropriate for inclusion on the Restricted List, the
department/entity heads in which Insider Risk Employees are
employed are required to inform the Manager of Corporate
Compliance in writing of any companies they believe should be
included on the Restricted List, based upon facts known or readily
available to such department heads.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTED LIST Although the reasons for inclusion on the Restricted List may vary,
(cont.) they could typically include the following:
- Mellon is involved as a lender, investor or adviser in a merger,
acquisition or financial restructuring involving the company;
- Mellon is involved as a selling shareholder in a public
distribution of the company's securities;
- Mellon is involved as an agent in the distribution of the
company's securities;
- Mellon has received material nonpublic information on the
company;
- Mellon is considering the exercise of significant creditors' rights
against the company; or
- The company is a Mellon borrower in Credit Recovery.
Department heads of sections in which Insider Risk Employees are
employed are also responsible for notifying the Manager of Corporate
Compliance in writing of any change in circumstances making it
appropriate to remove a company from the Restricted List.
The Manager of Corporate Compliance will retain copies of the
restricted lists for five years.
CONFIDENTIAL TREATMENT The Manager of Corporate Compliance will use his or her best efforts
to assure that all requests for preclearance, all personal securities
transaction reports and all reports of securities holdings are treated
as "Personal and Confidential." However, such documents will be
available for inspection by appropriate regulatory agencies and by
other parties within and outside Mellon as are necessary to evaluate
compliance with or sanctions under this Policy.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTIONS ON TRANSACTIONS IN MELLON SECURITIES
Employees who engage in transactions involving Mellon securities should be aware of their unique responsibilities with respect to such transactions arising from the employment relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be presumed to exercise influence or control (see provisions under "Beneficial Ownership" on page 15 for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). - Short Sales -- Short sales of Mellon securities by employees are prohibited. - Short Term Trading -- Employees are prohibited from purchasing and selling, or from selling and purchasing, Mellon securities within any 60 calendar day period. - Margin Transactions -- Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. - Option Transactions -- Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. - Major Mellon Events -- Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. - Mellon Blackout Period -- Employees are prohibited from buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. |
PERSONAL SECURITIES TRADING PRACTICES
MELLON 401(k) PLAN For purposes of the blackout period and the short term trading rule,
employees' changing their existing account balance allocation to
increase or decrease the amount allocated to Mellon Common Stock
will be treated as a purchase or sale of Mellon Stock, respectively.
This means:
- Employees are prohibited from increasing or decreasing their
existing account balance allocation to Mellon Common Stock
during the blackout period.
- Employees are prohibited from increasing their existing account
balance allocation to Mellon Common Stock and then decreasing
it within 60 days. Similarly, employees are prohibited from
decreasing their existing account balance allocation to Mellon
Common Stock and then increasing it within 60 days. However,
changes to existing account balance allocations in the 401(k)
plan will not be compared to transactions in Mellon securities
outside the 401(k) for purposes of the 60-day rule. (Note: This
does not apply to members of the Executive Management Group,
who should consult with the Legal Department.)
Except for the above there are no other restrictions applicable to the
401(k) plan. This means, for example:
- Employees are not required to preclear any elections or changes
made in their 401(k) account.
- There is no restriction on employees' changing their salary
deferral contribution percentages with regard to either the
blackout period or the 60-day rule.
- The regular salary deferral contribution to Mellon Common Stock
in the 401(k) that takes place with each pay will not be
considered a purchase for the purposes of either the blackout
or the 60-day rule.
MELLON EMPLOYEE Receipt -- Your receipt of an employee stock option from Mellon is
STOCK OPTIONS not deemed to be a purchase of a security. Therefore, it is exempt
from preclearance and reporting requirements, can take place during
the blackout period and does not constitute a purchase for purposes
of the 60-day prohibition.
Exercises -- The exercise of an employee stock option that results in
your holding the shares is exempt from preclearance and reporting
requirements, can take place during the blackout period and does not
constitute a purchase for purposes of the 60-day prohibition.
"Cashless" Exercises -- The exercise of an employee stock option
which is part of a "cashless exercise" or "netting of shares" that is
administered by the Human Resources Department or Chase Mellon
Shareholder Services is exempt from the preclearance and reporting
requirements and will not constitute a purchase or a sale for purposes
of the 60-day prohibition. A "cashless exercise" or "netting of shares"
transaction is permitted during the blackout period for ShareSuccess
plan options only. They are not permitted during the blackout period
for any other plan options.
|
PERSONAL SECURITIES TRADING PRACTICES
MELLON EMPLOYEE Sales -- The sale of the Mellon securities that were received in the
STOCK OPTIONS exercise of an employee stock option is treated like any other sale
(cont.) under the Policy (regardless of how little time has elapsed between
the option exercise and the sale). Thus, such sales are subject to the
preclearance and reporting requirements, are prohibited during the
blackout period and constitute sales for purposes of the 60-day
prohibition.
|
RESTRICTIONS ON TRANSACTIONS IN OTHER SECURITIES
Purchases or sales by an employee of the securities of issuers with which Mellon does business, or other third party issuers, could result in liability on the part of such employee. Employees should be sensi- tive to even the appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" on page 15, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: - Credit, Consulting or Advisory Relationship -- Employees may not buy or sell securities of a company if they are considering granting, renewing, modifying or denying any credit facility to that company, acting as a benefits consultant to that company, or acting as an adviser to that company with respect to the company's own securities. In addition, lending employees who have assigned responsibilities in a specific industry group are not permitted to trade securities in that industry. This prohibition does not apply to transactions in open end mutual funds. - Customer Transactions -- Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. - Excessive Trading, Naked Options -- Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. - Front Running -- Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. |
PERSONAL SECURITIES TRADING PRACTICES
- Initial Public Offerings -- Insider Risk Employees are prohibited
from acquiring securities through an allocation by the underwriter
of an Initial Public Offering (IPO) without the approval of the
Manager of Corporate Compliance. Approval can be given only
when the allocation comes through an employee of the issuer
who is a direct family relation of the Insider Risk Employee. Due
to NASD rules, this approval may not be available to employees
of registered broker/dealers.
- Material Nonpublic Information -- Employees possessing material
nonpublic information regarding any issuer of securities must
refrain from purchasing or selling securities of that issuer until the
information becomes public or is no longer considered material.
- Private Placements -- Insider Risk Employees are prohibited from
acquiring any security in a private placement unless they obtain
the prior written approval of the Manager of Corporate
Compliance and the employee's department head. Approval must
be given by both persons for the acquisition to be considered
approved. After receipt of the necessary approvals and the
acquisition, employees are required to disclose that investment
if they participate in any subsequent consideration of credit for
the issuer, or of an investment in the issuer for an advised
account. Final decision to acquire such securities for an advised
account will be subject to independent review.
- Scalping -- Employees may not engage in "scalping," that is, the
purchase or sale of securities for their own or Mellon's accounts
on the basis of knowledge of customers' trading positions or
plans.
- Short Term Trading -- All employees are discouraged from
purchasing and selling, or from selling and purchasing, the same
(or equivalent) securities within any 60 calendar day period.
PROHIBITION ON INVESTMENTS IN You are prohibited from acquiring any security issued by a financial
SECURITIES OF FINANCIAL SERVICES services organization if you are:
ORGANIZATIONS
- a member of the Mellon Senior Management Committee.
- employed in any of the following departments:
- Corporate Strategy & Development
- Legal (Pittsburgh only)
- Finance (Pittsburgh only)
- an employee specifically designated by the Manager of Corporate
Compliance and informed that this prohibition is applicable
to you.
|
PERSONAL SECURITIES TRADING PRACTICES
PROHIBITION ON INVESTMENTS IN Financial Services Organizations -- The term "security issued by a
SECURITIES OF FINANCIAL SERVICES financial services organization" includes any security issued by:
ORGANIZATIONS
(cont.) - Commercial Banks other than Mellon
- Bank Holding Companies other than Mellon
- Insurance Companies
- Investment Advisory Companies
- Shareholder Servicing Companies
- Thrifts
- Savings and Loan Associations
- Broker/Dealers
- Transfer Agents
- Other Depository Institutions
The term "securities issued by a financial services organization" DOES
NOT INCLUDE securities issued by mutual funds, variable annuities or
insurance policies. Further, for purposes of determining whether a
company is a financial services organization, subsidiaries and parent
companies are treated as separate issuers.
Effective Date -- Securities of financial services organizations properly
acquired before the employee's becoming subject to this prohibition
may be maintained or disposed of at the owner's discretion consistent
with this policy.
Additional securities of a financial services organization acquired
through the reinvestment of the dividends paid by such financial ser-
vices organization through a dividend reinvestment program (DRIP),
or through an automatic investment plan (AIP) are not subject to this
prohibition, provided the employee's election to participate in the
DRIP or AIP predates the date of the employee's becoming subject to
this prohibition. Optional cash purchases through a DRIP or direct
purchase plan (DPP) are subject to this prohibition.
Securities acquired in any account over which an employee has no
direct or indirect control over the investment decision making
process (e.g., discretionary trading accounts) are not subject to this
prohibition.
Within 30 days of becoming subject to this prohibition, all holdings
of securities of financial services organizations must be disclosed in
writing to the Manager of Corporate Compliance.
|
PERSONAL SECURITIES TRADING PRACTICES
BENEFICIAL OWNERSHIP The provisions of the Policy apply to transactions in the employee's
own name and to all other accounts over which the employee could
be presumed to exercise influence or control, including:
- accounts of a spouse, minor children or relatives to whom
substantial support is contributed;
- accounts of any other member of the employee's household
(e.g., a relative living in the same home);
- trust or other accounts for which the employee acts as trustee or
otherwise exercises any type of guidance or influence;
- corporate accounts controlled, directly or indirectly, by the
employee;
- arrangements similar to trust accounts that are established for
bona fide financial purposes and benefit the employee; and
- any other account for which the employee is the beneficial
owner (see Glossary for a more complete legal definition of
"beneficial owner").
NON-MELLON EMPLOYEE The provisions discussed above do not apply to transactions done
BENEFIT PLANS under a bona fide employee benefits plan administered by an
organization not affiliated with Mellon and by an employee of that
organization who shares beneficial interest with a Mellon employee,
and in the securities of the employing organization. This means if a
Mellon employee's spouse is employed at a non-Mellon company,
the Mellon employee is not required to obtain approval for transac-
tions in the employer's securities done by the spouse as part of the
spouse's employee benefit plan.
The Securities Trading Policy does not apply in such a situation.
Rather, the other organization is relied upon to provide adequate
supervision with respect to conflicts of interest and compliance with
securities laws.
|
PERSONAL SECURITIES TRADING PRACTICES
PROTECTING CONFIDENTIAL INFORMATION
As an employee you may receive information about Mellon, its cus-
tomers and other parties that, for various reasons, should be treated as
confidential. All employees are expected to strictly comply with mea-
sures necessary to preserve the confidentiality of information.
Employees should refer to the Mellon Code of Conduct.
INSIDER TRADING AND TIPPING Federal securities laws generally prohibit the trading of securities
LEGAL PROHIBITIONS while in possession of "material nonpublic" information regarding
the issuer of those securities (insider trading). Any person who passes
along material nonpublic information upon which a trade is based
(tipping) may also be liable.
Information is "material" if there is a substantial likelihood that a
reasonable investor would consider it important in deciding whether
to buy, sell or hold securities. Obviously, information that would
affect the market price of a security would be material. Examples of
information that might be material include:
- a proposal or agreement for a merger, acquisition or divestiture,
or for the sale or purchase of substantial assets;
- tender offers, which are often material for the party making the
tender offer as well as for the issuer of the securities for which the
tender offer is made;
- dividend declarations or changes;
- extraordinary borrowings or liquidity problems;
- defaults under agreements or actions by creditors, customers or
suppliers relating to a company's credit standing;
- earnings and other financial information, such as large or unusual
write-offs, write-downs, profits or losses;
- pending discoveries or developments, such as new products,
sources of materials, patents, processes, inventions or discoveries
of mineral deposits;
- a proposal or agreement concerning a financial restructuring;
- a proposal to issue or redeem securities, or a development with
respect to a pending issuance or redemption of securities;
- a significant expansion or contraction of operations;
- information about major contracts or increases or decreases in
orders;
- the institution of, or a development in, litigation or a regulatory
proceeding;
- developments regarding a company's senior management;
|
PERSONAL SECURITIES TRADING PRACTICES
INSIDER TRADING AND TIPPING - information about a company received from a director of that
LEGAL PROHIBITIONS company; and
(cont.)
- information regarding a company's possible noncompliance with
environmental protection laws.
This list is not exhaustive. All relevant circumstances must be consid-
ered when determining whether an item of information is material.
"Nonpublic" -- Information about a company is nonpublic if it is not
generally available to the investing public. Information received
under circumstances indicating that it is not yet in general circulation
and which may be attributable, directly or indirectly, to the company
or its insiders is likely to be deemed nonpublic information.
If you obtain material non-public information you may not trade
related securities until you can refer to some public source to show
that the information is generally available (that is, available from
sources other than inside sources) and that enough time has passed
to allow wide dissemination of the information. While information
appearing in widely accessible sources -- such as in newspapers or on
the internet -- becomes public very soon after publication, information
appearing in less accessible sources -- such as regulatory filings, may
take up to several days to be deemed public. Similarly, highly com-
plex information might take longer to become public than would
information that is easily understood by the average investor.
MELLON'S POLICY Employees who possess material nonpublic information about a
company -- whether that company is Mellon, another Mellon entity,
a Mellon customer or supplier, or other company -- may not trade in
that company's securities, either for their own accounts or for any
account over which they exercise investment discretion. In addition,
employees may not recommend trading in those securities and may
not pass the information along to others, except to employees who
need to know the information in order to perform their job responsi-
bilities with Mellon. These prohibitions remain in effect until the
information has become public.
Employees who have investment responsibilities should take
appropriate steps to avoid receiving material nonpublic information.
Receiving such information could create severe limitations on
their ability to carry out their responsibilities to Mellon's fiduciary
customers.
Employees managing the work of consultants and temporary
employees who have access to the types of confidential information
described in this Policy are responsible for ensuring that consultants
and temporary employees are aware of Mellon's policy and the
consequences of noncompliance.
Questions regarding Mellon's policy on material nonpublic informa-
tion, or specific information that might be subject to it, should be
referred to the General Counsel.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTIONS ON THE FLOW OF As a diversified financial services organization, Mellon faces unique
INFORMATION WITHIN MELLON challenges in complying with the prohibitions on insider trading and
(THE "CHINESE WALL") tipping of material non-public information, and misuse of confidential
information. This is because one Mellon unit might have material
nonpublic information about a company while other Mellon units
may have a desire, or even a fiduciary duty, to buy or sell that com-
pany's securities or recommend such purchases or sales to customers.
To engage in such broad-ranging financial services activities without
violating laws or breaching Mellon's fiduciary duties, Mellon has
established a "Chinese Wall" policy applicable to all employees.
The "Chinese Wall" separates the Mellon units or individuals that
are likely to receive material nonpublic information (Potential Insider
Functions) from the Mellon units or individuals that either trade in
securities -- for Mellon's account or for the accounts of others -- or
provide investment advice (Investment Functions). Employees should
refer to CPP 903-2(C) The Chinese Wall.
|
PERSONAL SECURITIES TRADING PRACTICES
SECTION TWO - APPLICABLE TO INVESTMENT EMPLOYEES
QUICK REFERENCE - INVESTMENT EMPLOYEES
SOME THINGS YOU MUST DO
STATEMENT OF ACCOUNTS AND HOLDINGS -- Provide to your Preclearance Compliance Officer a statement of all securities accounts and holdings within 10 days of becoming an Investment Employee, and again annually on request.
DUPLICATE STATEMENTS & CONFIRMATIONS -- Instruct your broker, trust account manager or other entity through which you have a securities trading account to send directly to Compliance:
- Trade confirmations summarizing each transaction
- Periodic statements
Exhibit A can be used to notify your broker. Contact your designated Preclearance Compliance Officer for the correct address. This applies to all accounts in which you have a beneficial interest.
PRECLEARANCE -- Before initiating a securities transaction, written preclearance must be obtained from the designated Preclearance Compliance Officer. This can be accomplished by completing a Preclearance Request Form and:
- delivering or faxing the request to the designated Preclearance Compliance Officer, or
- contacting the designated Preclearance Compliance Officer for other available notification options.
Preclearance Request Forms can be obtained from the designated Preclearance Compliance Officer. If preclearance approval is received the trade should be communicated to the broker on the same day, and executed before the end of the next business day, at which time the preclearance approval will expire.
SPECIAL APPROVALS
- Acquisition of securities in a Private Placement must be precleared by the employee's Department/Entity head, the Manager of Corporate Compliance and the designated Preclearance Compliance Officer.
- Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship.
SOME THINGS YOU MUST NOT DO
MELLON SECURITIES -- The following transactions in Mellon securities are prohibited for all Mellon Employees:
- Short sales;
- Purchasing and selling or selling and purchasing within 60 days;
- Purchasing or selling during a blackout period
- Margin purchases or options other than employee options.
NON-MELLON SECURITIES --
- Purchasing and selling or selling and purchasing within 60 days is discouraged, and any profits must be disgorged.
- New investments in financial services organizations are prohibited for certain employees only (see page 30).
OTHER RESTRICTIONS are detailed throughout Section Two.
READ THE POLICY!
EXEMPTIONS
Preclearance is NOT required for:
- Purchases or sales of high quality short-term debt instruments, non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures, index securities, open-end mutual funds, non-affiliated closed-end investment companies, commercial paper; CDs; bankers' acceptances; repurchase agreements; and direct obligations of the government of the United States.)
- Transactions in any account over which the employ- ee has no direct or indirect control over the investment decision making process.
- Transactions that are non-volitional on the part of an employee (such as stock dividends).
- Changes in elections under Mellon's 401(k) Retirement Savings Plan.
- An exercise of an employee stock option administered by Human Resources.
- Automatic reinvestment of dividends under a DRIP or Automatic Investment Plan. (Optional cash purchases under a DRIP or Direct Purchase Plan do require preclearance.)
- Sales of securities pursuant to tender offers and sales or exercises of "Rights" (see page 23).
QUESTIONS?
Contact your designated Preclearance Compliance Officer. If you don't know who that is, call 412-234-1661
This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions.
PERSONAL SECURITIES TRADING PRACTICES
STANDARDS OF CONDUCT FOR INVESTMENT EMPLOYEES
Because of their particular responsibilities, Investment Employees are
subject to preclearance and personal securities reporting requirements,
as discussed below.
Every Investment Employee must follow these procedures or risk
serious sanctions, including dismissal. If you have any questions
about these procedures you should consult the Manager of Corporate
Compliance. Interpretive issues that arise under these procedures
shall be decided by, and are subject to the discretion of, the Manager
of Corporate Compliance.
CONFLICT OF INTEREST No employee may engage in or recommend any securities transac-
tion that places, or appears to place, his or her own interests above
those of any customer to whom financial services are rendered,
including mutual funds and managed accounts, or above the interests
of Mellon.
MATERIAL NONPUBLIC No employee may divulge the current portfolio positions, or current
INFORMATION or anticipated portfolio transactions, programs or studies, of Mellon
or any Mellon customer to anyone unless it is properly within his or
her job responsibilities to do so.
No employee may engage in or recommend a securities transaction,
for his or her own benefit or for the benefit of others, including
Mellon or its customers, while in possession of material nonpublic
information regarding such securities. No employee may communi-
cate material nonpublic information to others unless it is properly
within his or her job responsibilities to do so.
BROKERS Trading Accounts -- All Investment Employees are encouraged to
conduct their personal investing through a Mellon affiliate brokerage
account. This will assist in the monitoring of account activity on an
ongoing basis in order to ensure compliance with the Policy.
|
PERSONAL SECURITIES TRADING PRACTICES
PERSONAL SECURITIES Statements & Confirmations -- All Investment Employees are required
TRANSACTIONS REPORTS to instruct their broker, trust account manager or other entity through
which they have a securities trading account to submit directly to the
Manager of Corporate Compliance or designated Preclearance
Compliance Officer copies of all trade confirmations and statements
relating to each account of which they are a beneficial owner
regardless of what, if any, securities are maintained in such accounts.
Thus, for example, even if the brokerage account contains only
mutual funds or other exempt securities as that term is defined by
the Policy and the account has the capability to have reportable
securities traded in it, the Investment Employee maintaining such
an account must arrange for duplicate account statements and trade
confirmations to be sent by the broker to the Manager of Corporate
Compliance or designated Preclearance Compliance Officer.
Exhibit A is an example of an instruction letter to a broker.
Other securities transactions which were not completed through a
brokerage account, such as gifts, inheritances, spin-offs from
securities held outside brokerage accounts, or other transfers must
be reported to the designated Preclearance Compliance Officer
within 10 days.
PRECLEARANCE FOR PERSONAL All Investment Employees must notify the designated Preclearance
SECURITIES TRANSACTIONS Compliance Officer in writing and receive preclearance before they
engage in any purchase or sale of a security for their own accounts.
Investment Employees should refer to the provisions under "Beneficial
Ownership" on page 31, which are applicable to these provisions.
All requests for preclearance for a securities transaction shall be
submitted by completing a Preclearance Request Form which can be
obtained from the designated Preclearance Compliance Officer.
The designated Preclearance Compliance Officer will notify the
Investment Employee whether the request is approved or denied,
without disclosing the reason for such approval or denial.
Notifications may be given in writing or verbally by the designated
Preclearance Compliance Officer to the Investment Employee. A
record of such notification will be maintained by the designated
Preclearance Compliance Officer. However, it shall be the responsi-
bility of the Investment Employee to obtain a written record of the
designated Preclearance Compliance Officer's notification within 48
hours of such notification. The Investment Employee should retain a
copy of this written record.
As there could be many reasons for preclearance being granted or
denied, Investment Employees should not infer from the preclearance
response anything regarding the security for which preclearance was
requested.
|
PERSONAL SECURITIES TRADING PRACTICES
PRECLEARANCE FOR PERSONAL Although making a preclearance request does not obligate an
SECURITIES TRANSACTIONS Investment Employee to do the transaction, it should be noted that:
(cont.)
- Preclearance requests should not be made for a transaction that
the Investment Employee does not intend to make.
- The order for a transaction should be placed with the broker on
the same day that preclearance authorization is received. The
broker must execute the trade by the close of business on the next
business day, at which time the preclearance authorization will
expire.
- Investment Employees should not discuss with anyone else,
inside or outside Mellon, the response they received to a
preclearance request. If the Investment Employee is preclearing as
beneficial owner of another's account, the response may be dis-
closed to the other owner.
- Good Until Canceled/Stop Loss Orders ("Limit Orders") must be
precleared, and security transactions receiving preclearance
authorization must be executed before the preclearance expires.
At the end of the preclearance authorization period, any
unexecuted Limit Order must be canceled or a new preclearance
authorization must be obtained.
BLACKOUT POLICY Except as described below, Investment Employees will not generally
be given clearance to execute a transaction in any security that is on
the restricted list maintained by their Preclearance Compliance
Officer, or for which there is a pending buy or sell order for an
affiliated account. This provision does not apply to transactions
effected or contemplated by index funds.
Exceptions -- Regardless of any restrictions above, Investment
Employees will generally be given clearance to execute the following
transactions:
- Purchase or sale of up to $50,000 of securities of the top 200
issuers on the Russell list of largest publicly traded companies.
- Purchase or sale of up to the greater of 100 shares or $10,000 of
securities ranked 201 to 500 on the Russell list of largest publicly
traded companies.
The Investment Employee is limited to two such trades in the
securities of any one issuer in any calendar month.
|
PERSONAL SECURITIES TRADING PRACTICES
EXEMPTIONS FROM REQUIREMENT Preclearance is not required for the following transactions:
TO PRECLEAR
- Purchases or sales of Exempt Securities (direct obligations of the
government of the United States; high quality short-term debt
instruments; bankers' acceptances; CDs; commercial paper;
repurchase agreements; and securities issued by open-end
investment companies);
- Purchases or sales of non-affiliated closed-end investment
companies; non-financial commodities (such as agricultural
futures, metals, oil, gas, etc.), currency futures, financial futures,
index futures and index securities;
- Purchases or sales effected in any account over which an
employee has no direct or indirect control over the investment
decision making process (e.g., discretionary trading accounts).
Discretionary trading accounts may only be maintained, without
being subject to preclearance procedures, when the Manager of
Corporate Compliance, after a thorough review, is satisfied that
the account is truly discretionary;
- Transactions that are non-volitional on the part of an employee
(such as stock dividends);
- The sale of Mellon stock received upon the exercise of an
employee stock option if the sale is part of a "netting of shares"
or "cashless exercise" administered by the Human Resources
Department (for which the Human Resources Department will
forward information to the Manager of Corporate Compliance);
- Changes to elections in the Mellon 401(k) plan;
- Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of securities, to the extent such
rights were acquired from such issuer;
- Sales of rights acquired from an issuer, as described above;
and/or
- Sales effected pursuant to a bona fide tender offer.
GIFTING OF SECURITIES Investment Employees desiring to make a bona fide gift of securities
or who receive a bona fide gift of securities do not need to preclear
the transaction. However, Investment Employees must report such
bona fide gifts to the designated Preclearance Compliance Officer.
The report must be made within 10 days of making or receiving the
gift and must disclose the following information: the name of the
person receiving (giving) the gift, the date of the transaction, and the
name of the broker through which the transaction was effected. A
bona fide gift is one where the donor does not receive anything of
monetary value in return. An Investment Employee who purchases
a security with the intention of making a gift must preclear the
purchase transaction.
|
PERSONAL SECURITIES TRADING PRACTICES
DRIPS, DPPS AND AIPS Certain companies with publicly traded securities establish:
- Dividend Reinvestment Plans (DRIPs) -- These permit shareholders
to have their dividend payments channeled to the purchase of
additional shares of such company's stock. An additional benefit
offered to DRIP participants is the right to buy additional shares
by sending in a check before the dividend reinvestment date
("optional cash purchases").
- Direct Purchase Plans (DPPs) -- These allow purchasers to buy
stock by sending a check directly to the issuer, without using a
broker.
- Automatic Investment Plans (AIPs) -- These allow purchasers to set
up a plan whereby a fixed amount of money is automatically
deducted from their checking account each month and used to
purchase stock directly from the issuer.
Participation in a DRIP, DPP or AIP is voluntary.
Investment Employees who enroll in a DRIP or AIP are not required
to preclear enrollment, the periodic reinvestment of dividend
payments into additional shares of company stock through a DRIP,
or the periodic investments through an AIP.
Investment Employees must preclear all optional cash purchases
through a DRIP and all purchases through a DPP. Investment
Employees must also preclear all sales through a DRIP, DPP or AIP.
STATEMENT OF SECURITIES Within ten days of receiving this Policy and on an annual basis
ACCOUNTS AND HOLDINGS thereafter, all Investment Employees must submit to the designated
Preclearance Compliance Officer:
- a listing of all securities trading accounts in which the employee
has a beneficial interest.
- a statement of all securities in which they presently have any
direct or indirect beneficial ownership other than Exempt
Securities, as defined in the Glossary.
The annual report must be completed upon the request of Corporate
Compliance, and the information submitted must be current within
30 days of the date the report is submitted. The annual statement of
securities holdings contains an acknowledgment that the Investment
Employee has read and complied with this Policy.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTED LIST Each Preclearance Compliance Officer will maintain a list (the
"Restricted List") of companies whose securities are deemed
appropriate for implementation of trading restrictions for Investment
Employees in their area. From time to time, such trading restrictions
may be appropriate to protect Mellon and its Investment Employees
from potential violations, or the appearance of violations, of
securities laws. The inclusion of a company on the Restricted List
provides no indication of the advisability of an investment in the
company's securities or the existence of material nonpublic
information on the company. Nevertheless, the contents of the
Restricted List will be treated as confidential information in order
to avoid unwarranted inferences.
The Preclearance Compliance Officer will retain copies of the
restricted lists for five years.
CONFIDENTIAL TREATMENT The Manager of Corporate Compliance and/or Preclearance
Compliance Officer will use his or her best efforts to assure that all
requests for preclearance, all personal securities transaction reports
and all reports of securities holdings are treated as "Personal and
Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies, and by other parties
within and outside Mellon as are necessary to evaluate compliance
with or sanctions under this Policy. Documents received from
Investment Employees are also available for inspection by the boards
of directors of 40-Act entities and by the boards of directors (or
trustees or managing general partners, as applicable) of the
investment companies managed or administered by 40-Act entities.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTIONS ON TRANSACTIONS IN MELLON SECURITIES
Investment Employees who engage in transactions involving Mellon securities should be aware of their unique responsibilities with respect to such transactions arising from the employment relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be presumed to exercise influence or control (see provisions under "Beneficial Ownership" on page 31 for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). - Short Sales - Short sales of Mellon securities by employees are prohibited. - Short Term Trading - Investment Employees are prohibited from purchasing and selling, or from selling and purchasing Mellon securities within any 60 calendar day period. In addition to any other sanction, any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. - Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. - Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. - Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. - Mellon Blackout Period - Employees are prohibited from buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. |
PERSONAL SECURITIES TRADING PRACTICES
MELLON 401(k) PLAN For purposes of the blackout period and the short term trading rule,
employees' changing their existing account balance allocation to
increase or decrease the amount allocated to Mellon Common Stock
will be treated as a purchase or sale of Mellon Stock, respectively.
This means:
- Employees are prohibited from increasing or decreasing their
existing account balance allocation to Mellon Common Stock
during the blackout period.
- Employees are prohibited from increasing their existing account
balance allocation to Mellon Common Stock and then decreasing
it within 60 days. Similarly, employees are prohibited from
decreasing their existing account balance allocation to Mellon
Common Stock and then increasing it within 60 days. However:
- with respect to Investment Employees, any profits realized
on short term changes in the 401(k) will not have to be
disgorged.
- changes to existing account balance allocations in the 401(k)
plan will not be compared to transactions in Mellon
securities outside the 401(k) for purposes of the 60-day
rule. (Note: This does not apply to members of the Executive
Management Group, who should consult with the Legal
Department.)
Except for the above there are no other restrictions applicable to the
401(k) plan. This means, for example:
- Employees are not required to preclear any elections or changes
made in their 401(k) account.
- There is no restriction on employees' changing their salary
deferral contribution percentages with regard to either the
blackout period or the 60-day rule.
- The regular salary deferral contribution to Mellon Common
Stock in the 401(k) that takes place with each pay will not be
considered a purchase for the purposes of either the blackout or
the 60-day rule.
MELLON EMPLOYEE Receipt - Your receipt of an employee stock option from Mellon is not
STOCK OPTIONS deemed to be a purchase of a security. Therefore, it is exempt from
preclearance and reporting requirements, can take place during the
blackout period and does not constitute a purchase for purposes of
the 60-day prohibition.
Exercises - The exercise of an employee stock option that results in
your holding the shares is exempt from preclearance and reporting
requirements, can take place during the blackout period and does not
constitute a purchase for purposes of the 60-day prohibition.
|
PERSONAL SECURITIES TRADING PRACTICES
MELLON EMPLOYEE "Cashless" Exercises - The exercise of an employee stock option
STOCK OPTIONS which is part of a "cashless exercise" or "netting of shares" that is
(cont.) administered by the Human Resources Department or Chase Mellon
Shareholder Services is exempt from the preclearance and reporting
requirements and will not constitute a purchase or a sale for purposes
of the 60-day prohibition. A "cashless exercise" or "netting of shares"
transaction is permitted during the blackout period for ShareSuccess
plan options only. They are not permitted during the blackout period
for any other plan options.
Sales - The sale of the Mellon securities that were received in the
exercise of an employee stock option is treated like any other sale
under the Policy (regardless of how little time has elapsed between
the option exercise and the sale). Thus, such sales are subject to the
preclearance and reporting requirements, are prohibited during the
blackout period and constitute sales for purposes of the 60-day
prohibition.
|
RESTRICTIONS ON TRANSACTIONS IN OTHER SECURITIES
Purchases or sales by an employee of the securities of issuers with which Mellon does business, or other third party issuers, could result in liability on the part of such employee. Employees should be sensitive to even the appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" below, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: - Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. - Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. - Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. |
PERSONAL SECURITIES TRADING PRACTICES
- Initial Public Offerings - Investment Employees are prohibited from acquiring securities through an allocation by the under- writer of an Initial Public Offering (IPO) without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the Investment Employee. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. - Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. - Private Placements - Investment Employees are prohibited from acquiring any security in a private placement unless they obtain the prior written approval of the Manager of Corporate Compliance, the designated Preclearance Compliance Officer and the Investment Employee's department head. Approval must be given by all three persons for the acquisition to be considered approved. After receipt of the necessary approvals and the acquisition, Investment Employees are required to disclose that investment if they participate in any subsequent consideration of credit for the issuer, or of an investment in the issuer for an advised account. Final decision to acquire such securities for an advised account will be subject to independent review. - Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. - Short Term Trading - All Employees are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. With respect to Investment Employees, any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. Exception: securities may be sold pursuant to a bona fide tender offer without disgorgement under the 60-day rule. |
PERSONAL SECURITIES TRADING PRACTICES
PROHIBITION ON INVESTMENTS IN You are prohibited from acquiring any security issued by a financial
SECURITIES OF FINANCIAL SERVICES services organization if you are:
ORGANIZATION
- a member of the Mellon Senior Management Committee.
- employed in any of the following departments:
- Corporate Strategy & Development
- Legal (Pittsburgh only)
- Finance (Pittsburgh only)
- an employee specifically designated by the Manager of Corporate
Compliance and informed that this prohibition is applicable to
you.
Financial Services Organizations - The term "security issued by a
financial services organization" includes any security issued by:
- Commercial Banks other than Mellon
- Bank Holding Companies other than Mellon
- Insurance Companies
- Investment Advisory Companies
- Shareholder Servicing Companies
- Thrifts
- Savings and Loan Associations
- Broker/Dealers
- Transfer Agents
- Other Depository Institutions
The term "securities issued by a financial services organization" DOES
NOT INCLUDE securities issued by mutual funds, variable annuities or
insurance policies. Further, for purposes of determining whether a
company is a financial services organization, subsidiaries and parent
companies are treated as separate issuers.
Effective Date - Securities of financial services organizations properly
acquired before the employee's becoming subject to this prohibition
may be maintained or disposed of at the owner's discretion consistent
with this policy.
Additional securities of a financial services organization acquired
through the reinvestment of the dividends paid by such financial
services organization through a dividend reinvestment program
(DRIP), or through an automatic investment plan (AIP) are not subject
to this prohibition, provided the employee's election to participate
in the DRIP or AIP predates the date of the employee's becoming
subject to this prohibition. Optional cash purchases through a DRIP
or direct purchase plan (DPP) are subject to this prohibition.
Securities acquired in any account over which an employee has no
direct or indirect control over the investment decision making
process (e.g. discretionary trading accounts) are not subject to this
prohibition.
Within 30 days of becoming subject to this prohibition, all holdings
of securities of financial services organizations must be disclosed in
writing to the Manager of Corporate Compliance.
|
PERSONAL SECURITIES TRADING PRACTICES
BENEFICIAL OWNERSHIP The provisions of the Policy apply to transactions in the employee's
own name and to all other accounts over which the employee could
be presumed to exercise influence or control, including:
- accounts of a spouse, minor children or relatives to whom
substantial support is contributed;
- accounts of any other member of the employee's household
(e.g., a relative living in the same home);
- trust or other accounts for which the employee acts as trustee or
otherwise exercises any type of guidance or influence;
- corporate accounts controlled, directly or indirectly, by the
employee;
- arrangements similar to trust accounts that are established for
bona fide financial purposes and benefit the employee; and
- any other account for which the employee is the beneficial
owner (see Glossary for a more complete legal definition of
"beneficial owner").
NON-MELLON EMPLOYEE The provisions discussed above do not apply to transactions done
BENEFIT PLANS under a bona fide employee benefits plan administered by an
organization not affiliated with Mellon and by an employee of that
organization who shares beneficial interest with a Mellon employee,
and in the securities of the employing organization. This means if a
Mellon employee's spouse is employed at a non-Mellon company,
the Mellon employee is not required to obtain approval for transac-
tions in the employer's securities done by the spouse as part of the
spouse's employee benefit plan.
The Securities Trading Policy does not apply in such a situation.
Rather, the other organization is relied upon to provide adequate
supervision with respect to conflicts of interest and compliance
with securities laws.
|
PERSONAL SECURITIES TRADING PRACTICES
PROTECTING CONFIDENTIAL INFORMATION
As an employee you may receive information about Mellon, its cus-
tomers and other parties that, for various reasons, should be treated
as confidential. All employees are expected to strictly comply with
measures necessary to preserve the confidentiality of information.
Employees should refer to the Mellon Code of Conduct.
INSIDER TRADING AND TIPPING Federal securities laws generally prohibit the trading of securities
LEGAL PROHIBITIONS while in possession of "material nonpublic" information regarding the
issuer of those securities (insider trading). Any person who passes
along material nonpublic information upon which a trade is based
(tipping) may also be liable.
Information is "material" if there is a substantial likelihood that a
reasonable investor would consider it important in deciding whether
to buy, sell or hold securities. Obviously, information that would
affect the market price of a security would be material. Examples of
information that might be material include:
- a proposal or agreement for a merger, acquisition or divestiture,
or for the sale or purchase of substantial assets;
- tender offers, which are often material for the party making the
tender offer as well as for the issuer of the securities for which
the tender offer is made;
- dividend declarations or changes;
- extraordinary borrowings or liquidity problems;
- defaults under agreements or actions by creditors, customers or
suppliers relating to a company's credit standing;
- earnings and other financial information, such as large or unusual
write-offs, write-downs, profits or losses;
- pending discoveries or developments, such as new products,
sources of materials, patents, processes, inventions or discoveries
of mineral deposits;
- a proposal or agreement concerning a financial restructuring;
- a proposal to issue or redeem securities, or a development with
respect to a pending issuance or redemption of securities;
- a significant expansion or contraction of operations;
- information about major contracts or increases or decreases in
orders;
- the institution of, or a development in, litigation or a regulatory
proceeding;
- developments regarding a company's senior management;
- information about a company received from a director of that
company; and
- information regarding a company's possible noncompliance with
environmental protection laws.
|
PERSONAL SECURITIES TRADING PRACTICES
INSIDER TRADING AND TIPPING This list is not exhaustive. All relevant circumstances must be considered
LEGAL PROHIBITIONS when determining whether an item of information is material.
(cont.)
"Nonpublic" - Information about a company is nonpublic if it is not
generally available to the investing public. Information received
under circumstances indicating that it is not yet in general circulation
and which may be attributable, directly or indirectly, to the company
or its insiders is likely to be deemed nonpublic information.
If you obtain material non-public information you may not trade
related securities until you can refer to some public source to show
that the information is generally available (that is, available from
sources other than inside sources) and that enough time has passed
to allow wide dissemination of the information. While information
appearing in widely accessible sources -- such as in newspapers or on
the internet -- becomes public very soon after publication, information
appearing in less accessible sources -- such as regulatory filings, may
take up to several days to be deemed public. Similarly, highly
complex information might take longer to become public than would
information that is easily understood by the average investor.
MELLON'S POLICY Employees who possess material nonpublic information about a
company -- whether that company is Mellon, another Mellon entity, a
Mellon customer or supplier, or other company -- may not trade in
that company's securities, either for their own accounts or for any
account over which they exercise investment discretion. In addition,
employees may not recommend trading in those securities and may
not pass the information along to others, except to employees who
need to know the information in order to perform their job responsi-
bilities with Mellon. These prohibitions remain in effect until the
information has become public.
Employees who have investment responsibilities should take
appropriate steps to avoid receiving material nonpublic information.
Receiving such information could create severe limitations on their
ability to carry out their responsibilities to Mellon's fiduciary
customers.
Employees managing the work of consultants and temporary
employees who have access to the types of confidential information
described in this Policy are responsible for ensuring that consultants
and temporary employees are aware of Mellon's policy and the
consequences of noncompliance.
Questions regarding Mellon's policy on material nonpublic informa-
tion, or specific information that might be subject to it, should be
referred to the General Counsel.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTIONS ON THE As a diversified financial services organization, Mellon
FLOW OF INFORMATION faces unique challenges in complying with the prohibitions
WITHIN MELLON on insider trading and tipping of material non-public
(THE "CHINESE WALL") information, and misuse of confidential information. This
is because one Mellon unit might have material nonpublic
information about a company while other Mellon units may
have a desire, or even a fiduciary duty, to buy or sell
that company's securities or recommend such purchases or
sales to customers. To engage in such broad-ranging
financial services activities without violating laws or
breaching Mellon's fiduciary duties, Mellon has
established a "Chinese Wall" policy applicable to all
employees. The "Chinese Wall" separates the Mellon units
or individuals that are likely to receive material
nonpublic information (Potential Insider Functions) from
the Mellon units or individuals that either trade in
securities -- for Mellon's account or for the accounts of
others -- or provide investment advice (Investment
Functions). Employees should refer to CPP 903-2(C) The
Chinese Wall.
|
SPECIAL PROCEDURES FOR ACCESS DECISION MAKERS
Certain Portfolio Managers and Research Analysts in the fiduciary businesses have been designated as Access Decision Makers and are subject to additional procedures which are discussed in a separate edition of the Securities Trading Policy. If you have reason to believe that you may be an Access Decision Maker, contact your supervisor, designated Preclearance Compliance Officer or the Manager of Corporate Compliance. |
PERSONAL SECURITIES TRADING PRACTICES
SECTION THREE - APPLICABLE TO OTHER EMPLOYEES
QUICK REFERENCE - OTHER EMPLOYEES
SOME THINGS YOU MUST DO
- If you buy or sell Mellon Financial Corporation securities you must provide a report of the trade and a copy of the broker confirmation within 10 days of transaction to the Manager of Corporate Compliance, AIM 151-4340. This does not apply to the exercise of employee stock options, or changes in elections under Mellon's 401(k) Retirement Savings Plan.
- If you want to purchase any security in a Private Placement you must first obtain the approval of your Department/Entity head and the Manager of Corporate Compliance. Contact the Manager of Corporate Compliance at 412-234-0810.
- Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship.
- For Employees who are subject to the prohibition on new investments in financial services organizations (certain employees only - see page 41), broker must send directly to Manager of Corporate Compliance, Mellon Financial Corporation, PO Box 3130, Pittsburgh, PA 15230-3130:
- Broker trade confirmations summarizing each transaction
- Periodic statements
Exhibit A can be used to notify your broker of all accounts for which your broker will be responsible for sending duplicate confirmations and statements.
SOME THINGS YOU MUST NOT DO
MELLON SECURITIES -- The following transactions in Mellon securities are prohibited for all Mellon Employees:
- Short sales
- Purchasing and selling or selling and purchasing within 60 days
- Purchasing or selling during a blackout period
- Margin purchases or options other than employee options.
NON-MELLON SECURITIES --
- New investments in financial services organizations (certain employees only - see page 41).
OTHER RESTRICTIONS are detailed throughout Section Three.
READ THE POLICY!
QUESTIONS?
412-234-1661
This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions.
PERSONAL SECURITIES TRADING PRACTICES
STANDARDS OF CONDUCT FOR OTHER EMPLOYEES
Every Other Employee must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures you should consult the Manager of Corporate
Compliance. Interpretive issues that arise under these procedures
shall be decided by, and are subject to the discretion of, the Manager
of Corporate Compliance.
CONFLICT OF INTEREST No employee may engage in or recommend any securities transac-
tion that places, or appears to place, his or her own interests above
those of any customer to whom financial services are rendered,
including mutual funds and managed accounts, or above the interests
of Mellon.
MATERIAL NONPUBLIC No employee may engage in or recommend a securities transaction,
INFORMATION for his or her own benefit or for the benefit of others, including
Mellon or its customers, while in possession of material nonpublic
information regarding such securities. No employee may communi-
cate material nonpublic information to others unless it is properly
within his or her job responsibilities to do so.
BROKERS Trading Accounts - All employees are encouraged to conduct their
personal investing through a Mellon affiliate brokerage account.
PERSONAL SECURITIES TRANSACTIONS Other Employees must report in writing to the Manager of Corporate
REPORTS Compliance within ten calendar days whenever they purchase or
sell Mellon securities. Purchases and sales include optional cash
purchases under Mellon's Dividend Reinvestment and Common
Stock Purchase Plan (the "Mellon DRIP").
It should be noted that the reinvestment of dividends under the DRIP,
changes in elections under Mellon's 401(k) Retirement Savings Plan,
the receipt of stock under Mellon's Restricted Stock Award Plan, and
the receipt or exercise of options under Mellon's employee stock
option plans are not considered purchases or sales for the purpose
of this reporting requirement.
BROKERAGE ACCOUNT STATEMENTS Certain Other Employees are subject to the restriction on investments
in financial services organizations and are required to instruct their
brokers to send statements directly to Corporate Compliance. See
page 41.
An example of an instruction letter to a broker is contained in
Exhibit A.
|
PERSONAL SECURITIES TRADING PRACTICES
CONFIDENTIAL TREATMENT The Manager of Corporate Compliance will use his or her
best efforts to assure that all personal securities
transaction reports and all reports of securities
holdings are treated as "Personal and Confidential."
However, such documents will be available for inspection
by appropriate regulatory agencies and by other parties
within and outside Mellon as are necessary to evaluate
compliance with or sanctions under this Policy.
|
RESTRICTIONS ON TRANSACTIONS IN MELLON SECURITIES
Employees who engage in transactions involving Mellon securities should be aware of their unique responsibilities with respect to such transactions arising from the employment relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be expected to exercise influence or control (see provisions under "Beneficial Ownership" on page 42 for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). - Short Sales - Short sales of Mellon securities by employees are prohibited. - Short Term Trading - Employees are prohibited from purchasing and selling, or from selling and purchasing Mellon securities within any 60 calendar day period. - Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. - Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. - Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. |
PERSONAL SECURITIES TRADING PRACTICES
- Mellon Blackout Period - Employees are prohibited from buying or
selling Mellon's publicly traded securities during a blackout
period. The blackout period begins the 16th day of the last
month of each calendar quarter and ends 3 business days after
Mellon Financial Corporation publicly announces the financial
results for that quarter. Thus, the blackout periods begin on
March 16, June 16, September 16 and December 16. The end of
the blackout period is determined by counting business days
only, and the day of the earnings announcement is day 1. The
blackout period ends at the end of day 3, and employees can
trade Mellon securities on day 4.
MELLON 401(K) PLAN For purposes of the blackout period and the short term trading rule,
employees' changing their existing account balance allocation to
increase or decrease the amount allocated to Mellon Common Stock
will be treated as a purchase or sale of Mellon Stock, respectively.
This means:
- Employees are prohibited from increasing or decreasing their
existing account balance allocation to Mellon Common Stock
during the blackout period.
- Employees are prohibited from increasing their existing account
balance allocation to Mellon Common Stock and then decreasing
it within 60 days. Similarly, employees are prohibited from
decreasing their existing account balance allocation to Mellon
Common Stock and then increasing it within 60 days. However,
changes to existing account balance allocations in the 401(k)
plan will not be compared to transactions in Mellon securities
outside the 401(k) for purposes of the 60-day rule. (Note: This
does not apply to members of the Executive Management Group,
who should consult with the Legal Department.)
Except for the above there are no other restrictions applicable to the
401(k) plan. This means, for example:
- Employees are not required to preclear any elections or changes
made in their 401(k) account.
- There is no restriction on employees' changing their salary
deferral contribution percentages with regard to either the
blackout period or the 60-day rule.
- The regular salary deferral contribution to Mellon Common
Stock in the 401(k) that takes place with each pay will not be
considered a purchase for the purposes of either the blackout
or the 60-day rule.
|
PERSONAL SECURITIES TRADING PRACTICES
MELLON EMPLOYEE Receipt - Your receipt of an employee stock option from Mellon is not
STOCK OPTIONS deemed to be a purchase of a security. Therefore, it is exempt from
reporting requirements, can take place during the blackout period
and does not constitute a purchase for purposes of the 60-day
prohibition.
Exercises - The exercise of an employee stock option that results in
your holding the shares is exempt from reporting requirements, can
take place during the blackout period and does not constitute a
purchase for purposes of the 60-day prohibition.
"Cashless" Exercises - The exercise of an employee stock option
which is part of a "cashless exercise" or "netting of shares" that is
administered by the Human Resources Department or Chase Mellon
Shareholder Services is exempt from the preclearance and reporting
requirements and will not constitute a purchase or a sale for purposes
of the 60-day prohibition. A "cashless exercise" or "netting of shares"
transaction is permitted during the blackout period for ShareSuccess
plan options only. They are not permitted during the blackout period
for any other plan options.
Sales - The sale of the Mellon securities that were received in the
exercise of an employee stock option is treated like any other sale
under the Policy (regardless of how little time has elapsed between
the option exercise and the sale). Thus, such sales are subject to the
reporting requirements, are prohibited during the blackout period and
constitute sales for purposes of the 60-day prohibition.
|
RESTRICTIONS ON TRANSACTIONS IN OTHER SECURITIES
Purchases or sales by an employee of the securities of issuers with which Mellon does business, or other third party issuers, could result in liability on the part of such employee. Employees should be sensi- tive to even the appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" on page 42, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restric- tions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: - Credit, Consulting or Advisory Relationship - Employees may not buy or sell securities of a company if they are considering granting, renewing, modifying or denying any credit facility to that company, acting as a benefits consultant to that company, or acting as an adviser to that company with respect to the company's own securities. In addition, lending employees who have assigned responsibilities in a specific industry group are not permitted to trade securities in that industry. This prohibition |
PERSONAL SECURITIES TRADING PRACTICES
does not apply to transactions in open end mutual funds. - Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. - Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. - Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. - Initial Public Offerings - Other Employees are prohibited from acquiring securities through an allocation by the underwriter of an Initial Public Offering (IPO) without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the Other Employee. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. - Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. - Private Placements - Other Employees are prohibited from acquiring any security in a private placement unless they obtain the prior written approval of the Manager of Corporate Compliance and the employee's department head. Approval must be given by both persons for the acquisition to be considered approved. After receipt of the necessary approvals and the acquisition, employees are required to disclose that investment if they participate in any subsequent consideration of credit for the issuer, or of an investment in the issuer for an advised account. Final decision to acquire such securities for an advised account will be subject to independent review. - Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. - Short Term Trading - Employees are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. |
PERSONAL SECURITIES TRADING PRACTICES
PROHIBITION ON INVESTMENTS IN You are prohibited from acquiring any security issued by a financial
SECURITIES OF FINANCIAL SERVICES services organization if you are:
ORGANIZATIONS
- a member of the Mellon Senior Management Committee.
- employed in any of the following departments:
- Corporate Strategy & Development
- Legal (Pittsburgh only)
- Finance (Pittsburgh only)
- an employee specifically designated by the Manager of Corporate
Compliance and informed that this prohibition is applicable to
you.
Brokerage Accounts - All employees subject to this restriction on
investments in financial services organizations are required to
instruct their brokers to submit directly to the Manager of Corporate
Compliance copies of all trade confirmations and statements relating
to each account of which they are a beneficial owner regardless of
what, if any, securities are maintained in such accounts. Thus, for
example, even if the brokerage account has no reportable securities
traded in it, the employee maintaining such an account must arrange
for duplicate account statements and trade confirmations to be sent
by the broker to the Manager of Corporate Compliance. An example
of an instruction letter to a broker is contained in Exhibit A.
Financial Services Organizations - The term "security issued by a
financial services organization" includes any security issued by:
- Commercial Banks other than Mellon
- Bank Holding Companies other than Mellon
- Insurance Companies
- Investment Advisory Companies
- Shareholder Servicing Companies
- Thrifts
- Savings and Loan Associations
- Broker/Dealers
- Transfer Agents
- Other Depository Institutions
The term "securities issued by a financial services organization" does
not include securities issued by mutual funds, variable annuities or
insurance policies. Further, for purposes of determining whether a
company is a financial services organization, subsidiaries and parent
companies are treated as separate issuers.
Effective Date - Securities of financial services organizations properly
acquired before the employee's becoming subject to this prohibition
may be maintained or disposed of at the owner's discretion consistent
with this policy.
|
Personal Securities Trading Practices
PROHIBITION ON INVESTMENTS IN Additional securities of a financial services organization acquired
SECURITIES OF FINANCIAL SERVICES through the reinvestment of the dividends paid by such financial
ORGANIZATIONS services organization through a dividend reinvestment program
(DRIP), or through an automatic investment plan (AIP) are not subject
(cont.) to this prohibition, provided the employee's election to participate in
the DRIP or AIP predates the date of the employee's becoming
subject to this prohibition. Optional cash purchases through a DRIP
or direct purchase plan (DPP) are subject to this prohibition.
Securities acquired in any account over which an employee has no
direct or indirect control over the investment decision making
process (e.g. discretionary trading accounts) are not subject to this
prohibition.
Within 30 days of becoming subject to this prohibition, all holdings
of securities of financial services organizations must be disclosed in
writing to the Manager of Corporate Compliance.
BENEFICIAL OWNERSHIP The provisions of the Policy apply to transactions in the employee's
own name and to all other accounts over which the employee could
be presumed to exercise influence or control, including:
- accounts of a spouse, minor children or relatives to whom
substantial support is contributed;
- accounts of any other member of the employee's household (e.g.,
a relative living in the same home);
- trust or other accounts for which the employee acts as trustee or
otherwise exercises any type of guidance or influence;
- corporate accounts controlled, directly or indirectly, by the
employee;
- arrangements similar to trust accounts that are established for
bona fide financial purposes and benefit the employee; and
- any other account for which the employee is the beneficial
owner (see Glossary for a more complete legal definition of
"beneficial owner").
NON-MELLON EMPLOYEE The provisions discussed above do not apply to transactions done
BENEFIT PLANS under a bona fide employee benefits plan administered by an
organization not affiliated with Mellon and by an employee of that
organization who shares beneficial interest with a Mellon employee,
and in the securities of the employing organization. This means if a
Mellon employee's spouse is employed at a non-Mellon company,
the Mellon employee is not required to obtain approval for transac-
tions in the employer's securities done by the spouse as part of the
spouse's employee benefit plan.
The Securities Trading Policy does not apply in such a situation.
Rather, the other organization is relied upon to provide adequate
supervision with respect to conflicts of interest and compliance
with securities laws.
|
PERSONAL SECURITIES TRADING PRACTICES
PROTECTING CONFIDENTIAL INFORMATION
As an employee you may receive information about Mellon, its cus-
tomers and other parties that, for various reasons, should be treated
as confidential. All employees are expected to strictly comply with
measures necessary to preserve the confidentiality of information.
Employees should refer to the Mellon Code of Conduct.
INSIDER TRADING AND TIPPING Federal securities laws generally prohibit the trading of securities
LEGAL PROHIBITIONS while in possession of "material nonpublic" information regarding
the issuer of those securities (insider trading). Any person who passes
along material nonpublic information upon which a trade is based
(tipping) may also be liable.
Information is "material" if there is a substantial likelihood that a
reasonable investor would consider it important in deciding whether
to buy, sell or hold securities. Obviously, information that would
affect the market price of a security would be material. Examples of
information that might be material include:
- a proposal or agreement for a merger, acquisition or divestiture,
or for the sale or purchase of substantial assets;
- tender offers, which are often material for the party making the
tender offer as well as for the issuer of the securities for which
the tender offer is made;
- dividend declarations or changes;
- extraordinary borrowings or liquidity problems;
- defaults under agreements or actions by creditors, customers or
suppliers relating to a company's credit standing;
- earnings and other financial information, such as large or unusual
write-offs, write-downs, profits or losses;
- pending discoveries or developments, such as new products,
sources of materials, patents, processes, inventions or discoveries
of mineral deposits;
- a proposal or agreement concerning a financial restructuring;
- a proposal to issue or redeem securities, or a development with
respect to a pending issuance or redemption of securities;
- a significant expansion or contraction of operations;
- information about major contracts or increases or decreases in
orders;
- the institution of, or a development in, litigation or a regulatory
proceeding;
- developments regarding a company's senior management;
information about a company received from a director of that
company; and
- information regarding a company's possible noncompliance with
environmental protection laws.
|
PERSONAL SECURITIES TRADING PRACTICES
INSIDER TRADING AND TIPPING This list is not exhaustive. All relevant circumstances must be considered
LEGAL PROHIBITIONS when determining whether an item of information is material.
(cont.)
"Nonpublic" - Information about a company is nonpublic if it is not
generally available to the investing public. Information received
under circumstances indicating that it is not yet in general circulation
and which may be attributable, directly or indirectly, to the company
or its insiders is likely to be deemed nonpublic information.
If you obtain material non-public information you may not trade
related securities until you can refer to some public source to show
that the information is generally available (that is, available from
sources other than inside sources) and that enough time has passed to
allow wide dissemination of the information. While information
appearing in widely accessible sources -- such as in newspapers or on
the internet -- becomes public very soon after publication, information
appearing in less accessible sources -- such as regulatory filings, may
take up to several days to be deemed public. Similarly, highly
complex information might take longer to become public than
would information that is easily understood by the average investor.
MELLON'S POLICY Employees who possess material nonpublic information about a
company -- whether that company is Mellon, another Mellon entity,
a Mellon customer or supplier, or other company -- may not trade in
that company's securities, either for their own accounts or for any
account over which they exercise investment discretion. In addition,
employees may not recommend trading in those securities and may
not pass the information along to others, except to employees who
need to know the information in order to perform their job responsi-
bilities with Mellon. These prohibitions remain in effect until the
information has become public.
Employees who have investment responsibilities should take
appropriate steps to avoid receiving material nonpublic information.
Receiving such information could create severe limitations on their
ability to carry out their responsibilities to Mellon's fiduciary
customers.
Employees managing the work of consultants and temporary
employees who have access to the types of confidential information
described in this Policy are responsible for ensuring that consultants
and temporary employees are aware of Mellon's policy and the
consequences of noncompliance.
Questions regarding Mellon's policy on material nonpublic
information, or specific information that might be subject to it,
should be referred to the General Counsel.
|
PERSONAL SECURITIES TRADING PRACTICES
RESTRICTIONS ON THE FLOW OF As a diversified financial services organization, Mellon faces unique
INFORMATION WITHIN MELLON challenges in complying with the prohibitions on insider trading and
(THE "CHINESE WALL") tipping of material non-public information, and misuse of confidential
information. This is because one Mellon unit might have material
nonpublic information about a company while other Mellon units
may have a desire, or even a fiduciary duty, to buy or sell that com-
pany's securities or recommend such purchases or sales to customers.
To engage in such broad-ranging financial services activities without
violating laws or breaching Mellon's fiduciary duties, Mellon has
established a "Chinese Wall" policy applicable to all employees.
The "Chinese Wall" separates the Mellon units or individuals that are
likely to receive material nonpublic information (Potential Insider
Functions) from the Mellon units or individuals that either trade in
securities -- for Mellon's account or for the accounts of others -- or
provide investment advice (Investment Functions). Employees should
refer to CPP 903-2(C) The Chinese Wall.
|
GLOSSARY
DEFINITIONS - 40-ACT ENTITY - A Mellon entity registered under the Investment
Company Act and/or the Investment Advisers Act of 1940.
- ACCESS DECISION MAKER - A person designated as such by the
Investment Ethics Committee. Generally, this will be portfolio
managers and research analysts who make recommendations or
decisions regarding the purchase or sale of equity, convertible
debt, and non-investment grade debt securities for investment
companies and other managed accounts. See further details in
the Access Decision Maker edition of the Policy.
- ACCESS PERSON - As defined by Rule 17j-1 under the Investment
Company Act of 1940, "access person" means:
(A) With respect to a registered investment company or an
investment adviser thereof, any director, officer, general
partner, or advisory person (see definition below), of such
investment company or investment adviser;
(B) With respect to a principal underwriter, any director, officer,
or general partner of such principal underwriter who in the
ordinary course of his business makes, participates in or
obtains information regarding the purchase or sale of
securities for the registered investment company for which
the principal underwriter so acts, or whose functions or
duties as part of the ordinary course of his business relate to
the making of any recommendations to such investment
company regarding the purchase or sale of securities.
(C) Notwithstanding the provisions of paragraph (A) hereinabove,
where the investment adviser is primarily engaged in a
business or businesses other than advising registered
investment companies or other advisory clients, the term
"access person" shall mean: any director, officer, general
partner, or advisory person of the investment adviser who,
with respect to any registered investment company, makes
any recommendations, participates in the determination of
which recommendation shall be made, or whose principal
function or duties relate to the determination of which
recommendation will be made, to any such investment
company; or who, in connection with his duties, obtains any
information concerning securities recommendations being
made by such investment adviser to any registered
investment company.
(D) An investment adviser is "primarily engaged in a business or
businesses other than advising registered investment
companies or other advisory clients" when, for each of its
most recent three fiscal years or for the period of time since
its organization, whichever is less, the investment adviser
derived, on an unconsolidated basis, more than 50 percent of
(i) its total sales and revenues, and (ii) its income (or loss)
before income taxes and extraordinary items, from such other
business or businesses.
|
GLOSSARY
- ADVISORY PERSON of a registered investment company or an
investment adviser thereof means:
(A) Any employee of such company or investment adviser (or
any company in a control relationship to such investment
company or investment adviser) who, in connection with his
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by a
registered investment company, or whose functions relate to
the making of any recommendation with respect to such
purchases or sales; and
(B) Any natural person in a control relationship to such company
or investment adviser who obtains information concerning
recommendations made to such company with regard to the
purchase or sale of a security.
- APPROVAL - written consent or written notice of non-objection.
- BENEFICIAL OWNERSHIP - The definition that follows conforms to
interpretations of the Securities and Exchange Commission on
this matter. Because a determination of beneficial ownership
requires a detailed analysis of personal financial circumstances
that are subject to change, Corporate Compliance ordinarily will
not advise employees on this definition. It is the responsibility
of employee to read the definition and based on that definition,
determine whether he/she is the beneficial owner of an account.
If the employee determines that he/she is not a beneficial owner
of an account and Corporate Compliance becomes aware of the
existence of the account, the employee will be responsible for
justifying his/her determination.
Securities owned of record or held in the employee's name are
generally considered to be beneficially owned by the employee.
Securities held in the name of any other person are deemed to be
beneficially owned by the employee if by reason of any contract,
understanding, relationship, agreement or other arrangement, the
employee obtains therefrom benefits substantially equivalent to
those of ownership, including the power to vote, or to direct the
disposition of, such securities. Beneficial ownership includes
securities held by others for the employee's benefit (regardless of
record ownership), e.g., securities held for the employee or
members of the employee's immediate family, defined below, by
agents, custodians, brokers, trustees, executors or other adminis-
trators; securities owned by the employee, but which have not
been transferred into the employee's name on the books of the
company; securities which the employee has pledged; or securi-
ties owned by a corporation that should be regarded as the
employee's personal holding corporation. As a natural person,
beneficial ownership is deemed to include securities held in the
name or for the benefit of the employee's immediate
family, which includes the employee's spouse, the employee's
minor children and stepchildren and the employee's relatives or
|
GLOSSARY
- BENEFICIAL OWNERSHIP - definition continued: the relatives of the employee's spouse who are sharing the employee's home, unless because of countervailing circum- stances, the employee does not enjoy benefits substantially equivalent to those of ownership. Benefits substantially equiva- lent to ownership include, for example, application of the income derived from such securities to maintain a common home, meeting expenses that such person otherwise would meet from other sources, and the ability to exercise a controlling influ- ence over the purchase, sale or voting of such securities. An employee is also deemed the beneficial owner of securities held in the name of some other person, even though the employee does not obtain benefits of ownership, if the employee can vest or revest title in himself at once, or at some future time. In addition, a person will be deemed the beneficial owner of a security if he has the right to acquire beneficial ownership of such security at any time (within 60 days) including but not limited to any right to acquire: (1) through the exercise of any option, warrant or right; (2) through the conversion of a security; or (3) pursuant to the power to revoke a trust, discretionary account or similar arrangement. With respect to ownership of securities held in trust, beneficial ownership includes ownership of securities as a trustee in instances where either the employee as trustee or a member of the employee's "immediate family" has a vested interest in the income or corpus of the trust, the ownership by the employee of a vested beneficial interest in the trust and the ownership of securities as a settlor of a trust in which the employee as the settlor has the power to revoke the trust without obtaining the consent of the beneficiaries. Certain exemptions to these trust beneficial ownership rules exist, including an exemption for instances where beneficial ownership is imposed solely by reason of the employee being settlor or beneficiary of the securities held in trust and the ownership, acquisition and disposition of such securities by the trust is made without the employee's prior approval as settlor or beneficiary. "Immediate family" of an employee as trustee means the employee's son or daughter (including any legally adopted children) or any descen- dant of either, the employee's stepson or stepdaughter, the employee's father or mother or any ancestor of either, the employee's stepfather or stepmother and the employee's spouse. To the extent that stockholders of a company use it as a personal trading or investment medium and the company has no other substantial business, stockholders are regarded as beneficial owners, to the extent of their respective interests, of the stock thus invested or traded in. A general partner in a partnership is considered to have indirect beneficial ownership in the securities held by the partnership to the extent of his pro rata interest in the partnership. Indirect beneficial ownership is not, however, considered to exist solely by reason of an indirect interest in portfolio |
GLOSSARY
- BENEFICIAL OWNERSHIP - definition continued: securities held by any holding company registered under the Public Utility Holding Company Act of 1935, a pension or retirement plan holding securities of an issuer whose employees gen- erally are beneficiaries of the plan and a business trust with over 25 beneficiaries. Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership as part of a plan or scheme to evade the reporting requirements of the Securities Exchange Act of 1934 shall be deemed the beneficial owner of such security. The final determination of beneficial ownership is a question to be determined in light of the facts of a particular case. Thus, while the employee may include security holdings of other members of his family, the employee may nonetheless disclaim beneficial ownership of such securities. - "CHINESE WALL" POLICY - procedures designed to restrict the flow of information within Mellon from units or individuals who are likely to receive material nonpublic information to units or individuals who trade in securities or provide investment advice. - DIRECT FAMILY RELATION - employee's husband, wife, father, mother, brother, sister, daughter or son. Includes the preceding plus, where appropriate, the following prefixes/suffix: grand-, step-, foster-, half- and -in-law. - DISCRETIONARY TRADING ACCOUNT - an account over which the employee has no direct or indirect control over the investment decision making process. - EMPLOYEE - any employee of Mellon Financial Corporation or its more-than-50%-owned direct or indirect subsidiaries; includes all full-time, part-time, benefited and non-benefited, exempt and non-exempt, domestic and international employees; does not include consultants and contract or temporary employees. - EXEMPT SECURITIES - Exempt Securities are defined as: - direct obligations of the government of the United States; - high quality short-term debt instruments; - bankers' acceptances; - bank certificates of deposit and time deposits; - commercial paper; - repurchase agreements; - securities issued by open-end investment companies; |
GLOSSARY
- FAMILY RELATION - see direct family relation.
- GENERAL COUNSEL - General Counsel of Mellon Financial
Corporation or any person to whom relevant authority is
delegated by the General Counsel.
- INDEX FUND - an investment company or managed portfolio which
contains securities of an index in proportions designed to
replicate the return of the index.
- INITIAL PUBLIC OFFERING (IPO) - the first offering of a company's
securities to the public through an allocation by the underwriter.
- INVESTMENT CLUB - is a membership organization where investors
make joint decisions on which securities to buy or sell. The
securities are generally held in the name of the investment club.
Since each member of an investment club participates in the
investment decision making process, Insider Risk Employees,
Investment Employees and Access Decision Makers belonging to
such investment clubs must preclear and report the securities
transactions contemplated by such investment clubs. In contrast,
a private investment company is an organization where the
investor invests his/her money, but has no direct control over the
way his/her money is invested. Insider Risk Employees,
Investment Employees and Access Decision Makers investing in
such a private investment company are not required to preclear
any of the securities transactions made by the private investment
company. Insider Risk Employees, Investment Employees and
Access Decision Makers are required to report their investment in
a private investment company to the Manager of Corporate
Compliance and certify to the Manager of Corporate Compliance
that they have no direct control over the way their money is
invested.
- INVESTMENT COMPANY - a company that issues securities that
represent an undivided interest in the net assets held by the
company. Mutual funds are investment companies that issue and
sell redeemable securities representing an undivided interest in
the net assets of the company.
- INVESTMENT ETHICS COMMITTEE is composed of investment, legal,
compliance, and audit management representatives of Mellon
and its affiliates. The members of the Investment Ethics
Committee are:
- President and Chief Investment Officer of The Dreyfus
Corporation (Committee Chair)
- General Counsel, Mellon Financial Corporation
- Chief Risk Management Officer, Mellon Trust
- Manager of Corporate Compliance, Mellon Financial
Corporation
|
GLOSSARY
- Corporate Chief Auditor, Mellon Financial Corporation
- Chief Investment Officer, Mellon Private Asset Management
- Executive Officer of a Mellon investment adviser (rotating
membership)
The Committee has oversight of issues related to personal securi-
ties trading and investment activity by Access Decision Makers.
- MANAGER OF CORPORATE COMPLIANCE - the employee within the
Audit & Risk Review Department of Mellon Financial
Corporation who is responsible for administering the Securities
Trading Policy, or any person to whom relevant authority is
delegated by the Manager of Corporate Compliance.
- MELLON - Mellon Financial Corporation and all of its direct and
indirect subsidiaries.
- OPTION - a security which gives the investor the right, but not the
obligation, to buy or sell a specific security at a specified price
within a specified time. For purposes of compliance with the
Policy, any Mellon employee who buys/sells an option, is
deemed to have purchased/sold the underlying security when the
option was purchased/sold. Four combinations are possible as
described below.
- Call Options
If a Mellon employee buys a call option, the employee is
considered to have purchased the underlying security on the
date the option was purchased.
If a Mellon employee sells a call option, the employee is
considered to have sold the underlying security on the date
the option was sold.
- Put Options
If a Mellon employee buys a put option, the employee is
considered to have sold the underlying security on the date
the option was purchased.
If a Mellon employee sells a put option, the employee is
considered to have bought the underlying security on the
date the option was sold.
Below is a table describing the above:
|
Transaction Type
---------------------------------------------------------------------
Option Type Buy Sale
---------------------------------------------------------------------
Put Sale of Purchase of
Underlying Security Underlying Security
---------------------------------------------------------------------
Call Purchase of Sale of
Underlying Security Underlying Security
---------------------------------------------------------------------
|
GLOSSARY
- PRECLEARANCE COMPLIANCE OFFICER - a person designated by the Manager of Corporate Compliance and/or the Investment Ethics Committee to administer, among other things, employees' preclearance requests for a specific business unit. - PRIVATE PLACEMENT - an offering of securities that is exempt from registration under the Securities Act of 1933 because it does not constitute a public offering. Includes limited partnerships. - SENIOR MANAGEMENT COMMITTEE - the Senior Management Committee of Mellon Financial Corporation. - SHORT SALE - the sale of a security that is not owned by the seller at the time of the trade. |
EXHIBIT A - SAMPLE INSTRUCTION
LETTER TO BROKER
[MELLON LOGO]
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm noted above, please be advised that the Compliance Department of my employer should be noted as an "Interested Party" with respect to my accounts. They should, therefore, be sent copies of all trade confirmations and account statements relating to my account.
Please send the requested documentation ensuring the account holder's name appears on all correspondence to:
Manager, Corporate Compliance
Mellon Financial Corporation
PO Box 3130 Pittsburgh, PA 15230-3130
or
Preclearance Compliance Officer
(obtain address from your designated Preclearance Compliance Officer)
Thank you for your cooperation in this request.
Sincerely yours,
Employee
cc: Manager, Corporate Compliance (151-4340) or Preclearance Compliance Officer
Questions Concerning the Securities Trading Policy? Contact Corporate Compliance, (412) 234-1661 AIM 151-4340, Mellon Bank, Pittsburgh, PA 15258-0001
CO-1041 Rev. 06/00 PD 06/00
EXHIBIT (p)(7)
THE FRANKLIN TEMPLETON GROUP
CODE OF ETHICS
AND
POLICY STATEMENT ON INSIDER TRADING
TABLE OF CONTENTS
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS........................................................ 1
PART 1 - STATEMENT OF PRINCIPLES................................................................... 1
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE.............................................. 2
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS............................................ 3
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS........................ 10
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS............................................. 13
PART 6 - PRE-CLEARANCE REQUIREMENTS................................................................ 17
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE...................................................... 22
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY...................... 23
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS.................................... 24
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER...................................... 25
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS............................................... 31
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING, AND PRE-CLEARANCE PROVISIONS.............. 32
IV. LEGAL REQUIREMENT........................................................................... 33
APPENDIX B: FORMS AND SCHEDULES.................................................................... 34
ACKNOWLEDGMENT FORM................................................................................ 35
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX NUMBERS........... 36
SCHEDULE B: SECURITIES TRANSACTION REPORT......................................................... 37
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES HOLDINGS............ 38
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING............................................ 39
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST................................ 40
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS........................... 41
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY........................... 42
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS. 43
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF FRANKLIN RESOURCES, INC.
- FEBRUARY 2001 ....................................................................... 45
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING................................... 1
A. LEGAL REQUIREMENT.............................................................................. 1
B. WHO IS AN INSIDER?............................................................................. 2
C. WHAT IS MATERIAL INFORMATION?.................................................................. 2
D. WHAT IS NON-PUBLIC INFORMATION?................................................................ 2
E. BASIS FOR LIABILITY............................................................................ 3
F. PENALTIES FOR INSIDER TRADING.................................................................. 3
G. INSIDER TRADING PROCEDURES..................................................................... 4
|
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS
Franklin Resources, Inc. and all of its subsidiaries, and the funds in the Franklin Templeton Group of Funds (the "Funds") (collectively, the "Franklin Templeton Group") will follow this Code of Ethics (the "Code") and Policy Statement on Insider Trading (the "Insider Trading Policy"). Additionally, the subsidiaries listed in Appendix C of this Code, together with Franklin Resources, Inc., the Funds, the Fund's investment advisers and principal underwriter, have adopted the Code and Insider Trading Policy.
PART 1 - STATEMENT OF PRINCIPLES
The Franklin Templeton Group's policy is that the interests of shareholders and clients are paramount and come before the interests of any director, officer or employee of the Franklin Templeton Group.(1)
Personal investing activities of ALL directors, officers and employees of the Franklin Templeton Group should be conducted in a manner to avoid actual or potential conflicts of interest with the Franklin Templeton Group, Fund shareholders, and other clients of any Franklin Templeton adviser.
Directors, officers and employees of the Franklin Templeton Group shall use their positions with the Franklin Templeton Group, and any investment opportunities they learn of because of their positions with the Franklin Templeton Group, in a manner consistent with their fiduciary duties for the benefit of Fund shareholders, and clients.
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand this document, because its overall purpose is to help all of us comply with the law and to preserve and protect the outstanding reputation of the Franklin Templeton Group. This document was adopted to comply with Securities and Exchange Commission rules under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations contained in the ICI's Report of the Advisory Group on Personal Investing. Any violation of the Code or Insider Trading Policy, including engaging in a prohibited transaction or failing to file required reports, may result in disciplinary action, and, when appropriate, termination of employment and/or referral to appropriate governmental agencies.
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK?
The principles contained in the Code must be observed by ALL directors, officers and employees(2) of the Franklin Templeton Group. However, there are different categories of restrictions on personal investing activities. The category in which you have been placed generally depends on your job function, although unique circumstances may result in you being placed in a different category. The Code covers the following categories of employees who are described below:
(1) ACCESS PERSONS: Access Persons are those employees who have "access to information" concerning recommendations made to a Fund or client with regard to the purchase or sale of a security. Examples of "access to information" would include having access to trading systems, portfolio accounting systems, research data bases or settlement information. Access Persons would typically include employees, including Management Trainees, in the following departments:
- fund accounting;
- investment operations;
- information services & technology;
- product management;
- legal and legal compliance
- and anyone else designated by the Director of
Compliance
In addition, you are an Access Person if you are any of the following:
- an officer or and directors of funds;
- an officer or director of an investment advisor or
broker-dealer subsidiary in the Franklin Templeton
Group;
- a person that controls those entities; and
- any Franklin Resources' Proprietary Account
("Proprietary Account")(3)
(2) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are those employees of the Franklin Templeton Group, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in the Franklin Templeton Group, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include:
(3) See Appendix A. II., for definition of "Proprietary Accounts."
- portfolio managers;
- research analysts;
- traders;
- employees serving in equivalent capacities (such as
Management Trainees);
- employees supervising the activities of Portfolio
Persons; and
- anyone else designated by the Director of Compliance
(3) NON-ACCESS PERSONS: If you are an employee in the Franklin Templeton Group AND you do not fit into any of the above categories, you are a Non-Access Person. Because you do not normally receive confidential information about Fund portfolios, you are subject only to the prohibited transaction provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s Standards of Business Conduct contained in the Employee Handbook.
Please contact the Legal Compliance Department if you are unsure as to what category you fall in or whether you should be considered to be an Access Person or Portfolio Person.
The Code works by prohibiting some transactions and requiring
pre-clearance and reporting of most others. NON-ACCESS PERSONS do not have to
pre-clear their security transactions, and, in most cases, do not have to report
their transactions. "INDEPENDENT DIRECTORS" need not report any securities
transaction unless you knew, or should have known that, during the 15-day period
before or after the transaction, the security was purchased or sold or
considered for purchase or sale by a Fund or Franklin Resources for a Fund. (See
Section 5.2.B below.) HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL EMPLOYEES
AND INDEPENDENT DIRECTORS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED
TRANSACTIONS PROVISIONS CONTAINED IN 3.4 BELOW. If you have any questions
regarding your personal securities activity, contact the Legal Compliance
Department.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED?
The Code covers all of your personal securities accounts and transactions, as well as transactions by any of Franklin Resource's Proprietary Accounts. It also covers all securities and accounts in which you have "beneficial ownership."(4) A transaction by or for the account of your spouse, or any other
family member living in your home is considered to be the same as a transaction by you. Also, a transaction for any account in which you have any economic interest (other than the account of an unrelated client for which advisory fees are received) and have or share investment control is generally considered the same as a transaction by you. For example, if you invest in a corporation that invests in securities and you have or share control over its investments, that corporation's securities transactions are considered yours.
However, you are not deemed to have a pecuniary interest in any securities held by a partnership, corporation, trust or similar entity unless you control, or share control of such entity, or have, or share control over its investments. For example, securities transactions of a trust or foundation in which you do not have an economic interest (i.e., you are not the trustor or beneficiary) but of which you are a trustee are not considered yours unless you have voting or investment control of its assets. Accordingly, each time the words "you" or "your" are used in this document, they apply not only to your personal transactions and accounts, but also to all transactions and accounts in which you have any direct or indirect beneficial interest. If it is not clear whether a particular account or transaction is covered, ask a Preclearance Officer for guidance.
3.3 WHAT SECURITIES ARE EXEMPT FROM THE CODE OF ETHICS?
You do not need to pre-clear or report transactions of the following securities:
(1) securities that are direct obligations of the U. S. Government (i.e., issued or guaranteed by the U.S. Government, such as Treasury bills, notes and bonds, including U.S. Savings Bonds and derivatives thereof);
(2) high quality short-term instruments, including but not limited to bankers' acceptances, bank certificates of deposit, commercial paper and repurchase agreements;
(3) shares of registered open-end investment companies ("mutual funds"); and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
Such transactions are also exempt from: (i) the prohibited transaction
provisions contained in Part 3.4 such as front-running; (ii) the additional
compliance requirements applicable to portfolio persons contained in Part 4; and
(iii) the applicable reporting requirements contained in Part 5.
3.4 PROHIBITED TRANSACTIONS FOR ALL ACCESS PERSONS
A. "INTENT" IS IMPORTANT
Certain transactions described below have been determined by the courts and the SEC to be prohibited by law. The Code reiterates that these types of transactions are a violation of the Statement of Principals and are prohibited. Preclearance, which is a cornerstone of our compliance efforts, cannot detect transactions which are dependent upon intent, or which by their nature, occur before any order has been placed for a fund or client. A Preclearance Officer, who is there to assist you with compliance with the Code, cannot guarantee any transaction or transactions comply with the Code or the law. The fact that your transaction receives preclearance, shows evidence of good faith, but depending upon all the facts, may not provide a full and complete defense to any accusation of violation of the Code or of the law. For example, if you executed a transaction for which you received approval, or if the transaction
was exempt from preclearance (e.g., a transaction for 100 shares or less), would not preclude a subsequent finding that front-running or scalping occurred because such activity are dependent upon your intent. Intent cannot be detected during preclearance, but only after a review of all the facts.
In the final analysis, compliance remains the responsibility of each individual effecting personal securities transactions.
B. FRONT-RUNNING: TRADING AHEAD OF A FUND OR CLIENT
You cannot front-run any trade of a Fund or client. The term "front-run" means knowingly trading before a contemplated transaction by a Fund or client of any Franklin Templeton adviser, whether or not your trade and the Fund's or client's trade take place in the same market. Thus, you may not:
(1) purchase a security if you intend, or know of Franklin Templeton Group's intention, to purchase that security or a related security on behalf of a Fund or client, or
(2) sell a security if you intend, or know of Franklin Templeton Group's intention, to sell that security or a related security on behalf of a Fund or client.
C. SCALPING.
You cannot purchase a security (or its economic equivalent) with the intention of recommending that the security be purchased for a Fund, or client, or sell short a security (or its economic equivalent) with the intention of recommending that the security be sold for a Fund or client. Scalping is prohibited whether or not you realize a profit from such transaction.
D. TRADING PARALLEL TO A FUND OR CLIENT
You cannot buy a security if you know that the same or a related security is being bought contemporaneously by a Fund or client, or sell a security if you know that the same or a related security is being sold contemporaneously by a Fund or client.
E. TRADING AGAINST A FUND OR CLIENT
You cannot:
(1) buy a security if you know that a Fund or client is selling the same or a related security, or has sold the security, until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn, or
(2) sell a security if you know that a Fund or client is buying the same or a related security, or has bought the security until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn.
Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code for more details regarding the preclearance of personal securities transactions.
F. USING PROPRIETARY INFORMATION FOR PERSONAL TRANSACTIONS
You cannot buy or sell a security based on Proprietary Information(5) without disclosing the information and receiving written authorization. If you wish to purchase or sell a security about which you obtained such information, you must report all of the information you obtained regarding the security to the Appropriate Analyst(s)(6), or to the Director of Compliance for dissemination to the Appropriate Analyst(s).
(6) The Director of Compliance is designated on Schedule A. The "Appropriate Analyst" means any securities analyst or portfolio manager, other than you, making recommendations or investing funds on behalf of any associated client, who may be reasonably expected to recommend or consider the purchase or sale of the security in question.
You will be permitted to purchase or sell such security if the Appropriate Analyst(s) confirms to the Preclearance Desk that there is no intention to engage in a transaction regarding the security within seven (7) calendar days on behalf of an Associated Client(7) and you subsequently preclear such security in accordance with Part 6 below.
G. CERTAIN TRANSACTIONS IN SECURITIES OF FRANKLIN RESOURCES, INC., AND AFFILIATED CLOSED-END FUNDS, AND REAL ESTATE INVESTMENT TRUSTS
If you are an employee of Franklin Resources, Inc. or any of its affiliates, including the Franklin Templeton Group, you cannot effect a short sale of the securities, including "short sales against the box" of Franklin Resources, Inc., or any of the Franklin or Templeton closed-end funds, Franklin real estate investment trusts or any other security issued by Franklin Resources, Inc. or its affiliates. This prohibition would also apply to effecting economically equivalent transactions, including, but not limited to sales of any option to buy (i.e., a call option) or purchases of any option to sell (i.e., a put option) and "swap" transactions or other derivatives. Officers and directors of the Franklin Templeton Group who may be covered by Section 16 of the Securities Exchange Act of 1934, are reminded that their obligations under that section are in addition to their obligations under this Code.
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS(8)
4.1 REQUIREMENT TO DISCLOSE INTEREST AND METHOD OF DISCLOSURE
As a Portfolio Person, you must promptly disclose your direct or indirect beneficial interest in a security whenever you learn that the security is under consideration for purchase or sale by an Associated Client in the Franklin Templeton Group and you;
(1) Have or share investment control of the Associated Client;
(2) Make any recommendation or participate in the determination of which recommendation shall be made on behalf of the Associated Client; or
(3) Have functions or duties that relate to the determination of which recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest orally to the primary portfolio manager (or other Appropriate Analyst) of the Associated Client(s) considering the security, the Director of Research and Trading or the Director of Compliance. Following that oral disclosure, you must send a written acknowledgment of that interest on Schedule E (or on a form containing substantially similar information) to the primary portfolio manager (or other Appropriate Analyst), with a copy to the Legal Compliance Department.
4.2 SHORT SALES OF SECURITIES
You cannot sell short any security held by your Associated Clients, including "short sales against the box". Additionally, Portfolio Persons associated with the Templeton Group of Funds and clients cannot sell short any security on the Templeton "Bargain List". This prohibition would also apply to effecting economically equivalent transactions, including, but not limited to, sales of uncovered call
options, purchases of put options while not owning the underlying security and short sales of bonds that are convertible into equity positions.
4.3 SHORT SWING TRADING
Portfolio Persons cannot profit from the purchase and sale or sale and purchase within sixty calendar days of any security, including derivatives. Portfolio Persons are responsible for transactions that may occur in margin and option accounts and all such transactions must comply with this restriction.(9)
This restriction does NOT apply to:
(1) trading within a shorter period if you do not realize a profit and if you do not violate any other provisions of this Code; and
(2) profiting on the purchase and sale or sale and purchase within sixty calendar days of the following securities:
- securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
- high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
- shares of registered open-end investment companies; and
- commodity futures, currencies, currency forwards and derivatives thereof.
Calculation of profits during the 60 calendar day holding period generally will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in, first-out") basis when there has not been any activity in such security by their Associated Clients during the previous 60 calendar days.
4.4 SERVICE AS A DIRECTOR
As a Portfolio Person, you cannot serve as a director, trustee, or in a similar capacity for any company (excluding not-for-profit companies, charitable groups, and eleemosynary organizations) unless you receive approval from the Chief Executive Officer of the principal investment adviser to the Fund(s) of which you are a Portfolio Person and he/she determines that your service is consistent with the interests of the Fund(s) and its shareholders.
4.5 SECURITIES SOLD IN A PUBLIC OFFERING
Portfolio Persons cannot buy securities in any initial public offering, or a secondary offering by an issuer, including initial public offerings of securities made by closed-end funds and real estate investment trusts advised by the Franklin Templeton Group. Purchases of open-end mutual funds are excluded from this prohibition.
4.6 INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS
Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they:
(1) complete the Private Placement Checklist (Schedule H);
(2) provide supporting documentation (e.g., a copy of the offering memorandum); and
(3) obtain approval of the appropriate Chief Investment Officer; and
(4) submit all documents to the Legal Compliance Department
Approval will only be granted after the Director of Compliance consults with an executive officer of Franklin Resources, Inc.
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS
5.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS
Compliance with the following personal securities transaction reporting procedures is essential to enable us to meet our responsibilities to Funds and other clients and to comply with regulatory requirements. You are expected to comply with both the letter and spirit of these requirements, including completing and filing all reports required under the Code in a timely manner.
5.2 INITIAL HOLDINGS AND BROKERAGE ACCOUNT REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
Every employee (new or transfer) of the Franklin Templeton Group who becomes an Access Person, must file:
(1) An Acknowledgement Form;
(2) Schedule C: Initial, Annual & Updated Disclosure of Securities Holdings; and
(3) Schedule F: Initial, Annual & Updated Disclosure of Securities Accounts
The Acknowledgement Form, Schedule C and Schedule F must be completed and returned to the Legal Compliance Department within 10 calendar days of the date the employee becomes an access person.
5.3 QUARTERLY TRANSACTION REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
You must report all securities transactions by; (i) providing the Legal Compliance Department with copies of all broker's confirmations and statements within 10 calendar days after the end of the calendar quarter (which may be sent under separate cover by the broker) showing all transactions and holdings in securities and (ii) certifying by January 30th of each year that you have disclosed all such brokerage accounts on Schedule F to the Legal Compliance Department. The brokerage statements and confirmations must include all transactions in securities in which you have, or by reason of the
transaction acquire any direct or indirect beneficial ownership, including transactions in a discretionary account and transactions for any account in which you have any economic interest and have or share investment control. Also, if you acquire securities by any other method which is not being reported to the Legal Compliance Department by a duplicate confirmation statement at or near the time of the acquisition, you must report that acquisition to the Legal Compliance Department on Schedule B within 10 calendar days after you are notified of the acquisition. Such acquisitions include, among other things, securities acquired by gift, inheritance, vesting,(10) stock splits, merger or reorganization of the issuer of the security.
You must file these documents with the Legal Compliance Department not later than 10 calendar days after the end of each quarter, but you need not show or report transactions for any account over which you had no direct or indirect influence or control.(11) Failure to timely report transactions is a violation of Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of Directors and may also result, among other things, in denial of future personal security transaction requests.
B. INDEPENDENT DIRECTORS
If you are a director of the Franklin Templeton Group but you are not an "interested person" of the Fund, you are not required to file transaction reports unless you knew or should have known that, during the 15-day period before or after a transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund.
(11) See Sections 3.2 and 4.6 of the Code. Also, confirmations and statements of transactions in open-end mutual funds, including mutual funds sponsored by the Franklin Templeton Group are not required. See Section 3.3 above for a list of other securities that need not be reported. If you have any beneficial ownership in a discretionary account, transactions in that account are treated as yours and must be reported by the manager of that account (see Section 6.1.C below).
5.4 ANNUAL REPORTS - ALL ACCESS PERSONS
A. SECURITIES ACCOUNTS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
As an access person, you must file a report of all personal securities accounts on Schedule F, with the Legal Compliance Department, annually by January 30th. You must report the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of a spouse and minor children. You must also report any account in which you have any economic interest and have or share investment control (e.g., trusts, foundations, etc.) other than an account for a Fund in, or a client of, the Franklin Templeton Group.
B. SECURITIES HOLDINGS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
You must file a report of personal securities holdings on Schedule C, with the Legal Compliance Department, by January 30th of each year. This report should include all of your securities holdings, including any security acquired by a transaction, gift, inheritance, vesting, merger or reorganization of the issuer of the security, in which you have any direct or indirect beneficial ownership, including securities holdings in a discretionary account and for any account in which you have any economic interest and have or share investment control. Your securities holding information must be current as of a date no more than 30 days before the report is submitted. You may attach copies of year-end brokerage statements to the Schedule C in lieu of listing each security position on the schedule.
C. CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS (INCLUDING INDEPENDENT DIRECTORS)
All access persons, including independent directors, will be asked to certify that they will comply with the Franklin Templeton Group's Code of Ethics and Policy Statement on Insider Trading by filing the Acknowledgment Form with the Legal Compliance Department within 10 business days of receipt of the Code. Thereafter, you will be asked to certify that you have complied with the Code during the preceding year by filing a similar Acknowledgment Form by January 30 of each year.
5.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (EXCEPT INDEPENDENT DIRECTORS)
If you are an access person , in the Franklin Templeton Group, before or at a time contemporaneous with opening a brokerage account with a registered broker-dealer, or a bank, or placing an initial order for the purchase or sale of securities with that broker-dealer or bank, you must:
(1) notify the Legal Compliance Department, in writing, by completing Schedule D or by providing substantially similar information; and
(2) notify the institution with which the account is opened, in writing, of your association with the Franklin Templeton Group.
The Compliance Department will request the institution in writing to send to it duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their mailing to you.
If you have an existing account on the effective date of this Code or
upon becoming an access person, you must comply within 10 days with conditions
(1) and (2) above.
PART 6 - PRE-CLEARANCE REQUIREMENTS
6.1 PRIOR APPROVAL OF SECURITIES TRANSACTIONS
A. LENGTH OF APPROVAL
Unless you are covered by Paragraph D below, you cannot buy or sell any security, without first contacting a Preclearance Officer by fax, phone, or e-mail and obtaining his or her approval. A clearance is good until the close of the business day following the day clearance is granted but may be extended in special circumstances, shortened or rescinded, as explained in Appendix A.
B. SECURITIES NOT REQUIRING PRECLEARANCE
The securities enumerated below do not require preclearance under the Code. However, all other provisions of the Code apply, including, but not limited to: (i) the prohibited transaction provisions contained in Part 3.4 such as front-running; (ii) the additional compliance requirements applicable to portfolio persons contained in Part 4, (iii) the applicable reporting requirements contained in Part 5; and (iv) insider trading prohibitions.
You need NOT pre-clear transactions in the following securities:
(1) MUTUAL FUNDS. Transactions in shares of any registered open-end mutual fund;
(2) FRANKLIN RESOURCES, INC., AND ITS AFFILIATES. Purchases and sales of securities of Franklin Resources, Inc., closed-end funds of the Franklin Templeton Group, or real estate investment trusts advised by Franklin Properties Inc., as these securities cannot be purchased on behalf of our advisory clients.(12)
(3) SMALL QUANTITIES.
- Transactions that do not result in purchases or sales of more than 100 shares of any one security, regardless of where it is traded, in any 30 day period; or
- Transactions of 500 shares or less of any security listed on the NYSE or NASDAQ NMS in any 30 day period; or
- Transactions of 1000 shares or less of the top 50 securities by volume during the previous calendar quarter on the NYSE or NASDAQ NMS in any 30 day period.
HOWEVER, YOU MAY NOT EXECUTE ANY TRANSACTION, REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS ARE ACTIVE IN THE SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND ACTIVITY IN THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD WITH A TRANSACTION REQUEST. Transactions made pursuant to dividend reinvestment plans ("DRIPs") do not require preclearance regardless of quantity or Fund activity.
(4) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by the governments of the United States, Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan, or their agencies or instrumentalities, or derivatives thereof;
(5) PAYROLL DEDUCTION PLANS. Securities purchased by an employee's spouse pursuant to a payroll deduction program, provided the Compliance Department has been previously notified in writing by the access person that the spouse will be participating in the payroll deduction program.
(6) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or purchase by an access person or an access person's spouse of securities pursuant to a program sponsored by a corporation employing the access person or spouse.
(7) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received.
(8) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender offer made for any and all such securities to all similarly situated shareholders in conjunction with mergers, acquisitions, reorganizations and/or similar corporate actions. However, tenders pursuant to offers for less than all outstanding securities of a class of securities of an issuer must be precleared.
(9) NOT ELIGIBLE FOR FUNDS AND CLIENTS. Transactions in any securities that are prohibited investments for all Funds and clients advised by the entity employing the access person.
(10) NO INVESTMENT CONTROL. Transactions effected for an account or entity over which you do not have or share investment control (i.e., an account where someone else exercises complete investment control).
(11) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or dispose of direct or indirect beneficial ownership (i.e., an account where in you have no financial interest).
Although an access person's securities transaction may be exempt from pre-clearing, such transactions must comply with the prohibited transaction provisions of Section 3.4 above. Additionally, you may not trade any securities as to which you have "inside information" (see attached The Franklin Templeton Group Policy Statement on Insider Trading). If you have any questions, contact a Preclearance Officer before engaging in the transaction. If you have any doubt whether you have or
might acquire direct or indirect beneficial ownership or have or share investment control over an account or entity in a particular transaction, or whether a transaction involves a security covered by the Code, you should consult with a Preclearance Officer before engaging in the transaction.
C. DISCRETIONARY ACCOUNTS
You need not pre-clear transactions in any discretionary account for which a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity, which is not affiliated with the Franklin Templeton Group, exercises sole investment discretion, if the following conditions are met:(13)
(1) The terms of each account relationship ("Agreement") must be in writing and filed with a Preclearance Officer prior to any transactions.
(2) Any amendment to each Agreement must be filed with a Preclearance Officer prior to its effective date.
(3) The Portfolio Person certifies to the Compliance Department at the time such account relationship commences, and annually thereafter, as contained in Schedule G of the Code that such Portfolio Person does not have direct or indirect influence or control over the account, other than the right to terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity must provide duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their delivery to you., If your discretionary account acquires securities which are not reported to a Preclearance Officer by a duplicate confirmation, such transaction must be reported to a Preclearance Officer on Schedule B within 10 days after you are notified of the acquisition.(14)
However, if you make any request that the discretionary account manager enter into or refrain from a specific transaction or class of transactions, you must first consult with a Preclearance Officer and obtain approval prior to making such request.
(14) Any pre-existing agreement must be promptly amended to comply with this condition. The required reports may be made in the form of an account statement if they are filed by the applicable deadline.
D. DIRECTORS WHO ARE NOT ADVISORY PERSONS OR ADVISORY REPRESENTATIVES
You need not pre-clear any securities if:
(1) You are a director of a Fund in the Franklin Templeton Group and a director of the fund's advisor;
(2) You are not an "advisory person"(15) of a Fund in the Franklin Templeton Group; and
(3) You are not an employee of any Fund,
or
(1) You are a director of a Fund in the Franklin Templeton Group;
(2) You are not an "advisory representative"(16) of Franklin Resources or any subsidiary; and
(3) You are not an employee of any Fund,
unless you know or should know that, during the 15-day period before the transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund or other client.
(16) Generally, an "advisory representative" is any person who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made, or who, in connection with his duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations. See Section II of Appendix A for the legal definition of "Advisory Representative."
Directors, other than independent Directors, qualifying under this paragraph are required to comply with all applicable provisions of the Code including reporting their initial holdings and brokerage accounts in accordance with 5.2, personal securities transactions and accounts in accordance with 5.3 and 5.5, and annual reports in accordance with 5.4 of the Code.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable law and to maintain shareholder confidence in the Franklin Templeton Group.
In adopting this Code, it is the intention of the Boards of Directors/Trustees, to attempt to achieve 100% compliance with all requirements of the Code - but it is recognized that this may not be possible. Incidental failures to comply with the Code are not necessarily a violation of the law or the Franklin Templeton Group's Statement of Principles. Such isolated or inadvertent violations of the Code not resulting in a violation of law or the Statement of Principles will be referred to the Director of Compliance and/or management personnel, and disciplinary action commensurate with the violation, if warranted, will be imposed.
However, if you violate any of the enumerated prohibited transactions contained in Parts 3 and 4 of the Code, you will be expected to give up any profits realized from these transactions to Franklin Resources for the benefit of the affected Funds or other clients. If Franklin Resources cannot determine which Fund(s) or client(s) were affected, the proceeds will be donated to a charity chosen by Franklin Resources. Failure to disgorge profits when requested may result in additional disciplinary action, including termination of employment.
Further, a pattern of violations that individually do not violate the law or Statement of Principles, but which taken together demonstrate a lack of respect for the Code of Ethics, may result in disciplinary action including termination of employment. A violation of the Code resulting in a violation of the law will be severely sanctioned, with disciplinary action including, but not limited to, referral of the matter to the board of directors of the affected Fund, termination of employment or referral of the matter to the appropriate regulatory agency for civil and/or criminal investigation.
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY
The Code of Ethics is primarily concerned with transactions in securities held or to be acquired by any of the Funds or Franklin Resources' clients, regardless of whether those transactions are based on inside information or actually harm a Fund or a client.
The Insider Trading Policy (attached to this document) deals with the problem of insider trading in securities that could result in harm to a Fund, a client, or members of the public, and applies to all directors, officers and employees of any entity in the Franklin Templeton Group. Although the requirements of the Code and the Insider Trading Policy are similar, you must comply with both.
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS
This appendix sets forth the additional responsibilities and obligations of Compliance Officers, and the Legal/Administration and Legal/Compliance Departments, under the Franklin Templeton Group Code of Ethics and Policy Statement on Insider Trading.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES
The Director of Compliance, or a Preclearance Officer, shall only permit an access person to go forward with a proposed security(17) transaction if he or she determines that, considering all of the facts and circumstances, the transaction does not violate the provisions of Rule 17j-1, or of this Code and there is no likelihood of harm to a client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to
disapprove a personal securities transaction request, a Preclearance Officer
shall consider only those securities transactions of the "Associated Clients" of
the access person, including open and executed orders and recommendations, in
determining whether to approve such a request. "Associated Clients" are those
Funds or clients whose trading information would be available to the access
person during the course of his or her regular functions or duties. Currently,
there are three groups of Associated Clients: (i) the Franklin Mutual Series
Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients");
(ii) the Franklin Group of Funds and the clients advised by the various Franklin
investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds
and the clients advised by the various Templeton investment advisers ("Templeton
Clients"). Thus, persons who have access to the trading information of Mutual
Clients generally will be precleared solely against the securities transactions
of the Mutual Clients, including open and executed orders and recommendations.
Similarly, persons who have access to the trading information of Franklin
Clients or Templeton Clients generally will be precleared solely against the
securities transactions of Franklin Clients or Templeton Clients, as
appropriate.
Certain officers of Franklin Resources, as well as legal, compliance, fund accounting, investment operations and other personnel who generally have access to trading information of the funds and clients of the Franklin Templeton Group during the course of their regular functions and duties, will have their personal securities transactions precleared against executed transactions, open orders and recommendations of the entire Franklin Templeton Group.
3. SPECIFIC STANDARDS
(a) Securities Transactions by Funds or clients
No clearance shall be given for any transaction in any security on any day during which an Associated Client of the access person has executed a buy or sell order in that security, until seven (7) calendar days after the order has been executed. Notwithstanding a transaction in the previous seven days, clearance may be granted to sell if the security has been disposed of by all Associated Clients.
(b) Securities under Consideration
Open Orders
No clearance shall be given for any transaction in any security on any day which an Associated Client of the access person has a pending buy or sell order for such security, until seven (7) calendar days after the order has been executed.
Recommendations
No clearance shall be given for any transaction in any security on any day on which a recommendation for such security was made by a Portfolio Person, until seven (7) calendar days after the recommendation was made and no orders have subsequently been executed or are pending.
(c) Private Placements
In considering requests by Portfolio Personnel for approval of limited partnerships and other private placement securities transactions, the Director of Compliance shall consult with an executive officer of Franklin Resources, Inc. In deciding whether to approve the transaction, the Director of Compliance and the executive officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the Portfolio Person by virtue of his or her position with the Franklin Templeton Group. If the Portfolio Person receives clearance for the transaction, an investment in the same issuer may only be made for a Fund or client if an executive officer of Franklin Resources, Inc., who has been informed of the Portfolio Person's pre-existing investment and who has no interest in the issuer, approves the transaction.
(d) Duration of Clearance
If a Preclearance Officer approves a proposed securities transaction, the order for the transaction must be placed and effected by the close of the next business day following the day approval was granted. The Director of Compliance may, in his or her discretion, extend the clearance period up to seven calendar days, beginning on the date of the approval, for a securities transaction of any access person who demonstrates that special circumstances make the extended clearance period necessary and appropriate. (18) The Director of Compliance may, in his or her discretion, after consultation with a member of senior management for Franklin Resources, Inc., renew the approval for a particular transaction for up to an additional seven calendar days upon a similar showing of special circumstances by the access person. The Director of Compliance may shorten or rescind any approval or renewal of approval under this paragraph if he or she determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR OF COMPLIANCE
The Director of Compliance may, in his or her discretion, after consultation with an executive officer of Franklin Resources, Inc., waive compliance by any access person with the provisions of the Code, if he or she finds that such a waiver:
(1) is necessary to alleviate undue hardship or in view of unforeseen circumstances or is otherwise appropriate under all the relevant facts and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of the Franklin Templeton Group, the interests of the Franklin Templeton Group or its affiliates; and
(4) will not result in a transaction or conduct that would violate provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for it, and a copy shall be promptly sent by the Director of Compliance to the General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
A Preclearance Officer shall make a record of all requests for pre-clearance regarding the purchase or sale of a security, including the date of the request, the name of the access person, the details of the proposed transaction, and whether the request was approved or denied. A Preclearance Officer shall keep a record of any waivers given, including the reasons for each exception and a description of any potentially conflicting Fund or client transactions.
A Preclearance Officer shall also collect the signed initial acknowledgments of receipt and the annual acknowledgments from each access person of receipt of a copy of the Code and Insider Trading Policy, as well as reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition, a Preclearance Officer shall request copies of all confirmations, and other information with respect to an account opened and maintained with the broker-dealer by any access person of the Franklin Templeton Group. A Preclearance Officer shall preserve those acknowledgments and reports, the records of consultations and waivers, and the confirmations, and other information for the period required by applicable regulation.
A Preclearance Officer shall review brokerage transaction confirmations, account statements, Schedules B, C, D, E, F and Private Placement Checklists of Access Persons for compliance with the Code. The reviews shall include, but are not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage statements to preclearance request worksheets or, if a private placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Fs to current securities holding information;
(3) Comparison of Schedule C to current securities account information;
(4) Conducting periodic "back-testing" of access person transactions, Schedule Es and/or Schedule Gs in comparison to fund and client transactions;
A Preclearance Officer shall evidence review by initialing and dating the appropriate document. Any apparent violations of the Code detected by a Preclearance Officer during his or her review shall be promptly brought to the attention of the Director of Compliance.
D. PERIODIC RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
The Legal Compliance Department shall consult with the General Counsel and the Human Resources Department, as the case may be, to assure that:
(1) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code.
(2) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code.
(3) All access persons and new employees of the Franklin Templeton Group are adequately informed and receive appropriate education and training as to their duties and obligations under the Code.
(4) There are adequate educational, informational and monitoring efforts to ensure that reasonable steps are taken to prevent and detect unlawful insider trading by access persons and to control access to inside information.
(5) Written compliance reports are submitted to the Board of Directors of Franklin Resources, Inc., and the Board of each relevant Fund at least annually. Such reports will describe any issues arising under the Code or procedures since the last report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations.
(6) The Legal Compliance Department will certify at least annually to the Fund's board of directors that the Franklin Templeton Group has adopted procedures reasonably necessary to prevent Access Persons from violating the Code, and
(7) Appropriate records are kept for the periods required by law.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) Basis for Approval
The Board of Directors/Trustees must base its approval of the Code on a determination that the Code contains provisions reasonably necessary to prevent access persons from engaging in any conduct prohibited by rule 17j-1.
(2) New Funds
At the time a new fund is organized, the Legal Compliance Department will provide the Fund's board of directors, a certification that the investment adviser and principal underwriter have adopted procedures reasonably necessary to prevent Access Persons from violating the Code. Such certification will state that the Code contains provisions reasonably necessary to prevent Access Persons from violating the Code.
(3) Material Changes to the Code of Ethics
The Legal Compliance Department will provide the Fund's board of directors a written description of all material changes to the Code no later than six months after adoption of the material change by the Franklin Templeton Group.
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS
For purposes of the Code of Ethics and Insider Trading Policy, the terms below have the following meanings:
1934 ACT - The Securities Exchange Act of 1934, as amended.
1940 ACT - The Investment Company Act of 1940, as amended.
ACCESS PERSON - Each director, trustee, general partner or officer, and any other person that directly or indirectly controls (within the meaning of Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person, including an Advisory Representative, who has access to information concerning recommendations made to a Fund or client with regard to the purchase or sale of a security.
ADVISORY REPRESENTATIVE - Any officer or director of Franklin Resources; any
employee who makes any recommendation, who participates in the
determination of which recommendation shall be made, or whose functions
or duties relate to the determination of which recommendation shall be
made; any employee who, in connection with his or her duties, obtains
any information concerning which securities are being recommended prior
to the effective dissemination of such recommendations or of the
information concerning such recommendations; and any of the following
persons who obtain information concerning securities recommendations
being made by Franklin Resources prior to the effective dissemination
of such recommendations or of the information concerning such
recommendations: (i) any person in a control relationship to Franklin
Resources, (ii) any affiliated person of such controlling person, and
(iii) any affiliated person of such affiliated person.
AFFILIATED PERSON - same meaning as Section 2(a)(3) of the Investment Company Act of 1940. An "affiliated person" of an investment company includes directors, officers, employees, and the investment adviser. In addition, it includes any person owning 5% of the company's voting securities, any person in which the investment company owns 5% or more of the voting securities, and any person directly or indirectly controlling, controlled by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any access person, any securities analyst or portfolio manager making investment recommendations or investing funds on behalf of an Associated Client and who may be reasonably expected to recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be available to the access person during the course of his or her regular functions or duties.
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the 1934 Act. Generally, a person has a beneficial ownership in a security if he or she, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the security. There is a presumption of a pecuniary interest in a security held or acquired by a member of a person's immediate family sharing the same household.
FUNDS - Investment companies in the Franklin Templeton Group of Funds.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund.
PORTFOLIO PERSON - Any employee of the Franklin Templeton Group, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in the Franklin Templeton Group, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include portfolio managers, research analysts, traders, persons serving in equivalent capacities (such as Management Trainees), persons supervising the activities of Portfolio Persons, and anyone else designated by the Director of Compliance
PROPRIETARY ACCOUNTS - Any corporate account or other account including, but not limited to, a limited partnership, a corporate hedge fund, a limited liability company or any other pooled investment vehicle in which Franklin Resources or its affiliates, owns 5 percent or more of the outstanding capital or is entitled to 25% or more of the profits or losses in the account (excluding any asset based investment management fees based on average periodic net assets in accounts).
SECURITY - Any stock, note, bond, evidence of indebtedness, participation or interest in any profit-sharing plan or limited or general partnership, investment contract, certificate of deposit for a security, fractional undivided interest in oil or gas or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit), guarantee of, or warrant or right to subscribe for or purchase any of the foregoing, and in general any interest or instrument commonly known as a security, except commodity futures, currency and currency forwards. For the purpose of this Code, "security" does not include:
(1) Direct obligations of the Government of the United States;
(2) Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and
(3) Shares issued by open-end funds.
See Section III of Appendix A for a summary of different requirements for different types of securities.
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING, AND PRE-CLEARANCE PROVISIONS
A. PROHIBITED TRANSACTIONS
Securities that are EXEMPT from the prohibited transaction provisions of Section 3.4 include:
(1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
(2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
(3) shares of registered open-end investment companies;
(4) commodity futures, currencies, currency forwards and derivatives thereof;
(5) securities that are prohibited investments for all Funds and clients advised by the entity employing the access person; and
(6) transactions in securities issued or guaranteed by the governments or their agencies or instrumentalities of Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan and derivatives thereof.
B. REPORTING AND PRECLEARANCE
Securities that are EXEMPT from both the reporting requirements of
Section 5 and preclearance requirements of Section 6 of the Code include:
(1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
(2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
(3) shares of registered open-end investment companies; and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
IV. LEGAL REQUIREMENT
Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it unlawful for any affiliated person of the Franklin Templeton Group in connection with the purchase or sale of a security, including any option to purchase or sell, and any security convertible into or exchangeable for, any security that is "held or to be acquired" by a Fund in the Franklin Templeton Group:
A. To employ any device, scheme or artifice to defraud a Fund;
B. To make to a Fund any untrue statement of a material fact or omit to state to a Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
C. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Fund; or
D. To engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund. .
APPENDIX B: FORMS AND SCHEDULES
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING
To: DIRECTOR OF COMPLIANCE, LEGAL COMPLIANCE DEPARTMENT
I hereby acknowledge receipt of a copy of the Franklin Templeton Group's CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING, AMENDED AND RESTATED, FEBRUARY 2000, which I have read and understand. I will comply fully with all provisions of the Code and the Insider Trading Policy to the extent they apply to me during the period of my employment. Additionally, I authorize any broker-dealer, bank or investment adviser with whom I have securities accounts and accounts in which I have beneficial ownership, to provide brokerage confirmations and statements as required for compliance with the Code. I further understand and acknowledge that any violation of the Code or Insider Trading Policy, including engaging in a prohibited transaction or failure to file reports as required (see Schedules B, C, D, E, F and G), may subject me to disciplinary action, including termination of employment.
SIGNATURE:
PRINT NAME:
TITLE:
DEPARTMENT:
LOCATION:
DATE ACKNOWLEDGMENT WAS SIGNED:
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS - FLOOR 2
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX NUMBERS(19)
LEGAL OFFICER
MURRAY SIMPSON
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
FRANKLIN TEMPLETON INVESTMENTS
ONE FRANKLIN PARKWAY
SAN MATEO, CA 94403-1906
(650) 525 -7331
COMPLIANCE OFFICERS
DIRECTOR OF COMPLIANCE PRECLEARANCE OFFICERS
James M. Davis Stephanie Harwood, Supervisor
Franklin Templeton Investments Monique Glowinak
One Franklin Parkway Legal Compliance Department
San Mateo, CA 94403-1906 Franklin Templeton Investments
(650) 312-2832 One Franklin Parkway
San Mateo, CA 94403-1906
(650) 312-3693 (telephone)
(650) 312-5646 (facsimile)
Preclear, Legal (internal e-mail address)
Lpreclear@frk.com (external e-mail address)
|
SCHEDULE B: SECURITIES TRANSACTION REPORT
This report of personal securities transactions NOT reported by duplicate confirmations and brokerage statements pursuant to Section 5.3 of the Code is required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or Rule 17j-1(c) of the Investment Company Act of 1940. The report must be completed and submitted to the Compliance Department no later than 10 calendar days after the end of the calendar quarter. Refer to Section 5.3 of the Code of Ethics for further instructions.
TRADE BUY, SELL SECURITY DESCRIPTION, INCLUDING TYPE OF QUANTITY OR PRICE BROKER - DEALER DATE PRECLEARANCE
DATE OR OTHER INTEREST RATE AND MATURITY SECURITY PRINCIPAL OR BANK OBTAINED FROM
(IF APPROPRIATE) (STOCK, AMOUNT COMPLIANCE DEPT.
BOND,
OPTION, ETC)
|
The report or recording of any transaction above shall not be construed as an admission that I have any direct or indirect ownership in the securities.
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES HOLDINGS
This report shall set forth the security name or description and security class of each security holding in which you have a direct or indirect beneficial interest, including holdings by a spouse, minor children, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund in or a client of the Franklin Templeton Group. In lieu of listing each security position below, you may instead attach copies of brokerage statements, sign below and return Schedule C and brokerage statements to the Legal Compliance Department within 10 days if an initial report or by January 30th of each year if an annual report. Refer to Sections 5.2.A and 5.4.A of the Code for additional filing instructions.
SECURITY DESCRIPTION, INCLUDING TYPE OF SECURITY
INTEREST RATE AND MATURITY (STOCK, BOND, QUANTITY OR NAME OF BROKER -
(IF APPROPRIATE) OPTION, ETC.) PRINCIPAL AMOUNT DEALER OR BANK ACCOUNT NUMBER
|
[ ] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR ENDED ____________
[ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY PERSONAL SECURITIES HOLDINGS FOR THE YEAR ENDED ______
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED PARTY.
* Securities that are EXEMPT from being reported on Schedule C include: (i) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii) high quality short-term instruments ("money market instruments") including but not limited to bankers' acceptances, U.S. bank certificates of deposit; commercial paper; and repurchase agreements; (iii) shares of registered open-end investment companies; and (iv) commodity futures, currencies, currency forwards and derivatives thereof.
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING
TO: Preclearance Desk
Legal Compliance Department
One Franklin Parkway
San Mateo, CA 94403-1906
(650) 312-3693
FAX: (650) 312-5646
FROM: NAME:
------------------------------------
DEPARTMENT:
------------------------------
LOCATION:
--------------------------------
EXTENSION:
-------------------------------
ARE YOU A REG. REPRESENTATIVE? YES [ ] NO [ ]
ARE YOU AN ACCESS PERSON? YES [ ] NO [ ]
|
This is to advise you that I will be opening or have opened a securities account with the following firm:
PLEASE FILL OUT COMPLETELY TO EXPEDITE PROCESSING
* All Franklin registered representatives and Access Persons, PRIOR TO OPENING A BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER, are required to notify the Legal Compliance Department and the executing broker-dealer in writing. This includes accounts in which the registered representative or access person has or will have a financial interest (e.g., a spouse's account) or discretionary authority (e.g., a trust account for a minor child).
Upon receipt of the NOTIFICATION OF SECURITIES ACCOUNT OPENING form, the Legal Compliance Department will contact the broker-dealer identified above and request that it receive duplicate confirmations and statements of your brokerage account.
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST
If you have any beneficial ownership in a security and you recommend to the Appropriate Analyst that the security be considered for purchase or sale by an Associated Client, or if you carry out a purchase or sale of that security for an Associated Client, you must disclose your beneficial ownership to the Legal Compliance Department and the Appropriate Analyst in writing on Schedule E (or an equivalent form containing similar information) before the purchase or sale, or before or simultaneously with the recommendation.
OWNERSHIP METHOD OF PRIMARY
TYPE ACQUISITION DATE AND METHOD LEARNED PORTFOLIO MANAGER
SECURITY (DIRECT OR YEAR (PURCH/GIFT/ THAT SECURITY UNDER OR APPROPRIATE NAME OF PERSON DATE OF VERBAL
DESCRIPTION INDIRECT) ACQUIRED OTHER) CONSIDERATION BY FUNDS ANALYST NOTIFIED NOTIFICATION
|
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS
This report shall set forth the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of a spouse, minor children, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund in, or a client of, the Franklin Templeton Group. In lieu of listing each securities account below, you may instead attach copies of the brokerage statements, sign below and return Schedule F and brokerage statements to the Compliance Department.
NAME(S) ON ACCOUNT ADDRESS OF BROKERAGE FIRM,
(REGISTRATION SHOWN NAME OF BROKERAGE FIRM, BANK OR INVEST. ADVISER ACCOUNT NAME OF ACCOUNT
ON STATEMENT) BANK OR INVESTMENT ADVISER (STREET, CITY , STATE AND ZIP CODE) NUMBER EXECUTIVE/REPRESENTATIVE
|
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME.
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY
This report shall set forth the account name or description in which you have a direct or indirect beneficial interest, including holdings by a spouse, minor children, trusts, foundations, and as to which trading authority has been delegated by you to an unaffiliated registered broker-dealer, registered investment adviser, or other investment manager acting in a similar fiduciary capacity, who exercises sole investment discretion.
TYPE OF OWNERSHIP
NAME/DESCRIPTION OF BROKERAGE FIRM, DIRECT OWNERSHIP (DO) ACCOUNT NUMBER
NAME(S) AS SHOWN ON ACCOUNT OR INVESTMENT BANK, INVESTMENT ADVISER OR INVESTMENT INDIRECT OWNERSHIP (IO) (IF APPLICABLE)
|
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR CONTROL OVER THE ACCOUNTS LISTED ABOVE.
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-190
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS
GENERAL INSTRUCTIONS: In considering requests by Access Persons for approval of limited partnerships and other private placement securities transactions, the Director of Compliance shall consult with an executive officer of Franklin Resources, Inc. In deciding whether to approve the transaction, the Director of Compliance and the executive officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the access person by virtue of his or her position with the Franklin Templeton Group. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, AN INVESTMENT IN THE SAME ISSUER MAY ONLY BE MADE FOR A FUND OR CLIENT IF AN EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WHO HAS BEEN INFORMED OF THE ACCESS PERSON'S PRE-EXISTING INVESTMENT AND WHO HAS NO INTEREST IN THE ISSUER, APPROVES THE TRANSACTION.
IN ORDER TO PROCESS YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
3) Please attach pages of the offering memorandum (or other documents) summarizing the investment opportunity, including:
a) Name of the partnership/hedge fund/issuer;
b) Name of the general partner, location & telephone number;
c) Summary of the offering; including the total amount the offering/issuer;
d) Percentage your investment will represent of the total offering;
e) Plan of distribution; and
f) Investment objective and strategy,
PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
4) Was this investment opportunity presented to you in your capacity as a portfolio manager, trader or research analyst? If no, please explain the relationship, if any, you have to the issuer or principals of the issuer.
5) Is this investment opportunity suitable for any fund/client that you advise? If yes, why isn't the investment being made on behalf of the fund/client? If no, why isn't the investment opportunity suitable for the fund/clients?
6) Do any of the fund/clients that you advise presently hold securities of the issuer of this proposed investment (e.g., common stock, preferred stock, corporate debt, loan participations, partnership interests, etc)? If yes, please provide the names of the funds/clients and security description.
7) Do you presently have or will you have any managerial role with the company/issuer as a result of your investment? If yes, please explain in detail your responsibilities, including any compensation you will receive.
8) Will you have any investment control or input to the investment decision making process?
9) If applicable, will you receive reports of portfolio holdings? If yes, when and how frequently will these be provided?
Reminder: Personal securities transactions that do not generate brokerage confirmations must be reported to the Legal Compliance Department on Schedule B within 10 calendar days after you are notified.
Name of Access Person
---------------------------------------- ------------------------
Access Person Signature Date
Approved by:
---------------------------------------- ------------------------
Chief Investment Officer Signature Date
|
LEGAL COMPLIANCE USE ONLY
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER
SUBSIDIARIES OF FRANKLIN RESOURCES, INC. - FEBRUARY 2001
Franklin Advisers, Inc. IA Franklin Templeton Investments Corp. (Canada) IA Franklin Advisory Services, LLC IA Templeton/Franklin Investment Services, Inc. IA/BD Franklin Investment Advisory Services, Inc. IA Templeton Investment Counsel, LLC IA Franklin Management, Inc. IA Templeton Asset Management, Ltd. IA/FIA Franklin Mutual Advisers, LLC IA Franklin Templeton Investments Japan Ltd. FIA Franklin Properties, Inc. REA Closed Joint-Stock Company Templeton (Russia) FIA Franklin/Templeton Distributors, Inc. IA/BD Templeton Unit Trust Management Ltd. (UK) FBD Franklin Asset Management (Proprietary) Ltd. IA Orion Fund Management Ltd. FIA Templeton (Switzerland), Ltd. FBD Templeton Global Advisors Ltd. (Bahamas) IA Franklin Templeton Investments (Asia) Ltd. FBD Templeton Asset Management (India) Pvt. Ltd. FIA/FBD Franklin Templeton Investments Corp. (UK) IA/FIA Templeton Italia SIM S.p.A. (Italy) FBD Franklin Templeton International Services S.A. FBD Franklin Templeton Investment Services GmbH FBD (Luxembourg) (Germany) Franklin Templeton Investments (Australia) Limited FIA Templeton Funds Annuity Company INS Franklin/Templeton Investor Services, LLC TA FTTrust Company Trust Franklin Templeton Services, LLC BM |
Codes: IA: US registered investment adviser BD: US registered broker-dealer FIA: Foreign equivalent investment adviser FBD: Foreign equivalent broker-dealer TA: US registered transfer agent BM: Business manager to the funds REA: Real estate adviser INS: Insurance company Trust: Trust company |
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of 1988, it is the policy of the Franklin Templeton Group to forbid any officer, director, employee, consultant acting in a similar capacity, or other person associated with the Franklin Templeton Group from trading, either personally or on behalf of clients, including all client assets managed by the entities in the Franklin Templeton Group, on material non-public information or communicating material non-public information to others in violation of the law. This conduct is frequently referred to as "insider trading." The Franklin Templeton Group's Policy Statement on Insider Trading applies to every officer, director, employee or other person associated with the Franklin Templeton Group and extends to activities within and outside their duties with the Franklin Templeton Group. Every officer, director and employee must read and retain this policy statement. Any questions regarding the Franklin Templeton Group's Policy Statement on Insider Trading or the Compliance Procedures should be referred to the Legal Department.
The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public information; or
(2) trading by a non-insider, while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions, you should consult the Legal Department.
POLICY STATEMENT ON INSIDER TRADING
B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's outside attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, an investment adviser may become a temporary insider of a company it advises or for which it performs other services. According to the U.S. Supreme Court, the company must expect the outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.
C. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of the company's securities. Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Wall Street Journal and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION?
Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public.
POLICY STATEMENT ON INSIDER TRADING
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY
In 1980, the Supreme Court found that there is no general duty to disclose before trading on material non-public information, but that such a duty arises only where there is a fiduciary relationship. That is, there must be a relationship between the parties to the transaction such that one party has a right to expect that the other party will not disclose any material non-public information or refrain from trading. Chiarella v. U.S., 445 U.S. 22 (1980).
In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders. They can enter into a confidential relationship with the company through which they gain information (e.g., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be pecuniary but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY
Another basis for insider trading liability is the "misappropriation" theory, under which liability is established when trading occurs on material non-public information that was stolen or misappropriated from any other person. In U.S. v. Carpenter, supra, the Court found, in 1987, a columnist defrauded The Wall Street Journal when he stole information from the Wall Street Journal and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory.
F. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include:
- civil injunctions;
- treble damages;
- disgorgement of profits;
- jail sentences;
POLICY STATEMENT ON INSIDER TRADING
- fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and
- fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided.
In addition, any violation of this policy statement can result in serious sanctions by the Franklin Templeton Group, including dismissal of any person involved.
G. INSIDER TRADING PROCEDURES
Each access person, Compliance Officer, the Risk Management Department, and the Legal Department, as the case may be, shall comply with the following procedures.
1. IDENTIFYING INSIDE INFORMATION
Before trading for yourself or others, including investment companies or private accounts managed by the Franklin Templeton Group, in the securities of a company about which you may have potential inside information, ask yourself the following questions:
- Is the information material?
- Is this information that an investor would consider important in making his or her investment decisions?
- Is this information that would substantially affect the market price of the securities if generally disclosed?
- Is the information non-public?
- To whom has this information been provided?
- Has the information been effectively communicated to the marketplace (e.g., published in Reuters, The Wall Street Journal or other publications of general circulation)?
If, after consideration of these questions, you believe that the information may be material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps:
(i) Report the matter immediately to the designated Compliance Officer, or if he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others, including investment companies or private accounts managed by the Franklin Templeton Group.
POLICY STATEMENT ON INSIDER TRADING
(iii) Do not communicate the information inside or outside the Franklin Templeton Group, other than to the Compliance Officer or the Legal Department.
(iv) The Compliance Officer shall immediately contact the Legal Department for advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with the Compliance Officer, you will be instructed either to continue the prohibitions against trading and communication noted in (ii) and (iii), or you will be allowed to trade and communicate the information.
(vi) In the event the information in your possession is determined by the Legal Department or the Compliance Officer to be material and non-public, it may not be communicated to anyone, including persons within the Franklin Templeton Group, except as provided in (i) above. In addition, care should be taken so that the information is secure. For example, files containing the information should be sealed and access to computer files containing material non-public information should be restricted to the extent practicable.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION
All Franklin Templeton Group personnel also are reminded of the need to be careful to protect from disclosure other types of sensitive information that they may obtain or have access to as a result of their employment or association with the Franklin Templeton Group.
(i) GENERAL ACCESS CONTROL PROCEDURES
The Franklin Templeton Group has established a process by which access to company files that may contain sensitive or non-public information such as the Bargain List and the Source of Funds List is carefully limited. Since most of the Franklin Templeton Group files which contain sensitive information are stored in computers, personal identification numbers, passwords and/or code access numbers are distributed to Franklin Templeton Group computer access persons only. This activity is monitored on an ongoing basis. In addition, access to certain areas likely to contain sensitive information is normally restricted by access codes.
POWER OF ATTORNEY
The undersigned Trustees of Prudential Diversified Funds hereby constitute, appoint and authorize George P. Attisano as true and lawful agent and attorney-in-fact, to sign on his or her behalf in the capacities indicated, any Registration Statement or amendment thereto (including post-effective amendments), and to file the same, with all exhibits thereto, with the Securities and Exchange Commission. The undersigned do hereby give to said agent and attorney-in-fact full power and authority to act in these premises, including, but not limited to, the power to appoint a substitute or substitutes to act hereunder with the same power and authority as said agent and attorney-in-fact would have if personally acting. The undersigned do hereby approve, ratify and confirm all that said agent and attorney-in-fact, or any substitute or substitutes, may do by virtue hereof.
/s/ Eugene C. Dorsey /s/ Thomas T. Mooney
-------------------- --------------------
Eugene C. Dorsey, Trustee Thomas T. Mooney, Trustee
/s/ Saul K. Fenster /s/ David R. Odenath
------------------- --------------------
Saul K. Fenster, Trustee David R. Odenath, Trustee and
President
/s/ Robert F. Gunia /s/ Stephen Stoneburn
------------------- ---------------------
Robert F. Gunia, Trustee and Vice Stephen Stoneburn, Trustee
President
/s/ Maurice F. Holmes /s/ Grace C. Torres
--------------------- -------------------
Maurice F. Holmes, Trustee Grace C. Torres, Principal Financial
and Accounting Officer
/s/ Robert E. LaBlanc /s/ Joseph Weber
--------------------- -------------------
Robert E. LaBlanc Joseph Weber, Trustee
/s/ Douglas H. McCorkindale /s/ Clay T. Whitehead
--------------------------- ---------------------
Douglas H. McCorkindale, Trustee Clay T. Whitehead, Trustee
/s/ W. Scott McDonald, Jr.
--------------------------
W. Scott McDonald, Jr., Trustee
|
Dated: May 22, 2001