As filed with the Securities and Exchange Commission on June 30, 2010
1933 Act Registration No. 33-17619
1940 Act Registration No. 811-05349
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Pre-Effective
Amendment No. ___
o
Post-Effective Amendment No. 249
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 250
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(Check appropriate box or
boxes)
GOLDMAN SACHS TRUST
(Exact Name of Registrant as Specified in Charter)
71 South Wacker Drive
Chicago, Illinois 60606
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code: (312) 655-4400
PETER V. BONANNO, ESQ.
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
(Name and Address of Agent for Service)
Copies to:
STEPHEN H. BIER, ESQ.
Dechert LLP
1095 Avenue of the Americas
New York, NY 10036
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of
the registration statement
It is proposed that this filing will become effective (check appropriate box)
þ
immediately upon filing pursuant to paragraph (b)
o
on (date), pursuant to paragraph (b)
o
60 days after filing pursuant to paragraph (a)(1)
o
on (date) pursuant to paragraph (a)(1)
o
75 days after filing pursuant to paragraph (a)(2)
o
on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
o
this post-effective amendment designates a new effective date for a previously filed post-effective amendment.
Title of Securities Being Registered:
Class A Shares, Class C Shares, Institutional Shares, Class R Shares and Class IR Shares of the
Goldman Sachs Strategic Income Fund.
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Prospectus
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June 30, 2010
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GOLDMAN
SACHS STRATEGIC INCOME FUND
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THE
SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
AN INVESTMENT IN A FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, AND YOU MAY LOSE MONEY IN A FUND.
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n
Goldman Sachs
Strategic Income Fund
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Class A Shares: GSZAX
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Class C Shares: GSZCX
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Institutional Shares: GSZIX
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Class IR Shares: GZIRX
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Class R Shares: GSZRX
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Table of
Contents
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1
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Goldman Sachs Strategic Income FundSummary
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7
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Investment Management Approach
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12
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Risks of the Fund
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18
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Service Providers
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24
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Dividends
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26
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Shareholder Guide
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26
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How
to Buy Shares
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41
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How
to Sell Shares
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53
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Taxation
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56
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Appendix A
Additional Information on Portfolio Risks, Securities and
Techniques
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88
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Appendix B
Financial Highlights
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NOT FDIC-INSURED
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May Lose Value
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No Bank Guarantee
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Goldman
Sachs Strategic Income FundSummary
Investment
Objective
The Fund seeks total return comprised of income and capital
appreciation.
Fees and
Expenses of the Fund
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund. You may qualify for sales
charge discounts on purchases of Class A Shares if you and
your family invest, or agree to invest in the future, at least
$100,000 in Goldman Sachs Funds. More information about these
and other discounts is available from your financial
professional and in Shareholder GuideCommon
Questions Applicable to the Purchase of Class A
Shares beginning on page 34 of this Prospectus and
Other Information Regarding Maximum Sales Charge,
Purchases, Redemptions, Exchanges and Dividends beginning
on
page B-95
of the Funds statement of additional information
(SAI).
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Class A
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Class C
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Institutional
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Class
IR
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Class R
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Shareholder Fees
(fees paid directly from your
investment)
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Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)
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3.75%
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None
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None
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None
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None
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Maximum Deferred Sales Charge (Load) (as a percentage of the
lower of original purchase price or sale
proceeds)
1
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None
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1.00%
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None
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None
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None
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Class A
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Class C
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Institutional
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Class
IR
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Class R
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Annual Fund Operating
Expenses
2
(expenses that you pay each
year as a percentage of the value of your investment)
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Management Fees
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0.60%
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0.60%
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0.60%
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0.60%
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0.60%
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Distribution and Service (12b-1) Fees
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0.25%
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1.00%
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None
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None
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0.50%
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Other Expenses
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0.34%
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0.34%
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0.25%
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0.34%
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0.34%
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Total Annual Fund Operating Expenses
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1.19%
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1.94%
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0.85%
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0.94%
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1.44%
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Expense
Limitation
3
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0.16%
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0.16%
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0.16%
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0.16%
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0.16%
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Total Annual Fund Operating Expenses After Expense
Limitation
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1.03%
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1.78%
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0.69%
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0.78%
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1.28%
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1
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A contingent deferred sales
charge (CDSC) of 1% is imposed on Class C
Shares redeemed within 12 months of purchase.
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2
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The Funds annual operating
expenses have been estimated to reflect expenses expected to be
incurred during the fiscal year.
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1
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3
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The Investment Adviser (as
defined below) has agreed to reduce or limit Other
Expenses (excluding management fees, distribution and
service fees, transfer agency fees and expenses, taxes,
interest, brokerage fees and litigation, indemnification,
shareholder meeting and other extraordinary expenses, exclusive
of any custody and transfer agent fee credit reductions) to
0.054% of the Funds average daily net assets through at
least June 30, 2011, and prior to such date the Investment
Adviser may not terminate the arrangement without the approval
of the Board of Trustees.
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Expense
Example
This Example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds.
The Example assumes that you invest $10,000 in Class A,
Class C, Institutional, Class IR
and/or
Class R Shares of the Fund for the time periods indicated
and then redeem all of your Class A, Class C,
Institutional, Class IR
and/or
Class R Shares at the end of those periods. The Example
also assumes that your investment has a 5% return each year and
that the Funds operating expenses remain the same (except
that the Example assumes that the expense limitation arrangement
between the Fund and the Investment Adviser will remain in place
for only one year). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
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1 Year
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3 Years
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Class A Shares
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$
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476
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$
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724
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Class C Shares
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Assuming complete redemption at end of period
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$
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281
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$
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595
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Assuming no redemption
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$
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181
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$
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595
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Institutional Shares
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$
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70
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$
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256
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Class IR Shares
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$
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80
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$
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284
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Class R Shares
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$
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130
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$
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440
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Portfolio
Turnover
The Fund pays transaction costs when it buys and sells
securities or instruments (i.e., turns over its
portfolio). A high rate of portfolio turnover may result in
increased transaction costs, including brokerage commissions,
which must be borne by the Fund and its shareholders, and is
also likely to result in higher short-term capital gains for
taxable shareholders. These costs are not reflected in annual
fund operating expenses or in the expense example above, but
will be reflected in the Funds performance.
Fund Strategy
The Fund invests in a broadly diversified portfolio of U.S. and
foreign investment grade and non-investment grade fixed income
investments including, but not limited to: U.S. Government
securities (such as U.S. Treasury securities or Treasury
inflation protected securities), non-U.S. sovereign debt,
agency securities, corporate debt securities, agency and
non-agency mortgage-backed securities, asset-backed securities,
custodial receipts, municipal securities, loan participations
and convertible securities. The Fund may invest in fixed income
securities of any maturity.
2
Non-investment grade fixed income securities are securities
rated BB, Ba or below by a nationally recognized statistical
rating organization (NRSRO), or, if unrated,
determined by the Investment Adviser to be of comparable quality.
The Fund may invest in fixed income securities of issuers
located in emerging countries. Such investments may include
sovereign debt issued by emerging countries that have sovereign
ratings below investment grade or that are unrated. There is no
limitation to the amount the Fund invests in non-investment
grade or emerging market securities. From time to time, the Fund
may also invest in preferred stock. The Funds investments
may be denominated in currencies other than the
U.S. dollar. The Fund may engage in forward foreign
currency transactions for both investment and hedging purposes.
The Fund also intends to invest in other derivative instruments.
Derivatives are instruments that have a value based on another
instrument, exchange rate or index. The Funds investments
in derivatives may include, in addition to forward foreign
currency exchange contracts, interest rate futures contracts,
options (including options on futures contracts, swaps, bonds,
stocks and indexes), swaps (including credit default, index,
basis, total return, volatility and currency swaps), and other
forward contracts. The Fund may use derivatives instead of
buying and selling bonds to manage duration, to gain exposure or
to short individual securities or to gain exposure to a credit
or asset backed index.
The Fund may implement short positions and generally will do so
by using swaps or futures. For example, the Fund may enter into
a futures contract pursuant to which it agrees to sell an asset
(that it does not currently own) at a specified price at a
specified point in the future. This gives the Fund a short
position with respect to that asset. The Fund will benefit to
the extent the asset decreases in value (and will be harmed to
the extent the asset increases in value) between the time it
enters into the futures contract and the agreed date of sale.
Strategic in the Funds name means that the
Fund seeks both current income and capital appreciation as
elements of total return. The Fund attempts to exploit pricing
anomalies throughout the global fixed income and currency
markets. Additionally, the Fund uses short positions and
derivatives to enhance portfolio return or for hedging purposes.
The Fund may sell investments that the portfolio managers
believe are no longer favorable with regard to these factors.
Principal
Risks of the Fund
Loss of money is a risk of investing in the Fund. An investment
in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
government agency. The Fund should not be relied upon as a
complete investment program. There can be no assurance that the
Fund will achieve its investment objective.
Non-Investment Grade Fixed Income Securities
Risk.
Non-investment grade fixed income securities
and unrated securities of comparable credit quality are subject
to the increased risk of an issuers inability to meet
principal and interest payment obligations. These securities may
be subject to greater price volatility due to such factors as
3
specific corporate or municipal developments, interest rate
sensitivity, negative perceptions of the junk bond markets
generally and less secondary market liquidity.
Interest Rate Risk.
When interest rates
increase, fixed income securities held by the Fund will
generally decline in value. Long-term fixed income securities
will normally have more price volatility because of this risk
than short-term fixed income securities.
Credit/Default Risk.
An issuer or guarantor
of fixed income securities held by the Fund (which may have low
credit ratings) may default on its obligation to pay interest
and repay principal. Additionally, the credit quality of
securities may deteriorate rapidly, which may impair the
Funds liquidity and cause significant NAV deterioration.
To the extent that the Fund invests in non-investment grade
fixed income securities, these risks will be more pronounced.
Derivatives Risk.
The risk that loss may
result from the Funds investments in options, futures,
forwards, swaps, structured securities and other derivative
instruments. These instruments may be illiquid, difficult to
price and leveraged so that small changes may produce
disproportionate losses to the Fund. Derivatives are also
subject to counterparty risk, which is the risk that the other
party in the transaction will not fulfill its contractual
obligation. Foreign exchange rates can be extremely volatile and
a variance in the degree of volatility of the market or in the
direction of the market from the Investment Advisers
expectations for speculative forward foreign currency
transactions may produce significant losses to the Fund. The
Fund may use derivatives, including futures and swaps, to
implement short positions. Taking short positions involves
leverage of the Funds assets and presents various risks.
If the price of the instrument or market which the Fund has
taken a short position on increases, then the Fund will incur a
loss equal to the increase in price from the time that the short
position was entered into plus any premiums and interest paid to
a counterparty. Therefore, taking short positions involves the
risk that losses may be exaggerated, potentially losing more
money than the actual cost of the investment.
Market Risk.
The value of the instruments in
which the Fund invests may go up or down in response to the
prospects of individual companies, particular industry sectors
or governments
and/or
general economic conditions.
Management Risk.
The risk that a strategy
used by the Investment Adviser may fail to produce the intended
results.
Liquidity Risk.
The risk that the Fund may
make investments that may be illiquid or that may become less
liquid in response to market developments or adverse investor
perceptions. Liquidity risk may also refer to the risk that the
Fund will not be able to pay redemption proceeds within the
allowable time period because of unusual market conditions, an
unusually high volume of redemption requests, or other reasons.
To meet redemption requests, the Fund may be forced to sell
securities at an unfavorable time
and/or
under
unfavorable conditions.
Foreign and Emerging Countries Risk.
Foreign
securities may be subject to risk of loss because of less
foreign government regulation, less public information and less
economic, political and social stability in these countries.
Loss may also result from
4
the imposition of exchange controls, confiscations and other
government restrictions, or from problems in registration,
settlement or custody. Foreign risk also involves the risk of
negative foreign currency rate fluctuations. To the extent that
the Fund also invests in securities of issuers located in
emerging markets, these risks will be more pronounced. The
securities markets of emerging countries are especially subject
to greater price volatility and are not subject to as extensive
and frequent accounting, financial and other reporting
requirements as the securities markets of more developed
countries.
Sovereign Risk.
The risk that the issuer of
non-U.S. sovereign debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to
repay the principal or interest when due. This risk may be
heightened in the case of sovereign debt that is rated below
investment grade.
Mortgage-Backed and Other Asset-Backed
Risk.
Generally, rising interest rates tend to
extend the duration of fixed rate mortgage-backed securities,
making them more sensitive to changes in interest rates. As a
result, in a period of rising interest rates, if the Fund holds
mortgage-backed securities, it may exhibit additional
volatility. This is known as extension risk. In addition,
adjustable and fixed rate mortgage-backed securities are subject
to prepayment risk. When interest rates decline, borrowers may
pay off their mortgages sooner than expected. This can reduce
the returns of the Fund because the Fund may have to reinvest
that money at the lower prevailing interest rates. The Fund may
purchase many types of U.S. Government securities,
including those issued by the Federal National Mortgage
Association (Fannie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac) and Federal Home Loan
Banks. These securities are neither issued nor guaranteed by the
United States Treasury and, therefore, are not backed by the
full faith and credit of the United States. The Funds
investments in other asset-backed securities are subject to
risks similar to those associated with mortgage-backed
securities, as well as additional risks associated with the
nature of the assets and the servicing of those assets.
Performance
As the Fund had not yet commenced investment operations as of
the date of this Prospectus, there is no performance information
quoted for the Fund.
Portfolio
Management
Goldman Sachs Asset Management, L.P. is the investment adviser
for the Fund (the Investment Adviser or
GSAM).
Portfolio Managers:
Jonathan Beinner, Managing Director,
co-head of GSAM Global Fixed Income and Liquidity Management,
has managed the Fund since 2010. Michael Swell, Managing
Director, Co-Head Global Lead Portfolio Management, has managed
the Fund since 2010.
5
Buying
and Selling Fund Shares
The minimum initial investment for Class A and Class C
Shares is, generally, $1,000. The minimum initial investment for
Institutional Shares is, generally, $10,000,000 for individual
investors and $1,000,000 for other types of investors alone or
in combination with other assets under the management of GSAM
and its affiliates. There may be no minimum for initial
purchases of Institutional Shares for certain retirement
accounts or for initial purchases in Class IR and
Class R Shares.
The minimum subsequent investment for Class A and
Class C shareholders is $50, except for Employer Sponsored
Benefit Plans, for which there is no minimum. There is no
minimum subsequent investment for Institutional, Class IR
or Class R shareholders.
You may purchase and redeem (sell) shares of the Fund on any
business day through certain brokers, registered advisers and
other financial institutions (Authorized
Institutions).
Tax
Information
The Funds distributions are taxable, and will be taxed as
ordinary income or capital gains, unless you are investing
through a tax-deferred arrangement, such as a 401(k) plan or an
individual retirement account.
Payments
to Brokers-Dealers and other Financial Intermediaries
If you purchase the Fund through an Authorized Institution, the
Fund and/or its related companies may pay the Authorized
Institution for the sale of Fund shares and related services.
These payments may create a conflict of interest by influencing
the Authorized Institution and your salesperson to recommend the
Fund over another investment. Ask your salesperson or visit your
Authorized Institutions website for more information.
6
Investment Management Approach
INVESTMENT
OBJECTIVE
The Fund seeks total return comprised of income and capital
appreciation.
PRINCIPAL
INVESTMENT STRATEGIES
The Fund invests in a broadly diversified portfolio of U.S. and
foreign investment grade and non-investment grade fixed income
investments including, but not limited to: U.S. Government
securities (such as U.S. Treasury securities or Treasury
inflation protected securities), non-U.S. sovereign debt, agency
securities, corporate debt securities, agency and non-agency
mortgage-backed securities, asset-backed securities, custodial
receipts, municipal securities, loan participations and
convertible securities. The Fund may invest in fixed income
securities of any maturity.
Non-investment grade fixed income securities are securities
rated BB, Ba or below by a NRSRO, or, if unrated, determined by
the Investment Adviser to be of comparable quality.
The Fund may invest in fixed income securities of issuers
located in emerging countries. Such investments may include
sovereign debt issued by emerging countries that have sovereign
ratings below investment grade or that are unrated. There is no
limitation to the amount the Fund invests in non-investment
grade or emerging market securities. From time to time, the Fund
may invest in preferred stock. The Funds investments may
be denominated in currencies other than the U.S. dollar.
The Fund may engage in forward foreign currency transactions for
both investment and hedging purposes.
The Fund also intends to invest in other derivative instruments.
Derivatives are instruments that have a value based on another
instrument, exchange rate or index. The Funds investments
in derivatives may include, in addition to forward foreign
currency exchange contracts, interest rate futures contracts,
options (including options on futures contracts, swaps, bonds,
stocks and indexes), swaps (including credit default, index,
basis, total return, volatility and currency swaps), and other
forward contracts. The Fund may use derivatives instead of
buying and selling bonds to manage duration, to gain exposure or
to short individual securities or to gain exposure to a credit
or asset backed index.
The Fund may implement short positions and generally will do so
by using swaps or futures. For example, the Fund may enter into
a futures contract pursuant to which it agrees to sell an asset
(that it does not currently own) at a specified price
7
at a specified point in the future. This gives the Fund a short
position with respect to that asset. The Fund will benefit to
the extent the asset decreases in value (and will be harmed to
the extent the asset increases in value) between the time it
enters into the futures contract and the agreed date of sale.
Strategic in the Funds name means that the
Fund seeks both current income and capital appreciation as
elements of total return. The Fund attempts to exploit pricing
anomalies throughout the global fixed income and currency
markets. Additionally, the Fund uses short positions and
derivatives to enhance portfolio return or for hedging purposes.
The Fund may sell investments that the portfolio managers
believe are no longer favorable with regard to these factors.
The Fund may, from time to time, take temporary defensive
positions in attempting to respond to adverse market, political
or other conditions. For temporary defensive purposes, the Fund
may invest any portion of its total assets in, among other
things, U.S. Government securities, commercial paper rated
at least
A-2
by Standard & Poors,
P-2
by
Moodys or a comparable rating by another NRSRO,
certificates of deposit, bankers acceptances, repurchase
agreements, non-convertible preferred stocks and non-convertible
corporate bonds with a remaining maturity of less than
one year, exchange-traded funds (ETFs) and other investment
companies and cash and cash equivalents. When the Funds
assets are invested in such instruments, the Fund may not be
achieving its investment objective.
Goldman
Sachs Fixed Income Investment Philosophy:
Global fixed income markets are constantly evolving and are
highly diversewith myriad countries, currencies, sectors,
issuers and securities. GSAM believes inefficiencies in these
complex markets cause bond prices to diverge from their fair
value for periods of time. To capitalize on these inefficiencies
and generate consistent risk-adjusted performance, the
Investment Adviser believes it is critical to:
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Thoughtfully combine diversified
sources of return by employing multiple investment strategies
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Take a global perspective to
uncover relative value opportunities
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Employ focused specialist teams to
identify short-term mispricings and incorporate long-term views
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n
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Emphasize a risk-aware approach
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The Fund implements this overall philosophy through an
investment process that seeks to maximize risk-adjusted total
returns and revolves around four key steps:
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1.
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Developing a long-term risk budget
Lead
portfolio managers are responsible for the overall results of
the Fund. They set the strategic direction of the Fund by
establishing a risk budget. The risk
budget for the Fund is the range the portfolio managers
set with respect to sector allocations, country allocations,
|
8
INVESTMENT
MANAGEMENT APPROACH
|
|
|
|
|
securities selection and duration. Following careful analysis of
risk and return objectives, the portfolio managers allocate the
risk budget to each component strategy to optimize potential
return.
|
|
|
|
|
2.
|
Generating investment views and
strategies
The Investment Advisers top-down
and bottom-up strategy teams (collectively, strategy
teams) generate investment ideas within their areas of
specialization. The top-down strategy teams are responsible for
cross-sector, duration, country and currency decisions.
Concurrently, bottom-up strategy teams, comprised of sector
specialists, formulate sub-sector allocation and security
selection decisions.
|
|
|
3.
|
Constructing the portfolios
The lead
portfolio managers and strategy teams construct the Funds
portfolio through a collaborative process in which the
Funds portfolio managers oversee the overall portfolio
while the strategy teams actively manage the securities and
strategies within their areas of specialization. This process
enables the portfolio managers to build a diversified portfolio
consisting of the portfolio managers and the strategy
teams best ideas.
|
|
|
4.
|
Dynamic adjustments based on market
conditions
As market conditions change, the
volatility and attractiveness of sectors and strategies can
change as well. To optimize the Funds risk/return
potential within its long-term risk budget, the portfolio team
dynamically adjusts the mix of top-down and bottom-up strategies
in the Funds portfolio. At the same time, the strategy
teams adjust their positions in an effort to optimize
performance within their specialty areas.
|
References in the Prospectus to the Funds benchmark are
for informational purposes only, and unless otherwise noted, are
not an indication of how the Fund is managed.
OTHER
INVESTMENT PRACTICES AND SECURITIES
The following tables identify some of the investment techniques
that may (but are not required to) be used by the Fund in
seeking to achieve its investment objective. Numbers in the
table show allowable usage only. For more information about
these and other investment practices and securities, see
Appendix A. The Fund publishes on its website
(http://www.goldmansachsfunds.com)
complete portfolio
holdings as of the end of each fiscal quarter subject to a
thirty-one day lag between the date of the information and the
date on which the information is disclosed. In addition, the
Fund publishes on its website selected holdings information
monthly subject to a ten day lag between the date of the
information and the date on which the information is disclosed.
This information will be available on the website until the date
on which the Fund files its next quarterly portfolio holdings
report on
Form N-CSR
or
Form N-Q
with the SEC. In addition, a description of the Funds
policies and procedures with respect to the disclosure of the
Funds portfolio holdings is available in the Funds
Statement of Additional Information (SAI).
9
|
|
|
10
Percent
of total assets (including securities lending collateral)
(italic type)
|
|
|
10
Percent
of net assets (excluding borrowings for investment purposes)
(roman type)
|
|
|
No
specific percentage limitation on usage;
|
|
|
limited
only by the
|
|
Strategic
|
objectives
and strategies of the Fund
|
|
Income
|
|
|
Fund
|
Investment Practices
|
Borrowings
|
|
33
1
/
3
|
Credit, Currency, Interest Rate, Total Return and Mortgage
Swaps
*
|
|
|
Cross Hedging of Currencies
|
|
|
Futures Contracts
|
|
|
Forward Foreign Currency Exchange Contracts
|
|
|
Interest Rate Floors, Caps and Collars
|
|
|
Investment Company Securities (including exchange-traded
funds)***
|
|
10
|
Mortgage Dollar Rolls
|
|
|
Options (including Options on
Futures)
1
|
|
|
Options on Foreign
Currencies
2
|
|
|
Repurchase
Agreements
**
|
|
|
Securities Lending
|
|
33
1
/
3
|
When-Issued Securities and Forward Commitments
|
|
|
|
|
|
|
|
|
*
|
|
Limited to 15% of net assets
(together with other illiquid securities) for all structured
securities and swap transactions that are not deemed
liquid.
|
**
|
|
The Fund may enter into
repurchase agreements collateralized by U.S. Government
Securities, and securities issued by foreign governments and
their central banks.
|
***
|
|
This percentage limitation does
not apply to the Funds investments in investment companies
(including exchange-traded funds) where a higher percentage
limitation is permitted under the terms of an SEC exemptive
order or SEC exemptive rule.
|
1
|
|
The Fund may sell covered call
and put options and purchase call and put options on securities
and securities indices in which it may invest.
|
2
|
|
The Fund may purchase and sell
call and put options on foreign currencies.
|
10
INVESTMENT
MANAGEMENT APPROACH
|
|
|
|
|
10
Percent
of total assets
(italic type)
|
|
|
|
10
Percent
of Net Assets (including borrowings for investment purposes)
(roman type)
|
|
|
|
No
specific percentage limitation on usage;
|
|
|
|
limited
only by the
|
|
Strategic
|
|
objectives
and strategies of the Fund
|
|
Income
|
|
Not
permitted
**
|
|
Fund
|
|
Investment Securities
|
Asset-Backed Securities
|
|
|
|
|
Bank Obligations
|
|
|
|
|
Convertible Securities
|
|
|
|
|
Corporate Debt Obligations and Trust Preferred Securities
|
|
|
|
|
Emerging Country Securities
|
|
|
|
|
Floating and Variable Rate Obligations
|
|
|
|
|
Foreign
Securities
1
|
|
|
|
|
Loan Participations
|
|
|
|
|
Mortgage-Backed Securities
|
|
|
|
|
Municipal Securities
|
|
|
|
|
Non-Investment Grade Fixed Income Securities
|
|
|
|
|
Preferred Stock, Warrants and Rights
|
|
|
|
|
Structured Securities (which may include credit linked notes)*
|
|
|
|
|
Temporary Investments
|
|
|
|
|
U.S. Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Limited to 15% of net assets
(together with other illiquid securities) for all structured
securities and swap transactions that are not deemed
liquid.
|
**
|
|
The Fund may, however, invest
securities lending collateral in registered funds that invest in
such instruments.
|
1
|
|
Includes issuers domiciled in
one country and issuing securities denominated in the currency
of another.
|
11
Risks of the Fund
Loss of money is a risk of investing in the Fund. An investment
in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other governmental agency. The principal risks of the Fund are
discussed in the Summary section of this Prospectus. The
following gives additional information on the risks that apply
to the Fund and may result in a loss of your investment. The
Fund should not be relied upon as a complete investment program.
There can be no assurance that the Fund will achieve its
investment objective.
|
|
|
|
|
ü
Principal
Risk
|
|
Strategic
|
|
Additional
Risk
|
|
Income
|
|
|
|
Fund
|
|
Call
|
|
|
|
|
|
|
|
|
|
Credit/Default
|
|
|
ü
|
|
|
|
|
|
|
Derivatives
|
|
|
ü
|
|
|
|
|
|
|
Emerging Countries
|
|
|
ü
|
|
|
|
|
|
|
Extension
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
ü
|
|
|
|
|
|
|
Interest Rate
|
|
|
ü
|
|
|
|
|
|
|
Liquidity
|
|
|
ü
|
|
|
|
|
|
|
Management
|
|
|
ü
|
|
|
|
|
|
|
Market
|
|
|
ü
|
|
|
|
|
|
|
Mortgage-Backed and Other Asset-Backed
|
|
|
ü
|
|
|
|
|
|
|
NAV
|
|
|
|
|
|
|
|
|
|
Non-Hedging Foreign Currency Trading
|
|
|
|
|
|
|
|
|
|
Non-Investment Grade Fixed Income Securities
|
|
|
ü
|
|
|
|
|
|
|
Sovereign
|
|
|
|
|
|
|
|
|
|
Economic
|
|
|
ü
|
|
|
|
|
|
|
Political
|
|
|
ü
|
|
|
|
|
|
|
Repayment
|
|
|
ü
|
|
|
|
|
|
|
U.S. Government Securities
|
|
|
|
|
|
|
|
|
|
12
RISKS
OF THE FUND
|
|
n
|
Call
Risk
The risk
that an issuer will exercise its right to pay principal on an
obligation held by the Fund earlier than expected. This may
happen when there is a decline in interest rates. Under these
circumstances, the Fund may be unable to recoup all of its
initial investment and will also suffer from having to reinvest
in lower-yielding securities.
|
n
|
Credit/Default
Risk
The risk
that an issuer or guarantor of fixed income securities held by
the Fund (which may have low credit ratings) may default on its
obligation to pay interest and repay principal.
|
The credit quality of the Funds portfolio securities may
meet the Funds credit quality requirements at the time of
purchase but then deteriorate thereafter, and such deterioration
can occur rapidly. In certain instances, the downgrading or
default of a single holding or guarantor of the Funds
holding may impair the Funds liquidity and have the
potential to cause significant NAV deterioration.
|
|
n
|
Derivatives
Risk
The risk
that loss may result from the Funds investments in
options, futures, forwards, swaps, structured securities and
other derivative instruments. These instruments may be illiquid,
difficult to price and leveraged so that small changes may
produce disproportionate losses to the Fund. Derivatives are
also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual
obligation. The Fund may use derivatives, including futures and
swaps, to implement short positions. Taking short positions
involves leverage of the Funds assets and presents various
risks. If the price of the instrument or market which the Fund
has taken a short position on increases, then the Fund will
incur a loss equal to the increase in price from the time that
the short position was entered into plus any premiums and
interest paid to a counterparty. Therefore, taking short
positions involves the risk that losses may be exaggerated,
potentially losing more money than the actual cost of the
investment.
|
|
|
n
|
Emerging Countries
Risk
The Fund
may invest in emerging countries. The securities markets of most
Central and South American, African, Middle Eastern, certain
Asian and Eastern European, and other emerging countries are
less liquid, are especially subject to greater price volatility,
have smaller market capitalizations, have less government
regulation and are not subject to as extensive and frequent
accounting, financial and other reporting requirements as the
securities markets of more developed countries. These risks are
not normally associated with investments in more developed
countries.
|
n
|
Extension
Risk
The risk
that an issuer will exercise its right to pay principal on an
obligation held by the Fund later than expected. This may happen
when there is a rise in interest rates. Under these
circumstances, the value of the obligation will decrease, and
the Fund will also suffer from the inability to invest in higher
yielding securities.
|
13
|
|
n
|
Foreign
Risk
The risk
that when the Fund invests in foreign securities, it will be
subject to risk of loss not typically associated with domestic
issuers. Loss may result because of less foreign government
regulation, less public information and less economic, political
and social stability. Loss may also result from the imposition
of exchange controls, confiscations and other government
restrictions, or from problems in security registration or
settlement and custody. The Fund will also be subject to the
risk of negative foreign currency rate fluctuations. Foreign
risks will normally be greatest when the Fund invests in issuers
located in emerging countries.
|
n
|
Interest Rate
Risk
The risk
that when interest rates increase, fixed income securities held
by the Fund will decline in value. Long-term fixed income
securities will normally have more price volatility because of
this risk than short-term fixed-income securities.
|
n
|
Liquidity
Risk
The risk
that the Fund may invest to a greater degree in securities or
instruments that trade in lower volumes and may make investments
that may be less liquid than other investments. Also the risk
that the Fund may make investments that may become less liquid
in response to market developments or adverse investor
perceptions. When there is no willing buyer and investments
cannot be readily sold at the desired time or price, the Fund
may have to accept a lower price or may not be able to sell the
security or instrument at all. An inability to sell one or more
portfolio positions can adversely affect the Funds value
or prevent the Fund from being able to take advantage of other
investment opportunities.
|
Because the Fund invests in non-investment grade fixed income
securities and emerging country issuers, it will be especially
subject to the risk that during certain periods the liquidity of
particular issuers or industries, or all securities within a
particular investment category, will shrink or disappear
suddenly and without warning as a result of adverse economic,
market or political events, or adverse investor perceptions
whether or not accurate.
Liquidity risk may also refer to the risk that the Fund will not
be able to pay redemption proceeds within the time period stated
in this Prospectus because of unusual market conditions, an
unusually high volume of redemption requests, or other reasons.
Although the Fund reserves the right to meet redemption requests
through in-kind distributions, to date no Fund has historically
paid redemptions in kind. While the Fund may pay redemptions in
kind in the future, the Fund may instead choose to raise cash to
meet redemption requests through sales of portfolio securities
or permissible borrowings. If the Fund is forced to sell
securities at an unfavorable time
and/or
under
unfavorable conditions, such sales may adversely affect the
Funds NAV.
Certain shareholders, including clients or affiliates of the
Investment Adviser
and/or
other
funds managed by the Investment Adviser, may from time to time
own or
14
RISKS
OF THE FUND
control a significant percentage of the Funds shares.
Redemptions by these shareholders of their shares of the Fund
may further increase the Funds liquidity risk and may
impact the Funds NAV. These shareholders may include, for
example, institutional investors, funds of funds, discretionary
advisory clients, and other shareholders whose buy-sell
decisions are controlled by a single decision-maker.
|
|
n
|
Management
Risk
The risk
that a strategy used by the Investment Adviser may fail to
produce the intended results.
|
n
|
Market
Risk
The risk
that the value of the securities in which the Fund invests may
go up or down in response to the prospects of individual
companies, particular industry sectors or governments and/or
general economic conditions. Price changes may be temporary or
last for extended periods. The Funds investments may be
overweighted from time to time in one or more industry sectors,
which will increase the Funds exposure to risk of loss
from adverse developments affecting those sectors.
|
n
|
Mortgage-Backed and Other
Asset-Backed
Risk
Mortgage-related
and other asset-backed securities are subject to certain
additional risks. Generally, rising interest rates tend to
extend the duration of fixed rate mortgage-backed securities,
making them more sensitive to changes in interest rates. As a
result, in a period of rising interest rates, if the Fund holds
mortgage-backed securities, it may exhibit additional
volatility. This is known as extension risk. In addition,
adjustable and fixed rate mortgage-backed securities are subject
to prepayment risk. When interest rates decline, borrowers may
pay off their mortgages sooner than expected. This can reduce
the returns of the Fund because the Fund may have to reinvest
that money at the lower prevailing interest rates. The
Funds investments in other asset-backed securities are
subject to risks similar to those associated with
mortgage-backed securities, as well as additional risks
associated with the nature of the assets and the servicing of
those assets.
|
The Fund may invest in mortgage-backed securities issued by the
U.S. Government. See U.S. Government Securities
Risk. To the extent that the Fund invests in
mortgage-backed securities offered by non-governmental issuers,
such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other
secondary market issuers, the Fund may be subject to additional
risks. Timely payment of interest and principal of
non-governmental issuers are supported by various forms of
private insurance or guarantees, including individual loan,
title, pool and hazard insurance purchased by the issuer. There
can be no assurance that the private insurers can meet their
obligations under the policies. An unexpectedly high rate of
defaults on the mortgages held by a mortgage pool may adversely
affect the value of a mortgage-backed security and could result
in losses to the Fund. The risk of such defaults is generally
higher in the case of mortgage pools that include subprime
mortgages. Subprime mortgages refer to loans
15
made to borrowers with weakened credit histories or with a lower
capacity to make timely payments on their mortgages.
|
|
n
|
NAV
Risk
The risk
that the NAV of the Fund and the value of your investment will
fluctuate.
|
n
|
Non-Hedging Foreign Currency
Trading
Risk
The Fund
may engage in forward foreign currency transactions for
speculative purposes. The Funds Investment Adviser may
purchase or sell foreign currencies through the use of forward
contracts based on the Investment Advisers judgment
regarding the direction of the market for a particular foreign
currency or currencies. In pursuing this strategy, the
Investment Adviser seeks to profit from anticipated movements in
currency rates by establishing long and/or
short positions in forward contracts on various
foreign currencies. Foreign exchange rates can be extremely
volatile and a variance in the degree of volatility of the
market or in the direction of the market from the Investment
Advisers expectations may produce significant losses to
the Fund. Some of the transactions may also be subject to
interest rate risk.
|
n
|
Non-Investment Grade Fixed
Income Securities
Risk
The Fund
may invest in non-investment grade fixed income securities
(commonly known as junk bonds) that are considered
speculative. Non-investment grade fixed income securities and
unrated securities of comparable credit quality are subject to
the increased risk of an issuers inability to meet
principal and interest payment obligations. These securities may
be subject to greater price volatility due to such factors as
specific corporate or municipal developments, interest rate
sensitivity, negative perceptions of the junk bond markets
generally and less secondary market liquidity.
|
n
|
Sovereign
Risk
The Fund
will be subject to the risk that the issuer of the non-U.S.
sovereign debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay the
principal or interest when due. This risk may be heightened in
the case of sovereign debt that is rated below investment grade.
|
|
|
|
|
n
|
Economic
Risk
The risks
associated with the general economic environment of a country.
These can encompass, among other things, low quality and growth
rate of Gross Domestic Product (GDP), high inflation
or deflation, high government deficits as a percentage of GDP,
weak financial sector, overvalued exchange rate, and high
current account deficits as a percentage of GDP.
|
|
n
|
Political
Risk
The risks
associated with the general political and social environment of
a country. These factors may include among other things
government instability, poor socioeconomic conditions,
corruption, lack of law and order, lack of democratic
accountability, poor quality of the bureaucracy, internal and
external conflict, and religious and ethnic tensions. High
political risk can impede the economic welfare of a country.
|
|
n
|
Repayment
Risk
The risk
associated with the inability of a country to pay its external
debt obligations in the immediate future. Repayment risk factors
may
|
16
RISKS
OF THE FUND
|
|
|
|
|
include but are not limited to high foreign debt as a percentage
of GDP, high foreign debt service as a percentage of exports,
low foreign exchange reserves as a percentage of short-term debt
or exports, and an unsustainable exchange rate structure.
|
|
|
n
|
U.S. Government
Securities
Risk
The risk
that the U.S. government will not provide financial support
to U.S. government agencies, instrumentalities or sponsored
enterprises if it is not obligated to do so by law. Although
many types of U.S. Government Securities may be purchased
by the Fund, such as those issued by the Federal National
Mortgage Association (Fannie Mae), Federal Home Loan
Mortgage Corporation (Freddie Mac) and Federal Home
Loan Banks, may be chartered or sponsored by Acts of Congress,
their securities are neither issued nor guaranteed by the United
States Treasury and, therefore, are not backed by the full faith
and credit of the United States. The maximum potential liability
of the issuers of some U.S. Government Securities held by
the Fund may greatly exceed their current resources, including
their legal right to support from the U.S. Treasury. It is
possible that these issuers will not have the funds to meet
their payment obligations in the future. In September 2008, the
U.S. Treasury Department and the Federal Housing Finance
Administration (FHFA) announced that Fannie Mae and
Freddie Mac would be placed into conservatorship under FHFA. The
effect that this conservatorship will have on the entities
debt and equities and on securities guaranteed by the entities
is unclear.
|
More information about the Funds portfolio securities and
investment techniques, and their associated risks, is provided
in Appendix A. You should consider the investment risks
discussed in this section and in Appendix A. Both are
important to your investment choice.
17
Service Providers
INVESTMENT
ADVISER
|
|
|
Investment
Adviser
|
|
Fund
|
Goldman Sachs Asset Management, L.P.
200 West Street
New York, New York 10282
|
|
Strategic Income
|
|
|
|
GSAM has been registered as an investment adviser with the SEC
since 1990 and is an affiliate of Goldman, Sachs & Co.
(Goldman Sachs). As of March 31, 2010, GSAM
including its investment advisory affiliates, had assets under
management of $713.9 billion.
The Investment Adviser provides day-to-day advice regarding the
Funds portfolio transactions. The Investment Adviser makes
the investment decisions for the Fund and places purchase and
sale orders for the Funds portfolio transactions in U.S.
and foreign markets. As permitted by applicable law, these
orders may be directed to any brokers, including Goldman Sachs
and its affiliates. While the Investment Adviser is ultimately
responsible for the management of the Fund, it is able to draw
upon the research and expertise of its asset management
affiliates for portfolio decisions and management with respect
to certain portfolio securities. In addition, the Investment
Adviser has access to the research and certain proprietary
technical models developed by Goldman Sachs, and will apply
quantitative and qualitative analysis in determining the
appropriate allocations among categories of issuers and types of
securities.
The Investment Adviser also performs the following additional
services for the Fund:
|
|
|
|
n
|
Supervises all non-advisory
operations of the Fund
|
|
n
|
Provides personnel to perform
necessary executive, administrative and clerical services to the
Fund
|
|
n
|
Arranges for the preparation of all
required tax returns, reports to shareholders, prospectuses and
statements of additional information and other reports filed
with the SEC and other regulatory authorities
|
|
n
|
Maintains the records of the Fund
|
|
n
|
Provides office space and all
necessary office equipment and services
|
MANAGEMENT
FEES AND OTHER EXPENSE INFORMATION
As compensation for its services and its assumption of certain
expenses, the Investment Adviser is entitled to the following
fees, computed daily and payable
18
SERVICE
PROVIDERS
monthly, at the annual rates listed below (as a percentage of
the Funds average daily net assets):
|
|
|
|
|
|
|
|
|
|
|
Management Fee
|
|
Average Daily
|
|
|
Annual
Rate
|
|
Net
Assets
|
Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Income
|
|
|
0.60%
|
|
|
|
First $1 Billion
|
|
|
|
|
0.54%
|
|
|
|
Next $1 Billion
|
|
|
|
|
0.51%
|
|
|
|
Next $3 Billion
|
|
|
|
|
0.50%
|
|
|
|
Next $3 Billion
|
|
|
|
|
0.49%
|
|
|
|
Over $8 Billion
|
|
|
|
|
|
|
|
|
|
|
The Investment Adviser may waive a portion of its management fee
from time to time, and may discontinue or modify any such waiver
in the future, consistent with the terms of any fee waiver
arrangements in place.
A discussion regarding the basis for the Board of Trustees
approval of the Management Agreement for the Fund in 2010 will
be available in the Funds semi-annual report dated
September 30, 2010.
The Investment Adviser has agreed to reduce or limit Other
Expenses (excluding management fees, distribution and
service fees, transfer agency fees and expenses, taxes,
interest, brokerage fees and litigation, indemnification,
shareholder meeting and other extraordinary expenses exclusive
of any custody or transfer agent fee credit reductions) to
0.054% of average daily net assets.
FUND
MANAGERS
Fixed
Income Portfolio Management Team
|
|
|
|
n
|
The investment process revolves
around four groups: the Investment Strategy Group, the Top-down
Strategy Team, the Bottom-up Strategy Team and the Portfolio
Teams.
|
|
n
|
These teams strive to maximize
risk-adjusted returns by de-emphasizing interest rate
anticipation and focusing on security selection and sector
allocation
|
|
|
|
|
n
|
As of March 31, 2010, the team
managed approximately $282.8 billion in municipal and
taxable fixed-income assets for retail, institutional and high
net worth clients.
|
19
|
|
|
|
|
|
|
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|
Years
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|
|
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Primarily
|
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|
Name and Title
|
|
Fund
Responsibility
|
|
Responsible
|
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Five Year
Employment History
|
Jonathan Beinner
Managing Director, CIO,
co-head of GSAM Global
Fixed Income and
Liquidity Management
|
|
Portfolio Manager
Strategic Income
|
|
Since
2010
|
|
Mr. Beinner joined the Investment Adviser in 1990 and
became a Portfolio Manager in 1992. He became Co-Head of Global
Fixed Income in 2002.
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Michael Swell
Managing Director,
Co-Head Global Lead
Portfolio Management
|
|
Portfolio Manager
Strategic Income
|
|
Since
2010
|
|
Mr. Swell is the Co-Head of Global Lead Portfolio
Management and a member of the Fixed Income Strategy Group.
Mr. Swell joined the Investment Adviser in 2007 as a
Managing Director and the Head of Structured Products. From 2005
to 2007, Mr. Swell was a Senior Managing Director in charge
of Friedman, Billings & Ramseys Fixed Income Sales
& Trading division.
|
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|
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|
Jonathan Beinner and Andrew Wilson co-head GSAM Global Fixed
Income and Liquidity Management. Jonathan Beinner serves as the
Chief Investment Officer. They are responsible for high-level
decisions pertaining to portfolios across multiple strategies.
The Fixed Income Portfolio Management Team is organized into a
series of specialist teams which focus on generating and
implementing investment ideas within their area of expertise.
Both top-down and bottom-up decisions are made by these small
strategy teams, rather than by one portfolio manager or
committee. Ultimate accountability for the portfolio resides
with the lead portfolio managers, Jonathan Beinner and Michael
Swell, who set the long-term risk budget and oversee the
portfolio construction process.
For information about the portfolio managers compensation,
other accounts managed by the portfolio managers and the
portfolio managers ownership of securities in the Fund,
see the SAI.
DISTRIBUTOR
AND TRANSFER AGENT
Goldman Sachs, 200 West Street, New York, New York 10282, serves
as the exclusive distributor (the Distributor) of
the Funds shares. Goldman Sachs,
71 S. Wacker Drive, Suite 500, Chicago,
Illinois 60606, also serves as the Funds transfer agent
(the Transfer Agent) and, as such, performs various
shareholder servicing functions.
For its transfer agency services, Goldman Sachs is entitled to
receive a transfer agency fee equal, on an annualized basis, to
0.04% of average daily net assets with respect to Institutional
Shares and 0.13% of average daily net assets with respect to
Class A, Class C, Class IR and Class R
Shares.
20
SERVICE
PROVIDERS
From time to time, Goldman Sachs or any of its affiliates may
purchase and hold shares of the Fund. Goldman Sachs reserves the
right to redeem at any time some or all of the shares acquired
for its own account.
|
|
ACTIVITIES
OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER
ACCOUNTS MANAGED BY GOLDMAN
SACHS
|
|
The involvement of the Investment Adviser, Goldman Sachs and
their affiliates in the management of, or their interest in,
other accounts and other activities of Goldman Sachs may present
conflicts of interest with respect to the Fund or limit the
Funds investment activities. Goldman Sachs is a full
service investment banking, broker dealer, asset management and
financial services organization and a major participant in
global financial markets. As such, it acts as an investor,
investment banker, research provider, investment manager,
financier, advisor, market maker, trader, prime broker, lender,
agent and principal, and has other direct and indirect
interests, in the global fixed income, currency, commodity,
equity and other markets in which the Fund directly and
indirectly invests. Thus, it is likely that the Fund will have
multiple business relationships with and will invest in, engage
in transactions with, make voting decisions with respect to, or
obtain services from entities for which Goldman Sachs performs
or seeks to perform investment banking or other services. The
Investment Adviser and/or certain of its affiliates are the
managers of the Goldman Sachs Funds. Goldman Sachs and its
affiliates engage in proprietary trading and advise accounts and
funds which have investment objectives similar to that of the
Fund and/or which engage in and compete for transactions in the
same types of securities, currencies and instruments as the
Fund. Goldman Sachs and its affiliates will not have any
obligation to make available any information regarding their
proprietary activities or strategies, or the activities or
strategies used for other accounts managed by them, for the
benefit of the management of the Fund. Goldman Sachs may
restrict transactions for itself, but not for the Fund (or vice
versa). The results of the Funds investment activities,
therefore, may differ from those of Goldman Sachs, its
affiliates and other accounts managed by Goldman Sachs, and it
is possible that the Fund could sustain losses during periods in
which Goldman Sachs and its affiliates and other accounts
achieve significant profits on their trading for proprietary or
other accounts. In addition, the Fund may enter into
transactions in which Goldman Sachs or its other clients have an
adverse interest. For example, the Fund may take a long position
in a security at the same time that Goldman Sachs or other
accounts managed by the Investment Adviser take a short position
in the same security (or vice versa). These and other
transactions undertaken by Goldman Sachs, its affiliates or
Goldman Sachs advised-clients may adversely impact the Fund.
Transactions by one or more Goldman Sachs advised-clients or the
Investment Adviser may have the effect of diluting or
21
otherwise disadvantaging the values, prices or investment
strategies of the Fund. The Funds activities may be
limited because of regulatory restrictions applicable to Goldman
Sachs and its affiliates, and/or their internal policies
designed to comply with such restrictions. As a global financial
services firm, Goldman Sachs also provides a wide range of
investment banking and financial services to issuers of
securities and investors in securities. Goldman Sachs, its
affiliates and others associated with it may create markets or
specialize in, have positions in and affect transactions in,
securities of issuers held by the Fund, and may also perform or
seek to perform investment banking and financial services for
those issuers. Goldman Sachs and its affiliates may have
business relationships with and purchase or distribute or sell
services or products from or to distributors, consultants or
others who recommend the Fund or who engage in transactions with
or for the Fund. For more information about conflicts of
interest, see the SAI.
The Fund may make brokerage and other payments to Goldman Sachs
and its affiliates in connection with the Funds portfolio
investment transactions, as permitted by applicable law.
LEGAL
PROCEEDINGS
On April 16, 2010, the Securities and Exchange Commission
(SEC) brought an action under the U.S. federal
securities laws in the U.S. District Court for the Southern
District of New York against Goldman, Sachs & Co.
(GS&Co.) and one of its employees alleging that
they made materially misleading statements and omissions in
connection with a 2007 private placement of securities relating
to a synthetic collateralized debt obligation sold to two
institutional investors. GS&Co. and/or other affiliates of
The Goldman Sachs Group, Inc. have received or may in the future
receive notices and requests for information from various
regulators, and have become or may in the future become involved
in legal proceedings, based on allegations similar to those made
by the SEC or other matters.
Neither Goldman Sachs Asset Management, L.P. or Goldman Sachs
Asset Management International (collectively GSAM)
nor any GSAM-managed funds have been named in the complaint.
Moreover, the SEC complaint does not seek any penalties against
them or against any employee who is or has been part of GSAM.
In the view of GS&Co. and GSAM, neither the matters alleged
in this or any such similar proceedings nor their eventual
resolution are likely to have a material effect on the ability
of GS&Co., GSAM or their affiliates to provide services to
GSAM-managed funds. Due to a provision in the law governing the
operation of mutual funds, the resolution of the SEC action
could, under certain circumstances, result in a situation in
which GS&Co., GSAM and their affiliates would be ineligible
to
22
SERVICE
PROVIDERS
serve as an investment adviser or principal underwriter for
U.S.-registered mutual funds absent an exemption from the SEC.
While there is no assurance that such an exemption would be
granted, the SEC has granted this type of relief in the past.
23
Dividends
The Fund pays dividends from its investment income and
distributions from net realized capital gains. You may choose to
have dividends and distributions paid in:
|
|
|
|
n
|
Cash
|
|
n
|
Additional shares of the same class
of the Fund
|
|
n
|
Shares of the same class of another
Goldman Sachs Fund. Special restrictions may apply. See the SAI.
|
You may indicate your election on your Account Application. Any
changes may be submitted in writing or via telephone, in some
instances, to the Transfer Agent at any time before the record
date for a particular dividend or distribution. If you do not
indicate any choice, your dividends and distributions will be
reinvested automatically in the Fund. If cash dividends are
elected with respect to the Funds monthly net investment
income dividends, then cash dividends must also be elected with
respect to the short-term capital gains component, if any, of
the Funds annual dividend.
The election to reinvest dividends and distributions in
additional shares will not affect the tax treatment of such
dividends and distributions, which will be treated as received
by you and then used to purchase the shares.
Dividends from net investment income and distributions from net
capital gains are declared and paid as follows:
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|
|
|
|
|
|
|
|
Investment
Income
|
|
Capital Gains
|
|
|
|
Dividends
|
|
Distributions
|
|
Fund
|
|
Declared
|
|
Paid
|
|
Declared and Paid
|
|
Strategic Income
|
|
Daily
|
|
Monthly
|
|
|
Annually
|
|
|
|
|
|
|
|
|
|
|
24
DIVIDENDS
From time to time a portion of the Funds dividends may
constitute a return of capital for tax purposes, and/or may
include amounts in excess of the Funds net investment
income for the period calculated in accordance with good
accounting practice.
When you purchase shares of the Fund, part of the NAV per share
may be represented by undistributed income and/or realized gains
that have previously been earned by the Fund. Therefore,
subsequent distributions on such shares from such income and/or
realized gains may be taxable to you even if the NAV of the
shares is, as a result of the distributions, reduced below the
cost of such shares and the distributions (or portions thereof)
represent a return of a portion of the purchase price.
25
Shareholder Guide
The following section will provide you with answers to some of
the most frequently asked questions regarding buying and selling
the Funds shares.
HOW
TO BUY SHARES
Shares
Offering
Shares of the Fund are continuously offered through the
Distributor. In addition, certain Authorized Institutions
(including certain banks, trust companies, brokers and
investment advisers) may be authorized to accept, on behalf of
the Fund, purchase and exchange orders and redemption requests
placed by or on behalf of their customers, and if approved by
the Fund, may designate other financial intermediaries to accept
such orders.
The Fund and the Distributor will have the sole right to accept
orders to purchase shares and reserve the right to reject any
order in whole or in part.
How
Can I Purchase Shares Of The Fund?
You may purchase shares of the Fund through certain Authorized
Institutions. In order to make an initial investment in the Fund
you must furnish to your Authorized Institution the information
in the Account Application.
The decision as to which class to purchase depends on the amount
you invest, the intended length of the investment and your
personal situation. You should contact your Authorized
Institution to discuss which share class is right for you.
To open an account, contact your Authorized Institution or, for
an investment in Institutional Shares only, the Fund directly.
See the back cover of this Prospectus for contact information.
Customers of certain Authorized Institutions will normally give
their purchase instructions to the Authorized Institution, and
the Authorized Institution will, in turn, place purchase orders
with Goldman Sachs. Authorized Institutions will set times by
which purchase orders and payments must be received by them from
their customers.
For purchases by check, the Fund will not accept checks drawn on
foreign banks, third party checks, temporary checks, or cash or
cash equivalents;
e.g.
, cashiers checks, official
bank checks, money orders, travelers cheques or credit card
checks. In limited situations involving the transfer of
retirement assets, the Fund may accept cashiers checks or
official bank checks.
26
SHAREHOLDER
GUIDE
Class IR and Class R Shares are not sold directly to
the public. Instead, Class IR and Class R Shares
generally are available only to 401(k) plans, 457 plans,
employer-sponsored 403(b) plans, profit sharing and money
purchase pension plans, defined benefit plans and non-qualified
deferred compensation plans (the Retirement Plans).
Class IR and Class R Shares are also generally
available only to Retirement Plans where plan level or omnibus
accounts are held on the books of the Fund. Class IR and
Class R Shares are not available to traditional and Roth
Individual Retirement Accounts (IRAs), SEPs,
SARSEPs, SIMPLE IRAs and individual 403(b) plans. Class IR
Shares may also be sold to accounts established under a
fee-based program that is sponsored and maintained by a
registered broker-dealer or other Authorized Institution and
that is approved by Goldman Sachs (Eligible Fee-Based
Program).
Retirement Plans generally may open an account and purchase
Class IR
and/or
Class R Shares through Authorized Institutions, financial
planners, Retirement Plan administrators and other financial
intermediaries. Additional shares may be purchased through a
Retirement Plans administrator or recordkeeper.
What
Is My Minimum Investment In The Fund?
For each of your accounts investing in Class A or
Class C Shares, the following investment minimums must be
met:
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|
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|
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|
|
|
|
|
Initial
|
|
Additional*
|
Regular Accounts
|
|
|
$1,000
|
|
|
|
$50
|
|
|
|
|
|
|
|
|
|
|
Employer Sponsored Benefit Plans
|
|
|
No Minimum
|
|
|
|
No Minimum
|
|
|
|
|
|
|
|
|
|
|
Uniform Gift/Transfer to Minors Accounts (UGMA/UTMA)
|
|
|
$250
|
|
|
|
$50
|
|
|
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|
|
|
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|
|
Individual Retirement Accounts and Coverdell ESAs
|
|
|
$250
|
|
|
|
$50
|
|
|
|
|
|
|
|
|
|
|
Automatic Investment Plan Accounts
|
|
|
$250
|
|
|
|
$50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
No minimum additional investment requirements are imposed
with respect to investors trading through intermediaries who
aggregate shares in omnibus or similar accounts (
e.g.
,
retirement plan accounts, wrap program accounts or traditional
brokerage house accounts). A maximum purchase limitation of
$1,000,000 in the aggregate normally applies to purchases of
Class C Shares across all Goldman Sachs Funds.
|
27
For Institutional Shares the following minimum investments apply:
|
|
|
Type of
Investor
|
|
Minimum
Investment
|
n
Banks,
trust companies or other depository institutions investing for
their own account or on behalf of their clients
|
|
$1,000,000 in Institutional Shares of the Fund alone or in
combination with other assets under the management of GSAM and
its affiliates
|
n
State,
county, city or any instrumentality, department, authority or
agency thereof
|
|
|
n
Corporations
with at least $100 million in assets or in outstanding publicly
traded securities
|
|
|
n
Wrap
account sponsors (provided they have an agreement covering the
arrangement with GSAM)
|
|
|
n
Registered
investment advisers investing for accounts for which they
receive asset-based fees
|
|
|
n
Qualified
non-profit organizations, charitable trusts, foundations and
endowments
|
|
|
|
|
|
n
Individual
investors
|
|
$10,000,000
|
n
Accounts
over which GSAM or its advisory affiliates have investment
discretion
|
|
|
n
Corporations
with less than $100 million in assets or in outstanding
publicly traded securities
|
|
|
|
|
|
n
Section 401(k),
profit sharing, money purchase pension, tax-sheltered annuity,
defined benefit pension, or other employee benefit plans that
are sponsored by one or more employers (including governmental
or church employers) or employee organizations
|
|
No minimum
|
|
|
|
No minimum amount is required for initial purchases in
Class IR and Class R Shares or additional investments
in Institutional, Class IR or Class R Shares.
The minimum investment requirement for Class A,
Class C and Institutional Shares may be waived for current
and former officers, partners, directors or employees of Goldman
Sachs or any of its affiliates; any Trustee or officer of the
Goldman Sachs Trust (the Trust); brokerage or
advisory clients of Goldman Sachs Private Wealth Management and
accounts for which The Goldman Sachs Trust Company, N.A. acts in
a fiduciary capacity (
i.e.
, as agent or trustee); certain
mutual fund wrap programs at the discretion of the
Trusts officers; and for other investors at the
28
SHAREHOLDER
GUIDE
discretion of the Trusts officers. No minimum amount is
required for additional investments by such accounts.
What
Should I Know When I Purchase Shares Through An Authorized
Institution?
If shares of the Fund are held in street name
(
i.e.
, accounts maintained and serviced by your
Authorized Institution), all recordkeeping, transaction
processing and payments of distributions relating to your
account will be performed by your Authorized Institution, and
not by the Fund and its Transfer Agent. Since the Fund will have
no record of your transactions, you should contact your
Authorized Institution to purchase, redeem or exchange shares,
to make changes in or give instructions concerning your account
or to obtain information about your account. The transfer of
shares in a street name account to an account with
another Authorized Institution involves special procedures and
may require you to obtain historical purchase information about
the shares in the account from your Authorized Institution. If
your Authorized Institutions relationship with Goldman
Sachs is terminated, and you do not transfer your account to
another Authorized Institution, the Trust reserves the right to
redeem your shares. The Trust will not be responsible for any
loss in an investors account or tax liability resulting
from a redemption.
Certain Authorized Institutions and other financial
intermediaries may be authorized to accept, on behalf of the
Trust, purchase, redemption and exchange orders placed by or on
behalf of their customers, and if approved by the Trust, to
designate other financial intermediaries to accept such orders.
In these cases:
|
|
|
|
n
|
The Fund will be deemed to have
received an order that is in proper form when the order is
accepted by an Authorized Institution or other financial
intermediary on a business day, and the order will be priced at
the Funds NAV per share (adjusted for any applicable sales
charge) next determined after such acceptance.
|
|
n
|
Authorized Institutions and such
other financial intermediaries are responsible for transmitting
accepted orders to the Fund within the time period agreed upon
by them.
|
You should contact your Authorized Institution or another
financial intermediary to learn whether it is authorized to
accept orders for the Trust.
Authorized Institutions that invest in shares on behalf of their
customers may charge other fees directly to their customer
accounts in connection with their investments. You should
contact your Authorized Institution for information regarding
such charges, as these fees, if any, may affect the return
customers realize with respect to their investments.
The Investment Adviser, Distributor and/or their affiliates may
make payments or provide services to Authorized Institutions and
other financial intermediaries
29
(Intermediaries) to promote the sale, distribution
and/or servicing of shares of the Fund and other Goldman Sachs
Funds. These payments are made out of the Investment
Advisers, Distributors and/or their affiliates
own assets, and are not an additional charge to the Fund. The
payments are in addition to the distribution and service fees
and sales charges described in this Prospectus. Such payments
are intended to compensate Intermediaries for, among other
things: marketing shares of the Fund and other Goldman Sachs
Funds, which may consist of payments relating to the Funds
inclusion on preferred or recommended fund lists or in certain
sales programs sponsored by the Intermediaries; access to the
Intermediaries registered representatives or salespersons,
including at conferences and other meetings; assistance in
training and education of personnel; marketing support; and/or
other specified services intended to assist in the distribution
and marketing of the Fund and other Goldman Sachs Funds. The
payments may also, to the extent permitted by applicable
regulations, contribute to various non-cash and cash incentive
arrangements to promote the sale of shares, as well as sponsor
various educational programs, sales contests and/or promotions.
The payments by the Investment Adviser, Distributor and/or their
affiliates which are in addition to the fees paid for these
services by the Fund, may also compensate Intermediaries for
sub-accounting, sub-transfer agency, administrative and/or
shareholder processing services. These additional payments may
exceed amounts earned on these assets by the Investment Adviser,
Distributor and/or their affiliates for the performance of these
or similar services. The amount of these additional payments is
normally not expected to exceed 0.50% (annualized) of the amount
sold or invested through the Intermediaries. In addition,
certain Intermediaries may have access to certain services from
the Investment Adviser, Distributor and/or their affiliates,
including research reports and economic analysis, and portfolio
analysis tools. In certain cases, the Intermediary may not pay
for these services. Please refer to the Payments to
Intermediaries section of the SAI for more information
about these payments and services.
The payments made by the Investment Adviser, Distributor and/or
their affiliates and the services provided by an Intermediary
may differ for different Intermediaries. The presence of these
payments, receipt of these services and the basis on which an
Intermediary compensates its registered representatives or
salespersons may create an incentive for a particular
Intermediary, registered representative or salesperson to
highlight, feature or recommend the Fund based, at least in
part, on the level of compensation paid. You should contact your
Authorized Institution or other financial intermediary for more
information about the payments it receives and any potential
conflicts of interest.
30
SHAREHOLDER
GUIDE
What
Else Should I Know About Share Purchases?
The Trust reserves the right to:
|
|
|
|
n
|
Refuse to open an account or
require an Authorized Institution to refuse to open an account
if you fail to (i) provide a Social Security Number or
other taxpayer identification number; or (ii) certify that
such number is correct (if required to do so under applicable
law).
|
|
n
|
Reject or restrict any purchase or
exchange order by a particular purchaser (or group of related
purchasers) for any reason in its discretion. Without limiting
the foregoing, the Trust may reject or restrict purchase and
exchange orders by a particular purchaser (or group of related
purchasers) when a pattern of frequent purchases, sales or
exchanges of shares of the Fund is evident, or if purchases,
sales or exchanges are, or a subsequent redemption might be, of
a size that would disrupt the management of the Fund.
|
|
n
|
Close the Fund to new investors
from time to time and reopen the Fund whenever it is deemed
appropriate by the Funds Investment Adviser.
|
|
n
|
Provide for, modify or waive the
minimum investment requirements.
|
|
n
|
Modify the manner in which shares
are offered.
|
|
n
|
Modify the sales charge rate
applicable to future purchases of shares.
|
Generally, non-U.S. citizens and certain U.S. citizens residing
outside the United States may not open an account with the Fund.
The Fund may allow you to purchase shares with securities
instead of cash if consistent with the Funds investment
policies and operations and if approved by the Funds
Investment Adviser.
Notwithstanding the foregoing, the Trust and Goldman Sachs
reserve the right to reject or restrict purchase or exchange
requests from any investor. The Trust and Goldman Sachs will not
be liable for any loss resulting from rejected purchase or
exchange orders.
Customer Identification
Program.
Federal law requires the Fund to
obtain, verify and record identifying information for certain
investors, which will be reviewed solely for customer
identification purposes, which may include the name, residential
or business street address, date of birth (for an individual),
Social Security Number or Taxpayer Identification Number or
other information. Applications without the required information
may not be accepted by the Fund. After accepting an application,
to the extent permitted by applicable law or their customer
identification program, the Fund reserves the right to:
(i) place limits on transactions in any account until the
identity of the investor is verified; (ii) refuse an
investment in the Fund; or (iii) involuntarily redeem an
investors shares and close an account in the event that
the Fund is unable to verify an investors identity or is
unable to obtain all required information. The Fund and its
agents will not be responsible for any
31
loss in an investors account or any tax liability
resulting from the investors delay in providing all
required information or from closing an account and redeeming an
investors shares pursuant to the customer identification
program.
How
Are Shares Priced?
The price you pay when you buy shares is the Funds next
determined NAV for a share class (as adjusted for any applicable
sales charge)
after
the Fund receives your order in
proper form. The price you receive when you sell shares is the
Funds next determined NAV for a share class with the
redemption proceeds reduced by any applicable charges
(
e.g.
, CDSCs)
after
the Fund receives your order
in proper form. Each class calculates its NAV as follows:
|
|
|
NAV =
|
|
(Value of Assets of the Class)
(Liabilities of the Class)
Number
of Outstanding Shares of the Class
|
The Funds investments are valued based on market
quotations, or if market quotations are not readily available,
or if the Investment Adviser believes that such quotations do
not accurately reflect fair value, the fair value of the
Funds investments may be determined in good faith under
procedures established by the Board of Trustees.
Fair value prices are provided by an independent
fair value service in accordance with the fair value procedures
approved by the Board of Trustees. Fair value prices are used
because many foreign markets operate at times that do not
coincide with those of the major U.S. markets. Events that
could affect the values of foreign portfolio holdings may occur
between the close of the foreign market and the time of
determining the NAV, and would not otherwise be reflected in the
NAV. If the independent fair value service does not provide a
fair value price for a particular security, or if the price
provided does not meet the established criteria for the Fund,
the Fund will price that security at the most recent closing
price for that security on its principal exchange.
In addition, the Investment Adviser, consistent with its
procedures and applicable regulatory guidance, may (but need
not) determine to make an adjustment to the previous closing
prices of either domestic or foreign securities in light of
significant events, to reflect what it believes to be the fair
value of the securities at the time of determining the
Funds NAV. Significant events that could affect a large
number of securities in a particular market may include, but are
not limited to: situations relating to one or more single
issuers in a market sector; significant fluctuations in U.S. or
foreign markets; market dislocations; market disruptions or
market closings; equipment failures; natural or man made
disasters or acts of God; armed conflicts; governmental actions
or other developments; as well as the same or similar events
32
SHAREHOLDER
GUIDE
which may affect specific issuers or the securities markets even
though not tied directly to the securities markets. Other
significant events that could relate to a single issuer may
include, but are not limited to: corporate actions such as
reorganizations, mergers and buy-outs; corporate announcements,
including those relating to earnings, products and regulatory
news; significant litigation; low trading volume; and trading
limits or suspensions.
One effect of using an independent fair value service and fair
valuation may be to reduce stale pricing arbitrage opportunities
presented by the pricing of Fund shares. However, it involves
the risk that the values used by the Fund to price their
investments may be different from those used by other investment
companies and investors to price the same investments.
Investments in other registered mutual funds (if any) are valued
based on the NAV of those mutual funds (which may use fair value
pricing as discussed in their prospectuses).
Please note the following with respect to the price at which
your transactions are processed:
|
|
|
|
n
|
NAV per share of each share class
is generally calculated by the accounting agent on each business
day as of the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m. New York time) or
such other times as the New York Stock Exchange or NASDAQ
market may officially close. Fund shares will generally not be
priced on any day the New York Stock Exchange is closed although
Portfolio shares may be priced on such days if the Securities
Industries Financial Markets Association (SIFMA)
recommends that the bond markets open for all or part of the day.
|
|
|
|
|
n
|
On any business day when the SIFMA
recommends that the bond markets close early, each Portfolio
reserves the right to close at or prior to the SIFMA recommended
closing time. If a Portfolio does so, it will cease granting
same business day credit for purchase and redemption orders
received after the Funds closing time and credit will be
given the next business day.
|
|
|
|
|
n
|
The Trust reserves the right to
reprocess purchase (including dividend reinvestments),
redemption and exchange transactions that were processed at a
NAV that is subsequently adjusted, and to recover amounts from
(or distribute amounts to) shareholders accordingly based on the
official closing NAV, as adjusted.
|
|
n
|
The Trust reserves the right to
advance the time by which purchase and redemption orders must be
received for same business day credit as otherwise permitted by
the SEC.
|
Consistent with industry practice, investment transactions not
settling on the same day are recorded and factored into the
Funds NAV on the business day following trade date (T+1).
The use of T+1 accounting generally does not, but may, result in
a
33
NAV that differs materially from the NAV that would result if
all transactions were reflected on their trade dates.
Note: The time at which transactions and shares are priced
and the time by which orders must be received may be changed in
case of an emergency or if regular trading on the New York
Stock Exchange or the bond markets is stopped at a time other
than their regularly scheduled closing time. In the event the
New York Stock Exchange or the bond markets do not open for
business, the Trust may, but is not required to, open the Fund
for purchase, redemption and exchange transactions if the
Federal Reserve wire payment system is open. To learn whether
the Fund is open for business during this situation, please call
the appropriate phone number located on the back cover of this
Prospectus.
Foreign securities may trade in their local markets on days the
Fund is closed. As a result, if the Fund holds foreign
securities, its NAV may be impacted on days when investors may
not purchase or redeem Fund shares.
|
|
|
COMMON QUESTIONS
APPLICABLE TO THE PURCHASE OF CLASS A SHARES
|
What
Is The Offering Price Of Class A Shares?
The offering price of Class A Shares of the Fund is
the next determined NAV per share plus an initial sales charge
paid to Goldman Sachs at the time of purchase of shares.
The sales charge varies depending upon the amount you
purchase. In some cases, described below, the initial sales
charge may be eliminated altogether, and the offering price will
be the NAV per share. The current sales charges and commissions
paid to Authorized Institutions for Class A Shares of the
Fund are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Charge
|
|
Maximum Dealer
|
|
|
Sales Charge
as
|
|
as Percentage
|
|
Allowance as
|
Amount of
Purchase
|
|
Percentage of
|
|
of Net Amount
|
|
Percentage of
|
(including sales
charge, if any)
|
|
Offering
Price
|
|
Invested
|
|
Offering
Price*
|
Less than $100,000
|
|
|
3.75
|
%
|
|
|
3.90
|
%
|
|
|
3.25
|
%
|
$100,000 up to (but less than) $250,000
|
|
|
3.00
|
|
|
|
3.09
|
|
|
|
2.50
|
|
$250,000 up to (but less than) $500,000
|
|
|
2.50
|
|
|
|
2.56
|
|
|
|
2.00
|
|
$500,000 up to (but less than) $1 million
|
|
|
2.00
|
|
|
|
2.04
|
|
|
|
1.75
|
|
$1 million or more
|
|
|
0.00
|
**
|
|
|
0.00
|
**
|
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Dealers allowance may be
changed periodically. During special promotions, the entire
sales charge may be allowed to Authorized Institutions.
Authorized Institutions to whom substantially the entire sales
charge is allowed may be deemed to be underwriters
under the Securities Act of 1933.
|
**
|
|
No sales charge is payable at
the time of purchase of Class A Shares of $1 million or
more, but a CDSC of 1% may be imposed in the event of certain
redemptions within 18 months after the end of the month in
which such purchase was made.
|
***
|
|
The Distributor may pay a
one-time commission to Authorized Institutions who initiate or
are responsible for purchases of $1 million or more of shares of
the Fund equal to 1.00% of the amount
|
34
SHAREHOLDER
GUIDE
|
|
|
|
|
under $3 million, 0.50% of the
next $2 million, and 0.25% thereafter. In instances where an
Authorized Institution (including Goldman Sachs Private
Wealth Management Unit) agrees to waive its receipt of the
one-time commission described above, the CDSC on Class A
Shares, generally, will be waived. The Distributor may also pay,
with respect to all or a portion of the amount purchased, a
commission in accordance with the foregoing schedule to
Authorized Institutions who initiate or are responsible for
purchases of $500,000 or more by certain Section 401(k),
profit sharing, money purchase pension, tax-sheltered annuity,
defined benefit pension, or other employee benefit plans
(including health savings accounts) that are sponsored by one or
more employers (including governmental or church employers) or
employee organizations investing in the Fund which satisfy the
criteria set forth in the subsequent section When Are
Class A Shares Not Subject To A Sales Load? or $1
million or more by certain wrap accounts. Purchases
by such plans will be made at NAV with no initial sales charge,
but if shares are redeemed within 18 months after the end
of the month in which such purchase was made, a CDSC of 1% may
be imposed upon the plan, the plan sponsor or the third-party
administrator. In addition, Authorized Institutions will remit
to the Distributor such payments received in connection with
wrap accounts in the event that shares are redeemed
within 18 months after the end of the month in which the
purchase was made.
|
You should note that the actual sales charge that appears in
your mutual fund transaction confirmation may differ slightly
from the rate disclosed above in this Prospectus due to rounding
calculations.
As indicated in the preceding chart, and as discussed further
below and in the following section titled How Can The
Sales Charge On Class A Shares Be Reduced?, you may,
under certain circumstances, be entitled to pay reduced sales
charges on your purchases of Class A Shares or have those
charges waived entirely. To take advantage of these discounts,
your Authorized Institution or other financial intermediary must
notify the Funds Transfer Agent at the time of your
purchase order that a discount may apply to your current
purchases. You may also be required to provide appropriate
documentation to receive these discounts, including:
|
|
|
|
(i)
|
Information or records regarding shares of the Fund or other
Goldman Sachs Funds held in all accounts (
e.g.,
retirement accounts) of the shareholder at the Authorized
Institution or other financial intermediary;
|
|
|
(ii)
|
Information or records regarding shares of the Fund or other
Goldman Sachs Funds held in any account of the shareholder at
another Authorized Institution or other financial intermediary;
and
|
|
|
(iii)
|
Information or records regarding shares of the Fund or other
Goldman Sachs Funds held at any Authorized Institution or other
financial intermediary by related parties of the shareholder,
such as members of the same family or household.
|
What
Else Do I Need To Know About Class A Shares
CDSC?
Purchases of $1 million or more of Class A Shares will be
made at NAV with no initial sales charge. However, if you redeem
shares within 18 months after the end of the month in which
the purchase was made, a CDSC of 1% may be imposed.
35
The CDSC may not be imposed if your Authorized Institution
enters into an agreement with the Distributor to return all or
an applicable prorated portion of its commission to the
Distributor. The CDSC is waived on redemptions in certain
circumstances. See the following section In What
Situations May The CDSC On Class A Or C Shares Be Waived Or
Reduced?.
When
Are Class A Shares Not Subject To A Sales Load?
Class A Shares of the Fund may be sold at NAV without
payment of any sales charge to the following individuals and
entities:
|
|
|
|
n
|
Goldman Sachs, its affiliates or
their respective officers, partners, directors or employees
(including retired employees and former partners), any
partnership of which Goldman Sachs is a general partner, any
Trustee or officer of the Trust and designated family members of
any of these individuals;
|
|
n
|
Qualified employee benefit plans of
Goldman Sachs;
|
|
n
|
Trustees or directors of investment
companies for which Goldman Sachs or an affiliate acts as
sponsor;
|
|
n
|
Any employee or registered
representative of any Authorized Institution or their respective
spouses, children and parents;
|
|
n
|
Banks, trust companies or other
types of depository institutions;
|
|
n
|
Any state, county or city, or any
instrumentality, department, authority or agency thereof, which
is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares
of the Fund;
|
|
n
|
Section 401(k), profit
sharing, money purchase pension, tax-sheltered annuity, defined
benefit pension, or other employee benefit plans (including
health savings accounts) or SIMPLE plans that are sponsored by
one or more employers (including governmental or church
employers) or employee organizations (Employee Benefit
Plans) that:
|
|
|
|
|
l
|
Buy shares of Goldman Sachs Funds
worth $500,000 or more; or
|
|
l
|
Have 100 or more eligible employees
at the time of purchase; or
|
|
l
|
Certify that they expect to have
annual plan purchases of shares of Goldman Sachs Funds of
$200,000 or more; or
|
|
l
|
Are provided administrative
services by certain third party administrators that have entered
into a special service arrangement with Goldman Sachs relating
to such plans; or
|
|
l
|
Have at the time of purchase
aggregate assets of at least $2,000,000.
|
|
l
|
These requirements may be waived at
the discretion of the Trusts officers;
|
|
|
|
|
n
|
Non-qualified pension plans
sponsored by employers who also sponsor qualified plans that
qualify for and invest in Goldman Sachs Funds at NAV without the
payment of any sales charge;
|
|
n
|
Insurance company separate accounts
that make the Fund available as underlying investments in
certain group annuity contracts;
|
36
SHAREHOLDER
GUIDE
|
|
|
|
n
|
Wrap accounts for the
benefit of clients of broker-dealers, financial institutions or
financial planners, provided they have entered into an agreement
with GSAM specifying aggregate minimums and certain operating
policies and standards;
|
|
n
|
Registered investment advisers
investing for accounts for which they receive asset-based fees;
|
|
n
|
Accounts over which GSAM or its
advisory affiliates have investment discretion;
|
|
n
|
Shareholders who roll over
distributions from any tax-qualified Employee Benefit Plan or
tax-sheltered annuity to an IRA which invests in the Goldman
Sachs Funds if the tax-qualified Employee Benefit Plan or
tax-sheltered annuity receives administrative services provided
by certain third party administrators that have entered into a
special service arrangement with Goldman Sachs relating to such
plan or annuity;
|
|
n
|
State sponsored 529 college savings
plans; or
|
|
n
|
Investors who qualify under other
exemptions that are stated from time to time in the SAI.
|
You must certify eligibility for any of the above exemptions
on your Account Application and notify your Authorized
Institution and the Fund if you no longer are eligible for the
exemption.
The Fund will grant you an exemption subject to confirmation of
your entitlement by your Authorized Institution. You may be
charged a fee by your Authorized Institution.
How
Can The Sales Charge On Class A Shares Be
Reduced?
|
|
|
|
n
|
Right of Accumulation:
When buying
Class A Shares in Goldman Sachs Funds, your current
aggregate investment determines the initial sales load you pay.
You may qualify for reduced sales charges when the current
market value of holdings across Class A, Class B
and/or Class C Shares, plus new purchases, reaches $100,000
or more. Class A, Class B and/or Class C Shares
of any of the Goldman Sachs Funds may be combined under the
Right of Accumulation. If the Funds Transfer Agent is
properly notified, the Amount of Purchase in the
chart in the section What Is The Offering Price Of
Class A Shares? will be deemed to include all
Class A, Class B and/or Class C Shares of the
Goldman Sachs Funds that were held at the time of purchase by
any of the following persons: (i) you, your spouse, your
parents and your children; and (ii) any trustee, guardian
or other fiduciary of a single trust estate or a single
fiduciary account. This includes, for example, any Class A,
Class B and/or Class C Shares held at a broker-dealer
or other financial intermediary other than the one handling your
current purchase. For purposes of applying the Right of
Accumulation, shares of the Fund and any other Goldman Sachs
Funds purchased by an existing client of Goldman Sachs Private
Wealth Management or GS Ayco Holding LLC will be
|
37
|
|
|
|
|
combined with Class A, Class B and/or Class C
Shares and other assets held by all other Goldman Sachs Private
Wealth Management accounts or accounts of GS Ayco Holding LLC,
respectively. In addition, under some circumstances,
Class A and/or Class C Shares of the Fund and
Class A, Class B and/or Class C Shares of any
other Goldman Sachs Fund purchased by partners, directors,
officers or employees of certain organizations may be combined
for the purpose of determining whether a purchase will qualify
for the Right of Accumulation and, if qualifying, the applicable
sales charge level. To qualify for a reduced sales load, you or
your Authorized Institution must notify the Funds Transfer
Agent at the time of investment that a quantity discount is
applicable. If you do not notify your Authorized Institution at
the time of your current purchase or a future purchase that you
qualify for a quantity discount, you may not receive the benefit
of a reduced sales charge that might otherwise apply. Use of
this option is subject to a check of appropriate records.
|
In some circumstances, other Class A, Class B and/or
Class C Shares may be aggregated with your current purchase
under the Right of Accumulation as described in the SAI. For
purposes of determining the Amount of Purchase, all
Class A, Class B and/or Class C Shares currently
held will be valued at their current market value.
|
|
|
|
n
|
Statement of Intention:
You may obtain a
reduced sales charge by means of a written Statement of
Intention which expresses your non-binding commitment to invest
(not counting reinvestments of dividends and distributions) in
the aggregate $100,000 or more within a period of 13 months
in Class A Shares of one or more of the Goldman Sachs
Funds. Any investments you make during the period will receive
the discounted sales load based on the full amount of your
investment commitment. Purchases made during the previous
90 days may be included; however, capital appreciation does
not apply toward these combined purchases. If the investment
commitment of the Statement of Intention is not met prior to the
expiration of the
13-month
period, the entire amount will be subject to the higher
applicable sales charge unless the failure to meet the
investment commitment is due to the death of the investor. By
selecting the Statement of Intention, you authorize the Transfer
Agent to escrow and redeem Class A Shares in your account
to pay this additional charge if the Statement of Intention is
not met. You must, however, inform the Transfer Agent that the
Statement of Intention is in effect each time shares are
purchased. Each purchase will be made at the public offering
price applicable to a single transaction of the dollar amount
specified on the Statement of Intention. The SAI has more
information about the Statement of Intention, which you should
read carefully.
|
38
SHAREHOLDER
GUIDE
|
|
|
A COMMON QUESTION
APPLICABLE TO THE PURCHASE OF CLASS C SHARES
|
What
Is The Offering Price Of Class C Shares?
You may purchase Class C Shares of the Fund at the next
determined NAV without paying an initial sales charge. However,
if you redeem Class C Shares within 12 months of
purchase, a CDSC of 1% will normally be deducted from the
redemption proceeds. In connection with purchases by Employee
Benefit Plans, where Class C Shares are redeemed within
12 months of purchase, a CDSC of 1% may be imposed upon the
plan sponsor or third party administrator.
Proceeds from the CDSC are payable to the Distributor and may be
used in whole or in part to defray the Distributors
expenses related to providing distribution-related services to
the Fund in connection with the sale of Class C Shares,
including the payment of compensation to Authorized
Institutions. An amount equal to 1% of the amount invested is
normally paid by the Distributor to Authorized Institutions.
|
|
COMMON
QUESTIONS APPLICABLE TO THE PURCHASE OF CLASS A
AND C SHARES
|
|
When
Will Shares Be Issued And Dividends Begin To Be Paid?
|
|
|
|
n
|
Shares Purchased by Federal Funds
Wire or ACH Transfer:
|
|
|
|
|
l
|
If a purchase order is received in
proper form before the Fund closes, shares will be issued on the
day the order is received and dividends will generally begin to
accrue on the purchased shares on the business day after payment
is received.
|
|
|
|
|
l
|
If a purchase order is placed
through an Authorized Dealer that settles through the National
Securities Clearing Corporation (the NSCC), the
purchase order will begin accruing dividends on the NSCC
settlement date.
|
|
|
|
|
n
|
Shares Purchased by Check:
|
|
|
|
|
l
|
If a purchase order is received in
proper form before the Fund closes, shares will be issued on the
day the order is received and dividends will generally begin to
accrue on the purchased shares on the business day after payment
is received.
|
What
Else Do I Need To Know About The CDSC On Class A Or C
Shares?
|
|
|
|
n
|
The CDSC is based on the lesser of
the NAV of the shares at the time of redemption or the original
offering price (which is the original NAV).
|
|
|
|
|
l
|
No CDSC is charged on shares
acquired from reinvested dividends or capital gains
distributions.
|
|
l
|
No CDSC is charged on the per share
appreciation of your account over the initial purchase price.
|
39
|
|
|
|
l
|
When counting the number of months
since a purchase of Class A Shares was made, all payments
made during a month will be combined and considered to have been
made on the first day of the next month.
|
|
|
|
|
l
|
When counting the number of months
since a purchase of Class C Shares was made, all payments
made during a month will be combined and considered to have been
made on the first day of that month.
|
|
|
|
|
n
|
To keep your CDSC as low as
possible, each time you place a request to sell shares, the Fund
will first sell any shares in your account that do not carry a
CDSC and then the shares in your account that have been held the
longest.
|
In
What Situations May The CDSC On Class A Or C Shares Be
Waived Or Reduced?
The CDSC on Class A and Class C Shares that are
subject to a CDSC may be waived or reduced if the redemption
relates to:
|
|
|
|
n
|
Mandatory retirement distributions
or loans to participants or beneficiaries from Employee Benefit
Plans;
|
|
n
|
Hardship withdrawals by a
participant or beneficiary in an Employee Benefit Plan;
|
|
n
|
The separation from service by a
participant or beneficiary in an Employee Benefit Plan;
|
|
n
|
Excess contributions distributed
from an Employee Benefit Plan;
|
|
n
|
Distributions from a qualified
Employee Benefit Plan invested in the Goldman Sachs Funds which
are being rolled over to an IRA in the same share class of a
Goldman Sachs Fund;
|
|
n
|
The death or disability (as defined
in Section 72(m)(7) of the Internal Revenue Code of 1986,
as amended (the Code)) of a shareholder, participant
or beneficiary in an Employee Benefit Plan;
|
|
n
|
Satisfying the minimum distribution
requirements of the Code;
|
|
n
|
Establishing substantially
equal periodic payments as described under
Section 72(t)(2) of the Code;
|
|
n
|
Redemption proceeds which are to be
reinvested in accounts or non-registered products over which
GSAM or its advisory affiliates have investment discretion;
|
|
|
|
|
n
|
A systematic withdrawal plan. The
Trust reserves the right to limit such redemptions, on an annual
basis, to 12% of the account value of your C Shares and 10%
of the account value of Class A Shares;
|
|
|
|
|
n
|
Redemptions or exchanges of Fund
shares held through an Employee Benefit Plan using the Fund as
part of a qualified default investment alternative or
QDIA; or
|
|
n
|
Other redemptions, at the
discretion of the Trusts officers, relating to shares
purchased through certain Section 401(k), profit sharing,
money purchase pension, tax-sheltered annuity, defined benefit
pension, or other Employee
|
40
SHAREHOLDER
GUIDE
|
|
|
|
|
Benefit Plans (including health savings accounts) that are
sponsored by one or more employers (including governmental or
church employers) or employee organizations investing in the
Fund.
|
HOW
TO SELL SHARES
How
Can I Sell Shares Of The Fund?
You may arrange to take money out of your account by selling
(redeeming) some or all of your shares through your
Authorized Institution.
Generally, the Fund will redeem its
shares upon request on any business day at the NAV next
determined after receipt of such request in proper form, subject
to any applicable CDSC.
You should contact your Authorized
Institution to discuss redemptions and redemption proceeds.
Certain Authorized Institutions are authorized to accept
redemption requests on behalf of the Fund as described under
HOW TO BUY SHARESShares Offering. The Fund may
transfer redemption proceeds to an account with your Authorized
Institution. In the alternative, your Authorized Institution may
request that redemption proceeds be sent to you by check or wire
(if the wire instructions are designated in the current records
of the Transfer Agent). Redemptions may be requested by your
Authorized Institution in writing, by telephone or through an
electronic trading platform.
Generally, any redemption request that requires money to go to
an account or address other than that designated in the current
records of the Transfer Agent must be in writing and signed by
an authorized person (a Medallion signature guarantee may be
required). The written request may be confirmed by telephone
with both the requesting party and the designated bank to verify
instructions.
When
Do I Need A Medallion Signature Guarantee To Redeem
Shares?
A Medallion signature guarantee may be required if:
|
|
|
|
n
|
A request is made in writing to
redeem Class A, Class C, Class R or Class IR
Shares in an amount over $50,000 by check;
|
|
|
|
|
n
|
You would like the redemption
proceeds sent to an address that is not your address of record;
or
|
|
n
|
You would like the redemption
proceeds sent to a domestic bank account that is not your bank
account designated in the current records of the Transfer Agent.
|
A Medallion signature guarantee must be obtained from a bank,
brokerage firm or other financial intermediary that is a member
of an approved Medallion Guarantee Program or that is otherwise
approved by the Trust. A notary public cannot provide a
Medallion signature guarantee. Additional documentation may be
required.
41
What
Do I Need To Know About Telephone Redemption Requests?
The Trust, the Distributor and the Transfer Agent will not be
liable for any loss or tax liability you may incur in the event
that the Trust accepts unauthorized telephone redemption
requests that the Trust reasonably believes to be genuine. The
Trust may accept telephone redemption instructions from any
person identifying himself or herself as the owner of an account
or the owners registered representative where the owner
has not declined in writing to use this service. Authorized
Institutions may submit redemption requests by telephone. You
risk possible losses if a telephone redemption is not authorized
by you.
In an effort to prevent unauthorized or fraudulent redemption
and exchange requests by telephone, Goldman Sachs or Boston
Financial Data Services, Inc. (BFDS) each employ
reasonable procedures specified by the Trust to confirm that
such instructions are genuine. If reasonable procedures are not
employed, the Trust may be liable for any loss due to
unauthorized or fraudulent transactions. The following general
policies are currently in effect:
|
|
|
|
n
|
Telephone requests are recorded.
|
|
n
|
Proceeds of telephone redemption
requests will be sent to your address of record or authorized
account designated in the current records of the Transfer Agent
(unless you provide written instructions and a Medallion
signature guarantee indicating another address or account).
|
|
n
|
For the
30-day
period following a change of address, telephone redemptions will
only be filled by a wire transfer to the authorized account
designated in the current records of the Transfer Agent (see
immediately preceding bullet point). In order to receive the
redemption by check during this time period, the redemption
request must be in the form of a written, Medallion signature
guaranteed letter.
|
|
|
|
|
n
|
The telephone redemption option
does not apply to shares held in a street name
account. If your account is held in street name, you
should contact your registered representative of record, who may
make telephone redemptions on your behalf.
|
|
|
|
|
n
|
The telephone redemption option may
be modified or terminated at any time without prior notice.
|
|
|
|
|
n
|
The Fund may redeem up to $50,000
in Class A, Class C, Class R or Class IR
Shares via telephone.
|
Note: It may be difficult to make telephone redemptions in
times of unusual economic or market conditions.
How
Are Redemption Proceeds Paid?
By Wire:
You may arrange for your redemption
proceeds to be paid as federal funds to an account with your
Authorized Institution or to a domestic bank account
42
SHAREHOLDER
GUIDE
designated in the current records of the Transfer Agent. In
addition, redemption proceeds may be transmitted through an
electronic trading platform to an account with your Authorized
Institution. The following general policies govern wiring
redemption proceeds:
|
|
|
|
n
|
Redemption proceeds will normally
be wired on the next business day in federal funds, but may be
paid up to three business days following receipt of a properly
executed wire transfer redemption request.
|
|
n
|
Although redemption proceeds will
normally be paid as described above, under certain
circumstances, redemption requests or payments may be postponed
or suspended as permitted under Section 22(e) of the
Investment Company Act. Generally, under that section,
redemption requests or payments may be postponed or suspended if
(i) the New York Stock Exchange is closed for trading or
trading is restricted; (ii) an emergency exists which makes
the disposal of securities owned by the Fund or the fair
determination of the value of the Funds net assets not
reasonably practicable; or (iii) the SEC, by order, permits
the suspension of the right of redemption.
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n
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If you are selling shares you
recently paid for by check or purchased by Automated Clearing
House (ACH), the Fund will pay you when your check
or ACH has cleared, which may take up to 15 days.
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n
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If the Federal Reserve Bank is
closed on the day that the redemption proceeds would ordinarily
be wired, wiring the redemption proceeds may be delayed until
the Federal Reserve Bank reopens.
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n
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To change the bank designated in
the current records of the Transfer Agent, you must send written
instructions signed by an authorized person designated in the
current records of the Transfer Agent. A Medallion signature
guarantee may be required if you are requesting a redemption in
conjunction with the change.
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n
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Neither the Trust nor Goldman Sachs
assumes any responsibility for the performance of your bank or
any other financial intermediary in the transfer process. If a
problem with such performance arises, you should deal directly
with your bank or any such financial intermediaries.
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By Check:
A shareholder may elect in writing to
receive your redemption proceeds by check. Redemption proceeds
paid by check will normally be mailed to the address of record
within three business days of receipt of a properly executed
redemption request. If you are selling shares you recently paid
for by check or ACH, the Fund will pay you when your check or
ACH has cleared, which may take up to 15 days.
What
Else Do I Need To Know About Redemptions?
The following generally applies to redemption requests:
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n
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Shares of the Fund continue to earn
dividends declared up to, but not including the date of
settlement.
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43
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n
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Additional documentation may be
required when deemed appropriate by the Transfer Agent. A
redemption request will not be in proper form until such
additional documentation has been received.
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n
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Authorized Institutions are
responsible for the timely transmittal of redemption requests by
their customers to the Transfer Agent. In order to facilitate
the timely transmittal of redemption requests, these Authorized
Institutions may set times by which they must receive redemption
requests. These Authorized Institutions may also require
additional documentation from you.
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The Trust reserves the right to:
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|
n
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Redeem your shares in the event
your Authorized Institutions relationship with Goldman
Sachs is terminated, and you do not transfer your account to
another Authorized Institution with a relationship with Goldman
Sachs, or in the event that the Fund is no longer an option in
your Retirement Plan or no longer available through your
Eligible Fee-Based Program.
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n
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Redeem your shares if your account
balance is below the required Fund minimum. The Fund will not
redeem your shares on this basis if the value of your account
falls below the minimum account balance solely as a result of
market conditions. The Fund will give you 60 days prior
written notice to allow you to purchase sufficient additional
shares of the Fund in order to avoid such redemption.
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n
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Subject to applicable law, redeem
your shares in other circumstances determined by the Board of
Trustees to be in the best interest of the Trust.
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n
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Pay redemptions by a distribution
in-kind of securities (instead of cash). If you receive
redemption proceeds in-kind, you should expect to incur
transaction costs upon the disposition of those securities.
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n
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Reinvest any amounts (
e.g.
,
dividends, distributions or redemption proceeds) which you have
elected to receive by check should your check be returned to the
Fund as undeliverable or remain uncashed for six months. This
provision may not apply to certain retirement or qualified
accounts or to a closed account. Your participation in a
systematic withdrawal program may be terminated if your checks
remain uncashed. No interest will accrue on amounts represented
by uncashed checks.
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n
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Charge an additional fee in the
event a redemption is made via wire transfer.
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The Trust will not be responsible for any loss in an
investors account or tax liability resulting from a
redemption.
Can
I Reinvest Redemption Proceeds In The Same Or Another Goldman
Sachs Fund?
You may redeem shares of the Fund and reinvest a portion or all
of the redemption proceeds at NAV. To be eligible for this
privilege, you must have held the shares
44
SHAREHOLDER
GUIDE
you want to redeem for at least 30 days (60 days with
respect to certain Goldman Sachs Funds offered in other
prospectuses) and you must reinvest the share proceeds within
90 days after you redeem.
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n
|
You should obtain and read the
applicable prospectuses before investing in any other Goldman
Sachs Funds.
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n
|
If you pay a CDSC upon redemption
of Class A or Class C Shares and then reinvest in
Class A or Class C Shares of another Goldman Sachs
Fund as described above, your account will be credited with the
amount of the CDSC you paid. The reinvested shares will,
however, continue to be subject to a CDSC. The holding period of
the shares acquired through reinvestment will include the
holding period of the redeemed shares for purposes of computing
the CDSC payable upon a subsequent redemption.
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n
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The reinvestment privilege may be
exercised at any time in connection with transactions in which
the proceeds are reinvested at NAV in a tax-sheltered Employee
Benefit Plan. In other cases, the reinvestment privilege may be
exercised once per year upon receipt of a written request.
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n
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You may be subject to tax as a
result of a redemption. You should consult your tax adviser
concerning the tax consequences of a redemption and reinvestment.
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Can
I Exchange My Investment From One Goldman Sachs Fund To Another
Goldman Sachs Fund?
You may exchange shares of a Goldman Sachs Fund at NAV without
the imposition of an initial sales charge or CDSC, if
applicable, at the time of exchange for certain shares of
another Goldman Sachs Fund. Redemption of shares (including by
exchange) of certain Goldman Sachs Funds offered in other
prospectuses may, however, be subject to a redemption fee for
shares that are held for 30 or 60 days or less. The
exchange privilege may be materially modified or withdrawn at
any time upon 60 days written notice. You should contact
your Authorized Institution to arrange for exchanges of shares
of the Fund for shares of another Goldman Sachs Fund.
You should keep in mind the following factors when making or
considering an exchange:
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n
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You should obtain and carefully
read the prospectus of the Goldman Sachs Fund you are acquiring
before making an exchange. You should be aware that not all
Goldman Sachs Funds may offer all share classes.
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n
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Currently, the Fund does not impose
any charge for exchanges, although the Fund may impose a charge
in the future.
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n
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The exchanged shares may later be
exchanged for shares of the same class of the original Fund at
the next determined NAV without the imposition of an initial
sales charge or CDSC (but subject to any applicable redemption
fee) if the
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45
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amount in the Fund resulting from such exchanges is less than
the largest amount on which you have previously paid the
applicable sales charge.
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|
n
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When you exchange shares subject to
a CDSC, no CDSC will be charged at that time. For purposes of
determining the amount of the applicable CDSC, the length of
time you have owned the shares will be measured from the date
you acquired the original shares subject to a CDSC and will not
be affected by a subsequent exchange.
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n
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Eligible investors may exchange
certain classes of shares for another class of shares of the
same Fund. For further information, contact your Authorized
Institution.
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n
|
All exchanges which represent an
initial investment in a Goldman Sachs Fund must satisfy the
minimum initial investment requirement of that Fund. This
requirement may be waived at the discretion of the Trust.
Exchanges into a money market fund need not meet the traditional
minimum investment requirements for that fund if the entire
balance of the original Fund account is exchanged.
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n
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Exchanges are available only in
states where exchanges may be legally made.
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n
|
It may be difficult to make
telephone exchanges in times of unusual economic or market
conditions.
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n
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Goldman Sachs and BFDS may use
reasonable procedures described under What Do I Need To
Know About Telephone Redemption Requests? in an effort to
prevent unauthorized or fraudulent telephone exchange requests.
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n
|
Normally, a telephone exchange will
be made only to an identically registered account.
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n
|
Exchanges into Goldman Sachs Funds
or certain share classes of Goldman Sachs Funds that are closed
to new investors may be restricted.
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n
|
Exchanges into the Fund from
another Goldman Sachs Fund may be subject to any redemption fee
imposed by the other Goldman Sachs Fund.
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For federal income tax purposes, an exchange from one Goldman
Sachs Fund to another is treated as a redemption of the shares
surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange.
Exchanges within Retirement Plan accounts will not result in
capital gains or loss for federal or state income tax purposes.
You should consult your tax adviser concerning the tax
consequences of an exchange.
SHAREHOLDER
SERVICES
Can
I Arrange To Have Automatic Investments Made On A Regular
Basis?
You may be able to make automatic investments in Class A
and Class C Shares through your bank via ACH transfer or
bank draft each month. The minimum dollar amount for
46
SHAREHOLDER
GUIDE
this service is $250 for the initial investment and $50 per
month for additional investments. Forms for this option are
available online at www.goldmansachsfunds.com and from your
Authorized Institution, or you may check the appropriate box on
the Account Application.
Can
My Dividends And Distributions From The Fund Be Invested In
Other Goldman Sachs Funds?
You may elect to cross-reinvest dividends and capital gains
distributions paid by a Goldman Sachs Fund in shares of the same
class of other Goldman Sachs Funds.
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Shares will be purchased at NAV.
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n
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You cannot make cross-reinvestments
into a Goldman Sachs Fund unless that Funds minimum
initial investment requirement is met.
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n
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You should obtain and read the
prospectus of the Fund into which dividends are invested.
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Can
I Arrange To Have Automatic Exchanges Made On A Regular
Basis?
You may elect to exchange automatically a specified dollar
amount of Class A or Class C Shares of the Fund for
shares of the same class of other Goldman Sachs Funds.
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n
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Shares will be purchased at NAV if
a sales charge had been imposed on the initial purchase.
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Shares subject to a CDSC acquired
under this program may be subject to a CDSC at the time of
redemption from the Goldman Sachs Fund into which the exchange
is made depending upon the date and value of your original
purchase.
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n
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Automatic exchanges are made
monthly on the
15
th
day
of each month or the first business day thereafter.
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n
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Minimum dollar amount: $50 per
month.
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n
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You cannot make automatic exchanges
into a Goldman Sachs Fund unless that Funds minimum
initial investment requirement is met.
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n
|
You should obtain and read the
prospectus of the Goldman Sachs Fund into which automatic
exchanges are made.
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Can
I Have Systematic Withdrawals Made On A Regular Basis?
You may redeem from your Class A or Class C Share
account systematically via check or ACH transfer in any amount
of $50 or more.
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|
n
|
It is normally undesirable to
maintain a systematic withdrawal plan at the same time that you
are purchasing additional Class A or Class C Shares
because of the CDSCs that are imposed on certain redemptions of
Class A and Class C Shares.
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n
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Checks are normally mailed within
two business days after your selected systematic withdrawal date
of either the
15
th
or
25
th
of
the month. ACH payments may take up to three business days to
post to your account after your
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47
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selected systematic withdrawal date between, and including, the
3
rd
and
26
th
of
the month.
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n
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Each systematic withdrawal is a
redemption and therefore may be a taxable transaction.
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n
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The CDSC applicable to Class A
or Class C Shares redeemed under the systematic withdrawal
plan may be waived. The Fund reserves the right to limit such
redemptions, on an annual basis, to 12% of the value of
Class C Shares and 10% of the value of your Class A
Shares.
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What
Types Of Reports Will I Be Sent Regarding My
Investment?
Authorized Institutions and other financial intermediaries may
provide varying arrangement for their clients to purchase and
redeem Fund shares. In addition, Authorized Institutions and
other financial intermediaries are responsible for providing to
you any communication from the Fund to its shareholders,
including but not limited to, prospectuses, prospectus
supplements, proxy materials and notices regarding the source of
dividend payments under Section 19 of the Investment
Company Act. They may charge additional fees not described in
this Prospectus to their customers for such services.
You will be provided with a printed confirmation of each
transaction in your account and a quarterly account statement if
you invest in Class A, Class C, Class IR or
Class R Shares and a monthly account statement if you
invest in Institutional Shares. If your account is held directly
with your Authorized Institution, you will receive this
information from your Authorized Institution.
You will also receive an annual shareholder report containing
audited financial statements and a semi-annual shareholder
report. If you have consented to the delivery of a single copy
of shareholder reports, prospectuses and other information to
all shareholders who share the same mailing address with your
account, you may revoke your consent at any time by contacting
Goldman Sachs Funds at the appropriate phone number or address
found on the back cover of this Prospectus. The Fund will begin
sending individual copies to you within 30 days after
receipt of your revocation. If your account is held through an
Authorized Institution, please contact the Authorized
Institution to revoke your consent.
The types of reports Class IR
and/or
Class R shareholders will receive depends on the related
arrangements in effect with respect to such shareholders
Retirement Plan or Eligible Fee-Based Program.
48
SHAREHOLDER
GUIDE
DISTRIBUTION
SERVICES AND FEES
What
Are The Different Distribution And/Or Service Fees Paid By The
Funds Shares?
The Trust has adopted distribution and service plans (each a
Plan) under which Class A, Class C and
Class R Shares bear distribution and/or service fees paid
to Goldman Sachs and Authorized Institutions. These financial
intermediaries seek distribution and/or servicing fee revenues
to, among other things, offset the cost of servicing small and
medium sized plan investors and providing information about the
Fund. If the fees received by Goldman Sachs pursuant to the
Plans exceed its expenses, Goldman Sachs may realize a profit
from these arrangements. Goldman Sachs generally receives and
pays the distribution and service fees on a quarterly basis.
Under the Plans, Goldman Sachs is entitled to a monthly fee from
the Fund for distribution services equal, on an annual basis, to
0.25%, 0.75% and 0.50% respectively, of the Funds average
daily net assets attributed to Class A, Class C and
Class R Shares. Because these fees are paid out of the
Funds assets on an ongoing basis, over time, these fees
will increase the cost of your investment and may cost you more
than paying other types of such charges.
The distribution fees and service fees are subject to the
requirements of
Rule 12b-1
under the Investment Company Act, and may be used (among other
things) for:
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Compensation paid to and expenses
incurred by Authorized Institutions, Goldman Sachs and their
respective officers, employees and sales representatives;
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Commissions paid to Authorized
Institutions;
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Allocable overhead;
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n
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Telephone and travel expenses;
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Interest and other costs associated
with the financing of such compensation and expenses;
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Printing of prospectuses for
prospective shareholders;
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Preparation and distribution of
sales literature or advertising of any type; and
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n
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All other expenses incurred in
connection with activities primarily intended to result in the
sale of Class A, Class C and Class R Shares.
|
In connection with the sale of Class C Shares, Goldman
Sachs normally begins paying the 0.75% distribution fee as an
ongoing commission to Authorized Institutions after the shares
have been held for one year. Goldman Sachs normally begins
paying the annual 0.25% and 0.50% distribution fee for the
Class A and Class R Shares respectively, as an ongoing
commission to Authorized Institutions immediately. Goldman Sachs
generally pays the distribution fee on a quarterly basis.
49
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CLASS C PERSONAL
ACCOUNT MAINTENANCE SERVICES AND FEES
|
Under the Class C Plan, Goldman Sachs is also entitled to
receive a separate fee equal on an annual basis to 0.25% of the
Funds average daily net assets attributed to Class C
Shares. This fee is for personal and account maintenance
services, and may be used to make payments to Goldman Sachs,
Authorized Institutions and their officers, sales
representatives and employees for responding to inquiries of,
and furnishing assistance to, shareholders regarding ownership
of their shares or their accounts or similar services not
otherwise provided on behalf of the Fund. If the fees received
by Goldman Sachs pursuant to the Plans exceed its expenses,
Goldman Sachs may realize a profit from this arrangement.
In connection with the sale of Class C Shares, Goldman
Sachs normally begins paying the 0.25% ongoing service fee to
Authorized Institutions after the shares have been held for one
year. Goldman Sachs generally pays the ongoing service fee on a
quarterly basis.
RESTRICTIONS
ON EXCESSIVE TRADING PRACTICES
Policies and Procedures on Excessive Trading
Practices.
In accordance with the policy
adopted by the Board of Trustees, the Trust discourages frequent
purchases and redemptions of Fund shares and does not permit
market timing or other excessive trading practices. Purchases
and exchanges should be made with a view to longer-term
investment purposes only that are consistent with the investment
policies and practices of the respective Fund. Excessive,
short-term (market timing) trading practices may disrupt
portfolio management strategies, increase brokerage and
administrative costs, harm Fund performance and result in
dilution in the value of Fund shares held by longer-term
shareholders. The Trust and Goldman Sachs reserve the right to
reject or restrict purchase or exchange requests from any
investor. The Trust and Goldman Sachs will not be liable for any
loss resulting from rejected purchase or exchange orders. To
minimize harm to the Trust and its shareholders (or Goldman
Sachs), the Trust (or Goldman Sachs) will exercise this right
if, in the Trusts (or Goldman Sachs) judgment, an
investor has a history of excessive trading or if an
investors trading, in the judgment of the Trust (or
Goldman Sachs), has been or may be disruptive to the Fund. In
making this judgment, trades executed in multiple accounts under
common ownership or control may be considered together to the
extent they can be identified. No waivers of the provisions of
the policy established to detect and deter market timing and
other excessive trading activity are permitted that would harm
the Trust or its shareholders or would subordinate the interests
of the Trust or its shareholders to those of Goldman Sachs or
any affiliated person or associated person of Goldman Sachs.
50
SHAREHOLDER
GUIDE
To deter excessive shareholder trading, certain Goldman Sachs
Funds (which are offered in separate prospectuses) impose a
redemption fee on redemptions made within 30 days or
60 days of purchase subject to certain exceptions. As a
further deterrent to excessive trading, many foreign equity
securities held by the Fund are priced by an independent pricing
service using fair valuation. For more information on fair
valuation, please see Shareholder Guide How To
Buy Shares How Are Shares Priced?
Pursuant to the policy adopted by the Board of Trustees of the
Trust, Goldman Sachs has developed criteria that it uses to
identify trading activity that may be excessive. Goldman Sachs
reviews on a regular, periodic basis available information
relating to the trading activity in the Fund in order to assess
the likelihood that the Fund may be the target of excessive
trading. As part of its excessive trading surveillance process,
Goldman Sachs, on a periodic basis, examines transactions that
exceed certain monetary thresholds or numerical limits within a
period of time. Consistent with the standards described above,
if, in its judgment, Goldman Sachs detects excessive, short-term
trading, Goldman Sachs is authorized to reject or restrict a
purchase or exchange request and may further seek to close an
investors account with the Fund. Goldman Sachs may modify
its surveillance procedures and criteria from time to time
without prior notice regarding the detection of excessive
trading or to address specific circumstances. Goldman Sachs will
apply the criteria in a manner that, in Goldman Sachs
judgment, will be uniform.
Fund shares may be held through omnibus arrangements maintained
by financial intermediaries such as broker-dealers, investment
advisers and insurance companies. In addition, Fund shares may
be held in omnibus 401(k) plans, employee benefit plans,
Eligible Fee-Based Programs and other group accounts. Omnibus
accounts include multiple investors and such accounts typically
provide the Fund with a net purchase or redemption request on
any given day where the purchases and redemptions of Fund shares
by the investors are netted against one another. The identity of
individual investors whose purchase and redemption orders are
aggregated are ordinarily not tracked by the Fund on a regular
basis. A number of these intermediaries may not have the
capability or may not be willing to apply the Funds market
timing policies or any applicable redemption fee. While Goldman
Sachs may monitor share turnover at the omnibus account level,
the Funds ability to monitor and detect market timing by
shareholders or apply any applicable redemption fee in these
omnibus accounts may be limited in certain circumstances, and
certain of these intermediaries may charge the Fund a fee for
providing certain shareholder information requested as part of
the Funds surveillance process. The netting effect makes
it more difficult to identify, locate and eliminate market
timing activities. In addition, those investors who engage in
market timing and other excessive trading activities may employ
a variety of techniques to avoid detection.
51
There can be no assurance that the Fund and Goldman Sachs will
be able to identify all those who trade excessively or employ a
market timing strategy, and curtail their trading in every
instance. If necessary, the Trust may prohibit additional
purchases of Fund shares by a financial intermediary or by
certain of the financial intermediarys customers.
Financial intermediaries may also monitor their customers
trading activities in the Fund. The criteria used by financial
intermediaries to monitor for excessive trading may differ from
the criteria used by the Fund. If a financial intermediary fails
to cooperate in the implementation or enforcement of the
Trusts excessive trading policies, the Trust may take
certain actions including terminating the relationship.
52
Taxation
As with any investment, you should consider how your investment
in the Fund will be taxed. The tax information below is provided
as general information. More tax information is available in the
SAI. You should consult your tax adviser about the federal,
state, local or foreign tax consequences of your investment in
the Fund. Except as otherwise noted, the tax information
provided assumes that you are a U.S. citizen or resident.
Unless your investment is through an IRA or other tax-advantaged
account, you should consider the possible tax consequences of
Fund distributions and the sale of your Fund shares.
DISTRIBUTIONS
The Fund contemplates declaring as dividends each year all or
substantially all of its taxable income. Distributions you
receive from the Fund are generally subject to federal income
tax, and may also be subject to state or local taxes. This is
true whether you reinvest your distributions in additional Fund
shares or receive them in cash. For federal tax purposes, the
Funds distributions attributable to net investment income
and short-term capital gains are taxable to you as ordinary
income. Any long-term capital gains distributions are taxable as
long-term capital gains, no matter how long you have owned your
Fund shares.
Under current provisions of the Code, the maximum long-term
capital gain tax rate applicable to individuals, estates, and
trusts is 15%. A sunset provision provides that the 15%
long-term capital gain rate will increase to 20% and the
taxation of dividends of the long-term capital gain rate will
end after 2010. (The 15% maximum tax rate also applies to
certain qualifying dividend income, but Fund distributions will
not qualify for that favorable treatment and will also not
qualify for the corporate dividends received deduction because
the Fund will be earning interest income rather than dividend
income.)
The Funds transactions in derivatives (such as futures
contracts and swaps) will be subject to special tax rules, the
effect of which may be to accelerate income to the Fund, defer
losses to the Fund, cause adjustments in the holding periods of
the Funds securities and convert short-term capital losses
into long-term capital losses. These rules could therefore
affect the amount, timing and character of distributions to you.
The Funds use of derivatives may result in the Fund
realizing more short-term capital gains and ordinary income
subject to tax at ordinary income tax rates than it would if it
did not use derivatives.
53
Although distributions are generally treated as taxable to you
in the year they are paid, distributions declared in October,
November or December but paid in January are taxable as if they
were paid in December. The character and tax status of all
distributions will be available to shareholders after the close
of each calender year.
If you buy shares of the Fund before it makes a distribution,
the distribution will be taxable to you even though it may
actually be a return of a portion of your investment. This is
known as buying into a dividend.
The Fund may be subject to foreign withholding or other foreign
taxes on income or gain from certain foreign securities. In
general, the Fund may deduct these taxes in computing their
taxable income.
SALES
AND EXCHANGES
Your sale of Fund shares is a taxable transaction for federal
income tax purposes, and may also be subject to state and local
taxes. For tax purposes, the exchange of your Fund shares for
shares of a different Goldman Sachs Fund is the same as a sale.
When you sell your shares, you will generally recognize a
capital gain or loss in an amount equal to the difference
between your adjusted tax basis in the shares and the amount
received. Generally, this capital gain or loss will be long-term
or short-term depending on whether your holding period for the
shares exceeds one year, except that any loss realized on shares
held for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain
dividends that were received on the shares. Additionally, any
loss realized on a sale, exchange or redemption of shares of the
Fund may be disallowed under wash sale rules to the
extent the shares disposed of are replaced with other shares of
the Fund within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition
(such as pursuant to a dividend reinvestment in shares of the
Fund.) If disallowed, the loss will be reflected in an
adjustment to the basis of the shares acquired.
OTHER
INFORMATION
When you open your account, you should provide your Social
Security Number or Tax Identification Number on your Account
Application. By law, the Fund must withhold 28% (scheduled to
increase to 31% after 2010) of your taxable distributions and
any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct,
or if the IRS instructs the Fund to do so.
54
TAXATION
Non-U.S. investors are generally subject to
U.S. withholding tax and may be subject to U.S. estate tax.
However, withholding is generally not required on properly
designated distributions to
non-U.S.
investors of long-term capital gains. Distributions of net
investment income and short-term capital gains will generally be
subject to withholding when paid to
non-U.S.
investors. More information about U.S. taxation of
non-U.S.
investors is included in the SAI.
55
Appendix A
Additional Information on Portfolio
Risks, Securities and Techniques
A. General
Portfolio Risks
The Fund will be subject to the risks associated with fixed
income securities. These risks include interest rate risk,
credit/default risk and call/extension risk. In general,
interest rate risk involves the risk that when interest rates
decline, the market value of fixed income securities tends to
increase (although many mortgage-related securities will have
less potential than other debt securities for capital
appreciation during periods of declining rates). Conversely,
when interest rates increase, the market value of fixed income
securities tends to decline. Credit/default risk involves the
risk that an issuer or guarantor could default on its
obligations, and the Fund will not recover its investment. Call
risk and extension risk are normally present in adjustable rate
mortgage loans (ARMs), mortgage-backed securities
and asset-backed securities. For example, homeowners have the
option to prepay their mortgages. Therefore, the duration of a
security backed by home mortgages can either shorten (call risk)
or lengthen (extension risk). In general, if interest rates on
new mortgage loans fall sufficiently below the interest rates on
existing outstanding mortgage loans, the rate of prepayment
would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on existing
outstanding mortgage loans, the rate of prepayment would be
expected to decrease. In either case, a change in the prepayment
rate can result in losses to investors. The same would be true
of asset-backed securities, such as securities backed by car
loans.
The Investment Adviser will not consider the portfolio turnover
rate a limiting factor in making investment decisions for the
Fund. A high rate of portfolio turnover (100% or more) involves
correspondingly greater expenses which must be borne by the Fund
and its shareholders and is also likely to result in higher
short-term capital gains taxable to shareholders. The portfolio
turnover rate is calculated by dividing the lesser of the dollar
amount of sales or purchases of portfolio securities by the
average monthly value of the Funds portfolio securities,
excluding securities having a maturity at the date of purchase
of one year or less. See Financial Highlights in
Appendix B for a statement of the Funds historical
portfolio turnover rates.
The Fund has a target duration. The Funds duration
approximates its price sensitivity to changes in interest rates.
For example, suppose that interest rates in one day fall by one
percent which, in turn, causes yields on every bond in the
market to fall by the same amount. In this example, the price of
a bond with a
56
APPENDIX
A
duration of three years may be expected to rise approximately
three percent and the price of a bond with a five year duration
may be expected to rise approximately five percent. The converse
is also true. Suppose interest rates in one day rise by one
percent which, in turn, causes yields on every bond in the
market to rise by the same amount. In this second example, the
price of a bond with a duration of three years may be expected
to fall approximately three percent and the price of a bond with
a five year duration may be expected to fall approximately five
percent. The longer the duration of a bond, the more sensitive
the bonds price is to changes in interest rates. In
computing portfolio duration, the Fund will estimate the
duration of obligations that are subject to prepayment or
redemption by the issuer, taking into account the influence of
interest rates on prepayments and coupon flows. This method of
computing duration is known as option-adjusted
duration. The Investment Adviser may use futures contracts,
options on futures contracts and swaps to manage the Funds
target duration in accordance with its benchmark. The Fund will
not be limited as to its maximum weighted average portfolio
maturity or the maximum stated maturity with respect to
individual securities unless otherwise noted.
Maturity measures the time until final payment is due; it takes
no account of the pattern of a securitys cash flows over
time. In calculating maturity, the Fund may determine the
maturity of a variable or floating rate obligation according to
its interest rate reset date, or the date principal can be
recovered on demand, rather than the date of ultimate maturity.
Similarly, to the extent that a fixed income obligation has a
call, refunding or redemption provision, the date on which the
instrument is expected to be called, refunded or redeemed may be
considered to be its maturity date. There is no guarantee that
the expected call, refund or redemption will occur, and the
Funds average maturity may lengthen beyond the Investment
Advisers expectations should the expected call, refund or
redemption not occur.
The Investment Adviser may use derivative instruments, among
other things, to manage the duration of the Funds
investment portfolio in accordance with its target duration.
These derivative instruments include financial futures contracts
and swap transactions, as well as other types of derivatives,
and can be used to shorten and lengthen the duration of the
Fund. The Funds investments in derivative instruments,
including financial futures contracts and swaps, can be
significant. These transactions can result in sizeable realized
and unrealized capital gains and losses relative to the gains
and losses from the Funds investments in bonds and other
securities. Short-term and long-term realized capital gains
distributions paid by the Fund are taxable to its shareholders.
Interest rates, fixed income securities prices, the prices of
futures and other derivatives, and currency exchange rates can
be volatile, and a variance in the
57
degree of volatility or in the direction of the market from the
Investment Advisers expectations may produce significant
losses in the Funds investments in derivatives. In
addition, a perfect correlation between a derivatives position
and a fixed income security position is generally impossible to
achieve. As a result, the Investment Advisers use of
derivatives may not be effective in fulfilling the Investment
Advisers investment strategies and may contribute to
losses that would not have been incurred otherwise.
Financial futures contracts used by the Fund include interest
rate futures contracts including, among others, Eurodollar
futures contracts. Eurodollar futures contracts are U.S.
dollar-denominated futures contracts that are based on the
implied forward London Interbank Offered Rate
(LIBOR) of a three-month deposit. Further
information is included in this Prospectus regarding futures
contracts, swaps and other derivative instruments used by the
Fund, including information on the risks presented by these
instruments and other purposes for which they may be used by the
Fund.
As discussed below, the Fund may invest in credit default swaps,
which are derivative investments. When the Fund sells a credit
default swap (commonly known as selling protection), the Fund
may be required to pay the notional value of the
credit default swap on a specified security (or group of
securities) if the security defaults.
The following sections provide further information on certain
types of securities and investment techniques that may be used
by the Fund, including their associated risks. Additional
information is provided in the SAI, which is available upon
request. Among other things, the SAI describes certain
fundamental investment restrictions that cannot be changed
without shareholder approval. You should note, however, that all
investment objectives and all investment policies not
specifically designated as fundamental are non-fundamental, and
may be changed without shareholder approval. If there is a
change in the Funds investment objective, you should
consider whether the Fund remains an appropriate investment in
light of your then current financial position and needs.
B. Other
Portfolio Risks
Credit/Default Risks.
Debt securities
purchased by the Fund may include securities (including zero
coupon bonds) issued by the U.S. government (and its agencies,
instrumentalities and sponsored enterprises), foreign
governments, domestic and foreign corporations, banks and other
issuers. Some of these fixed income securities are described in
the next section below. Further information is provided in the
SAI.
58
APPENDIX
A
Debt securities rated BBB or higher by
Standard & Poors Rating Group
(Standard & Poors), or Baa3 or
higher by Moodys Investors Service, Inc.
(Moodys) or having a comparable rating by
another NRSRO are considered investment grade.
Securities rated BBB or Baa3 are considered medium-grade
obligations with speculative characteristics, and adverse
economic conditions or changing circumstances may weaken their
issuers capacity to pay interest and repay principal.
The Fund may invest in fixed income securities rated BB or Ba or
below (or comparable unrated securities) which are commonly
referred to as junk bonds. Junk bonds are considered
speculative and may be questionable as to principal and interest
payments.
In some cases, junk bonds may be highly speculative, have poor
prospects for reaching investment grade standing and be in
default. As a result, investment in such bonds will present
greater speculative risks than those associated with investment
in investment grade bonds. Also, to the extent that the rating
assigned to a security in the Funds portfolio is
downgraded by a rating organization, the market price and
liquidity of such security may be adversely affected.
Risks of Derivative Investments.
The Fund may
invest in derivative instruments including without limitation,
options, futures, options on futures, swaps, interest rate caps,
floors and collars, structured securities and forward contracts
and other derivatives relating to foreign currency transactions.
Investments in derivative instruments may be for both hedging
and nonhedging purposes (that is, to seek to increase total
return), although suitable derivative instruments may not always
be available to the Investment Adviser for these purposes.
Losses from investments in derivative instruments can result
from a lack of correlation between changes in the value of
derivative instruments and the portfolio assets (if any) being
hedged, the potential illiquidity of the markets for derivative
instruments, the failure of the counterparty to perform its
contractual obligations, or the risks arising from margin
requirements and related leverage factors associated with such
transactions. Losses may also arise if the Fund receives cash
collateral under the transactions and some or all of that
collateral is invested in the market. To the extent that cash
collateral is so invested, such collateral will be subject to
market depreciation or appreciation, and the Fund may be
responsible for any loss that might result from its investment
of the counterpartys cash collateral. The use of these
management techniques also involves the risk of loss if the
Investment Adviser is incorrect in its expectation of the timing
or level of fluctuations in securities prices, interest rates or
currency prices. Investments in derivative instruments may be
harder to value, subject to greater volatility and more likely
subject to changes in tax treatment than other investments. For
these reasons, the Investment Advisers attempts to hedge
portfolio
59
risks through the use of derivative instruments may not be
successful, and the Investment Adviser may choose not to hedge
certain portfolio risks. Investing for nonhedging purposes is
considered a speculative practice and presents even greater risk
of loss.
Derivative mortgage-backed securities (such as principal-only
(POs), interest-only (IOs) or inverse
floating rate securities) are particularly exposed to call and
extension risks. Small changes in mortgage prepayments can
significantly impact the cash flow and the market value of these
securities. In general, the risk of faster than anticipated
prepayments adversely affects IOs, super floaters and premium
priced mortgage-backed securities. The risk of slower than
anticipated prepayments generally adversely affects POs,
floating-rate securities subject to interest rate caps, support
tranches and discount priced mortgage-backed securities. In
addition, particular derivative securities may be leveraged such
that their exposure (
i.e.
, price sensitivity) to interest
rate and/or prepayment risk is magnified.
Some floating-rate derivative debt securities can present more
complex types of derivative and interest rate risks. For
example, range floaters are subject to the risk that the coupon
will be reduced below market rates if a designated interest rate
floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the
event of an unfavorable change in the spread between two
designated interest rates.
Risks of Foreign Investments.
The Fund may
make foreign investments. Foreign investments involve special
risks that are not typically associated with U.S. dollar
denominated or quoted securities of U.S. issuers. Foreign
investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to
such investments and changes in exchange control regulations
(
e.g.
, currency blockage). A decline in the exchange rate
of the currency (
i.e.
, weakening of the currency against
the U.S. dollar) in which a portfolio security is quoted or
denominated relative to the U.S. dollar would reduce the value
of the portfolio security. In addition, if the currency in which
the Fund receives dividends, interest or other payments declines
in value against the U.S. dollar before such income is
distributed as dividends to shareholders or converted to U.S.
dollars, the Fund may have to sell portfolio securities to
obtain sufficient cash to pay such dividends.
Brokerage commissions, custodial services and other costs
relating to investment in international securities markets
generally are more expensive than in the United States. In
addition, clearance and settlement procedures may be different
in foreign countries and, in certain markets, such procedures
have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such
transactions.
60
APPENDIX
A
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those
applicable to U.S. issuers. There may be less publicly available
information about a foreign issuer than a U.S. issuer. In
addition, there is generally less government regulation of
foreign markets, companies and securities dealers than in the
United States, and the legal remedies for investors may be more
limited than the remedies available in the United States.
Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign
issuers are less liquid and more volatile than securities of
comparable domestic issuers. Furthermore, with respect to
certain foreign countries, there is a possibility of
nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on dividend or interest
payments (or, in some cases, capital gains distributions),
limitations on the removal of funds or other assets from such
countries, and risks of political or social instability or
diplomatic developments which could adversely affect investments
in those countries.
Concentration of the Funds assets in one or a few
countries and currencies will subject the Fund to greater risks
than if the Funds assets were not geographically
concentrated.
Risks of Sovereign Debt.
Investment in sovereign
debt obligations by the Fund involves risks not present in debt
obligations of corporate issuers. The issuer of the debt or the
governmental authorities that control the repayment of the debt
may be unable or unwilling to repay principal or interest when
due in accordance with the terms of such debt, and the Fund may
have limited recourse to compel payment in the event of a
default. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt, and in turn the
Funds NAV, to a greater extent than the volatility
inherent in debt obligations of U.S. issuers.
A sovereign debtors willingness or ability to repay
principal and pay interest in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of
its foreign currency reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the
sovereign debtors policy toward international lenders, and
the political constraints to which a sovereign debtor may be
subject.
Risks of Emerging Countries.
The Fund may
invest in securities of issuers located in emerging countries.
The risks of foreign investment are heightened when the issuer
is located in an emerging country. Emerging countries are
generally located in Asia, Africa, the Middle East, Eastern
Europe and Central and South America. The Funds purchase
and sale of portfolio securities in certain emerging countries
may be constrained by limitations relating to daily changes in
the prices of listed
61
securities, periodic trading or settlement volume and/or
limitations on aggregate holdings of foreign investors. Such
limitations may be computed based on the aggregate trading
volume by or holdings of the Fund, the Investment Adviser, its
affiliates and their respective clients and other service
providers. The Fund may not be able to sell securities in
circumstances where price, trading or settlement volume
limitations have been reached.
Foreign investment in the securities markets of certain emerging
countries is restricted or controlled to varying degrees which
may limit investment in such countries or increase the
administrative costs of such investments. For example, certain
Asian countries require governmental approval prior to
investments by foreign persons or limit investment by foreign
persons to only a specified percentage of an issuers
outstanding securities or a specific class of securities which
may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. In
addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to
national interests. Such restrictions may affect the market
price, liquidity and rights of securities that may be purchased
by the Fund. The repatriation of both investment income and
capital from certain emerging countries is subject to
restrictions such as the need for governmental consents. In
situations where a country restricts direct investment in
securities (which may occur in certain Asian and other
countries), the Fund may invest in such countries through other
investment funds in such countries.
Many emerging countries have recently experienced currency
devaluations and substantial (and, in some cases, extremely
high) rates of inflation. Other emerging countries have
experienced economic recessions. These circumstances have had a
negative effect on the economies and securities markets of those
emerging countries. Economies in emerging countries generally
are dependent heavily upon commodity prices and international
trade and, accordingly, have been and may continue to be
affected adversely by the economies of their trading partners,
trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade.
Many emerging countries are subject to a substantial degree of
economic, political and social instability. Governments of some
emerging countries are authoritarian in nature or have been
installed or removed as a result of military coups, while
governments in other emerging countries have periodically used
force to suppress civil dissent. Disparities of wealth, the pace
and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social
unrest, violence and/or labor unrest in some emerging countries.
Unanticipated political or social developments may result in
sudden and significant investment
62
APPENDIX
A
losses. Investing in emerging countries involves greater risk of
loss due to expropriation, nationalization, confiscation of
assets and property or the imposition of restrictions on foreign
investments and on repatriation of capital invested. As an
example, in the past some Eastern European governments have
expropriated substantial amounts of private property, and many
claims of the property owners have never been fully settled.
There is no assurance that similar expropriations will not recur
in Eastern European or other countries.
The Funds investment in emerging countries may also be
subject to withholding or other taxes, which may be significant
and may reduce the return to the Fund from an investment in
issuers in such countries.
Settlement procedures in emerging countries are frequently less
developed and reliable than those in the United States and may
involve the Funds delivery of securities before receipt of
payment for their sale. In addition, significant delays may
occur in certain markets in registering the transfer of
securities. Settlement or registration problems may make it more
difficult for the Fund to value its portfolio securities and
could cause the Fund to miss attractive investment
opportunities, to have a portion of its assets uninvested or to
incur losses due to the failure of a counterparty to pay for
securities the Fund has delivered or the Funds inability
to complete its contractual obligations because of theft or
other reasons.
The creditworthiness of the local securities firms used by the
Fund in emerging countries may not be as sound as the
creditworthiness of firms used in more developed countries. As a
result, the Fund may be subject to a greater risk of loss if a
securities firm defaults in the performance of its
responsibilities.
The small size and inexperience of the securities markets in
certain emerging countries and the limited volume of trading in
securities in those countries may make the Funds
investments in such countries less liquid and more volatile than
investments in countries with more developed securities markets
(such as the United States, Japan and most Western European
countries). The Funds investments in emerging countries
are subject to the risk that the liquidity of a particular
investment, or investments generally, in such countries will
shrink or disappear suddenly and without warning as a result of
adverse economic, market or political conditions or adverse
investor perceptions, whether or not accurate. Because of the
lack of sufficient market liquidity, the Fund may incur losses
because it will be required to effect sales at a disadvantageous
time and then only at a substantial drop in price. Investments
in emerging countries may be more difficult to value precisely
because of the characteristics discussed above and lower trading
volumes.
The Funds use of foreign currency management techniques in
emerging countries may be limited. Due to the limited market for
these instruments in emerging
63
countries, all or a significant portion of the Funds
currency exposure in emerging countries may not be covered by
such instruments.
Foreign Custody Risk.
Because the Fund
invests in foreign securities, it may hold such securities and
cash with foreign banks, agents, and securities depositories
appointed by the Funds custodian (each a Foreign
Custodian). Some Foreign Custodians may be recently
organized or new to the foreign custody business. In some
countries, Foreign Custodians may be subject to little or no
regulatory oversight over or independent evaluation of their
operations. Further, the laws of certain countries may place
limitations on the Funds ability to recover its assets if
a Foreign Custodian enters bankruptcy. Investments in emerging
markets may be subject to even greater custody risks than
investments in more developed markets. Custody services in
emerging market countries are very often undeveloped and may be
considerably less well regulated than in more developed
countries, and thus may not afford the same level of investor
protection as would apply in developed countries.
Risks of Illiquid Securities.
The Fund may
invest up to 15% of its net assets in illiquid securities which
cannot be disposed of in seven days in the ordinary course of
business at fair value. Illiquid securities include:
|
|
|
|
n
|
Both domestic and foreign
securities that are not readily marketable
|
|
n
|
Certain municipal leases and
participation interests
|
|
n
|
Certain stripped mortgage-backed
securities
|
|
n
|
Repurchase agreements and time
deposits with a notice or demand period of more than seven days
|
|
n
|
Certain over-the-counter options
|
|
n
|
Certain structured securities and
swap transactions
|
|
n
|
Certain restricted securities,
unless it is determined, based upon a review of the trading
markets for a specific restricted security, that such restricted
security is liquid because it is so-called
4(2) commercial paper or is otherwise eligible
for resale pursuant to Rule 144A under the Securities Act
of 1933 (144A Securities).
|
Investing in 144A Securities may decrease the liquidity of the
Funds portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing these
restricted securities. The purchase price and subsequent
valuation of restricted and illiquid securities normally reflect
a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Securities purchased by the Fund, particularly debt securities
and over-the-counter traded securities, that are liquid at the
time of purchase may subsequently become
64
APPENDIX
A
illiquid due to events relating to the issuer of the securities,
markets events, economic conditions or investor perceptions.
Domestic and foreign markets are becoming more and more complex
and interrelated, so that events in one sector of the market or
the economy, or in one geographical region, can reverberate and
have negative consequences for other market, economic or
regional sectors in a manner that may not be reasonably
foreseen. With respect to over-the-counter traded securities,
the continued viability of any over-the-counter secondary market
depends on the continued willingness of dealers and other
participants to purchase the securities.
If one or more instruments in the Funds portfolio become
illiquid, the Fund may exceed its 15% limitation in illiquid
instruments. In the event that changes in the portfolio or other
external events cause the investments in illiquid instruments to
exceed 15% of the Funds net assets, the Fund must take
steps to bring the aggregate amount of illiquid instruments back
within the prescribed limitations as soon as reasonably
practicable. This requirement would not force the Fund to
liquidate any portfolio instrument where the Fund would suffer a
loss on the sale of that instrument.
In cases where no clear indication of the value of the
Funds portfolio instruments is available, the portfolio
instruments will be valued at their fair value according to the
valuation procedures approved by the Board of Trustees. These
cases include, among others, situations where the secondary
markets on which a security has previously been traded are no
longer viable for lack of liquidity. For more information on
fair valuation, please see Shareholder GuideHow to
Buy SharesHow Are Shares Priced?
Risks of Structured Investment
Vehicles.
Structured Investment Vehicles
(SIVs) are legal entities that are sponsored by
banks, broker-dealers or other financial firms specifically
created for the purpose of issuing particular securities or
instruments. SIVs are often leveraged and securities issued by
SIVs may have differing credit preferences. Investments in SIVs
present counterparty risks, although they may be subject to a
guarantee or other financial support by the sponsoring entity.
Investments in SIVs may be more volatile, less liquid and more
difficult to price accurately than other types of investments.
Temporary Investment Risks.
The Fund may, for
temporary defensive purposes, invest any portion of its total
assets in:
|
|
|
|
n
|
U.S. Government securities
|
|
|
|
|
n
|
Commercial paper rated at least
A-2
by
Standard & Poors,
P-2
by
Moodys or have a comparable rating by another NRSRO
|
|
|
|
|
n
|
Certificates of deposit
|
65
|
|
|
|
n
|
Non-convertible preferred stocks
and non-convertible corporate bonds with a remaining maturity of
less than one year
|
|
|
|
|
n
|
Other investment companies
|
|
|
|
|
n
|
Cash
|
|
n
|
Cash equivalents
|
When the Funds assets are invested in such instruments,
the Fund may not be achieving its investment objective.
Risks of Large Shareholder
Redemptions.
Certain funds, accounts, individuals
or Goldman Sachs affiliates may from time to time own
(beneficially or of record) or control a significant percentage
of the Funds shares. Redemptions by these funds, accounts
or individuals of their holdings in the Fund may impact the
Funds liquidity and NAV. These redemptions may also force
the Fund to sell securities, which may negatively impact the
Funds brokerage and tax costs.
Risks of Short Selling.
The Fund expects to
engage in short selling. In these transactions, the Fund sells a
security it does not own in anticipation of a decline in the
market value of the security, then must borrow the security to
make delivery to the buyer. The Fund is 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, which
may result in a loss or gain, respectively. Unlike purchasing a
stock, where potential losses are limited to the purchase price
and there is no upside limit on potential gain, short sales
involve no cap on maximum losses, while gains are limited to the
price of the stock at the time of the short sale.
The Fund may, during the term of any short sale, withdraw the
cash proceeds of such short sale and use these cash proceeds to
purchase additional securities or for any other Fund purposes.
Because cash proceeds are Fund assets which are typically used
to satisfy the collateral requirements for the short sale, the
reinvestment of these cash proceeds may require the Fund to post
as collateral other securities that it owns. If the Fund
reinvests the cash proceeds, the Fund might be required to post
an amount greater than its net assets (but less than its total
assets) as collateral. For these or other reasons, the Fund
might be required to liquidate long and short positions at times
that may be disadvantageous to the Fund.
The Fund also may make short sales against the box, in which the
Fund enters into a short sale of a security which it owns or has
the right to obtain at no additional cost.
66
APPENDIX
A
C. Portfolio
Securities and Techniques
This section provides further information on certain types of
securities and investment techniques that may be used by the
Fund, including their associated risks.
The Fund may purchase other types of securities or instruments
similar to those described in this section if otherwise
consistent with the Funds investment objective and
policies. Further information is provided in the SAI, which is
available upon request.
U.S. Government Securities.
The Fund may
invest in U.S. Government securities. U.S. Government securities
include U.S. Treasury obligations and obligations issued or
guaranteed by U.S. government agencies, instrumentalities or
sponsored enterprises. U.S. Government securities may be
supported by (i) the full faith and credit of the U.S.
Treasury; (ii) the right of the issuer to borrow from the
U.S. Treasury; (iii) the discretionary authority of the
U.S. government to purchase certain obligations of the issuer;
or (iv) only the credit of the issuer. U.S. Government
Securities also include Treasury receipts, zero coupon bonds and
other stripped U.S. Government securities where the interest and
principal components are traded independently.
U.S. Government securities may also include Treasury
inflation-protected securities whose principal value is
periodically adjusted according to the rate of inflation.
U.S. Treasury obligations include, among other things, the
separately traded principal and interest components of
securities guaranteed or issued by the U.S. Treasury if
such components are traded independently under the Separate
Trading of Registered Interest and Principal of Securities
program (STRIPS).
U.S. Government securities are deemed to include
(a) securities for which the payment of principal and
interest is backed by an irrevocable letter of credit issued by
the U.S. government, its agencies, authorities or
instrumentalities; and (b) participations in loans made to
foreign governments or their agencies that are so guaranteed.
Certain of these participations may be regarded as illiquid.
U.S. Government securities also include zero coupon bonds.
U.S. Government securities have historically involved
little risk of loss of principal if held to maturity. However,
no assurance can be given that the U.S. government will
provide financial support to U.S. government agencies,
authorities, instrumentalities or sponsored enterprises if it is
not obligated to do so by law.
Custodial Receipts and Trust
Certificates.
The Fund may invest in custodial
receipts and trust certificates representing interests in
securities held by a custodian or trustee. The securities so
held may include U.S. Government securities, municipal
67
securities or other types of securities in which the Fund may
invest. The custodial receipts or trust certificates may
evidence ownership of future interest payments, principal
payments or both on the underlying securities, or, in some
cases, the payment obligation of a third party that has entered
into an interest rate swap or other arrangement with the
custodian or trustee. For certain securities laws purposes,
custodial receipts and trust certificates may not be considered
obligations of the U.S. government or other issuer of the
securities held by the custodian or trustee. If for tax purposes
the Fund is not considered to be the owner of the underlying
securities held in the custodial or trust account, the Fund may
suffer adverse tax consequences. As a holder of custodial
receipts and trust certificates, the Fund will bear its
proportionate share of the fees and expenses charged to the
custodial account or trust. The Fund may also invest in
separately issued interests in custodial receipts and trust
certificates.
Mortgage-Backed Securities.
The Fund may
invest in mortgage-backed securities. Mortgage-backed securities
represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by
real property. Mortgage-backed securities can be backed by
either fixed rate mortgage loans or adjustable rate mortgage
loans, and may be issued by either a governmental or
non-governmental entity. The value of some mortgage-backed
securities may be particularly sensitive to changes in
prevailing interest rates. The value of these securities may
also fluctuate in response to the markets perception of
the creditworthiness of the issuers. Early repayment of
principal on mortgage- or asset-backed securities may expose the
Fund to the risk of earning a lower rate of return upon
reinvestment of principal.
The Fund may invest in privately-issued mortgage pass-through
securities that represent interests in pools of mortgage loans
that are issued by trusts formed by originators of and
institutional investors in mortgage loans (or represent
interests in custodial arrangements administered by such
institutions). These originators and institutions include
commercial banks, savings and loans associations, credit unions,
savings banks, mortgage bankers, insurance companies, investment
banks or special purpose subsidiaries of the foregoing. The
pools underlying privately-issued mortgage pass-through
securities consist of mortgage loans secured by mortgages or
deeds of trust creating a first lien on commercial, residential,
residential multi-family and mixed residential/commercial
properties. These mortgage-backed securities typically do not
have the same credit standing as U.S. government guaranteed
mortgage-backed securities.
Privately-issued mortgage pass-through securities generally
offer a higher yield than similar securities issued by a
government entity because of the absence of any direct or
indirect government or agency payment guarantees. However,
timely payment of
68
APPENDIX
A
interest and principal on mortgage loans in these pools may be
supported by various other forms of insurance or guarantees,
including individual loan, pool and hazard insurance,
subordination and letters of credit. Such insurance and
guarantees may be issued by private insurers, banks and mortgage
poolers. There is no assurance that private guarantors or
insurers, if any, will meet their obligations. Mortgage-backed
securities without insurance or guarantees may also be purchased
by the Fund if they have the required rating from an NRSRO. Some
mortgage-backed securities issued by private organizations may
not be readily marketable, may be more difficult to value
accurately and may be more volatile than similar securities
issued by a government entity.
Mortgage-backed securities may include multiple class
securities, including collateralized mortgage obligations
(CMOs) and Real Estate Mortgage Investment Conduit
(REMIC) pass-through or participation certificates.
A REMIC is a CMO that qualifies for special tax treatment under
the Code and invests in certain mortgages principally secured by
interests in real property and other permitted investments. CMOs
provide an investor with a specified interest in the cash flow
from a pool of underlying mortgages or of other mortgage-backed
securities. CMOs are issued in multiple classes each with a
specified fixed or floating interest rate and a final scheduled
distribution date. In many cases, payments of principal are
applied to the CMO classes in the order of their respective
stated maturities, so that no principal payments will be made on
a CMO class until all other classes having an earlier stated
maturity date are paid in full.
Sometimes, however, CMO classes are parallel pay,
i.e.
, payments of principal are made to two or more
classes concurrently. In some cases, CMOs may have the
characteristics of a stripped mortgage-backed security whose
price can be highly volatile. CMOs may exhibit more or less
price volatility and interest rate risk than other types of
mortgage-backed securities, and under certain interest rate and
payment scenarios, the Fund may fail to recoup fully its
investment in certain of these securities regardless of their
credit quality.
To the extent the Fund concentrates its investments in pools of
mortgage-backed securities sponsored by the same sponsor or
serviced by the same servicer, it may be subject to additional
risks. Servicers of mortgage-related pools collect payments on
the underlying mortgage assets for pass-through to the pool on a
periodic basis. Upon insolvency of the servicer, the pool may be
at risk with respect to collections received by the servicer but
not yet delivered to the pool.
Mortgaged-backed securities also include stripped
mortgage-backed securities (SMBS), which are
derivative multiple class mortgage-backed securities. SMBS are
usually structured with two different classes: one that receives
substantially all of the interest payments and the other that
receives substantially all of the principal
69
payments from a pool of mortgage loans. The market value of SMBS
consisting entirely of principal payments generally is unusually
volatile in response to changes in interest rates. The yields on
SMBS that receive all or most of the interest from mortgage
loans are generally higher than prevailing market yields on
other mortgage-backed securities because their cash flow
patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped. Throughout 2008,
the market for mortgage-backed securities began experiencing
substantially, often dramatically, lower valuations and greatly
reduced liquidity. Markets for other asset-backed securities
have also been affected. These instruments are increasingly
subject to liquidity constraints, price volatility, credit
downgrades and unexpected increases in default rates and,
therefore, may be more difficult to value and more difficult to
dispose of than previously. These events may have an adverse
effect on the Fund to the extent it invests in mortgage-backed
or other fixed income securities or instruments affected by the
volatility in the fixed income markets.
Asset-Backed Securities.
The Fund may invest
in asset-backed securities. Asset-backed securities are
securities whose principal and interest payments are
collateralized by pools of assets such as auto loans, credit
card receivables, leases, installment contracts and personal
property. Asset-backed securities may also include home equity
line of credit loans and other second-lien mortgages.
Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the
underlying loans. During periods of declining interest rates,
prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, the Funds ability to
maintain positions in such securities will be affected by
reductions in the principal amount of such securities resulting
from prepayments, and its ability to reinvest the returns of
principal at comparable yields is subject to generally
prevailing interest rates at that time. Asset-backed securities
present credit risks that are not presented by mortgage-backed
securities. This is because asset-backed securities generally do
not have the benefit of a security interest in collateral that
is comparable to mortgage assets. Some asset-backed securities
have only a subordinated claim or security interest in
collateral. If the issuer of an asset-backed security defaults
on its payment obligations, there is the possibility that, in
some cases, the Fund will be unable to possess and sell the
underlying collateral and that the Funds recoveries on
repossessed collateral may not be available to support payments
on the securities. In the event of a default, the Fund may
suffer a loss if it cannot sell collateral quickly and receive
the amount it is owed. The value of some asset-backed securities
may be particularly sensitive to changes in the prevailing
interest rates. There is no guarantee that private guarantors or
insurers of an asset-backed security, if any, will meet their
obligations. Asset-
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APPENDIX
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backed securities may also be subject to increased volatility
and may become illiquid and more difficult to value even when
there is no default or threat of default due to the
markets perception of the creditworthiness of the issuers
and market conditions impacting asset-backed securities more
generally.
Municipal Securities.
The Fund may invest in
securities and instruments issued by state and local government
issuers. Municipal securities in which the Fund may invest
consist of bonds, notes, commercial paper and other instruments
(including participation interests in such securities) issued by
or on behalf of the states, territories and possessions of the
United States (including the District of Columbia) and their
political subdivisions, agencies or instrumentalities. Such
securities may pay fixed, variable or floating rates of interest.
Municipal securities include both general and
revenue bonds and may be issued to obtain funds for
various purposes. General obligations are secured by the
issuers pledge of its full faith, credit and taxing power.
Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities.
Municipal securities are often issued to obtain funds for
various public purposes, including the construction of a wide
range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and
sewer works. Other purposes for which municipal securities may
be issued include refunding outstanding obligations, obtaining
funds for general operating expenses, and obtaining funds to
lend to other public institutions and facilities. Municipal
securities in which the Fund may invest include private activity
bonds, pre-refunded municipal securities and auction rate
securities. Dividends paid by the Fund based on investments in
municipal securities will be taxable.
The obligations of the issuer to pay the principal of and
interest on a municipal security are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Act,
and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or
interest or imposing other constraints upon the enforcement of
such obligations. There is also the possibility that, as a
result of litigation or other conditions, the power or ability
of the issuer to pay when due the principal of or interest on a
municipal security may be materially affected.
In addition, municipal securities include municipal leases,
certificates of participation and moral obligation
bonds. A municipal lease is an obligation issued by a state or
local government to acquire equipment or facilities.
Certificates of participation represent interests in municipal
leases or other instruments, such as installment purchase
agreements. Moral obligation bonds are supported by a moral
commitment but not a legal obligation of a state or local
government. Municipal
71
leases, certificates of participation and moral obligation bonds
frequently involve special risks not normally associated with
general obligation or revenue bonds. In particular, these
instruments permit governmental issuers to acquire property and
equipment without meeting constitutional and statutory
requirements for the issuance of debt. If, however, the
governmental issuer does not periodically appropriate money to
enable it to meet its payment obligations under these
instruments, it cannot be legally compelled to do so. If a
default occurs, it is likely that the Fund would be unable to
obtain another acceptable source of payment. Some municipal
leases, certificates of participation and moral obligation bonds
may be illiquid.
Municipal securities may also be in the form of a tender option
bond, which is a municipal security (generally held pursuant to
a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically
issued with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, which grants the
security holders the option, at periodic intervals, to tender
their securities to the institution. After payment of a fee to
the financial institution that provides this option, the
security holder effectively holds a demand obligation that bears
interest at the prevailing short-term, tax-exempt rate. An
institution may not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrading in the
credit rating assigned to the issuer of the bond. The tender
option will be taken into account in determining the maturity of
the tender option bonds and the Funds duration. Certain
tender option bonds may be illiquid.
Municipal securities may be backed by letters of credit or other
forms of credit enhancement issued by domestic or foreign banks
or by other financial institutions. The deterioration of the
credit quality of these banks and financial institutions could,
therefore, cause a loss to the Fund that invests in such
Municipal Securities. Letters of credit and other obligations of
foreign banks and financial institutions may involve risks in
addition to those of domestic obligations because of less
publicly available financial and other information, less
securities regulation, potential imposition of foreign
withholding and other taxes, war, expropriation or other adverse
governmental actions. Foreign banks and their foreign branches
are not regulated by U.S. banking authorities, and are generally
not bound by the accounting, auditing and financial reporting
standards applicable to U.S. banks.
The Fund may invest 25% or more of the value of its total assets
in municipal securities which are related in such a way that an
economic, business or political development or change affecting
one municipal security would also affect the other municipal
security. For example, the Fund may invest all of its assets in
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APPENDIX
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(a) municipal securities the interest on which is paid
solely from revenues from similar projects such as hospitals,
electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies or
life care facilities; (b) municipal securities whose
issuers are in the same state; or (c) industrial
development obligations (except where the non-governmental
entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry). The
Funds investments in these municipal securities will
subject the Fund, to a greater extent to the risks of adverse
economic, business or political developments affecting the
particular state, industry or other area of investment.
Brady Bonds and Similar Instruments.
The Fund
may invest in debt obligations commonly referred to as
Brady Bonds. Brady Bonds are created through the
exchange of existing commercial bank loans to foreign borrowers
for new obligations in connection with debt restructurings under
a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the Brady Plan).
Brady Bonds involve various risk factors including the history
of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be
no assurance that Brady Bonds in which the Fund may invest will
not be subject to restructuring arrangements or to requests for
new credit, which may cause the Fund to suffer a loss of
interest or principal on its holdings.
In addition, the Fund may invest in other interests issued by
entities organized and operated for the purpose of restructuring
the investment characteristics of instruments issued by emerging
country issuers. These types of restructuring involve the
deposit with or purchase by an entity of specific instruments
and the issuance by that entity of one or more classes of
securities backed by, or representing interests in, the
underlying instruments. Certain issuers of such structured
securities may be deemed to be investment companies
as defined in the Investment Company Act. As a result, the
Funds investment in such securities may be limited by
certain investment restrictions contained in the Investment
Company Act.
Corporate Debt Obligations; Trust Preferred Securities;
Convertible Securities.
The Fund may invest in
corporate debt obligations, trust preferred securities and
convertible securities. Corporate debt obligations include
bonds, notes, debentures, commercial paper and other obligations
of corporations to pay interest and repay principal. A trust
preferred security is a long dated bond (for example,
30 years) with preferred features. The preferred features
are that payment of interest can be deferred for a specified
period without initiating a default event. The securities are
generally senior in claim to standard preferred stock but junior
to other bondholders.
73
The Fund may also invest in other short-term obligations issued
or guaranteed by U.S. corporations, non-U.S. corporations or
other entities.
Convertible securities are preferred stock or debt obligations
that are convertible into common stock. Convertible securities
generally offer lower interest or dividend yields than
non-convertible securities of similar quality. Convertible
securities have both equity and fixed income risk
characteristics. Like all fixed income securities, the value of
convertible securities is susceptible to the risk of market
losses attributable to changes in interest rates. Generally, the
market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest
rates decline. However, when the market price of the common
stock underlying a convertible security exceeds the conversion
price of the convertible security, the convertible security
tends to reflect the market price of the underlying common
stock. As the market price of the underlying common stock
declines, the convertible security, like a fixed income
security, tends to trade increasingly on a yield basis, and thus
may not decline in price to the same extent as the underlying
common stock.
Bank Obligations.
The Fund may invest in
obligations issued or guaranteed by U.S. or foreign banks. Bank
obligations, including without limitation, time deposits,
bankers acceptances and certificates of deposit, may be
general obligations of the parent bank or may be limited to the
issuing branch by the terms of the specific obligations or by
government regulations. Banks are subject to extensive but
different governmental regulations which may limit both the
amount and types of loans which may be made and interest rates
which may be charged. In addition, the profitability of the
banking industry is largely dependent upon the availability and
cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from
possible financial difficulties of borrowers play an important
part in the operation of this industry.
Foreign Currency Transactions.
The Fund may,
to the extent consistent with its investment policies, purchase
or sell foreign currencies on a cash basis or through forward
contracts. A forward contract involves an obligation to purchase
or sell a specific currency at a future date at a price set at
the time of the contract.
The Fund may engage in foreign currency transactions for hedging
purposes and to seek to protect against anticipated changes in
future foreign currency exchange rates. In addition, the Fund
may enter into foreign currency transactions to seek a closer
correlation between the Funds overall currency exposures
and the currency exposures of the Funds performance
benchmark. The Fund may also enter into such
74
APPENDIX
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transactions to seek to increase total return, which is
considered a speculative practice.
The Fund may also engage in cross-hedging by using forward
contracts in a currency different from that in which the hedged
security is denominated or quoted. The Fund may hold foreign
currency received in connection with investments in foreign
securities when, in the judgment of the Investment Adviser, it
would be beneficial to convert such currency into U.S. dollars
at a later date (
e.g.
, the Investment Adviser may
anticipate the foreign currency to appreciate against the U.S.
dollar).
Currency exchange rates may fluctuate significantly over short
periods of time, causing, along with other factors, the
Funds NAV to fluctuate (when the Funds NAV
fluctuates, the value of your shares may go up or down).
Currency exchange rates also can be affected unpredictably by
the intervention of U.S. or foreign governments or central
banks, or the failure to intervene, or by currency controls or
political developments in the United States or abroad.
The market in forward foreign currency exchange contracts,
currency swaps and other privately negotiated currency
instruments offers less protection against defaults by the other
party to such instruments than is available for currency
instruments traded on an exchange. Such contracts are subject to
the risk that the counterparty to the contract will default on
its obligations. Since these contracts are not guaranteed by an
exchange or clearinghouse, a default on a contract would deprive
the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or could force the Fund to cover
its purchase or sale commitments, if any, at the current market
price.
As an investment company registered with the SEC, the Fund must
set aside (often referred to as asset
segregation) liquid assets, or engage in other appropriate
measures to cover open positions with respect to its
transactions in forward currency contracts.
Structured Securities and Inverse
Floaters.
The Fund may invest in structured
securities. Structured securities are securities whose value is
determined by reference to changes in the value of specific
currencies, securities, interest rates, commodities, indices or
other financial indicators (the Reference) or the
relative change in two or more References. Investments in
structured securities may provide exposure to certain securities
or markets in situations where regulatory or other restrictions
prevent direct investments in such issuers or markets.
The interest rate or the principal amount payable upon maturity
or redemption may be increased or decreased depending upon
changes in the applicable Reference.
75
Structured securities may be positively or negatively indexed,
so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the
value of the security at maturity may be a multiple of changes
in the value of the Reference. Consequently, structured
securities may present a greater degree of market risk than many
types of securities and may be more volatile, less liquid and
more difficult to price accurately than less complex securities.
Structured securities are also subject to the risk that the
issuer of the structured securities may fail to perform its
contractual obligations. Certain issuers of structured products
may be deemed to be investment companies as defined in the
Investment Company Act. As a result, the Funds investments
in structured securities may be subject to the limits applicable
to investments in other investment companies.
Structured securities may also include credit linked notes.
Credit linked notes are securities with embedded credit default
swaps. An investor holding a credit linked note generally
receives a fixed or floating coupon and the notes par
value upon maturity, unless the referred credit defaults or
declares bankruptcy, in which case the investor receives the
amount recovered. In effect, investors holding credit linked
notes receive a higher yield in exchange for assuming the risk
of a specified credit event.
Structured securities may also include inverse floating rate
debt securities (inverse floaters). The interest
rate on inverse floaters resets in the opposite direction from
the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to
the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse
floater, the greater the volatility of its market value.
Floating and Variable Rate Obligations.
The
Fund may purchase floating and variable rate obligations. The
value of these obligations is generally more stable than that of
a fixed rate obligation in response to changes in interest rate
levels. The issuers or financial intermediaries providing demand
features may support their ability to purchase the obligations
by obtaining credit with liquidity supports. These may include
lines of credit, which are conditional commitments to lend, and
letters of credit, which will ordinarily be irrevocable both of
which may be issued by domestic banks or foreign banks. The Fund
may purchase variable or floating rate obligations from the
issuers or may purchase certificates of participation, a type of
floating or variable rate obligation, which are interests in a
pool of debt obligations held by a bank or other financial
institutions.
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APPENDIX
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Zero Coupon, Deferred Interest, Pay-In-Kind and Capital
Appreciation Bonds.
The Fund may invest in zero
coupon bonds, deferred interest, pay-in-kind and capital
appreciation bonds. These bonds are issued at a discount from
their face value because interest payments are typically
postponed until maturity. Pay-in-kind securities are securities
that have interest payable by the delivery of additional
securities. The market prices of these securities generally are
more volatile than the market prices of interest-bearing
securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities
having similar maturities and credit quality.
Mortgage Dollar Rolls.
The Fund may enter
into mortgage dollar rolls. A mortgage dollar roll involves the
sale by the Fund of securities for delivery in the current
month. The Fund simultaneously contracts with the same
counterparty to repurchase substantially similar (same type,
coupon and maturity) but not identical securities on a specified
future date. During the roll period, the Fund loses the right to
receive principal and interest paid on the securities sold.
However, the Fund benefits to the extent of any difference
between (a) the price received for the securities sold and
(b) the lower forward price for the future purchase and/or
fee income plus the interest earned on the cash proceeds of the
securities sold. Unless the benefits of a mortgage dollar roll
exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the
securities sold as part of the roll, the use of this technique
will diminish the Funds performance.
Successful use of mortgage dollar rolls depends upon the
Investment Advisers ability to predict correctly interest
rates and mortgage prepayments. If the Investment Adviser is
incorrect in its prediction, the Fund may experience a loss. The
Fund does not currently intend to enter into mortgage dollar
rolls for financing and do not treat them as borrowings.
Options on Securities, Securities Indices and Foreign
Currencies.
A put option gives the purchaser of the
option the right to sell, and the writer (seller) of the option
the obligation to buy, the underlying instrument during the
option period. A call option gives the purchaser of the option
the right to buy, and the writer (seller) of the option the
obligation to sell, the underlying instrument during the option
period. The Fund may write (sell) covered call and put options
and purchase put and call options on any securities in which the
Fund may invest or on any securities index consisting of
securities in which it may invest. The Fund may also, to the
extent consistent with its investment policies, purchase and
sell (write) put and call options on foreign currencies.
The writing and purchase of options is a highly specialized
activity which involves special investment risks. Options may be
used for either hedging or cross-hedging
77
purposes, or to seek to increase total return (which is
considered a speculative activity). The successful use of
options depends in part on the ability of the Investment Adviser
to anticipate future price fluctuations and the degree of
correlation between the options and securities (or currency)
markets. If the Investment Adviser is incorrect in its
expectation of changes in market prices or determination of the
correlation between the instruments or indices on which options
are written and purchased and the instruments in the Funds
investment portfolio, the Fund may incur losses that it would
not otherwise incur. The use of options can also increase the
Funds transaction costs. Options written or purchased by
the Fund may be traded on either U.S. or foreign exchanges or
over-the-counter. Foreign and over-the-counter options will
present greater possibility of loss because of their greater
illiquidity and credit risks. When writing an option, the Fund,
as an investment company registered with the SEC, must set
aside liquid assets, or engage in other appropriate
measures to cover its obligation under the option
contract.
Yield Curve Options.
The Fund may enter into
options on the yield spread or differential between
two securities. Such transactions are referred to as yield
curve options. In contrast to other types of options, a
yield curve option is based on the difference between the yields
of designated securities, rather than the prices of the
individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if
this differential widens (in the case of a call) or narrows (in
the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
The trading of yield curve options is subject to all of the
risks associated with the trading of other types of options. In
addition, such options present a risk of loss even if the yield
of one of the underlying securities remains constant, or if the
spread moves in a direction or to an extent which was not
anticipated. When writing an option, the Fund must set
aside liquid assets, or engage in other appropriate
measures to cover its obligation under the option
contract.
Futures Contracts and Options on Futures
Contracts.
Futures contracts are standardized,
exchange-traded contracts that provide for the sale or purchase
of a specified financial instrument or currency at a future time
at a specified price. An option on a futures contract gives the
purchaser the right (and the writer of the option the
obligation) to assume a position in a futures contract at a
specified exercise price within a specified period of time. A
futures contract may be based on particular securities, foreign
currencies, securities indices and other financial instruments
and indices. The Fund may engage in futures transactions on U.S.
and foreign exchanges.
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APPENDIX
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The Fund may purchase and sell futures contracts, and purchase
and write call and put options on futures contracts, in order to
seek to increase total return or to hedge against changes in
interest rates, securities prices or, to the extent the Fund
invests in foreign securities, currency exchange rates, or to
otherwise manage its term structure, sector selection and
duration in accordance with its investment objective and
policies. The Fund may also enter into closing purchase and sale
transactions with respect to such contracts and options. The
Trust, on behalf of the Fund, has claimed an exclusion from the
definition of the term commodity pool operator under
the Commodity Exchange Act and, therefore, is not subject to
registration or regulation as a pool operator under that Act
with respect to the Fund.
Futures contracts and related options present the following
risks:
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While the Fund may benefit from the
use of futures and options on futures, unanticipated changes in
interest rates, securities prices or currency exchange rates may
result in poorer overall performance than if the Fund had not
entered into any futures contracts or options transactions.
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Because perfect correlation between
a futures position and a portfolio position that is intended to
be protected is impossible to achieve, the desired protection
may not be obtained and the Fund may be exposed to additional
risk of loss.
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The loss incurred by the Fund in
entering into futures contracts and in writing call options on
futures is potentially unlimited and may exceed the amount of
the premium received.
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Futures markets are highly volatile
and the use of futures may increase the volatility of the
Funds NAV.
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As a result of the low margin
deposits normally required in futures trading, a relatively
small price movement in a futures contract may result in
substantial losses to the Fund.
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Futures contracts and options on
futures may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day.
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Foreign exchanges may not provide
the same protection as U.S. exchanges.
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The Fund must set aside liquid assets, or engage in
other appropriate measures to cover open positions
with respect to its transactions in futures contracts and
options on futures contracts. In the case of futures contracts
that do not cash settle, for example, the Fund must set aside
liquid assets equal to the full notional value of the futures
contracts while the positions are open. With respect to futures
contracts that do cash settle, however, the Fund is permitted to
set aside liquid assets in an amount equal to the Funds
daily marked-to-market net obligations (
i.e.
, the
Funds daily net liability) under the futures contracts, if
any, rather than their full notional value. The Fund reserves
the right to modify its asset segregation policies in the future
to comply with any changes in the positions from time to time
articulated by the SEC or its staff regarding asset segregation.
By setting aside assets equal to only
79
its net obligations under cash-settled futures contracts, the
Fund will have the ability to employ leverage to a greater
extent than if the Fund were required to segregate assets equal
to the full notional amount of the futures contracts.
When-Issued Securities and Forward
Commitments.
The Fund may purchase when-issued
securities and make contracts to purchase or sell securities for
a fixed price at a future date beyond customary settlement time.
When-issued securities are securities that have been authorized,
but not yet issued. When-issued securities are purchased in
order to secure what is considered to be an advantageous price
or yield to the Fund at the time of entering into the
transaction. A forward commitment involves entering into a
contract to purchase or sell securities for a fixed price at a
future date beyond the customary settlement period.
The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the
security to be purchased declines before the settlement date.
Conversely, the sale of securities on a forward commitment basis
involves the risk that the value of the securities sold may
increase before the settlement date. Although the Fund will
generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring the securities
for its portfolio, the Fund may dispose of when-issued
securities or forward commitments prior to settlement if the
Investment Adviser deems it appropriate. When purchasing a
security on a when-issued basis or entering into a forward
commitment, the Fund must set aside liquid assets,
or engage in other appropriate measures to cover its
obligations.
Lending of Portfolio Securities.
The Fund may
engage in securities lending. Securities lending involves the
lending of securities owned by the Fund to financial
institutions such as certain broker-dealers, including, as
permitted by the SEC, Goldman Sachs. The borrowers are required
to secure their loans continuously with cash, cash equivalents,
U.S. Government securities or letters of credit in an amount at
least equal to the market value of the securities loaned. Cash
collateral may be invested by the Fund in short-term
investments, including registered and unregistered investment
pools managed by the Investment Adviser, State Street Bank and
Trust Company (State Street) or their affiliates and
from which the Investment Adviser, State Street or their
affiliates may receive fees. To the extent that cash collateral
is so invested, such collateral will be subject to market
depreciation or appreciation, and the Fund will be responsible
for any loss that might result from its investment of the
borrowers collateral. If the Investment Adviser determines
to make securities loans, the value of the securities loaned may
not exceed
33
1
/
3
%
of the value of the total assets of the Fund (including the loan
collateral). Loan collateral (including any investment of that
collateral) is not subject to the
80
APPENDIX
A
percentage limitations described elsewhere in this Prospectus
regarding investments in particular types of fixed income and
other securities.
The Fund may lend its securities to increase its income. The
Fund may, however, experience delay in the recovery of its
securities or incur a loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement
with the Fund or becomes insolvent.
Repurchase Agreements.
Repurchase agreements
involve the purchase of securities subject to the sellers
agreement to repurchase them at a mutually agreed upon date and
price. The Fund may enter into repurchase agreements with
securities dealers and banks which furnish collateral at least
equal in value or market price to the amount of their repurchase
obligation. The Fund may also enter into repurchase agreements
involving certain foreign government securities.
If the other party or seller defaults, the Fund
might suffer a loss to the extent that the proceeds from the
sale of the underlying securities and other collateral held by
the Fund are less than the repurchase price and the Funds
costs associated with delay and enforcement of the repurchase
agreement. In addition, in the event of bankruptcy of the
seller, the Fund could suffer additional losses if a court
determines that the Funds interest in the collateral is
not enforceable.
The Fund, together with other registered investment companies
having advisory agreements with the Investment Adviser or any of
its affiliates, may transfer uninvested cash balances into a
single joint account, the daily aggregate balance of which will
be invested in one or more repurchase agreements.
Borrowings and Reverse Repurchase
Agreements.
The Fund can borrow money from banks
and other financial institutions, and may enter into reverse
repurchase agreements in amounts not exceeding one-third of the
Funds total assets. The Fund may not make additional
investments if borrowings exceed 5% of its total assets. Reverse
repurchase agreements involve the sale of securities held by the
Fund subject to the Funds agreement to repurchase them at
a mutually agreed upon date and price (including interest).
These transactions may be entered into as a temporary measure
for emergency purposes or to meet redemption requests. Reverse
repurchase agreements may also be entered into when the
Investment Adviser expects that the interest income to be earned
from the investment of the transaction proceeds will be greater
than the related interest expense. Borrowings and reverse
repurchase agreements involve leveraging. If the securities held
by the Fund decline in value while these transactions are
outstanding, the NAV of the Funds outstanding shares will
decline in value by proportionately more than the decline in
value of the securities. In addition, reverse repurchase
agreements involve the risk that the investment return earned by
the Fund (from the investment of the proceeds) will be
81
less than the interest expense of the transaction, that the
market value of the securities sold by the Fund will decline
below the price the Fund is obligated to pay to repurchase the
securities, and that the securities may not be returned to the
Fund. The Fund must set aside liquid assets, or
engage in other appropriate measures to cover open
positions with respect to its transactions in reverse repurchase
agreements.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps,
Currency Swaps, Total Return Swaps, Options on Swaps and
Interest Rate Caps, Floors and Collars.
Interest
rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, such
as an exchange of fixed-rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in
that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool
or pools of mortgages. Credit swaps involve the receipt of
floating or fixed rate payments in exchange for assuming
potential credit losses on an underlying security. Credit swaps
give one party to a transaction (the buyer of the credit swap)
the right to dispose of or acquire an asset (or group of assets
or exposure to the performance of an index), or the right to
receive a payment from the other party, upon the occurrence of
specified credit events. Currency swaps involve the exchange of
the parties respective rights to make or receive payments
in specified currencies. Total return swaps give the Fund the
right to receive the appreciation in the value of a specified
security, index or other instrument in return for a fee paid to
the counterparty, which will typically be an agreed upon
interest rate. If the underlying asset in a total return swap
declines in value over the term of the swap, the Fund may also
be required to pay the dollar value of that decline to the
counterparty.
The Fund may also purchase and write (sell) options contracts on
swaps, commonly referred to as swaptions. A swaption is an
option to enter into a swap agreement. Like other types of
options, the buyer of a swaption pays a non-refundable premium
for the option and obtains the right, but not the obligation, to
enter into an underlying swap on agreed-upon terms. The seller
of a swaption, in exchange for the premium, becomes obligated
(if the option is exercised) to enter into an underlying swap on
agreed-upon terms. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on
a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap
and a floor that preserves a certain return within a
predetermined range of interest rates.
82
APPENDIX
A
The Fund may enter into swap transactions for hedging purposes
or to seek to increase total return. As an example, when the
Fund is the buyer of a credit default swap (commonly known as
buying protection), it may make periodic payments to the seller
of the credit default swap to obtain protection against a credit
default on a specified underlying asset (or group of assets). If
a default occurs, the seller of a credit default swap may be
required to pay the Fund the notional value of the
credit default swap on a specified security (or group of
securities). On the other hand, when the Fund is a seller of a
credit default swap (commonly known as selling protection), in
addition to the credit exposure the Fund has on the other assets
held in its portfolio, the Fund is also subject to the credit
exposure on the notional amount of the swap since, in the event
of a credit default, the Fund may be required to pay the
notional value of the credit default swap on a
specified security (or group of securities) to the buyer of the
credit default swap.
The use of interest rate, mortgage, credit, currency and total
return swaps, options on swaps, and interest rate caps, floors
and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the
Investment Adviser is incorrect in its forecasts of market
values, interest rates and currency exchange rates, or in its
evaluation of the creditworthiness of swap counterparties and
the issuers of the underlying assets, the investment performance
of the Fund would be less favorable than it would have been if
these investment techniques were not used. When entering into
swap contracts or writing options, the Fund must set
aside liquid assets, or engage in other appropriate
measures to cover its obligation under the swap
contract.
Other Investment Companies.
The Fund may
invest in securities of other investment companies, including
exchange traded funds (ETFs) such as
iShares
sm
,
subject to statutory limitations prescribed by the Investment
Company Act. These limitations include in certain circumstances
a prohibition on the Fund acquiring more than 3% of the voting
shares of any other investment company, and a prohibition on
investing more than 5% of the Funds total assets in
securities of any one investment company or more than 10% of its
total assets in securities of all investment companies. Many
ETFs, however, have obtained exemptive relief from the SEC to
permit unaffiliated funds to invest in the ETFs shares
beyond these statutory limitations, subject to certain
conditions and pursuant to a contractual arrangement between the
ETFs and the investing funds. The Fund may rely on these
exemptive orders to invest in unaffiliated ETFs.
The use of ETFs is intended to help the Fund match the total
return of the particular market segments or indices represented
by those ETFs, although that may not be the result. Most ETFs
are passively managed investment companies whose shares are
83
purchased and sold on a securities exchange. An ETF represents a
portfolio of securities designed to track a particular market
segment or index. An investment in an ETF generally presents the
same primary risks as an investment in a conventional fund
(
i.e.
, one that is not exchange-traded) that has the same
investment objectives, strategies and policies. In addition, an
ETF may fail to accurately track the market segment or index
that underlies its investment objective. The price of an ETF can
fluctuate, and the Fund could lose money investing in an ETF.
Moreover, ETFs are subject to the following risks that do not
apply to conventional funds: (i) the market price of the
ETFs shares may trade at a premium or a discount to their
net asset value; (ii) an active trading market for an
ETFs shares may not develop or be maintained; and
(iii) there is no assurance that the requirements of the
exchange necessary to maintain the listing of an ETF will
continue to be met or remain unchanged.
Pursuant to an exemptive order obtained from the SEC or under an
exemptive rule adopted by the SEC, the Fund may invest in
certain other investment companies and money market funds beyond
the statutory limits described above. Some of those investment
companies and money market funds may be funds for which the
Investment Adviser or any of its affiliates serves as investment
adviser, administrator or distributor.
The Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by such other investment
companies, in addition to the fees and expenses regularly borne
by the Fund. Although the Fund does not expect to do so in the
foreseeable future, the Fund is authorized to invest
substantially all of its assets in a single open-end investment
company or series thereof that has substantially the same
investment objective, policies and fundamental restrictions as
the Fund.
Non-Investment Grade Fixed Income
Securities.
Non-investment grade fixed-income
securities and unrated securities of comparable credit quality
(commonly known as junk bonds) are considered
speculative. In some cases, these obligations may be highly
speculative and have poor prospects for reaching investment
grade standing. Non-investment grade fixed income securities are
subject to the increased risk of an issuers inability to
meet principal and interest obligations. These securities, also
referred to as high yield securities, may be subject to greater
price volatility due to such factors as specific corporate or
municipal developments, interest rate sensitivity, negative
perceptions of the junk bond markets generally and less
secondary market liquidity.
Non-investment grade fixed income securities are often issued in
connection with a corporate reorganization or restructuring or
as part of a merger, acquisition, takeover
84
APPENDIX
A
or similar event. They are also issued by less established
companies seeking to expand. Such issuers are often highly
leveraged and generally less able than more established or less
leveraged entities to make scheduled payments of principal and
interest in the event of adverse developments or business
conditions. Non-investment grade securities are also issued by
governmental bodies that may have difficulty in making all
scheduled interest and principal payments.
The market value of non-investment grade fixed income securities
tends to reflect individual corporate or municipal developments
to a greater extent than that of higher rated securities which
react primarily to fluctuations in the general level of interest
rates. As a result, the Funds ability to achieve its
investment objectives may depend to a greater extent on the
Investment Advisers judgment concerning the
creditworthiness of issuers than funds which invest in
higher-rated securities. Issuers of non-investment grade fixed
income securities may not be able to make use of more
traditional methods of financing and their ability to service
debt obligations may be affected more adversely than issuers of
higher-rated securities by economic downturns, specific
corporate or financial developments or the issuers
inability to meet specific projected business forecasts.
Negative publicity about the junk bond market and investor
perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such
securities.
A holders risk of loss from default is significantly
greater for non-investment grade fixed income securities than is
the case for holders of other debt securities because such
non-investment grade securities are generally unsecured and are
often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the Fund in defaulted
securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities.
Even if such securities are held to maturity, recovery by the
Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed income
securities is concentrated in relatively few market makers and
is dominated by institutional investors, including mutual funds,
insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as
liquid as, and is more volatile than, the secondary market for
higher-rated securities. In addition, market trading volume for
high yield fixed income securities is generally lower and the
secondary market for such securities could shrink or disappear
suddenly and without warning as a result of adverse market or
economic conditions, independent of any specific adverse changes
in the condition of a particular issuer. The lack of sufficient
market liquidity may cause the Fund to incur losses because it
will be required to effect sales at a disadvantageous time and
then only at a substantial drop in price. These factors may have
an adverse effect on the market price and the
85
Funds ability to dispose of particular portfolio
investments. A less liquid secondary market also may make it
more difficult for the Fund to obtain precise valuations of the
high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk
of non-investment grade securities and, therefore, may not fully
reflect the true risks of an investment. In addition, credit
rating agencies may or may not make timely changes in a rating
to reflect changes in the economy or in the conditions of the
issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary
indicator of investment quality.
Downgraded Securities.
After its purchase, a
portfolio security may be assigned a lower rating or cease to be
rated. If this occurs, the Fund may continue to hold the
security if the Investment Adviser believes it is in the best
interest of the Fund and its shareholders.
Loan Participations.
The Fund may invest in
loan participations. A loan participation is an interest in a
loan to a U.S. or foreign company or other borrower which is
administered and sold by a financial intermediary. The Fund may
only invest in loans to issuers in whose obligations it may
otherwise invest. Loan participation interests may 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
sellers share of the loan. When the Fund acts as co-lender
in connection with a participation interest or when it acquires
certain participation interests, the Fund will have direct
recourse against the borrower if the borrower fails to pay
scheduled principal and interest. In cases where the Fund lacks
direct recourse, it will look to an agent for the lenders (the
agent lender) to enforce appropriate credit remedies
against the borrower. In these cases, the Fund may be subject to
delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the Fund
may be regarded as a creditor of the agent lender (rather than
of the underlying corporate borrower), so that the Fund may also
be subject to the risk that the agent lender may become
insolvent.
Preferred Stock, Warrants and Rights.
The
Fund may invest in preferred stock, warrants and rights.
Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuers
earnings and assets before common stock owners but after bond
owners. Unlike debt securities, the obligations of an issuer of
preferred stock, including dividend and other payment
obligations, may not typically be accelerated by the holders of
such preferred stock on the
86
APPENDIX
A
occurrence of an event of default or other non-compliance by the
issuer of the preferred stock.
Warrants and other rights are options to buy a stated number of
shares of common stock at a specified price at any time during
the life of the warrant or right. The holders of warrants and
rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
87
Appendix B
Financial Highlights
Because the Fund has not commenced investment operations as of
the date of this Prospectus, financial highlights are not
available.
88
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Strategic
Income Fund
Prospectus
FOR
MORE INFORMATION
Annual/Semiannual
Report
Additional information about the Funds investments is
available in the Funds annual and semiannual reports to
shareholders. In the Funds annual report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Funds performance during
the last fiscal year.
Statement
Of Additional Information
Additional information about the Fund and its policies is also
available in the Funds SAI. The SAI is incorporated by
reference into this Prospectus (is legally considered part of
this Prospectus).
The Funds annual and semi-annual reports and SAI are
available free upon request by calling Goldman Sachs at
1-800-526-7384. You can also access and download the annual and
semiannual reports and the SAI at the Funds website:
http://www.goldmansachsfunds.com/summaries.
From time to time, certain announcements and other information
regarding the Fund may be found at
http://www.gs.com/gsam/redirect/announcements/individuals
for individual investors,
http://www.gs.com/gsam/redirect/announcements/institutions
for institutional investors or
http://www.gs.com/gsam/redirect/announcements/advisors
for advisors.
To obtain other information and for shareholder inquiries:
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Institutional
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Class A, C, IR & R
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By
telephone:
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1-800-621-2550
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1-800-526-7384
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By
mail:
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Goldman Sachs Funds
P.O. Box 06050
Chicago, Illinois 60606
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Goldman Sachs Funds
P.O. Box 219711
Kansas City, MO 64121
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On
the Internet:
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SEC EDGAR database http://www.sec.gov
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You may review and obtain copies of Fund documents (including
the SAI) by visiting the SECs public reference room in
Washington, D.C. You may also obtain copies of Fund documents,
after paying a duplicating fee, by writing to the SECs
Public Reference Section, Washington, D.C. 20549-1520 or by
electronic request to: publicinfo@sec.gov. Information on the
operation of the public reference room may be obtained by
calling the SEC at
(202) 551-8090.
The Funds investment company
registration number is
811-05349.
GSAM
®
is a registered service mark of Goldman, Sachs & Co.
STRINCPRO10
PART B
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 30, 2010
Class A Shares: GSZAX
Class C Shares: GSZCX
Class R Shares: GSZRX
Class IR Shares: GZIRX
Institutional Shares: GSZIX
GOLDMAN SACHS STRATEGIC INCOME FUND
(A portfolio of Goldman Sachs Trust)
Goldman Sachs Trust
71 South Wacker Drive
Chicago, Illinois 60606
This Statement of Additional Information (the SAI) is not a prospectus. This SAI should be
read in conjunction with the Prospectus of the Goldman Sachs Strategic Income Fund (the Fund),
dated June 30, 2010 (the Prospectus), as it may be further amended and/or supplemented from time
to time. The Prospectus may be obtained without charge from Goldman, Sachs & Co. by calling the
telephone numbers, or writing to one of the addresses, listed below, or from institutions acting on
behalf of their customers.
GSAM® is a registered service mark of Goldman, Sachs & Co.
TABLE OF CONTENTS
The date of this SAI is June 30, 2010.
-i-
GOLDMAN SACHS ASSET MANAGEMENT, L.P.
Investment Adviser
200 West Street
New York, New York 10282
GOLDMAN, SACHS & CO.
Distributor
200 West Street
New York, New York 10282
GOLDMAN, SACHS & CO.
Transfer Agent
71 South Wacker Drive
Chicago, Illinois 60606
Toll free (in U.S.) 800-621-2550 (Institutional) or 800-526-7384 (Retail)
INTRODUCTION
Goldman Sachs Trust (the Trust) is an open-end, management investment company. The Trust is
organized as a Delaware statutory trust and was established by a Declaration of Trust dated January
28, 1997. The Trust is a successor to a Massachusetts business trust that was combined with the
Trust on April 30, 1997. The Goldman Sachs Strategic Income Fund (Strategic Income Fund) or the
Fund), a series of the Trust, is described in this SAI.
The Trustees of the Trust have authority under the Declaration of Trust to create and classify
shares into separate series and to classify and reclassify any series of shares into one or more
classes without further action by shareholders, and have created the Fund and other series pursuant
thereto. The Fund is authorized to issue five classes of shares: Class A, Class C, Institutional
Class, Class R and Class IR. Additional series may be added in the future from time to time.
Goldman Sachs Asset Management, L.P. (GSAM), an affiliate of Goldman, Sachs & Co. (Goldman
Sachs), serves as the investment adviser to the Fund. GSAM is referred to herein as the
Investment Adviser. In addition, Goldman Sachs serves as the Funds distributor and transfer
agent. The Funds custodian is State Street Bank and Trust Company.
The following information relates to and supplements the description of the Funds investment
policies contained in the Prospectus. See the Prospectus for a more complete description of the
Funds investment objective and policies. Investing in the Fund entails certain risks and there is
no assurance that the Fund will achieve its objective. Capitalized terms used but not defined
herein have the same meaning as in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has a distinct investment objective and policies. There can be no assurance that the
Funds objective will be achieved. The Fund is a diversified, open-end management investment
company. The investment objective and policies of the Fund, and the associated risks of the Fund,
are discussed in the Funds Prospectus, which should be read carefully before an investment is
made. All investment objectives and investment policies not specifically designated as fundamental
may be changed without shareholder approval. Additional information about the Fund, its policies,
and the investment instruments it may hold, is provided below.
The Funds share price will fluctuate with market, economic and, to the extent applicable,
foreign exchange conditions, so that an investment in the Fund may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a complete investment program.
The following discussion supplements the information in the Funds Prospectus.
General Information Regarding The Fund
The Strategic Income Fund is designed for investors seeking high total return, emphasizing
current income and opportunities for capital appreciation. However, investing in the Fund involves
certain risks, and there is no assurance that the Fund will achieve its investment objective. The
Fund invests in a broadly diversified portfolio of U.S. and foreign investment grade and
non-investment grade fixed income investments including, but not limited to: U.S. Government
securities (such as U.S. Treasury securities or Treasury inflation protected securities), non-U.S.
sovereign debt, agency securities, corporate debt securities, agency and non-agency mortgage-backed
securities, asset-backed securities, custodial receipts, municipal securities, loan participations
and convertible securities. The Fund may invest in fixed income securities of any maturity.
Non-investment grade fixed income securities are securities rated BB, Ba or below by a
nationally recognized statistical rating organization (NRSRO), or, if unrated, determined by the
Investment Adviser to be of comparable quality.
The Fund may invest in fixed income securities of issuers located in emerging countries. Such investments may
include sovereign debt issued by emerging countries that have sovereign ratings below investment grade or that are unrated. There is no limitation to the amount the Fund invests
in non-investment grade or emerging market securities. From time to
time the Fund may also invest in preferred stock.
The Funds investments may be denominated in currencies other than the U.S. dollar. The Fund
may engage in forward foreign currency transactions for both investment and hedging purposes.
The Fund also intends to invest in other derivative instruments. Derivatives are instruments
that have a value based on another instrument, exchange rate or index. The Funds investments in
derivatives may include, in addition to forward foreign currency exchange contracts, interest rate
futures contracts, options (including options on futures contracts, swaps, bonds, stocks and
indexes),
B-1
swaps (including credit default, index, basis, total return, volatility and currency swaps),
and other forward contracts. The Fund may use derivatives instead of buying and selling bonds to
manage duration, to gain exposure or to short individual securities or to gain exposure to a credit
or asset backed index.
The Fund may implement short positions and generally will do so by using swaps or futures. For
example, the Fund may enter into a futures contract pursuant to which it agrees to sell an asset
(that it does not currently own) at a specified price at a specified point in the future. This
gives the Fund a short position with respect to that asset. The Fund will benefit to the extent the
asset decreases in value (and will be harmed to the extent the asset increases in value) between
the time it enters into the futures contract and the agreed date of sale.
Strategic in the Funds name means that the Fund seeks both current income and capital
appreciation as elements of total return. The Fund attempts to exploit pricing anomalies throughout
the global fixed income and currency markets. Additionally, the Fund uses short positions and
derivatives to enhance portfolio return or for hedging purposes. The Fund may sell investments that
the portfolio managers believe are no longer favorable with regard to these factors.
The Fund may, from time to time, take temporary defensive positions in attempting to respond
to adverse market, political or other conditions. For temporary defensive purposes, the Fund may
invest any portion of its total assets in U.S. Government Securities,
commercial paper rated at least A-2 by Standard & Poors,
P-2 by Moodys or a comparable rating by another NRSRO,
certificates of deposit, bankers
acceptances,
repurchase agreements,
non-convertible preferred stocks and non-convertible corporate
bonds with a remaining maturity of less than one year, exchange-traded funds (ETFs) and other investment companies and cash and cash
equivalents.
When the Funds assets are invested in such instruments, the Fund may
not be achieving its investment objective.
Goldman Sachs Fixed Income Investment Philosophy:
Global fixed income markets are constantly evolving and are highly diversewith myriad
countries, currencies, sectors, issuers and securities. GSAM believes inefficiencies in these
complex markets cause bond prices to diverge from their fair value for periods of time. To
capitalize on these inefficiencies and generate consistent risk-adjusted performance, the
Investment Adviser believes it is critical to:
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Thoughtfully combine diversified sources of return by employing multiple investment
strategies
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Take a global perspective to uncover relative value opportunities
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Employ focused specialist teams to identify short-term mispricings and incorporate
long-term views
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Emphasize a risk-aware approach
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The Fund implements this overall philosophy through an investment process that seeks to
maximize risk-adjusted total returns and revolves around four key steps:
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Developing a long-term risk budgetLead portfolio managers are responsible for the
overall results of the Fund. They set the strategic direction of the Fund by establishing a
risk budget. The risk budget for the Fund is the range the portfolio managers set with
respect to sector allocations, country allocations, securities selection and duration.
Following careful analysis of risk and return objectives, the portfolio managers allocate
the risk budget to each component strategy to optimize potential return.
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2.
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Generating investment views and strategiesThe Investment Advisers top-down and
bottom-up strategy teams (collectively, strategy teams) generate investment ideas within
their areas of specialization. The top-down strategy teams are responsible for cross-sector,
duration, country and currency decisions. Concurrently, bottom-up strategy teams, comprised
of sector specialists, formulate sub-sector allocation and security selection decisions.
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3.
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Constructing the portfoliosThe lead portfolio managers and strategy teams construct the
Funds portfolio through a collaborative process in which the Funds portfolio managers
oversee the overall portfolio while the strategy teams actively manage the securities and
strategies within their areas of specialization. This process enables the portfolio managers
to build a diversified portfolio consisting of the portfolio managers and the strategy
teams best ideas.
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4.
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Dynamic adjustments based on market conditionsAs market conditions change, the
volatility and attractiveness of sectors and strategies can change as well. To optimize the
Funds risk/return potential within its long-term risk budget, the portfolio team
dynamically adjusts the mix of top-down and bottom-up strategies in the Funds portfolio. At
the same time, the strategy teams adjust their positions in an effort to optimize
performance within their specialty areas.
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B-2
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
U. S. Government Securities
The Fund may invest in U.S. Government securities. Some U.S. Government securities (such as
Treasury bills, notes and bonds, which differ only in their interest rates, maturities and times of
issuance) are supported by the full faith and credit of the United States. Others, such as
obligations issued or guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises, are supported either by (i) the right of the issuer to borrow from the U.S. Treasury,
(ii) the discretionary authority of the U.S. government to purchase certain obligations of the
issuer or (iii) only the credit of the issuer. The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or sponsored enterprises.
No assurance can be given that the U.S. government will provide financial support to the U.S.
government agencies, instrumentalities or sponsored enterprises in the future.
U.S. Government securities include (to the extent consistent with the Act) securities for
which the payment of principal and interest is backed by an irrevocable letter of credit issued by
the U.S. government, or its agencies, instrumentalities or sponsored enterprises. U.S. Government
securities may also include (to the extent consistent with the Act) participations in loans made to
foreign governments or their agencies that are guaranteed as to principal and interest by the U.S.
government or its agencies, instrumentalities or sponsored enterprises. The secondary market for
certain of these participations is extremely limited. In the absence of a suitable secondary
market, such participations are regarded as illiquid.
The Fund may also purchase U.S. Government securities in private placements and may also
invest in separately traded principal and interest components of securities guaranteed or issued by
the U.S. Treasury that are traded independently under the separate trading of registered interest
and principal of securities program (STRIPS).
Treasury Inflation-Protected Securities
. The Fund may invest in U.S. Government
securities, called Treasury inflation protected securities or TIPS, which are fixed income
securities whose principal value is periodically adjusted according to the rate of inflation. The
interest rate on TIPS is fixed at issuance, but over the life of the bond this interest may be paid
on an increasing or decreasing principal value that has been adjusted for inflation. Although
repayment of the original bond principal upon maturity is guaranteed, the market value of TIPS is
not guaranteed, and will fluctuate.
The values of TIPS generally fluctuate in response to changes in real interest rates, which
are in turn tied to the relationship between nominal interest rates and the rate of inflation. If
inflation were to rise at a faster rate than nominal interest rates, real interest rates might
decline, leading to an increase in the value of TIPS. In contrast, if nominal interest rates were
to increase at a faster rate than inflation, real interest rates might rise, leading to a decrease
in the value of TIPS. If inflation is lower than expected during the period the Fund holds TIPS,
the Fund may earn less on the TIPS than on a conventional bond. If interest rates rise due to
reasons other than inflation (for example, due to changes in the currency exchange rates),
investors in TIPS may not be protected to the extent that the increase is not reflected in the
bonds inflation measure. There can be no assurance that the inflation index for TIPS will
accurately measure the real rate of inflation in the prices of goods and services.
Any increase in principal value of TIPS caused by an increase in the consumer price index is
taxable in the year the increase occurs, even though the Fund holding TIPS will not receive cash
representing the increase at that time. As a result, the Fund could be required at times to
liquidate other investments, including when it is not advantageous to do so, in order to satisfy
its distribution requirements as a regulated investment company.
If the Fund invests in TIPS, it will be required to treat as original issue discount any
increase in the principal amount of the securities that occurs during the course of its taxable
year. If the Fund purchases such inflation protected securities that are issued in stripped form
either as stripped bonds or coupons, it will be treated as if it had purchased a newly issued debt
instrument having original issue discount.
Because the Fund is required to distribute substantially all of its net investment income
(including accrued original issue discount), the Funds investment in either zero coupon bonds or
TIPS may require it to distribute to shareholders an amount greater than the total cash income it
actually receives. Accordingly, in order to make the required distributions, the Fund may be
required to borrow or liquidate securities.
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Custodial Receipts and Trust Certificates
The Fund may invest in custodial receipts and trust certificates, which may be underwritten by
securities dealers or banks, representing interests in securities held by a custodian or trustee.
The securities so held may include U.S. Government securities, Municipal Securities or other types
of securities in which the Fund may invest. The custodial receipts or trust certificates are
underwritten by securities dealers or banks and may evidence ownership of future interest payments,
principal payments or both on the underlying securities, or, in some cases, the payment obligation
of a third party that has entered into an interest rate swap or other arrangement with the
custodian or trustee. For certain securities laws purposes, custodial receipts and trust
certificates may not be considered obligations of the U.S. government or other issuer of the
securities held by the custodian or trustee. As a holder of custodial receipts and trust
certificates, the Fund will bear its proportionate share of the fees and expenses charged to the
custodial account or trust. The Fund may also invest in separately issued interests in custodial
receipts and trust certificates.
Although under the terms of a custodial receipt or trust certificate the Fund would be
typically authorized to assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank or trustee those rights as may
exist against the underlying issuers. Thus, in the event an underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund had purchased a direct obligation of
the issuer. In addition, in the event that the trust or custodial account in which the underlying
securities have been deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, the yield on the underlying securities would be reduced in recognition of
any taxes paid.
Certain custodial receipts and trust certificates may be synthetic or derivative instruments
that have interest rates that reset inversely to changing short-term rates and/or have embedded
interest rate floors and caps that require the issuer to pay an adjusted interest rate if market
rates fall below or rise above a specified rate. Because some of these instruments represent
relatively recent innovations, and the trading market for these instruments is less developed than
the markets for traditional types of instruments, it is uncertain how these instruments will
perform under different economic and interest-rate scenarios. Also, because these instruments may
be leveraged, their market values may be more volatile than other types of fixed income instruments
and may present greater potential for capital gain or loss. The possibility of default by an issuer
or the issuers credit provider may be greater for these derivative instruments than for other
types of instruments. In some cases, it may be difficult to determine the fair value of a
derivative instrument because of a lack of reliable objective information and an established
secondary market for some instruments may not exist. In many cases, the Internal Revenue Service
(the IRS) has not ruled on the tax treatment of the interest or payments received on the
derivative instruments and, accordingly, purchases of such instruments are based on the opinion of
counsel to the sponsors of the instruments.
Mortgage Loans and Mortgage-Backed Securities
The Fund may invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and fixed-rate mortgage
loans (Mortgage-Backed Securities).
Mortgage-Backed Securities (including collateralized mortgage obligations, real estate
mortgage investment conduits (REMICs) and stripped mortgage-backed securities as described below)
are subject to both call risk and extension risk. Because of these risks, these securities can have
significantly greater price and yield volatility than traditional fixed income securities.
General Characteristics
. Each mortgage pool underlying Mortgage-Backed Securities
consists of mortgage loans evidenced by promissory notes secured by first mortgages or first deeds
of trust or other similar security instruments creating a first lien on owner occupied and
non-owner occupied one-unit to four-unit residential properties, multi-family (
i.e
., five or more)
properties, agricultural properties, commercial properties and mixed use properties (the Mortgaged
Properties). The Mortgaged Properties may consist of detached individual dwelling units,
multi-family dwelling units, individual condominiums, townhouses, duplexes, triplexes, fourplexes,
row houses, individual units in planned unit developments, other attached dwelling units or
commercial properties (such as office properties, retail properties, hospitality properties,
industrial properties, healthcare related properties or other types of income producing real
property). The Mortgaged Properties may also include residential investment properties and second
homes.
The investment characteristics of adjustable and fixed rate Mortgage-Backed Securities differ
from those of traditional fixed income securities. The major differences include the payment of
interest and principal on Mortgage-Backed Securities on a more frequent (usually monthly) schedule,
and the possibility that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly greater price and
yield volatility than is the case with traditional fixed income securities. As a result, if the
Fund purchases Mortgage-Backed Securities at a premium, a faster
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than expected prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected will have the opposite
effect, increasing yield to maturity and market value. Conversely, if the Fund purchases
Mortgage-Backed Securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce yield to maturity and market value. To the extent that
the Fund invests in Mortgage-Backed Securities, its Investment Adviser may seek to manage these
potential risks by investing in a variety of Mortgage-Backed Securities and by using certain
hedging techniques.
Prepayments on a pool of mortgage loans are influenced by changes in current interest rates
and a variety of economic, geographic, social and other factors (such as changes in mortgagors
housing needs, job transfers, unemployment, mortgagors equity in the mortgage properties and
servicing decisions). The timing and level of prepayments cannot be predicted. A predominant factor
affecting the prepayment rate on a pool of mortgage loans is the difference between the interest
rates on outstanding mortgage loans and prevailing mortgage loan interest rates (giving
consideration to the cost of any refinancing). Generally, prepayments on mortgage loans will
increase during a period of falling mortgage interest rates and decrease during a period of rising
mortgage interest rates. Accordingly, the amounts of prepayments available for reinvestment by the
Fund are likely to be greater during a period of declining mortgage interest rates. If general
interest rates decline, such prepayments are likely to be reinvested at lower interest rates than
the Fund was earning on the mortgage-backed securities that were prepaid. Due to these factors,
mortgage-backed securities may be less effective than U.S. Treasury and other types of debt
securities of similar maturity at maintaining yields during periods of declining interest rates.
Because the Funds investments in Mortgage-Backed Securities are interest-rate sensitive, the
Funds performance will depend in part upon the ability of the Fund to anticipate and respond to
fluctuations in market interest rates and to utilize appropriate strategies to maximize returns to
the Fund, while attempting to minimize the associated risks to its investment capital. Prepayments
may have a disproportionate effect on certain mortgage-backed securities and other multiple class
pass-through securities, which are discussed below.
The rate of interest paid on mortgage-backed securities is normally lower than the rate of
interest paid on the mortgages included in the underlying pool, due to the annual fees paid to the
servicer of the mortgage pool for passing through monthly payments to certificate holders and to
any guarantor, such as Ginnie Mae (as defined below), and due to any yield retained by the issuer.
Actual yield to the holder may vary from the coupon rate, even if adjustable, if the
mortgage-backed securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer receives mortgage
payments from the servicer and the time the issuer makes the payments on the mortgage-backed
securities and this delay reduces the effective yield to the holder of such securities.
The issuers of certain mortgage-backed obligations may elect to have the pool of mortgage
loans (or indirect interests in mortgage loans) underlying the securities treated as a REMIC, which
is subject to special federal income tax rules.
A description of the types of mortgage-backed securities in which the Fund may invest is
provided below. The descriptions are general and summary in nature, and do not detail every
possible variation of the types of securities that are permissible investments for the Fund.
Adjustable Rate Mortgage Loans (ARMs)
. The Fund may invest in ARMs. ARMs generally
provide for a fixed initial mortgage interest rate for a specified period of time. Thereafter, the
interest rates (the Mortgage Interest Rates) may be subject to periodic adjustment based on
changes in the applicable index rate (the Index Rate). The adjusted rate would be equal to the
Index Rate plus a fixed percentage spread over the Index Rate established for each ARM at the time
of its origination. ARMs allow the Fund to participate in increases in interest rates through
periodic increases in the securities coupon rates. During periods of declining interest rates,
coupon rates may readjust downward resulting in lower yields to the Fund.
Adjustable interest rates can cause payment increases that some mortgagors may find difficult
to make. However, certain ARMs may provide that the Mortgage Interest Rate may not be adjusted to a
rate above an applicable lifetime maximum rate or below an applicable lifetime minimum rate for
such ARM. Certain ARMs may also be subject to limitations on the maximum amount by which the
Mortgage Interest Rate may adjust for any single adjustment period (the Maximum Adjustment).
Other ARMs (Negatively Amortizing ARMs) may provide instead or as well for limitations on changes
in the monthly payment on such ARMs. Limitations on monthly payments can result in monthly payments
which are greater or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the event that a
monthly payment is not sufficient to pay the interest accruing on a Negatively Amortizing ARM, any
such excess interest is added to the principal balance of the loan, causing negative amortization,
and will be repaid through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum of the interest
accrued at the applicable Mortgage Interest Rate and the principal
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payment which would have been necessary to amortize the outstanding principal balance over the
remaining term of the loan, the excess (or accelerated amortization) further reduces the
principal balance of the ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a result, unless there
is a periodic recalculation of the payment amount (which there generally is), the final payment may
be substantially larger than the other payments. These limitations on periodic increases in
interest rates and on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases, but may result in increased credit exposure and prepayment risks for
lenders.
ARMs also have the risk of prepayment. The rate of principal prepayments with respect to ARMs
has fluctuated in recent years. The value of Mortgage-Backed Securities that are structured as pass
through mortgage securities collateralized by ARMs is less likely to rise during periods of
declining interest rates than the value of fixed-rate securities during such periods. Accordingly,
ARMs may be subject to a greater rate of principal repayments in a declining interest rate
environment resulting in lower yields to the Fund. For example, if prevailing interest rates fall
significantly, ARMs could be subject to higher prepayment rates (than if prevailing interest rates
remain constant or increase) because the availability of low fixed-rate mortgages may encourage
mortgagors to refinance their ARMs to lock-in a fixed-rate mortgage. On the other hand, during
periods of rising interest rates, the value of ARMs will lag behind changes in the market rate.
ARMs are also typically subject to maximum increases and decreases in the interest rate adjustment
which can be made on any one adjustment date, in any one year, or during the life of the security.
In the event of dramatic increases or decreases in prevailing market interest rates, the value of
the Funds investment in ARMs may fluctuate more substantially since these limits may prevent the
security from fully adjusting its interest rate to the prevailing market rates. As with fixed-rate
mortgages, ARM prepayment rates vary in both stable and changing interest rate environments.
There are two main categories of indices which provide the basis for rate adjustments 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. Indices commonly used for this purpose
include the one-year, three-year and five-year constant maturity Treasury 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, three-month, six-month or one-year London Interbank Offered Rate, the prime rate of a
specific bank or commercial paper rates. Some indices, such as the one-year constant maturity
Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market rate
levels and tend to be somewhat less volatile. The degree of volatility in the market value of ARMs
in the Funds portfolio and, therefore, in the net asset value of the Funds shares, will be a
function of the length of the interest rate reset periods and the degree of volatility in the
applicable indices.
Fixed-Rate Mortgage Loans
. Generally, fixed-rate mortgage loans included in mortgage
pools (the Fixed-Rate Mortgage Loans) will bear simple interest at fixed annual rates and have
original terms to maturity ranging from 5 to 40 years. Fixed-Rate Mortgage Loans generally provide
for monthly payments of principal and interest in substantially equal installments for the term of
the mortgage note in sufficient amounts to fully amortize principal by maturity, although certain
Fixed-Rate Mortgage Loans provide for a large final balloon payment upon maturity.
Legal Considerations of Mortgage Loans
. The following is a discussion of certain legal
and regulatory aspects of the mortgage loans in which the Fund may invest. This discussion is not
exhaustive, and does not address all of the legal or regulatory aspects affecting mortgage loans.
These regulations may impair the ability of a mortgage lender to enforce its rights under the
mortgage documents. These regulations may adversely affect the Funds investments in
Mortgage-Backed Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds receipt of payments derived from principal or
interest on mortgage loans affected by such regulations.
1.
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Foreclosure.
A foreclosure of a defaulted mortgage loan may be delayed due to compliance with
statutory notice or service of process provisions, difficulties in locating necessary parties
or legal challenges to the mortgagees right to foreclose. Depending upon market conditions,
the ultimate proceeds of the sale of foreclosed property may not equal the amounts owed on the
Mortgage-Backed Securities. Furthermore, courts in some cases have imposed general equitable
principles upon foreclosure generally designed to relieve the borrower from the legal effect
of default and have required lenders to undertake affirmative and expensive actions to
determine the causes for the default and the likelihood of loan reinstatement.
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2.
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Rights of Redemption.
In some states, after foreclosure of a mortgage loan, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the property, which
right may diminish the mortgagees ability to sell the property.
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3.
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Legislative Limitations.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to enforce its security interest. For example, a bankruptcy court may grant
the debtor a reasonable time to cure a
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B-6
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default on a mortgage loan, including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate of interest, reduce the
principal balance of the loan to the then-current appraised value of the related mortgaged
property, alter the mortgage loan repayment schedule and grant priority of certain liens over the
lien of the mortgage loan. If a court relieves a borrowers obligation to repay amounts otherwise
due on a mortgage loan, the mortgage loan servicer will not be required to advance such amounts,
and any loss may be borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose penalties for failure to comply with
specific requirements in connection with origination and servicing of mortgage loans.
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4.
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Due-on-Sale Provisions.
Fixed-rate mortgage loans may contain a so-called due-on-sale
clause permitting acceleration of the maturity of the mortgage loan if the borrower transfers
the property. The Garn-St. Germain Depository Institutions Act of 1982 sets forth nine
specific instances in which no mortgage lender covered by that Act may exercise a
due-on-sale clause upon a transfer of property. The inability to enforce a due-on-sale
clause or the lack of such a clause in mortgage loan documents may result in a mortgage loan
being assumed by a purchaser of the property that bears an interest rate below the current
market rate.
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5.
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Usury Laws.
Some states prohibit charging interest on mortgage loans in excess of statutory
limits. If such limits are exceeded, substantial penalties may be incurred and, in some cases,
enforceability of the obligation to pay principal and interest may be affected.
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6.
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Recent Governmental Action and Proposed Legislation and Regulation
. The rise in the rate of
foreclosures of properties in certain states or localities has resulted in legislative,
regulatory and enforcement action in such states or localities seeking to prevent or restrict
foreclosures. Actions have also been brought against issuers and underwriters of residential
mortgage-backed securities collateralized by such residential mortgage loans and investors in
such residential mortgage-backed securities. Legislative or regulatory initiatives by
federal, state or local legislative bodies or administrative agencies, if enacted or adopted,
could delay foreclosure or the exercise of other remedies, provide new defenses to
foreclosure, or otherwise impair the ability of the loan servicer to foreclose or realize on a
defaulted residential mortgage loan included in a pool of residential mortgage loans backing
such residential mortgage-backed securities. The nature or extent of limitations on
foreclosure or exercise of other remedies that may be enacted cannot be predicted. Any such
governmental actions that interfere with the foreclosure process could increase the costs of
such foreclosures or exercise of other remedies, delay the timing or reduce the amount of
recoveries on defaulted residential mortgage loans and securities backed by such residential
mortgage loans owned by any Fund, and could adversely affect the yields on the Mortgage-Backed
Securities owned by the Fund. Proposed federal legislation would, if enacted, permit
borrowers in bankruptcy to restructure residential mortgage loans secured by their primary
residences. Bankruptcy courts could, if this legislation is enacted, reduce the amount of the
principal balance of a residential mortgage loan that is secured by a lien on the residential
mortgaged property, reduce the interest rate, extend the term to maturity or otherwise modify
the terms of a bankrupt borrowers residential mortgage loan. As a result, the value of, and
the cash flows in respect of, the Mortgage-Backed Securities collateralized by these
residential mortgage loans may be adversely impacted, and, as a consequence, any Funds
investment in such Mortgage-Backed Securities could be adversely impacted. Other proposed
federal legislation or programs could require or encourage servicers to modify residential
mortgage loan terms specifically by reducing mortgage debt which would, in turn, allow the
mortgage borrower to refinance into a government sponsored mortgage origination program.
Other legislative or regulatory action could include limitations on upward adjustment of
residential mortgage loan interest rates, insulation of servicers from liability for
modification of residential mortgage loans without regard to the terms of the applicable
servicing agreements, and other actions, each of which may have the effect of reducing returns
to the Fund which have invested in Mortgage-Backed Securities collateralized by these
residential mortgage loans.
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Government Guaranteed Mortgage-Backed Securities
. There are several types of
government guaranteed Mortgage-Backed Securities currently available, including guaranteed mortgage
pass-through certificates and multiple class securities, which include guaranteed Real Estate
Mortgage Investment Conduit Certificates (REMIC Certificates), other collateralized mortgage
obligations and stripped Mortgage-Backed Securities. The Fund is permitted to invest in other types
of Mortgage-Backed Securities that may be available in the future to the extent consistent with
their respective investment policies and objectives.
The Funds investments in Mortgage-Backed Securities may include securities issued or
guaranteed by the U.S. government or one of its agencies, authorities, instrumentalities or
sponsored enterprises, such as the Government National Mortgage Association (Ginnie Mae), Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie
Mac). Ginnie Mae securities are backed by the full faith and credit of the U.S. government, which
means that the U.S. government guarantees that the interest and principal will be paid when due.
Fannie Mae and Freddie Mac securities are not backed by the full faith and credit of the U.S.
government. Fannie Mae and Freddie Mac have the ability to borrow from the U.S. Treasury, and as a
result, they are generally viewed by the market as high quality securities with low credit risks.
From time to time, proposals have been
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introduced before Congress for the purpose of restricting or eliminating federal sponsorship
of Fannie Mae and Freddie Mac that issue guaranteed Mortgage-Backed Securities. The Trust cannot
predict what legislation, if any, may be proposed in the future in Congress as regards such
sponsorship or which proposals, if any, might be enacted. Such proposals, if enacted, might
materially and adversely affect the availability of government guaranteed Mortgage-Backed
Securities and the liquidity and value of the Funds portfolio.
There is risk that the U.S. government will not provide financial support to its agencies,
authorities, instrumentalities or sponsored enterprises. The Fund may purchase U.S. Government
securities that are not backed by the full faith and credit of the U.S. government, such as those
issued by Fannie Mae and Freddie Mac. The maximum potential liability of the issuers of some U.S.
Government securities held by the Fund may greatly exceed such issuers current resources,
including such issuers legal right to support from the U.S. Treasury. It is possible that these
issuers will not have the Fund to meet their payment obligations in the future.
Additional Information with Respect to Freddie Mac and Fannie Mae
. The extreme and
unprecedented volatility and disruption that impacted the capital and credit markets during late
2008 and into 2009 have led to increased market concerns about Freddie Macs and Fannie Maes
ability to withstand future credit losses associated with securities held in their investment
portfolios, and on which they provide guarantees, without the direct support of the federal
government. On September 7, 2008, both Freddie Mac and Fannie Mae were placed under the
conservatorship of the Federal Housing Finance Agency (FHFA). Under the plan of conservatorship,
the FHFA has assumed control of, and generally has the power to direct, the operations of Freddie
Mac and Fannie Mae, and is empowered to exercise all powers collectively held by their respective
shareholders, directors and officers, including the power to (1) take over the assets of and
operate Freddie Mac and Fannie Mae with all the powers of the shareholders, the directors, and the
officers of Freddie Mac and Fannie Mae and conduct all business of Freddie Mac and Fannie Mae; (2)
collect all obligations and money due to Freddie Mac and Fannie Mae; (3) perform all functions of
Freddie Mac and Fannie Mae which are consistent with the conservators appointment; (4) preserve
and conserve the assets and property of Freddie Mac and Fannie Mae; and (5) contract for assistance
in fulfilling any function, activity, action or duty of the conservator. In addition, in
connection with the actions taken by the FHFA, the U.S. Treasury Department (the Treasury) has
entered into certain preferred stock purchase agreements with each of Freddie Mac and Fannie Mae
which establish the Treasury as the holder of a new class of senior preferred stock in each of
Freddie Mac and Fannie Mae, which stock was issued in connection with financial contributions from
the Treasury to Freddie Mac and Fannie Mae. The Treasury has also (i) established a new secured
lending credit facility which will be available to Freddie Mac, Fannie Mae, and the Federal Home
Loan Banks, which is intended to serve as a liquidity backstop, and which will be available until
December 2012; and (iii) initiated a temporary program to purchase residential mortgage-backed
securities issued by Freddie Mac and Fannie Mae.
The conditions attached to the financial contribution made by the Treasury to Freddie Mac and
Fannie Mae and the issuance of this senior preferred stock place significant restrictions on the
activities of Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae must obtain the consent of
the Treasury to (i) make any payment to purchase or redeem its capital stock or pay any dividend
other than in respect of the senior preferred stock, (ii) issue capital stock of any kind, (iii)
terminate the conservatorship of the FHFA except in connection with a receivership, or (iv)
increase its debt beyond certain specified levels. In addition, significant restrictions are
placed on the maximum size of each of Freddie Macs and Fannie Maes respective portfolios of
mortgages and mortgage-backed securities portfolios, and the purchase agreements entered into by
Freddie Mac and Fannie Mae provide that the maximum size of their portfolios of these assets must
decrease by a specified percentage each year. The future status and role of Freddie Mac and Fannie
Mae could be impacted by (among other things) the actions taken and restrictions placed on Freddie
Mac and Fannie Mae by the FHFA in is role as conservator, the restrictions placed on Freddie Macs
and Fannie Maes operations and activities as a result of the senior preferred stock investment
made by the Treasury, market responses to developments at Freddie Mac and Fannie Mae, and future
legislative and regulatory action that alters the operations, ownership, structure and/or mission
of these institutions, each of which may, in turn, impact the value of, and cash flows on, any
Mortgage-Backed Securities guaranteed by Freddie Mac and Fannie Mae, including any such
Mortgage-Backed Securities held by the Fund.
Guaranteed Mortgage Pass-Through Securities
Ginnie Mae Certificates
. Ginnie Mae is a wholly-owned corporate instrumentality of the
United States. Ginnie Mae is authorized to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage loans insured by the
Federal Housing Administration (FHA), or guaranteed by the Veterans Administration (VA), or by
pools of other eligible mortgage loans. In order to meet its obligations under any guaranty, Ginnie
Mae is authorized to borrow from the United States Treasury in an unlimited amount. The National
Housing Act provides that the full faith and credit of the U.S. government is pledged to the timely
payment of principal and interest by Ginnie Mae of amounts due on Ginnie Mae certificates.
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Fannie Mae Certificates
. Fannie Mae is a stockholder-owned corporation chartered under
an act of the United States Congress. Generally, Fannie Mae Certificates are issued and guaranteed
by Fannie Mae and represent an undivided interest in a pool of mortgage loans (a Pool) formed by
Fannie Mae. A Pool consists of residential mortgage loans either previously owned by Fannie Mae or
purchased by it in connection with the formation of the Pool. The mortgage loans may be either
conventional mortgage loans (i.e., not insured or guaranteed by any U.S. government agency) or
mortgage loans that are either insured by the FHA or guaranteed by the VA. However, the mortgage
loans in Fannie Mae Pools are primarily conventional mortgage loans. The lenders originating and
servicing the mortgage loans are subject to certain eligibility requirements established by Fannie
Mae.
Fannie Mae has certain contractual responsibilities. With respect to each Pool, Fannie Mae is
obligated to distribute scheduled installments of principal and interest after Fannie Maes
servicing and guaranty fee, whether or not received, to Certificate holders. Fannie Mae also is
obligated to distribute to holders of Certificates an amount equal to the full principal balance of
any foreclosed mortgage loan, whether or not such principal balance is actually recovered. The
obligations of Fannie Mae under its guaranty of the Fannie Mae Certificates are obligations solely
of Fannie Mae. See Additional Information with Respect to Freddie Mac and Fannie Mae.
Freddie Mac Certificates
. Freddie Mac is a publicly held U.S. government sponsored
enterprise. A principal activity of Freddie Mac currently is the purchase of first lien,
conventional, residential and multifamily mortgage loans and participation interests in such
mortgage loans and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a group of mortgage loans
or participations in mortgage loans (a Freddie Mac Certificate group) purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac Certificate the timely
payment of interest at the rate provided for by such Freddie Mac Certificate (whether or not
received on the underlying loans). Freddie Mac also guarantees to each registered Certificate
holder ultimate collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled principal. The
obligations of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations solely of
Freddie Mac. See Additional Information with Respect to Freddie Mac and Fannie Mae.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates consist of
adjustable rate or fixed-rate mortgage loans with original terms to maturity of up to forty years.
These mortgage loans are usually secured by first liens on one-to-four-family residential
properties or multi-family projects. Each mortgage loan must meet the applicable standards set
forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include
whole loans, participation interests in whole loans, undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
Conventional Mortgage Loans
. The conventional mortgage loans underlying the Freddie
Mac and Fannie Mae Certificates consist of adjustable rate or fixed-rate mortgage loans normally
with original terms to maturity of between five and thirty years. Substantially all of these
mortgage loans are secured by first liens on one- to four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards set forth in the law
creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans, undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
Mortgage Pass-Through Securities
.
To the extent consistent with its investment
policies, the Fund may invest in both government guaranteed and privately issued mortgage
pass-through securities (Mortgage Pass-Throughs), that are fixed or adjustable rate
Mortgage-Backed Securities which provide for monthly payments that are a pass-through of the
monthly interest and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans. The seller or servicer of the
underlying mortgage obligations will generally make representations and warranties to certificate
holders as to certain characteristics of the mortgage loans and as to the accuracy of certain
information furnished to the trustee in respect of each such mortgage loan. Upon a breach of any
representation or warranty that materially and adversely affects the interests of the related
certificate holders in a mortgage loan, the seller or servicer generally may be obligated either to
cure the breach in all material respects, to repurchase the mortgage loan or, if the related
agreement so provides, to substitute in its place a mortgage loan pursuant to the conditions set
forth therein. Such a repurchase or substitution obligation may constitute the sole remedy
available to the related certificate holders or the trustee for the material breach of any such
representation or warranty by the seller or servicer.
The following discussion describes only a few of the wide variety of structures of Mortgage
Pass-Throughs that are available or may be issued.
B-9
Description of Certificates.
Mortgage Pass-Throughs may be issued in one or more classes of
senior certificates and one or more classes of subordinate certificates. Each such class may bear a
different pass-through rate. Generally, each certificate will evidence the specified interest of
the holder thereof in the payments of principal or interest or both in respect of the mortgage pool
comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to varying amounts of
principal and interest. If a REMIC election has been made, certificates of such subclasses may be
entitled to payments on the basis of a stated principal balance and stated interest rate, and
payments among different subclasses may be made on a sequential, concurrent, pro rata or
disproportionate basis, or any combination thereof. The stated interest rate on any such subclass
of certificates may be a fixed rate or one which varies in direct or inverse relationship to an
objective interest index.
Generally, each registered holder of a certificate will be entitled to receive its pro rata
share of monthly distributions of all or a portion of principal of the underlying mortgage loans or
of interest on the principal balances thereof, which accrues at the applicable mortgage
pass-through rate, or both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Because certain adjustable
rate mortgage loans included in a mortgage pool may provide for deferred interest (
i.e
., negative
amortization), the amount of interest actually paid by a mortgagor in any month may be less than
the amount of interest accrued on the outstanding principal balance of the related mortgage loan
during the relevant period at the applicable mortgage interest rate. In such event, the amount of
interest that is treated as deferred interest will generally be added to the principal balance of
the related mortgage loan and will be distributed pro rata to certificate-holders as principal of
such mortgage loan when paid by the mortgagor in subsequent monthly payments or at maturity.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage Obligations
. The
Fund may invest in multiple class securities including collateralized mortgage obligations (CMOs)
and REMIC Certificates. These securities may be issued by U.S. government agencies,
instrumentalities or sponsored enterprises such as Fannie Mae or Freddie Mac or, to the extent
consistent with the Funds investment policies, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial
banks, insurance companies, investment banks and special purpose subsidiaries of the foregoing. In
general, CMOs are debt obligations of a legal entity that are collateralized by, and multiple class
Mortgage-Backed Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on the CMOs or multiple
class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of principal
and interest by Fannie Mae. In addition, Fannie Mae will be obligated to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient funds are otherwise
available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC Certificates and
also guarantees the payment of principal as payments are required to be made on the underlying
mortgage participation certificates (PCs). PCs represent undivided interests in specified level
payment, residential mortgages or participations therein purchased by Freddie Mac and placed in a
PC pool. With respect to principal payments on PCs, Freddie Mac generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or deduction but the
receipt of the required payments may be delayed. Freddie Mac also guarantees timely payment of
principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac are types of
multiple class Mortgage-Backed Securities. The REMIC Certificates represent beneficial ownership
interests in a REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac or
Ginnie Mae guaranteed Mortgage-Backed Securities (the Mortgage Assets). The obligations of Fannie
Mae or Freddie Mac under their respective guaranty of the REMIC Certificates are obligations solely
of Fannie Mae or Freddie Mac, respectively. See Additional Information with Respect to Freddie
Mac and Fannie Mae.
CMOs and REMIC Certificates are issued in multiple classes. Each class of CMOs or REMIC
Certificates, often referred to as a tranche, is issued at a specific adjustable or fixed
interest rate and must be fully retired no later than its final distribution date. Principal
prepayments on the mortgage loans or the Mortgage Assets underlying the CMOs or REMIC Certificates
may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or accrues on all classes
of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among the several
classes of CMOs or REMIC Certificates in various ways. In certain structures (known as sequential
pay CMOs or REMIC Certificates), payments of principal, including
B-10
any principal prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment
of principal will be made on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others, parallel pay
CMOs and REMIC Certificates. Parallel pay CMOs or REMIC Certificates are those which are structured
to apply principal payments and prepayments of the Mortgage Assets to two or more classes
concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or sequential pay
structures. These securities include accrual certificates (also known as Z-Bonds), which only
accrue interest at a specified rate until all other certificates having an earlier final
distribution date have been retired and are converted thereafter to an interest-paying security,
and planned amortization class (PAC) certificates, which are parallel pay REMIC Certificates that
generally require that specified amounts of principal be applied on each payment date to one or
more classes or REMIC Certificates (the PAC Certificates), even though all other principal
payments and prepayments of the Mortgage Assets are then required to be applied to one or more
other classes of the PAC Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to the amount payable
on the next payment date. The PAC Certificate payment schedule is taken into account in calculating
the final distribution date of each class of PAC. In order to create PAC tranches, one or more
tranches generally must be created that absorb most of the volatility in the underlying Mortgage
Assets. These tranches tend to have market prices and yields that are much more volatile than other
PAC classes.
Commercial Mortgage-Backed Securities.
Commercial Mortgage-Backed Securities (CMBS)
are a type of Mortgage Pass-Through Security that are primarily backed by a pool of commercial
mortgage loans. The commercial mortgage loans are, in turn, generally secured by commercial
mortgaged properties (such as office properties, retail properties, hospitality properties,
multi-family self-storage, industrial properties, healthcare related properties or other types of
income producing real property). CMBS generally entitle the holders thereof to receive payments
that depend primarily on the cash flow from a specified pool of commercial or multifamily mortgage
loans. CMBS will be affected by payments, defaults, delinquencies and losses on the underlying
mortgage loans. Because issuers of CMBS have no significant assets other than the underlying
commercial real estate loans and because of the significant credit risks inherent in the underlying
collateral, credit risk is a correspondingly important consideration with respect to the related
CMBS Securities. Certain of the mortgage loans underlying CMBS Securities constituting part of the
collateral interests may be delinquent, in default or in foreclosure.
Commercial real estate lending may expose a lender (and the related Mortgage-Backed Security)
to a greater risk of loss than certain other forms of lending because it typically involves making
larger loans to single borrowers or groups of related borrowers. In addition, in the case of
certain commercial mortgage loans, repayment of loans secured by commercial and multifamily
properties depends upon the ability of the related real estate project to generate income
sufficient to pay debt service, operating expenses and leasing commissions and to make necessary
repairs, tenant improvements and capital improvements, and in the case of loans that do not fully
amortize over their terms, to retain sufficient value to permit the borrower to pay off the loan at
maturity through a sale or refinancing of the mortgaged property. The net operating income from
and value of any commercial property is subject to various risks, including changes in general or
local economic conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate tax rates and other
operating expenses; changes in governmental rules, regulations and fiscal policies; acts of God;
terrorist threats and attacks and social unrest and civil disturbances. In addition, certain of
the mortgaged properties securing the pools of commercial mortgage loans underlying CMBS may have a
higher degree of geographic concentration in a few states or regions. Any deterioration in the
real estate market or economy or adverse events in such states or regions, may increase the rate of
delinquency and default experience (and as a consequence, losses) with respect to mortgage loans
related to properties in such state or region. Pools of mortgaged properties securing the
commercial mortgage loans underlying CMBS may also have a higher degree of concentration in certain
types of commercial properties. Accordingly, such pools of mortgage loans represent higher
exposure to risks particular to those types of commercial properties. Certain pools of commercial
mortgage loans underlying CMBS consist of a fewer number of mortgage loans with outstanding
balances that are larger than average. If a mortgage pool includes mortgage loans with larger than
average balances, any realized losses on such mortgage loans could be more severe, relative to the
size of the pool, than would be the case if the aggregate balance of the pool were distributed
among a larger number of mortgage loans. Certain borrowers or affiliates thereof relating to
certain of the commercial mortgage loans underlying CMBS may have had a history of bankruptcy.
Certain mortgaged properties securing the commercial mortgage loans underlying CMBS may have been
exposed to environmental conditions or circumstances. The ratings in respect of certain of the
CMBS comprising the Mortgage-Backed Securities may have been withdrawn, reduced or placed on credit
watch since issuance. In addition, losses and/or appraisal reductions may be allocated to certain
of such CMBS and certain of the collateral or the assets underlying such collateral may be
delinquent and/or may default from time to time.
B-11
CMBS held by the Fund may be subordinated to one or more other classes of securities of the
same series for purposes of, among other things, establishing payment priorities and offsetting
losses and other shortfalls with respect to the related underlying mortgage loans. Realized losses
in respect of the mortgage loans included in the CMBS pool and trust expenses generally will be
allocated to the most subordinated class of securities of the related series. Accordingly, to the
extent any CMBS is or becomes the most subordinated class of securities of the related series, any
delinquency or default on any underlying mortgage loan may result in shortfalls, realized loss
allocations or extensions of its weighted average life and will have a more immediate and
disproportionate effect on the related CMBS than on a related more senior class of CMBS of the same
series. Further, even if a class is not the most subordinate class of securities, there can be no
assurance that the subordination offered to such class will be sufficient on any date to offset all
losses or expenses incurred by the underlying trust. CMBS are typically not guaranteed or insured,
and distributions on such CMBS generally will depend solely upon the amount and timing of payments
and other collections on the related underlying commercial mortgage loans.
Stripped Mortgage-Backed Securities.
The Fund may invest in stripped mortgage-backed
securities (SMBS), which are derivative multiclass mortgage securities, issued or guaranteed by
the U.S. government, its agencies or instrumentalities or, to the extent consistent with the Funds
investment policies, non-governmental originators. SMBS are usually structured with two different
classes: one that receives substantially all of the interest payments (the interest-only, or IO
and/or the high coupon rate with relatively low principal amount, or IOette), and the other that
receives substantially all of the principal payments (the principal-only, or PO), from a pool of
mortgage loans.
Certain SMBS may not be readily marketable and will be considered illiquid for purposes of the
Funds limitation on investments in illiquid securities. The Investment Adviser may determine that
SMBS which are U.S. Government securities are liquid for purposes of the Funds limitation on
investments in illiquid securities. The market value of POs generally is unusually volatile in
response to changes in interest rates. The yields on IOs and IOettes are generally higher than
prevailing market yields on other Mortgage-Backed Securities because their cash flow patterns are
more volatile and there is a greater risk that the initial investment will not be fully recouped.
The Funds investment in SMBS may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
Privately Issued Mortgage-Backed Securities.
The Fund may invest in privately issued
Mortgage-Backed Securities. Privately issued Mortgage-Backed Securities are generally backed by
pools of conventional (
i.e
., non-government guaranteed or insured) mortgage loans. The seller or
servicer of the underlying mortgage obligations will generally make representations and warranties
to certificate-holders as to certain characteristics of the mortgage loans and as to the accuracy
of certain information furnished to the trustee in respect of each such mortgage loan. Upon a
breach of any representation or warranty that materially and adversely affects the interests of the
related certificate-holders in a mortgage loan, the seller or servicer generally will be obligated
either to cure the breach in all material respects, to repurchase the mortgage loan or, if the
related agreement so provides, to substitute in its place a mortgage loan pursuant to the
conditions set forth therein. Such a repurchase or substitution obligation may constitute the sole
remedy available to the related certificate-holders or the trustee for the material breach of any
such representation or warranty by the seller or servicer.
Ratings
. The ratings assigned by a rating organization to Mortgage Pass-Throughs
address the likelihood of the receipt of all distributions on the underlying mortgage loans by the
related certificate-holders under the agreements pursuant to which such certificates are issued. A
rating organizations ratings normally take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal aspects associated with
such certificates, and the extent to which the payment stream on such mortgage pool is adequate to
make payments required by such certificates. A rating organizations ratings on such certificates
do not, however, constitute a statement regarding frequency of prepayments on the related mortgage
loans. In addition, the rating assigned by a rating organization to a certificate may not address
the possibility that, in the event of the insolvency of the issuer of certificates where a
subordinated interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization, payments on such
certificates may be affected.
Recently, rating agencies have placed on credit watch or downgraded the ratings previously
assigned to a large number of mortgage-backed securities (which may include certain of the
Mortgage-Backed Securities in which the Fund may have invested or may in the future be invested),
and may continue to do so in the future. In the event that any Mortgage-Backed Security held by
the Fund is placed on credit watch or downgraded, the value of such Mortgage-Backed Security may
decline and the Fund may consequently experience losses in respect of such Mortgage-Backed
Security.
Credit Enhancement
. Mortgage pools created by non-governmental issuers generally offer
a higher yield than government and government-related pools because of the absence of direct or
indirect government or agency payment guarantees. To lessen the effect
B-12
of failures by obligors on underlying assets to make payments. Mortgage Pass-Throughs may
contain elements of credit support. Credit support falls generally into two categories: (i)
liquidity protection and (ii) protection against losses resulting from default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances, generally by the
entity administering the pools of mortgages, the provision of a reserve fund, or a combination
thereof, to ensure, subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such credit support can
be provided by, among other things, payment guarantees, letters of credit, pool insurance,
subordination, or any combination thereof.
Subordination; Shifting of Interest; Reserve Fund
. In order to achieve ratings on one
or more classes of Mortgage Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-holders to receive any or
a specified portion of distributions with respect to the underlying mortgage loans may be
subordinated to the rights of the senior certificate-holders. If so structured, the subordination
feature may be enhanced by distributing to the senior certificate-holders on certain distribution
dates, as payment of principal, a specified percentage (which generally declines over time) of all
principal payments received during the preceding prepayment period (shifting interest credit
enhancement). This will have the effect of accelerating the amortization of the senior
certificates while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative to that of the
senior certificates is intended to preserve the availability of the subordination provided by the
subordinate certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of principal prepayments
which is greater than their proportionate interest in the trust fund, the rate of principal
prepayments on the mortgage loans may have an even greater effect on the rate of principal payments
and the amount of interest payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-holders to receive
current distributions from the mortgage pool, a reserve fund may be established relating to such
certificates (the Reserve Fund). The Reserve Fund may be created with an initial cash deposit by
the originator or servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the Reserve Fund reaches a
specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the likelihood of
timely receipt by senior certificate-holders of the full amount of scheduled monthly payments of
principal and interest due to them and will protect the senior certificate-holders against certain
losses; however, in certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before the subordinated
amount is reduced to zero, senior certificate-holders will nevertheless have a preferential right
to receive current distributions from the mortgage pool to the extent of the then outstanding
subordinated amount. Unless otherwise specified, until the subordinated amount is reduced to zero,
on any distribution date any amount otherwise distributable to the subordinate certificates or, to
the extent specified, in the Reserve Fund will generally be used to offset the amount of any losses
realized with respect to the mortgage loans (Realized Losses). Realized Losses remaining after
application of such amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has been reduced to zero,
Realized Losses generally will be allocated
pro
rata
among all certificate-holders
in proportion to their respective outstanding interests in the mortgage pool.
Alternative Credit Enhancement
. As an alternative, or in addition to the credit
enhancement afforded by subordination, credit enhancement for Mortgage Pass-Throughs may be
provided by mortgage insurance, hazard insurance, by the deposit of cash, certificates of deposit,
letters of credit, a limited guaranty or by such other methods as are acceptable to a rating
agency. In certain circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure to an external
credit enhancement provider.
Voluntary Advances
. Generally, in the event of delinquencies in payments on the
mortgage loans underlying the Mortgage Pass-Throughs, the servicer may agree to make advances of
cash for the benefit of certificate-holders, but generally will do so only to the extent that it
determines such voluntary advances will be recoverable from future payments and collections on the
mortgage loans or otherwise.
Optional Termination
. Generally, the servicer may, at its option with respect to any
certificates, repurchase all of the underlying mortgage loans remaining outstanding at such time if
at any time the aggregate outstanding principal balance of such mortgage loans is less than a
specified percentage (generally 5-10%) of the aggregate outstanding principal balance of the
mortgage loans as of the cut-off date specified with respect to such series.
Recent Events Relating to the Mortgage-Backed Securities Markets and the Overall Economy
B-13
The recent and unprecedented disruption in the residential mortgage-backed securities market
(and in particular, the subprime residential mortgage market), the broader mortgage-backed
securities market and the asset-backed securities market have resulted in downward price pressures
and increasing foreclosures and defaults in residential and commercial real estate. Concerns over
inflation, energy costs, geopolitical issues, the availability and cost of credit, the mortgage
market and a declining real estate market have contributed to increased volatility and diminished
expectations for the economy and markets going forward, and have contributed to dramatic declines
in the housing market, with falling home prices and increasing foreclosures and unemployment, and
significant asset write-downs by financial institutions. These conditions have prompted a number
of financial institutions to seek additional capital, to merge with other institutions and, in some
cases, to fail. The continuation or worsening of this general economic downturn may lead to
further declines in income from, or the value of, real estate, including the real estate which
secures the Mortgage-Backed Securities held by the Fund. Additionally, a lack of credit liquidity,
higher mortgage rates and decreases in the value of real property have occurred and may continue to
occur or worsen, and potentially prevent borrowers from refinancing their mortgages, which may
increase the likelihood of default on their mortgage loans. These economic conditions may also
adversely affect the amount of proceeds the holder of a mortgage loan or mortgage-backed securities
(including the Mortgaged-Backed Securities in which the Fund may invest) would realize in the event
of a foreclosure or other exercise of remedies. Moreover, even if such Mortgage-Backed Securities
are performing as anticipated, the value of such securities in the secondary market may
nevertheless fall or continue to fall as a result of deterioration in general market conditions for
such Mortgage-Backed Securities or other asset-backed or structured products. Trading activity
associated with market indices may also drive spreads on those indices wider than spreads on
Mortgage-Backed Securities, thereby resulting in a decrease in value of such Mortgage-Backed
Securities, including the Mortgage-Backed Securities owned by the Fund.
The U.S. Government, the Federal Reserve, the Treasury, and other governmental and regulatory
bodies have recently taken or are considering taking actions to address the financial crisis. The
impact such actions could have on any of the Mortgage-Backed Securities held by the Fund is
unknown.
Recently, delinquencies, defaults and losses on residential mortgage loans have increased
substantially and may continue to increase, which may affect the performance of the Mortgage-Backed
Securities in which the Fund may invest. Mortgage loans backing non-agency Mortgage-Backed
Securities are more sensitive to economic factors that could affect the ability of borrowers to pay
their obligations under the mortgage loans backing these securities. In addition, in recent months
housing prices and appraisal values in many states and localities have declined or stopped
appreciating. A continued decline or an extended flattening of those values may result in
additional increases in delinquencies and losses on mortgage-backed securities generally (including
the mortgaged-backed securities that the Fund may invest in as described above).
The foregoing adverse changes in market conditions and regulatory climate may reduce the cash
flow which the Fund, to the extent it invests in such Mortgage-Backed Securities receives from such
securities and increase the incidence and severity of credit events and losses in respect of such
securities. In addition, interest rate spreads for mortgage-backed securities have widened and are
more volatile when compared to the recent past due to these adverse changes in market conditions.
In the event that interest rate spreads for Mortgage-Backed Securities continue to widen following
the purchase of such assets by the Fund, the market value of such securities is likely to decline
and, in the case of a substantial spread widening, could decline by a substantial amount.
Furthermore, these adverse changes in market conditions have resulted in a severe liquidity crisis
in the market for mortgage-backed securities (including the Mortgaged-Backed Securities in which
the Fund may invest) and increasing unwillingness by banks, financial institutions and investors to
extend credit to servicers, originators and other participants in the Mortgage-Backed Securities
market for these securities and other asset-backed securities. As a result, the liquidity and/or
the market value of any Mortgage-Backed Securities that are owned by the Fund may experience
further declines after they are purchased by the Fund.
Asset-Backed Securities
Asset-backed securities represent participations in, or are secured by and payable from,
assets such as motor vehicle installment sales, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or other credit
enhancements may be present.
The Fund may invest in asset-backed securities. Such securities are often subject to more
rapid repayment than their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining interest rates,
prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly,
the Funds ability to maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from
B-14
prepayments, and its ability to reinvest the returns of principal at comparable yields is
subject to generally prevailing interest rates at that time. To the extent that the Fund invests in
asset-backed securities, the values of the Funds portfolio securities will vary with changes in
market interest rates generally and the differentials in yields among various kinds of asset-backed
securities.
Asset-backed securities present certain additional risks because asset-backed securities
generally do not have the benefit of a security interest in collateral that is comparable to
Mortgage Assets. Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal consumer credit laws,
many of which give such debtors the right to set-off certain amounts owed on the credit cards,
thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables permit the loan
servicers to retain possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire an interest superior
to that of the holders of the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state laws, the trustee
for the holders of the automobile receivables may not have a proper security interest in the
underlying automobiles. Therefore, if the issuer of an asset-backed security defaults on its
payment obligations, there is the possibility that, in some cases, the Fund will be unable to
possess and sell the underlying collateral and that the Funds recoveries on repossessed collateral
may not be available to support payments on these securities.
Loan Participations
The Fund may invest in loan participations. A loan participation is an interest in a loan to a
U.S. or foreign company or other borrower which is administered and sold by a financial
intermediary. 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.
Participation interests acquired by the Fund may 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 sellers share of the loan. When the Fund acts as
co-lender in connection with a participation interest or when the Fund acquires certain
participation interests, the Fund will have direct recourse against the borrower if the borrower
fails to pay scheduled principal and interest. In cases where the Fund lacks direct recourse, it
will look to the agent bank to enforce appropriate credit remedies against the borrower. In these
cases, the Fund may be subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as commercial paper) of such
borrower. For example, in the event of the bankruptcy or insolvency of the corporate borrower, a
loan participation may be subject to certain defenses by the borrower as a result of improper
conduct by the agent bank. Moreover, under the terms of the loan participation, the Fund may be
regarded as a creditor of the agent bank (rather than of the underlying corporate borrower), so
that the Fund may also be subject to the risk that the agent bank may become insolvent. The
secondary market, if any, for these loan participations is limited and loan participations
purchased by the Fund will normally be regarded as illiquid.
For purposes of certain investment limitations pertaining to diversification of the Funds
portfolio investments, the issuer of a loan participation will be the underlying borrower. However,
in cases where the 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 a loan participation.
Zero Coupon, Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds
The Fund may invest in zero coupon, deferred interest, pay-in-kind (PIK) and capital
appreciation bonds. Zero coupon, deferred interest and capital appreciation bonds are debt
securities issued or sold at a discount from their face value and which do not entitle the holder
to any periodic payment of interest prior to maturity or a specified date. The original issue
discount varies depending on the time remaining until maturity or cash payment date, prevailing
interest rates, the liquidity of the security and the perceived credit quality of the issuer. These
securities also may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates representing interests in such
stripped debt obligations or coupons. The market prices of zero coupon, deferred interest, capital
appreciation bonds and PIK securities generally are more volatile than the market prices of
interest bearing securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the issuer with the
option of paying interest or dividends on such obligations in cash or in the form of additional
securities rather than cash. Similar to zero coupon bonds and deferred interest bonds, PIK
securities are designed to give an issuer flexibility in managing cash flow. PIK securities that
are debt securities can be either senior or subordinated debt and generally trade flat (
i.e
.,
without accrued interest). The trading price of PIK debt securities generally reflects the market
value of the underlying debt plus an amount representing accrued interest since the last interest
payment.
B-15
Zero coupon, deferred interest, capital appreciation and PIK securities involve the additional
risk that, unlike securities that periodically pay interest to maturity, the Fund will realize no
cash until a specified future payment date unless a portion of such securities is sold and, if the
issuer of such securities defaults, the Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current interest in cash,
the Fund is nonetheless required to accrue income on such investments for each taxable year and
generally is required to distribute such accrued amounts (net of deductible expenses, if any) to
avoid being subject to tax. Because no cash is generally received at the time of the accrual, the
Fund may be required to liquidate other portfolio securities to obtain sufficient cash to satisfy
federal tax distribution requirements applicable to the Fund. A portion of the discount with
respect to stripped tax exempt securities or their coupons may be taxable. See TAXATION.
Variable and Floating Rate Securities
The interest rates payable on certain securities in which the Fund may invest are not fixed
and may fluctuate based upon changes in market rates. A variable rate obligation has an interest
rate which is adjusted at pre-designated periods in response to changes in the market rate of
interest on which the interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield. Nevertheless, such
obligations may fluctuate in value in response to interest rate changes if there is a delay between
changes in market interest rates and the interest reset date for the obligation.
The Fund may invest in leveraged inverse floating rate debt instruments (inverse
floaters), including leveraged inverse floaters. The interest rate on inverse floaters resets in
the opposite direction from the market rate of interest to which the inverse floater is indexed. An
inverse floater may be considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of interest. The higher the
degree of leverage inherent in inverse floaters is associated with greater volatility in their
market values. Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for purposes of the
Funds limitation on illiquid investments.
Preferred Stock, Warrants and Rights
The Fund may invest in preferred stock, warrants and rights. Preferred stocks are securities
that represent an ownership interest providing the holder with claims on the issuers earnings and
assets before common stock owners but after bond owners. Unlike debt securities, the obligations of
an issuer of preferred stock, including dividend and other payment obligations, may not typically
be accelerated by the holders of such preferred stock on the occurrence of an event of default
(such as a covenant default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event
of default or non-compliance by the issuer, preferred stockholders will be entitled to gain
representation on the issuers board of directors or increase their existing board representation.
In addition, preferred stockholders may be granted voting rights with respect to certain issues on
the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares of common stock at a
specified price at any time during the life of the warrant. The holders of warrants and rights have
no voting rights, receive no dividends and have no rights with respect to the assets of the issuer.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of industrial,
utility and financial issuers. Corporate debt obligations include bonds, notes, debentures and
other obligations of corporations to pay interest and repay principal. Corporate debt obligations
are subject to the risk of an issuers inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general market liquidity.
Corporate Debt Obligations rated BBB or Baa are considered medium grade obligations with
speculative characteristics, and adverse economic conditions or changing circumstances may weaken
their issuers capacity to pay interest and repay principal. Medium to lower rated and comparable
non-rated securities tend to offer higher yields than higher rated securities with the same
maturities because the historical financial condition of the issuers of such securities may not
have been as strong as that of other issuers. Another factor which causes fluctuations in the
prices of fixed income securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed income securities fluctuate in response to the general level of
interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition
will not affect cash income from such securities but will be reflected in the Funds net asset
value. Because medium to lower rated securities generally involve greater risks of loss of income
and principal than higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry
B-16
medium to lower ratings and in comparable unrated securities. In addition to the risk of
default, there are the related costs of recovery on defaulted issues. The Investment Adviser will
attempt to reduce these risks through portfolio diversification and by analysis of each issuer and
its ability to make timely payments of income and principal, as well as broad economic trends and
corporate developments.
The Investment Adviser employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends, the issuers
sensitivity to economic conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Funds portfolio and evaluates
whether to dispose of or to retain corporate debt obligations whose credit ratings or credit
quality may have changed.
Commercial Paper and Other Short-Term Corporate Obligations
The Fund may invest in commercial paper and other short-term obligations payable in U.S.
dollars and issued or guaranteed by U.S. corporations, non-U.S. corporations or other entities.
Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or
bank holding companies, corporations and finance companies.
Trust Preferred Securities
The Fund may invest in trust preferred securities. A trust preferred or capital security is a
long dated bond (for example 30 years) with preferred features. The preferred features are that
payment of interest can be deferred for a specified period without initiating a default event. From
a bondholders viewpoint, the securities are senior in claim to standard preferred but are junior
to other bondholders. From the issuers viewpoint, the securities are attractive because their
interest is deductible for tax purposes like other types of debt instruments.
High Yield Securities
The Fund may invest in bonds rated BB or below by Standard & Poors or Ba or below by Moodys
(or comparable rated and unrated securities). These bonds are commonly referred to as junk bonds
and are considered speculative. The ability of issuers of non-investment grade securities to make
principal and interest payments may be questionable. In some cases, such bonds may be highly
speculative, have poor prospects for reaching investment grade standing and be in default. As a
result, investment in such bonds will entail greater risks than those associated with investment
grade bonds (
i.e
., bonds rated AAA, AA, A or BBB by Standard and Poors or Aaa, Aa, A or Baa by
Moodys). Analysis of the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt securities, and the ability of the Fund to achieve its
investment objective may, to the extent of its investments in high yield securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities. See Appendix A for a description of the corporate bond and preferred
stock ratings by Standard & Poors, Moodys, Fitch, Inc. (Fitch) and Dominion Bond Rating Service
Limited (DBRS).
Risks associated with acquiring the securities of such issuers generally are greater than is
the case with higher rated securities because such issuers are often less creditworthy companies or
are highly leveraged and generally less able than more established or less leveraged entities to
make scheduled payments of principal and interest. High yield securities are also issued by
governmental issuers that may have difficulty in making all scheduled interest and principal
payments.
The market values of high yield, fixed income securities tend to reflect individual corporate
or municipal developments to a greater extent than do those of higher rated securities, which react
primarily to fluctuations in the general level of interest rates. Issuers of such high yield
securities are often highly leveraged, and may not be able to make use of more traditional methods
of financing. Their ability to service debt obligations may be more adversely affected than
issuers of higher rated securities by economic downturns, specific corporate or governmental
developments or the issuers inability to meet specific projected business forecasts. High yield
securities also tend to be more sensitive to economic conditions than higher-rated securities.
Negative publicity about the junk bond market and investor perceptions regarding lower-rated
securities, whether or not based on fundamental analysis, may depress the prices for such high
yield securities.
Because investors generally perceive that there are greater risks associated with
non-investment grade securities of the type in which the Fund may invest, the yields and prices of
such securities may tend to fluctuate more than those for higher-rated securities. In the lower
quality segments of the fixed income securities market, changes in perceptions of issuers
creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the fixed income securities market, resulting in greater yield and price
volatility.
B-17
Another factor which causes fluctuations in the prices of high yield, fixed income securities
is the supply and demand for similarly rated securities. In addition, the prices of fixed income
securities fluctuate in response to the general level of interest rates. Fluctuations in the prices
of portfolio securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Funds net asset value.
The risk of loss from default for the holders of high yield, fixed income securities is
significantly greater than is the case for holders of other debt securities because such high
yield, fixed income securities are generally unsecured and are often subordinated to the rights of
other creditors of the issuers of such securities. Investment by the Fund in already defaulted
securities poses an additional risk of loss should nonpayment of principal and interest continue in
respect of such securities. Even if such securities are held to maturity, recovery by the Fund of
its initial investment and any anticipated income or appreciation is uncertain. In addition, the
Fund may incur additional expenses to the extent that its required to seek recovery relating to the
default in the payment of principal or interest on such securities or otherwise protect its
interests. The Fund may be required to liquidate other portfolio securities to satisfy annual
distribution obligations of the Fund in respect of accrued interest income on securities which are
subsequently written off, even though the Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed income securities is concentrated in relatively few
markets and is dominated by institutional investors, including mutual funds, insurance companies
and other financial institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated securities. In addition,
the trading volume for high-yield, fixed income securities is generally lower than that of higher
rated securities and the secondary market for high yield, fixed income securities could contract
under adverse market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on the ability of the
Fund to dispose of particular portfolio investments. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the prices used in
calculating the net asset value of the Fund. A less liquid secondary market also may make it more
difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.
The adoption of new legislation could adversely affect the secondary market for high yield
securities and the financial condition of issuers of these securities. The form of any future
legislation, and the probability of such legislation being enacted, is uncertain.
Non-investment grade or high-yield, fixed income securities also present risks based on
payment expectations. High yield, fixed income securities frequently contain call or buy-back
features which permit the issuer to call or repurchase the security from its holder. If an issuer
exercises such a call option and redeems the security, the Fund may have to replace such security
with a lower-yielding security, resulting in a decreased return for investors. In addition, if the
Fund experiences net redemptions of its shares, it may be forced to sell its higher-rated
securities, resulting in a decline in the overall credit quality of the portfolio of the Fund and
increasing the exposure of the Fund to the risks of high yield securities.
Credit ratings issued by credit rating agencies are designed to evaluate the safety of
principal and interest payments of rated securities. They do not, however, evaluate the market
value risk of non-investment grade securities and, therefore, may not fully reflect the true risks
of an investment. In addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in non-investment grade and comparable unrated obligations will be
more dependent on the Investment Advisers credit analysis than would be the case with investments
in investment-grade debt obligations. The Investment Adviser employs its own credit research and
analysis, which includes a study of an issuers existing debt, capital structure, ability to
service debt and to pay dividends, sensitivity to economic conditions, operating history and
current trend of earnings. The Investment Adviser continually monitors the investments in the
portfolio of the Fund and evaluates whether to dispose of or to retain non-investment grade and
comparable unrated securities whose credit ratings or credit quality may have changed.
An economic downturn could severely affect the ability of highly leveraged issuers of junk
bond securities to service their debt obligations or to repay their obligations upon maturity.
Factors having an adverse impact on the market value of junk bonds will have an adverse effect on
the Funds net asset value to the extent it invests in such securities. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a default in payment
of principal or interest on its portfolio holdings.
The secondary market for junk bonds, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities. This reduced
liquidity may have an adverse effect on the ability of the Fund to dispose of a particular security
when necessary to meet its redemption requests or other liquidity needs. Under adverse market or
economic conditions, the secondary market for junk bonds could contract further, independent of any
specific adverse changes in the
B-18
condition of a particular issuer. As a result, the Investment Adviser could find it difficult
to sell these securities or may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under such circumstances, may be less than the prices used in calculating the Funds
net asset value.
Because investors generally perceive that there are greater risks associated with the medium
to lower rated securities of the type in which the Fund may invest, the yields and prices of such
securities may tend to fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed income securities market, changes in perceptions of issuers creditworthiness
tend to occur more frequently and in a more pronounced manner than do changes in higher quality
segments of the fixed income securities market, resulting in greater yield and price volatility.
Bank Obligations
The Fund may invest in obligations issued or guaranteed by U.S. and foreign banks. Bank
obligations, including without limitation time deposits, bankers acceptances and certificates of
deposit, may be general obligations of the parent bank or may be obligations only of the issuing
branch pursuant to the terms of the specific obligations or government regulation.
Banks are subject to extensive but different governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be charged. Foreign banks
are subject to different regulations and are generally permitted to engage in a wider variety of
activities than U.S. banks. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an important part in the
operations of this industry.
Certificates of deposit are certificates evidencing the obligation of a bank to repay funds
deposited with it for a specified period of time at a specified rate. Certificates of deposit are
negotiable instruments and are similar to saving deposits but have a definite maturity and are
evidenced by a certificate instead of a passbook entry. Banks are required to keep reserves
against all certificates of deposit. Fixed time deposits are bank obligations payable at a stated
maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on the
demand by the investor, but may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. The Fund may invest in deposits in
U.S. and European banks which satisfy the standards set forth above.
Municipal Securities
The Fund may invest in Municipal Securities, the interest on which is exempt from regular
federal income tax (
i.e
., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from the income taxes of any state
or local government). In addition, Municipal Securities include participation interests in such
securities the interest on which is, in the opinion of bond counsel or counsel selected by the
Investment Adviser, excluded from gross income for federal income tax purposes. The Fund may revise
its definition of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such counsel, excluded from
gross income for federal income tax purposes, provided that investing in such securities is
consistent with the Funds investment objective and policies. The Fund may also invest in taxable
Municipal Securities.
The yields and market values of municipal securities are determined primarily by the general
level of interest rates, the creditworthiness of the issuers of municipal securities and economic
and political conditions affecting such issuers. The yields and market prices of municipal
securities may be adversely affected by changes in tax rates and policies, which may have less
effect on the market for taxable fixed income securities. Moreover, certain types of municipal
securities, such as housing revenue bonds, involve prepayment risks which could affect the yield on
such securities. The credit rating assigned to municipal securities may reflect the existence of
guarantees, letters of credit or other credit enhancement features available to the issuers or
holders of such municipal securities.
Dividends paid by the Fund that are derived from interest paid on both tax exempt and taxable
Municipal Securities will be taxable to the Funds shareholders.
Municipal Securities are often issued to obtain funds for various public purposes including
refunding outstanding obligations, obtaining funds for general operating expenses, and obtaining
funds to lend to other public institutions and facilities. Municipal Securities also include
certain private activity bonds or industrial development bonds, which are issued by or on behalf
of public
B-19
authorities to provide financing aid to acquire sites or construct or equip facilities within
a municipality for privately or publicly owned corporations.
Investments in municipal securities are subject to the risk that the issuer could default on
its obligations. Such a default could result from the inadequacy of the sources or revenues from
which interest and principal payments are to be made or the assets collateralizing such
obligations. Revenue bonds, including private activity bonds, are backed only by specific assets or
revenue sources and not by the full faith and credit of the governmental issuer.
The two principal classifications of Municipal Securities are general obligations and
revenue obligations. General obligations are secured by the issuers pledge of its full faith and
credit for the payment of principal and interest, although the characteristics and enforcement of
general obligations may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds, resource recovery
bonds, certificates of participation and certain municipal notes, are not backed by the credit and
taxing authority of the issuer, and are payable solely from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a revenue obligation may be
backed by a letter of credit, guarantee or insurance. General obligations and revenue obligations
may be issued in a variety of forms, including commercial paper, fixed, variable and floating rate
securities, tender option bonds, auction rate bonds, zero coupon bonds, deferred interest bonds and
capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a variety of hybrid and
special types of Municipal Securities. There are also numerous differences in the security of
Municipal Securities both within and between these two principal classifications.
The Fund may own a large percentage of any one general assessment bond issuance. Therefore,
the Fund may be adversely impacted if the issuing municipality fails to pay principal and/or
interest on those bonds.
For the purpose of applying the Funds investment restrictions, the identification of the
issuer of a Municipal Security which is not a general obligation is made by the Investment Adviser
based on the characteristics of the Municipal Security, the most important of which is the source
of funds for the payment of principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small number of
institutional investors, including the Fund. Thus, the issue may not be said to be publicly
offered. Unlike some securities that are not publicly offered, a secondary market exists for many
Municipal Securities that were not publicly offered initially and such securities may be readily
marketable.
The credit rating assigned to Municipal Securities may reflect the existence of guarantees,
letters of credit or other credit enhancement features available to the issuers or holders of such
Municipal Securities.
The obligations of the issuer to pay the principal of and interest on a Municipal Security are
subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any, that may be enacted
by Congress or state legislatures extending the time for payment of principal or interest or
imposing other constraints upon the enforcement of such obligations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of the issuer to pay when
due principal of or interest on a Municipal Security may be materially affected.
The recognition of certain accrued market discount income (if the Fund acquires Municipal
Securities or other obligations at a market discount), income from investments other than Municipal
Securities and any capital gains generated from the disposition of investments, will result in
taxable income. In addition to federal income tax, shareholders may be subject to state, local or
foreign taxes on distributions of such income received from the Fund.
From time to time, proposals have been introduced before Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on Municipal Securities.
For example, under the Tax Reform Act of 1986, interest on certain private activity bonds must be
included in an investors federal alternative minimum taxable income, and corporate investors must
include all tax exempt interest in their federal alternative minimum taxable income. The Trust
cannot predict what legislation, if any, may be proposed in the future in Congress as regards the
federal income tax status of interest on Municipal Securities or which proposals, if any, might be
enacted. Such proposals, if enacted, might materially and adversely affect the tax treatment of
Municipal Securities and the availability of Municipal Securities for investment by the Fund and
the Funds liquidity and value. In such an event the Board of Trustees would reevaluate the Funds
investment policies.
B-20
Municipal Leases, Certificates of Participation and Other Participation
Interests
. The Fund may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a lease or installment
purchase which is issued by a state or local government to acquire equipment and facilities. Income
from such obligations is generally exempt from state and local taxes in the state of issuance.
Municipal leases frequently involve special risks not normally associated with general obligations
or revenue bonds. Leases and installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the governmental issuer) have evolved
as a means for governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or contracts of
non-appropriation clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition, such leases or
contracts may be subject to the temporary abatement of payments in the event the issuer is
prevented from maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities, the disposition of
the property in the event of non-appropriation or foreclosure might prove difficult, time consuming
and costly, and result in a delay in recovering or the failure to fully recover the Funds original
investment. To the extent that the Fund invests in unrated municipal leases or participates in such
leases, the credit quality rating and risk of cancellation of such unrated leases will be monitored
on an ongoing basis.
Certificates of participation represent undivided interests in municipal leases, installment
purchase agreements or other instruments. The certificates are typically issued by a trust or other
entity which has received an assignment of the payments to be made by the state or political
subdivision under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may be deemed to be
illiquid for the purpose of the Funds limitation on investments in illiquid securities. Other
municipal lease obligations and certificates of participation acquired by the Fund may be
determined by the Investment Adviser, pursuant to guidelines adopted by the Trustees of the Trust,
to be liquid securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and certificates of participation, the Investment Adviser will consider
a variety of factors, including: (i) the willingness of dealers to bid for the security; (ii) the
number of dealers willing to purchase or sell the obligation and the number of other potential
buyers; (iii) the frequency of trades or quotes for the obligation; and (iv) the nature of the
marketplace trades. In addition, the Investment Adviser will consider factors unique to particular
lease obligations and certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
The Fund may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide the Fund with the right to a pro rata
undivided interest in the underlying Municipal Securities. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than seven days notice,
of all or any part of the Funds participation interest in the underlying Municipal Securities,
plus accrued interest.
Municipal Notes
. Municipal Securities in the form of notes generally are used to
provide for short-term capital needs, in anticipation of an issuers receipt of other revenues or
financing, and typically have maturities of up to three years. Such instruments may include tax
anticipation notes, revenue anticipation notes, bond anticipation notes, tax and revenue
anticipation notes and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in anticipation of various tax
revenues, such as income, sales, property, use and business taxes, and are payable from these
specific future taxes. Revenue anticipation notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under federal revenue sharing programs. Bond
anticipation notes are issued to provide interim financing until long-term bond financing can be
arranged. In most cases, the long-term bonds then provide the funds needed for repayment of the
notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation
notes and revenue anticipation notes. Construction loan notes are sold to provide construction
financing. These notes are secured by mortgage notes insured by the FHA; however, the proceeds from
the insurance may be less than the economic equivalent of the payment of principal and interest on
the mortgage note if there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond financing. An investment
in such instruments, however, presents a risk that the anticipated revenues will not be received or
that such revenues will be insufficient to satisfy the issuers payment obligations under the notes
or that refinancing will be otherwise unavailable.
Tax Exempt Commercial Paper
. Issues of commercial paper typically represent
short-term, unsecured, negotiable promissory notes. These obligations are issued by state and local
governments and their agencies to finance working capital needs of municipalities or to provide
interim construction financing and are paid from general revenues of municipalities or are
refinanced with
B-21
long-term debt. In most cases, tax exempt commercial paper is backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
Pre-Refunded Municipal Securities
. The principal of and interest on pre-refunded
Municipal Securities are no longer paid from the original revenue source for the securities.
Instead, the source of such payments is typically an escrow fund consisting of U.S. Government
securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued
by the same issuer as the pre-refunded Municipal Securities. Issuers of Municipal Securities use
this advance refunding technique to obtain more favorable terms with respect to securities that are
not yet subject to call or redemption by the issuer. For example, advance refunding enables an
issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or
eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded
Municipal Securities. However, except for a change in the revenue source from which principal and
interest payments are made, the pre-refunded Municipal Securities remain outstanding on their
original terms until they mature or are redeemed by the issuer. Pre-refunded Municipal Securities
are often purchased at a price which represents a premium over their face value.
Private Activity Bonds
. The Fund may invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under current tax law as
private activity bonds), which are issued by or on behalf of public authorities to obtain funds to
provide privately operated housing facilities, airport, mass transit or port facilities, sewage
disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of industrial development bonds,
the proceeds of which are used for the construction, equipment, repair or improvement of privately
operated industrial or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such issues. The Funds
distributions of its interest income from private activity bonds may subject certain investors to
the federal alternative minimum tax whereas the Funds distributions of any tax exempt interest it
receives from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds
. A tender option bond is a Municipal Security (generally held
pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a
fixed rate substantially higher than prevailing short-term, tax exempt rates. The bond is typically
issued with the agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal to the difference between the
bonds fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near
the commencement of such period, that would cause the securities, coupled with the tender option,
to trade at par on the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the prevailing short-term, tax
exempt rate. However, an institution will not be obligated to accept tendered bonds in the event of
certain defaults or a significant downgrade in the credit rating assigned to the issuer of the
bond. The liquidity of a tender option bond is a function of the credit quality of both the bond
issuer and the financial institution providing liquidity. Tender option bonds are deemed to be
liquid unless, in the opinion of the Investment Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Funds credit quality requirements, to be
inadequate and the bond would not otherwise be readily marketable. The Fund intends to invest in
tender option bonds the interest on which will, in the opinion of bond counsel, counsel for the
issuer of interests therein or counsel selected by the Investment Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the IRS will agree with such
counsels opinion in any particular case, there is a risk that the Fund will not be considered the
owner of such tender option bonds and thus will not be entitled to treat such interest as exempt
from such tax. Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the associated fees in
relation to various regulated investment company tax provisions is unclear. The Fund intends to
manage its portfolio in a manner designed to eliminate or minimize any adverse impact from the tax
rules applicable to these investments.
Auction Rate Securities
. The Fund may invest in auction rate securities. Auction rate
securities include auction rate Municipal Securities and auction rate preferred securities issued
by closed-end investment companies that invest primarily in Municipal Securities (collectively,
auction rate securities). Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by Dutch auction in which bids are made by broker-dealers and
other institutions for a certain amount of securities at a specified minimum yield. The dividend
rate set by the auction is the lowest interest or dividend rate that covers all securities offered
for sale. While this process is designed to permit auction rate securities to be traded at par
value, there is some risk that an auction will fail due to insufficient demand for the securities.
The Fund will take the time remaining until the next scheduled auction date into account for
purpose of determining the securities duration.
B-22
Dividends on auction rate preferred securities issued by a closed-end fund may be designated
as exempt from federal income tax to the extent they are attributable to exempt income earned by
the fund on the securities in its portfolio and distributed to holders of the preferred securities,
provided that the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Internal Revenue Code of
1986, as amended (the Code).
The Funds investments in auction rate securities of closed-end funds are subject to the
limitations prescribed by the Act and certain state securities regulations. The Fund will
indirectly bear their proportionate share of any management and other fees paid by such closed-end
funds in addition to the advisory fees payable directly by the Fund.
Insurance
. The Fund may invest in insured tax exempt Municipal Securities. Insured
Municipal Securities are securities for which scheduled payments of interest and principal are
guaranteed by a private (non-governmental) insurance company. The insurance only entitles the Fund
to receive the face or par value of the securities held by the Fund. The insurance does not
guarantee the market value of the Municipal Securities or the value of the shares of the Fund.
The Fund may utilize new issue or secondary market insurance. A new issue insurance policy is
purchased by a bond issuer who wishes to increase the credit rating of a security. By paying a
premium and meeting the insurers underwriting standards, the bond issuer is able to obtain a high
credit rating (usually, Aaa from Moodys or AAA from Standard & Poors) for the issued security.
Such insurance is likely to increase the purchase price and resale value of the security. New issue
insurance policies generally are non-cancelable and continue in force as long as the bonds are
outstanding.
A secondary market insurance policy is purchased by an investor (such as the Fund) subsequent
to a bonds original issuance and generally insures a particular bond for the remainder of its
term. The Fund may purchase bonds which have already been insured under a secondary market
insurance policy by a prior investor, or the Fund may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by the Fund will typically be covered by only one of
the above types of policies.
Standby Commitments
. In order to enhance the liquidity of Municipal Securities, the
Fund may acquire the right to sell a security to another party at a guaranteed price and date. Such
a right to resell may be referred to as a standby commitment or liquidity put, depending on its
characteristics. The aggregate price which the Fund pays for securities with standby commitments
may be higher than the price which otherwise would be paid for the securities. Standby commitments
may not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign banks
supporting the other partys ability to purchase the security from the Fund. The right to sell may
be exercisable on demand or at specified intervals, and may form part of a security or be acquired
separately by the Fund. In considering whether a security meets the Funds quality standards, the
Fund will look to the creditworthiness of the party providing the Fund with the right to sell as
well as the quality of the security itself.
The Fund values Municipal Securities which are subject to standby commitments at amortized
cost. The exercise price of the standby commitments is expected to approximate such amortized cost.
No value is assigned to the standby commitments for purposes of determining the Funds net asset
value. The cost of a standby commitment is carried as unrealized depreciation from the time of
purchase until it is exercised or expires. Since the value of a standby commitment is dependent on
the ability of the standby commitment writer to meet its obligation to repurchase, the Funds
policy is to enter into standby commitment transactions only with banks, brokers or dealers which
present a minimal risk of default.
The Investment Adviser understands that the IRS has issued a favorable revenue ruling to the
effect that, under specified circumstances, a registered investment company will be the owner of
tax exempt municipal obligations acquired subject to a put option. The IRS has subsequently
announced that it will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation interests therein if
the purchaser has the right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. The Fund intends to take the position that it is
the owner of any Municipal Securities acquired subject to a standby commitment or acquired or held
with certain other types of put rights and that tax exempt interest earned with respect to such
Municipal Securities will be tax exempt in its hands. There is no assurance that standby
commitments will be available to the Fund nor has the Fund assumed that such commitments would
continue to be available under all market conditions.
B-23
Call Risk and Reinvestment Risk
. Municipal Securities may include call provisions
which permit the issuers of such securities, at any time or after a specified period, to redeem the
securities prior to their stated maturity. In the event that Municipal Securities held in the
Funds portfolio are called prior to the maturity, the Fund will be required to reinvest the
proceeds on such securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Funds return on its portfolio securities.
Tobacco Settlement Revenue Bonds
. The Fund may invest a portion of its assets in
tobacco settlement revenue bonds. Tobacco settlement revenue bonds are municipal obligations that
are backed entirely by expected revenues to be derived from lawsuits involving tobacco related
deaths and illnesses which were settled between certain states and American tobacco companies.
Tobacco settlement revenue bonds are secured by an issuing states proportionate share in the
Master Settlement Agreement (MSA). The MSA is an agreement, reached out of court in November 1998
between 46 states and nearly all of the U.S. tobacco manufacturers. The MSA provides for annual
payments in perpetuity by the manufacturers to the states in exchange for releasing all claims
against the manufacturers and a pledge of no further litigation. Tobacco manufacturers pay into a
master escrow trust based on their market share, and each state receives a fixed percentage of the
payment as set forth in the MSA. A number of states have securitized the future flow of those
payments by selling bonds pursuant to indentures or through distinct governmental entities created
for such purpose. The principal and interest payments on the bonds are backed by the future revenue
flow related to the MSA. Annual payments on the bonds, and thus risk to the Fund, are highly
dependent on the receipt of future settlement payments to the state or its governmental entity.
The actual amount of future settlement payments, is further dependent on many factors,
including, but not limited to, annual domestic cigarette shipments, reduced cigarette consumption,
increased taxes on cigarettes, inflation, financial capability of tobacco companies, continuing
litigation and the possibility of tobacco manufacturer bankruptcy. The initial and annual payments
made by the tobacco companies will be adjusted based on a number of factors, the most important of
which is domestic cigarette consumption. If the volume of cigarettes shipped in the U.S. by
manufacturers participating in the settlement decreases significantly, payments due from them will
also decrease. Demand for cigarettes in the U.S. could continue to decline due to price increases
needed to recoup the cost of payments by tobacco companies. Demand could also be affected by:
anti-smoking campaigns, tax increases, reduced advertising, enforcement of laws prohibiting sales
to minors; elimination of certain sales venues such as vending machines; and the spread of local
ordinances restricting smoking in public places. As a result, payments made by tobacco
manufacturers could be negatively impacted if the decrease in tobacco consumption is significantly
greater than the forecasted decline. A market share loss by the MSA companies to non-MSA
participating tobacco manufacturers would cause a downward adjustment in the payment amounts. A
participating manufacturer filing for bankruptcy also could cause delays or reductions in bond
payments. The MSA itself has been subject to legal challenges and has, to date, withstood those
challenges.
Foreign Investments
The Fund may also invest in fixed income securities quoted or denominated in a currency other
than U.S. dollars. Investments in foreign securities may offer potential benefits not available
from investments solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such
benefits may include the opportunity to invest in foreign issuers that appear, in the opinion of
the Investment Adviser, to offer the potential for better long term growth of capital and income
than investments in U.S. securities, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the opportunity to reduce
fluctuations in portfolio value by taking advantage of foreign securities markets that do not
necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign
issuers also involves, however, certain special risks, including those discussed in the Funds
Prospectus and those set forth below, which are not typically associated with investing in U.S.
dollar-denominated securities or quoted securities of U.S. issuers.
With any investment in foreign securities, there exist certain economic, political and social
risks, including the risk of adverse political developments, nationalization, confiscation without
fair compensation or war. Individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. Investments in the
securities of foreign issuers often involve currencies of foreign countries. Accordingly, the Fund
may be affected favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various currencies. The
Fund may be subject to currency exposure independent of ifz securities positions. To the extent
that the Fund is fully invested in foreign securities while also maintaining net currency
positions, it may be exposed to greater combined risk.
Currency exchange rates may fluctuate significantly over short periods of time. They generally
are determined by the forces of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency exchange rates also can
be
B-24
affected unpredictably by intervention by U.S. or foreign governments or central banks or the
failure to intervene or by currency controls or political developments in the United States or
abroad. To the extent that a portion of the Funds total assets, adjusted to reflect the Funds net
position after giving effect to currency transactions, is denominated or quoted in the currencies
of foreign countries, the Fund will be more susceptible to the risk of adverse economic and
political developments within those countries. The Funds net currency positions may expose it to
risks independent of its securities positions. In addition, if the payment declines in value
against the U.S. dollar before such income is distributed as dividends to shareholders or converted
to U.S. dollars, the Fund may have to sell portfolio securities to obtain sufficient cash to pay
such dividends.
Since foreign issuers generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable to U.S. companies,
there may be less publicly available information about a foreign company than about a comparable
U.S. company. Volume and liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more volatile than securities
of comparable U.S. companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the
most favorable net results on its portfolio transactions. There is generally less government
supervision and regulation of securities markets and exchanges, brokers, dealers and listed and
unlisted companies than in the United States and the legal remedies for investors may be more
limited than the remedies available in the United States. For example, there may be no comparable
provisions under certain foreign laws to insider trading and similar investor protection securities
laws that apply with respect to securities transactions consummated in the United States. Mail
service between the United States and foreign countries may be slower or less reliable than within
the United States, thus increasing the risk of delayed settlement of portfolio transactions or loss
of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. Such delays in
settlement could result in temporary periods when a portion of the assets of the Fund is uninvested
and no return is earned on such assets. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement problems could result
either in losses to the Fund due to subsequent declines in value of the portfolio securities, or,
if the Fund has entered into a contract to sell the securities, could result in possible liability
to the purchaser. In addition, with respect to certain foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the movement of funds and other assets
between different countries, political or social instability, or diplomatic developments which
could adversely affect the Funds investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources self-sufficiency and
balance of payments position.
Investing in Emerging Countries
Market Characteristics
.
The Fund is not limited in the amount of its assets that may
be invested in emerging countries. Investment in debt securities of emerging country issuers
involve special risks. The development of a market for such securities is a relatively recent
phenomenon and debt securities of most emerging country issuers are less liquid and are generally
subject to greater price volatility than securities of issuers in the United States and other
developed countries. In certain countries, there may be fewer publicly traded securities, and the
market may be dominated by a few issuers or sectors. The markets for securities of emerging
countries may have substantially less volume than the market for similar securities in the United
States and may not be able to absorb, without price disruptions, a significant increase in trading
volume or trade size. Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and reduced liquidity of
such markets. The less liquid the market, the more difficult it may be for the Fund to price
accurately its portfolio securities or to dispose of such securities at the times determined to be
appropriate. The risks associated with reduced liquidity may be particularly acute to the extent
that the Fund needs cash to meet redemption requests, to pay dividends and other distributions or
to pay its expenses.
The Funds purchase and sale of portfolio securities in certain emerging countries may be
constrained by limitations as to daily changes in the prices of listed securities, periodic trading
or settlement volume and/or limitations on aggregate holdings of foreign investors. Such
limitations may be computed based on the aggregate trading volume by or holdings of the Fund, the
Investment Adviser, its affiliates and their respective clients and other service providers. The
Fund may not be able to sell securities in circumstances where price, trading or settlement volume
limitations have been reached.
Securities markets of emerging countries may also have less efficient clearance and settlement
procedures than U.S. markets, making it difficult to conduct and complete transactions. Delays in
the settlement could result in temporary periods when a portion of the Funds assets is uninvested
and no return is earned thereon. Inability to make intended security purchases could cause the Fund
to
B-25
miss attractive investment opportunities. Inability to dispose of portfolio securities could
result either in losses to the Fund due to subsequent declines in value of the portfolio security
or, if the Fund has entered into a contract to sell the security, could result in possible
liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in emerging countries
may be higher than in the U.S. and other developed securities markets. As legal systems in emerging
countries develop, foreign investors may be adversely affected by new or amended laws and
regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and
equitable enforcement of the law.
With respect to investments in certain emerging countries, antiquated legal systems may have
an adverse impact on the Fund. For example, while the potential liability of a shareholder of a
U.S. corporation with respect to acts of the corporation is generally limited to the amount of the
shareholders investment, the notion of limited liability is less clear in certain emerging market
countries. Similarly, the rights of investors in emerging market companies may be more limited than
those of investors of U.S. corporations.
Economic, Political and Social Factors
.
Emerging countries may be subject to a greater
degree of economic, political and social instability than the United States, Japan and most Western
European countries, and unanticipated political and social developments may affect the value of the
Funds investments in emerging countries and the availability to the Fund of additional investments
in such countries. Moreover, political and economic structures in many emerging countries may be
undergoing significant evolution and rapid development. Instability may result from, among other
things: (i) authoritarian governments or military involvement in political and economic
decision-making, including changes or attempted changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved economic, political and social
conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; (v)
ethnic, religious and racial disaffection and conflict; and (vi) the absence of developed legal
structures governing foreign private property. Many emerging countries have experienced in the
past, and continue to experience, high rates of inflation. In certain countries, inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding financial assets in those countries. The
economies of many emerging countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and the economic conditions of their trading
partners. In addition, the economies of some emerging countries may differ unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation
. Certain emerging countries require
governmental approval prior to investments by foreign persons or limit investments by foreign
persons to only a specified percentage of an issuers outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than securities of the issuer
available for purchase by nationals. Repatriation of investment income and capital from certain
emerging countries is subject to certain governmental consents. Even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect the operation of
the Fund.
Sovereign Debt Obligations
. Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may not be able or
willing to repay the principal and/or interest when due in accordance with the terms of such debt.
A governmental entitys willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the governmental entitys
policy towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entitys implementation of economic
reforms and/or economic performance and the timely service of such debtors obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay principal or interest
when due may result in the cancellation of such third parties commitments to lend funds to the
governmental entity, which may further impair such debtors ability or willingness to services its
debts in a timely manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate in the rescheduling
of such debt and to extend further loans to governmental agencies.
Emerging country governmental issuers are among the largest debtors to commercial banks,
foreign governments, international financial organizations and other financial institutions.
Certain emerging country governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations arising from past
restructuring agreements may affect the economic performance and political and social stability of
those issuers.
B-26
The ability of emerging country governmental issuers to make timely payments on their
obligations is likely to be influenced strongly by the issuers balance of payments, including
export performance, and its access to international credits and investments. An emerging country
whose exports are concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased protectionism on the part of an
emerging countrys trading partners could also adversely affect the countrys exports and tarnish
its trade account surplus, if any. To the extent that emerging countries receive payment for their
exports in currencies other than dollars or non-emerging country currencies, the emerging country
issuers ability to make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging country cannot generate a trade surplus, it must depend on
continuing loans from foreign governments, multilateral organizations or private commercial banks,
aid payments from foreign governments and on inflows of foreign investment. The access of emerging
countries to these forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging country governmental issuers to make
payments on their obligations. In addition, the cost of servicing emerging country debt obligations
can be affected by a change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging countries to repay debt obligations is the
level of international reserves of a country. Fluctuations in the level of these reserves affect
the amount of foreign exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging countries to make payments on these debt obligations.
As a result of the foregoing or other factors, a governmental obligor, especially in an
emerging country, may default on its obligations. If such an event occurs, the Fund may have
limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the holder of foreign
sovereign debt securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign sovereign debt obligations in the event
of default under the commercial bank loan agreements.
Brady Bonds
. Certain foreign debt obligations commonly referred to as Brady Bonds
are created through the exchange of existing commercial bank loans to foreign borrowers for new
obligations in connection with debt restructurings under a plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady (the Brady Plan).
Brady Bonds may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated) and they are actively traded in the over-the-counter
secondary market. Certain Brady Bonds are collateralized in full as to principal due at maturity by
zero coupon obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities having the same maturity (Collateralized Brady Bonds). Brady Bonds are not,
however, considered to be U.S. Government securities.
Dollar-denominated, Collateralized Brady Bonds may be fixed rate bonds or floating rate bonds.
Interest payments on Brady Bonds are often collateralized by cash or securities in an amount that,
in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one years rolling interest
payments based on the applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to value recovery payments in certain circumstances,
which in effect constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i) collateralized
repayment of principal at final maturity; (ii) collateralized interest payments; (iii)
uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constitute the residual risk). In the event of a default
with respect to Collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as collateral for the
payment of principal will not be distributed to investors, nor will such obligations be sold and
the proceeds distributed. The collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds, which will continue to be outstanding, at which time the
face amount of the collateral will equal the principal payments which would have been due on the
Brady Bonds in the normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds should be viewed as
speculative.
Restructured Investments
. Included among the issuers of emerging country debt
securities are entities organized and operated solely for the purpose of restructuring the
investment characteristics of various securities. These entities are often organized by investment
banking firms which receive fees in connection with establishing each entity and arranging for the
placement of its securities. This type of restructuring involves the deposit with or purchase by an
entity, such as a corporation or trust, or specified instruments, such as Brady Bonds, and the
issuance by the entity of one or more classes of securities (Restructured Investments)
B-27
backed by, or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Restructured Investments to create
securities with different investment characteristics such as varying maturities, payment priorities
or investment rate provisions. Because Restructured Investments of the type in which the Fund may
invest typically involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
The Fund is permitted to invest in a class of Restructured Investments that is either
subordinated or unsubordinated to the right of payment of another class. Subordinated Restructured
Investments typically have higher yields and present greater risks than unsubordinated Restructured
Investments. Although the Funds, and Inflation Protected Securities Funds purchases of
subordinated Restructured Investments would have a similar economic effect to that of borrowing
against the underlying securities, such purchases will not be deemed to be borrowing for purposes
of the limitations placed on the extent of the Funds assets that may be used for borrowing.
Certain issuers of Restructured Investments may be deemed to be investment companies as
defined in the Act. As a result, the Funds investments in these Restructured Investments may be
limited by the restrictions contained in the Act. Restructured Investments are typically sold in
private placement transactions, and there currently is no active trading market for most
Restructured Investments.
Forward Foreign Currency Exchange Contracts
. The Fund may enter into forward foreign
currency exchange contracts for hedging purposes and to seek to increase total return. A forward
foreign currency exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are traded in the
interbank market and are conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract, the Fund may either accept or make delivery of the
currency specified in the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing purchase transactions
with respect to forward contracts are usually effected with the currency trader who is a party to
the original forward contract.
The Fund may enter into forward foreign currency exchange contracts for hedging purposes in
several circumstances. First, when the Fund enters into a contract for the purchase or sale of a
security quoted or denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of a dividend or interest payment on such a security which 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 the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in
the underlying transactions, the Fund may attempt to protect itself against an adverse change in
the relationship between the U.S. dollar and the subject 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.
Additionally, when the Investment Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter into a forward
contract to sell, for a fixed amount of U.S. dollars, the amount of foreign currency approximating
the value of some or all of the Funds portfolio securities quoted or denominated in such foreign
currency. The precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of those securities
between the date on which the contract is entered into and the date it matures. Using forward
contracts to protect the value of the Funds portfolio securities against a decline in the value of
a currency does not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Fund can achieve at some future point in time. The precise
projection of short-term currency market movements is not possible, and short-term hedging provides
a means of fixing the U.S. dollar value of only a portion of the Funds foreign assets.
The Fund may engage in cross-hedging by using forward contracts in one currency to hedge
against fluctuations in the value of securities denominated or quoted in a different currency if
the Investment Adviser determines that there is a pattern of correlation between the two
currencies. In addition, the Fund may enter into foreign currency transactions to seek a closer
correlation between the Funds overall currency exposures and the currency exposures of the Funds
performance benchmark.
Unless otherwise covered, cash or liquid assets will be segregated in an amount equal to the
value of the Funds assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to purchase foreign currencies and forward contracts entered into to
seek to increase total return. The segregated assets will be marked-to-market. If the value of the
segregated
B-28
assets declines, additional liquid assets will be segregated so that the value will equal the
amount of the Funds commitments with respect to such contracts. The Fund will not enter into a
forward contract with a term of greater than one year.
While the Fund may enter into forward contracts to seek to reduce currency exchange rate
risks, transactions in such contracts involve certain other risks. Thus, while the Fund may benefit
from such transactions, unanticipated changes in currency prices may result in a poorer overall
performance for the Fund than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between the Funds portfolio holdings of securities quoted or denominated
in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation
may cause the Fund to sustain losses which will prevent the Fund from achieving a complete hedge or
expose the Fund to risk of foreign exchange loss.
Markets for trading forward foreign currency contracts offer less protection against defaults
than is available when trading in currency instruments on an exchange. Forward contracts are
subject to the risk that the counterparty to such contract will default on its obligations. Since a
forward foreign currency exchange contract is not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale commitments, if any,
at the current market price. In addition, the institutions that deal in forward currency contracts
are not required to continue to make markets in the currencies they trade and these markets can
experience periods of illiquidity. The Fund will not enter into forward foreign currency exchange
contracts, unless the credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Investment Adviser. To the extent that
a substantial portion of the Funds total assets, adjusted to reflect the Funds net position after
giving effect to currency transactions, is denominated or quoted in the currencies of foreign
countries, the Fund will be more susceptible to the risk of adverse economic and political
developments within those countries.
Investing in Central and South American Countries
The Fund may invest in securities of issuers located in Central and South American countries.
The economies of Central and South American countries have experienced considerable difficulties in
the past decade, including high inflation rates, high interest rates and currency devaluations. As
a result, Central and South American securities markets have experienced great volatility. In
addition, a number of Central and South American countries are among the largest emerging country
debtors. There have been moratoria on, and reschedulings of, repayment with respect to these debts.
Such events can restrict the flexibility of these debtor nations in the international markets and
result in the imposition of onerous conditions on their economies.
In the past, many Central and South American countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. High inflation rates have also led
to high interest rates. Inflation and rapid fluctuations in inflation rates have had, and could, in
the future, have very negative effects on the economies and securities markets of certain Central
and South American countries. Many of the currencies of Central and South American countries have
experienced steady devaluation relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Any devaluations in the currencies in which the Funds
portfolio securities are denominated may have a detrimental impact on the Fund. There is also a
risk that certain Central and South American countries may restrict the free conversion of their
currencies into other currencies. Some Central and South American countries may have managed
currencies which are not free floating against the U.S. dollar. This type of system can lead to
sudden and large adjustments in the currency that, in turn, can have a disruptive and negative
effect on foreign investors. Certain Central and South American currencies may not be
internationally traded and it would be difficult for the Fund to engage in foreign currency
transactions designed to protect the value of the Funds interests in securities denominated in
such currencies.
In addition, substantial limitations may exist in certain countries with respect to the Funds
ability to repatriate investment income, capital or the proceeds of sales of securities by foreign
investors. The Fund could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
The emergence of the Central and South American economies and securities markets will require
continued economic and fiscal discipline that has been lacking at times in the past, as well as
stable political and social conditions. Governments of many Central and South American countries
have exercised and continue to exercise substantial influence over many aspects of the private
sector. The political history of certain Central and South American countries has been
characterized by political uncertainty, intervention by the military in civilian and economic
spheres and political corruption. Such developments, if they were to recur, could reverse favorable
trends toward market and economic reform, privatization and removal of trade barriers.
B-29
International economic conditions, particularly those in the United States, as well as world
prices for oil and other commodities may also influence the recovery of the Central and South
American economies. Because commodities such as oil, gas, minerals and metals represent a
significant percentage of the regions exports, the economies of Central and South American
countries are particularly sensitive to fluctuations in commodity prices. As a result, the
economies in many of these countries can experience significant volatility.
Certain Central and South American countries have entered into regional trade agreements that
would, among other things, reduce barriers among countries, increase competition among companies
and reduce government subsidies in certain industries. No assurance can be given that these changes
will result in the economic stability intended. There is a possibility that these trade
arrangements will not be implemented, will be implemented but not completed or will be completed
but then partially or completely unwound. It is also possible that a significant participant could
choose to abandon a trade agreement, which could diminish its credibility and influence. Any of
these occurrences could have adverse effects on the markets of both participating and
non-participating countries, including share appreciation or depreciation of participants national
currencies and a significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the Central and South American markets, an
undermining of Central and South American economic stability, the collapse or slowdown of the drive
toward Central and South American economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of such trade agreements.
Such developments could have an adverse impact on the Funds investments in Central and South
America generally or in specific countries participating in such trade agreements.
Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps, Total Return Swaps, Options on
Swaps and Interest Rate Caps, Floors and Collars
The Fund may enter into interest rate, credit and total return swaps. The Fund may also enter
into interest rate caps, floors and collars. In addition, the Fund may enter into mortgage swaps
and currency swaps. The Fund may also purchase and write (sell) options contracts on swaps,
commonly referred to as swaptions.
The Fund may enter into swap transactions for hedging purposes or to seek to increase total
return. As examples, the Fund may enter into swap transactions for the purpose of attempting to
obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread
through purchases and/or sales of instruments in other markets, to protect against currency
fluctuations, as a duration management technique, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date, or to gain exposure to certain markets
in an economical way.
Swap agreements are two party contracts entered into primarily by institutional investors. In
a standard swap transaction, two parties agree to exchange the returns (or differentials in rates
of return) earned or realized on particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties
are generally calculated with respect to a notional amount,
i.e.
, the return on or increase in
value of a particular dollar amount invested at a particular interest rate, in a particular foreign
currency or security, or in a basket of securities representing a particular index. As examples,
interest rate swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed-rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps in that they represent commitments
to pay and receive interest. The notional principal amount, however, is tied to a reference pool or
pools of mortgages. Credit swaps involve the receipt of floating or fixed rate payments in exchange
for assuming potential credit losses of an underlying security or pool of securities. Credit swaps
give one party to a transaction the right to dispose of or acquire an asset (or group of assets),
or the right to receive from or make a payment to the other party, upon the occurrence of specified
credit events. Currency swaps involve the exchange of the parties respective rights to make or
receive payments in specified currencies. Total return swaps are contracts that obligate a party to
pay or receive interest in exchange for payment by the other party of the total return generated by
a security, a basket of securities, an index, or an index component.
A swaption is an option to enter into a swap agreement. Like other types of options, the buyer
of a swaption pays a non-refundable premium for the option and obtains the right, but not the
obligation, to enter into an underlying swap on agreed-upon terms. The seller of a swaption, in
exchange for the premium, becomes obligated (if the option is exercised) to enter into an
underlying swap on agreed-upon terms. The purchase of an interest rate cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a specified index falls below
a predetermined interest rate, to receive payments of interest on a notional principal amount from
the party selling the interest rate floor. An interest rate collar is the combination of a cap and
a floor that preserves a certain return within a predetermined range of interest rates.
B-30
A great deal of flexibility is possible in the way swap transactions are structured. However,
generally the Fund will enter into interest rate, total return, credit and mortgage swaps on a net
basis, which means that the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate, total return, credit
and mortgage swaps do not normally involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate, total return, credit and
mortgage swaps is normally limited to the net amount of payments that the Fund is contractually
obligated to make. If the other party to an interest rate, total return, credit or mortgage swap
defaults, the Funds risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive, if any. In contrast, currency swaps may involve the delivery of
the entire principal amount of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
A credit swap may have as reference obligations one or more securities that may, or may not,
be currently held by the Fund. The protection buyer in a credit swap is generally obligated to
pay the protection seller an upfront or a periodic stream of payments over the term of the swap
provided that no credit event, such as a default, on a reference obligation has occurred. If a
credit event occurs, the seller generally must pay the buyer the par value (full notional value)
of the swap in exchange for an equal face amount of deliverable obligations of the reference entity
described in the swap, or the seller may be required to deliver the related net cash amount, if the
swap is cash settled. The Fund may be either the buyer or seller in the transaction. If the Fund is
a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its
termination date. However, if a credit event occurs, the buyer generally may elect to receive the
full notional value of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity whose value may have significantly decreased. As a seller, the Fund generally
receives an upfront payment or a rate of income throughout the term of the swap provided that there
is no credit event. As the seller, the Fund would effectively add leverage to its portfolio
because, in addition to its total net assets, the Fund would be subject to investment exposure on
the notional amount of the swap. If a credit event occurs, the value of any deliverable obligation
received by the Fund as seller, coupled with the upfront or periodic payments previously received,
may be less than the full notional value it pays to the buyer, resulting in a loss of value to the
Fund.
To the extent that the Funds exposure in a transaction involving a swap, swaption or an
interest rate floor, cap or collar is covered by the segregation of cash or liquid assets, or is
covered by other means in accordance with SEC guidance, the Fund and the Investment Adviser believe
that the transactions do not constitute senior securities under the Act and, accordingly, will not
treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter into any interest rate, total return, mortgage or credit swap
transactions unless the unsecured commercial paper, senior debt or claims-paying ability of the
other party is rated either A or A-1 or better by Standard & Poors or A or P-1 or better by
Moodys or their equivalent ratings. The Fund will not enter into any currency swap transactions
unless the unsecured commercial paper, senior debt or claimspaying ability of the other party
thereto is rated investment grade by Standard & Poors or Moodys, or, if unrated by such rating
organization, determined to be of comparable quality by the Investment Adviser. If there is a
default by the other party to such a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.
The use of interest rate, mortgage, credit, total return and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of a swap requires an understanding not only of the referenced asset,
reference rate, or index but also of the swap itself, without the benefit of observing the
performance of the swap under all possible market conditions. If the Investment Adviser is
incorrect in its forecasts of market values, credit quality, interest rates and currency exchange
rates, the investment performance of the Fund would be less favorable than it would have been if
these investment instruments were not used.
In addition, these transactions can involve greater risks than if the Fund had invested in the
reference obligation directly since, in addition to general market risks, swaps are subject to
illiquidity risk, counterparty risk, credit risk and pricing risk. Because they are two party
contracts and because they may have terms of greater than seven days, swap transactions may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a swap counterparty.
Many swaps are complex and often valued subjectively. Swaps may be subject to pricing or basis
risk, which exists when a particular swap becomes extraordinarily expensive relative to historical
prices or the price of corresponding cash market instruments. Under certain market conditions it
may not be economically feasible to imitate a transaction or liquidate a position in time to avoid
a loss or take advantage of an opportunity. If a swap transaction is particularly large or if the
relevant market is illiquid, it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price, which may result in significant losses.
B-31
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 in comparison with the
markets for other similar instruments which are traded in the interbank market. The Investment
Adviser, under the supervision of the Board of Trustees, is responsible for determining and
monitoring the liquidity of the Funds transactions in swaps, swaptions, caps, floors and collars.
Options on Securities and Securities Indices
Writing Covered Options
. The Fund may write (sell) covered call and put options on any
securities in which it may invest or on any securities index consisting of securities in which it
may invest. The Fund may write such options on securities that are listed on national domestic
securities exchanges or foreign securities exchanges or traded in the over-the-counter market. A
call option written by the Fund obligates the Fund to sell specified securities to the holder of
the option at a specified price if the option is exercised on or before the expiration date.
Depending upon the type of call option, the purchaser of a call option either (i) has the right to
any appreciation in the value of the security over a fixed price (the exercise price) on a
certain date in the future (the expiration date) or (ii) has the right to any appreciation in the
value of the security over the exercise price at any time prior to the expiration of the option. If
the purchaser does not exercise the option, the Fund pays the purchaser the difference between the
price of the security and the exercise price of the option. The premium, the exercise price and the
market value of the security determine the gain or loss realized by the Fund as the seller of the
call option. The Fund can also repurchase the call option prior to the expiration date, ending its
obligation. In this case, the cost of entering into closing purchase transactions will determine
the gain or loss realized by the Fund. All call options written by the Fund are covered, which
means that the Fund will own the securities subject to the option so long as the option is
outstanding or the Fund will use the other methods described below. The Funds purpose in writing
covered call options is to realize greater income than would be realized on portfolio securities
transactions alone. However, the Fund may forego the opportunity to profit from an increase in the
market price of the underlying security.
A put option written by the Fund obligates the Fund to purchase specified securities from the
option holder at a specified price if the option is exercised on or before the expiration date. All
put options written by the Fund would be covered, which means that the Fund will segregate cash or
liquid assets with a value at least equal to the exercise price of the put option (less any margin
on deposit) or will use the other methods described below. The purpose of writing such options is
to generate additional income for the Fund. However, in return for the option premium, the Fund
accepts the risk that it may be required to purchase the underlying securities at a price in excess
of the securities market value at the time of purchase.
In the case of a call option, the option is covered if the Fund owns the instrument
underlying the call or has an absolute and immediate right to acquire that instrument without
additional cash consideration (or, if additional cash consideration is required, liquid assets in
such amount are segregated) upon conversion or exchange of other instruments held by it. A call
option is also covered if the Fund holds a call on the same instrument as the option written where
the exercise price of the option held is (i) equal to or less than the exercise price of the option
written, or (ii) greater than the exercise price of the option written provided the Fund segregates
liquid assets in the amount of the difference. A put option is also covered if the Fund holds a put
on the same security as the option written where the exercise price of the option held is (i) equal
to or higher than the exercise price of the option written, or (ii) less than the exercise price of
the option written provided the Fund segregates liquid assets in the amount of the difference. The
Fund may also cover call options on securities by segregating cash or liquid assets, as permitted
by applicable law, with a value when added to any margin on deposit, that is equal to the market
value of the securities in the case of a call option. The Funds segregated cash or liquid assets
may be quoted or denominated in any currency.
The Fund may terminate its obligations under an exchange-traded call or put option by
purchasing an option identical to the one it has written. Obligations under over-the-counter
options may be terminated only by entering into an offsetting transaction with the counterparty to
such option. Such purchases are referred to as closing purchase transactions.
The Fund may also write (sell) covered call and put options on any securities index consisting
of securities in which it may invest. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash settlement payments
and does not involve the actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of securities or segment of the
securities market rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities whose price changes
are expected to be similar to those of the underlying index or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or if additional cash
consideration is required, liquid assets in such amount are segregated) upon conversion or
B-32
exchange of other securities held by it. The Fund may also cover call and put options on a
securities index by segregating cash or liquid assets, as permitted by applicable law, with a
value, when added to any margin on deposit, that is equal to the market value of the underlying
securities in the case of a call option or the exercise price in the case of a put option or by
owning offsetting options as described above.
The writing of options is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities transactions. The use
of options to seek to increase total return involves the risk of loss if the Investment Adviser is
incorrect in its expectation of fluctuations in securities prices or interest rates. The successful
use of options for hedging purposes also depends in part on the ability of the Investment Adviser
to predict future price fluctuations and the degree of correlation between the options and
securities markets. If the Investment Adviser is incorrect in its expectation of changes in
securities prices or determination of the correlation between the securities indices on which
options are written and purchased and the securities in the Funds investment portfolio, the
investment performance of the Fund will be less favorable than it would have been in the absence of
such options transactions. The writing of options could increase the Funds portfolio turnover rate
and, therefore, associated brokerage commissions or spreads.
Purchasing Options
. The Fund may purchase put and call options on any securities in
which it may invest or options on any securities index consisting of securities in which it may
invest. The Fund may also, to the extent that it invests in foreign securities, purchase put and
call options on foreign currencies. In addition, the Fund may enter into closing sale transactions
in order to realize gains or minimize losses on options it had purchased.
The Fund may purchase call options in anticipation of an increase, or put options in
anticipation of a decrease (protective puts), in the market value of securities of the type in
which it may invest. The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities at a specified price during the option period. The
Fund would ordinarily realize a gain on the purchase of a call option if, during the option period,
the value of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the
call option. The purchase of a put option would entitle the Fund, in exchange for the premium paid,
to sell specified securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market value of the Funds
securities. Put options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the underlying securities
decreased below the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing changes in the value of
the underlying portfolio securities.
The Fund may purchase put and call options on securities indices for the same purposes as it
may purchase options on securities. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security.
Writing and Purchasing Currency Call and Put Options
. The Fund may write covered put
and call options and purchase put and call options on foreign currencies in an attempt to protect
against declines in the U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities to be acquired. The Fund may also use options on
currency to cross-hedge, which involves writing or purchasing options on one currency to seek to
hedge against changes in exchange rates for a different currency with a pattern of correlation. As
with other kinds of option transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. If an option that the
Fund has written is exercised, the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against exchange rate fluctuations; however, in the
event of exchange rate movements adverse to the Funds position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. In addition, the Fund may purchase call
options on currency to seek to increase total return.
A currency call option written by the Fund obligates the Fund to sell specified currency to
the holder of the option at a specified price if the option is exercised at any time before the
expiration date. A currency put option written by the Fund obligates the Fund to purchase specified
currency from the option holder at a specified price if the option is exercised at any time before
the expiration date. The writing of currency options involves a risk that the Fund will, upon
exercise of the option, be required to sell currency subject to a call at a price that is less than
the currencys market value or be required to purchase currency subject to a put at a price that
exceeds the currencys market value.
B-33
The Fund may terminate its obligations under a written call or put option by purchasing an
option identical to the one written. Such purchases are referred to as closing purchase
transactions. The Fund may enter into closing sale transactions in order to realize gains or
minimize losses on purchased options.
The Fund may purchase call options in anticipation of an increase in the U.S. dollar value of
currency in which securities to be acquired by the Fund are denominated or quoted. The purchase of
a call option would entitle the Fund, in return for the premium paid, to purchase specified
currency at a specified price during the option period. The Fund would ordinarily realize a gain
if, during the option period, the value of such currency exceeded the sum of the exercise price,
the premium paid and transaction costs; otherwise, the Fund would realize either no gain or a loss
on the purchase of the call option.
The Fund may purchase put options in anticipation of a decline in the U.S. dollar value of
currency in which securities in its portfolio are denominated or quoted (protective puts). The
purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell
specified currency at a specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the U.S. dollar value of the Funds
portfolio securities due to currency exchange rate fluctuations. The Fund would ordinarily realize
a gain if, during the option period, the value of the underlying currency decreased below the
exercise price sufficiently to more than cover the premium and transaction costs; otherwise, the
Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing changes in the
value of the underlying currency.
In addition to using options for the hedging purposes described above, the Fund may use
options on currency to seek to increase total return. The Fund may write (sell) covered put and
call options on any currency in an attempt to realize greater income than would be realized on
portfolio securities transactions alone. However, in writing covered call options for additional
income, the Fund may forego the opportunity to profit from an increase in the market value of the
underlying currency. Also, when writing put options, the Fund accepts, in return for the option
premium, the risk that they may be required to purchase the underlying currency at a price in
excess of the currencys market value at the time of purchase.
The Fund may purchase call options to seek to increase total return in anticipation of an
increase in the market value of a currency. The Fund would ordinarily realize a gain if, during the
option period, the value of such currency exceeded the sum of the exercise price, the premium paid
and transaction costs. Otherwise the Fund would realize either no gain or a loss on the purchase of
the call option. Put options may be purchased by the Fund for the purpose of benefiting from a
decline in the value of currencies which it does not own. The Fund would ordinarily realize a gain
if, during the option period, the value of the underlying currency decreased below the exercise
price sufficiently to more than cover the premium and transaction costs. Otherwise, the Fund would
realize either no gain or a loss on the purchase of the put option.
Yield Curve Options
. The Fund may enter into options on the yield spread or
differential between two securities. Such transactions are referred to as yield curve options. In
contrast to other types of options, a yield curve option is based on the difference between the
yields of designated securities, rather than the prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable to the holder if
this differential widens (in the case of a call) or narrows (in the case of a put), regardless of
whether the yields of the underlying securities increase or decrease.
The Fund may purchase or write yield curve options for the same purposes as other options on
securities. For example, the Fund may purchase a call option on the yield spread between two
securities if the Fund owns one of the securities and anticipates purchasing the other security and
wants to hedge against an adverse change in the yield spread between the two securities. The Fund
may also purchase or write yield curve options in an effort to increase current income if, in the
judgment of the Investment Adviser, the Fund will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve options is subject to
all of the risks associated with the trading of other types of options. In addition, however, such
options present a risk of loss even if the yield of one of the underlying securities remains
constant, or if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Fund will be covered. A call (or put) option is covered
if the Fund holds another call (or put) option on the spread between the same two securities and
segregates cash or liquid assets sufficient to cover the Funds net liability under the two
options. Therefore, the Funds liability for such a covered option is generally limited to the
difference between the amount of the Funds liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be covered in such other manner
as may be in accordance with the requirements of the counterparty with which the option is traded
and applicable laws and regulations. Yield curve options are traded over-the-counter, and
established trading markets for these options may not exist.
B-34
Risks Associated with Options Transactions
. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to effect a closing
purchase transaction with respect to covered options it has written, the Fund will not be able to
sell the underlying securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with
respect to options it has purchased, it will have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include, but are not
limited to, the following: (i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to particular classes
or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on
an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled 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 that class or series of options) would cease to exist although outstanding options
on that exchange that had been issued by the Options Clearing Corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
There can be no assurance that higher trading activity, order flow or other unforeseen events
might not, at times, render certain of the facilities of the Options Clearing Corporation or
various exchanges inadequate. Such events have, in the past, resulted in the institution by an
exchange of special procedures, such as trading rotations, restrictions on certain types of order
or trading halts or suspensions with respect to one or more options. These special procedures may
limit liquidity.
The Fund may purchase and sell both options that are traded on U.S. and foreign exchanges and
options traded over-the-counter with broker-dealers and other types of institutions that make
markets in these options. The ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that the broker-dealers or financial
institutions participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options will be subject to limitations established by each of the
exchanges, boards of trade or other trading facilities on which such options are traded governing
the maximum number of options in each class which may be written or purchased by a single investor
or group of investors acting in concert regardless of whether the options are written or purchased
on the same or different exchanges, boards of trade or other trading facilities or are held in one
or more accounts or through one or more brokers. Thus, the number of options which the Fund may
write or purchase may be affected by options written or purchased by other investment advisory
clients of an Investment Adviser. An exchange, board of trade or other trading facility may order
the liquidation of positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of options to seek to increase total return involves the risk of loss if the
Investment Adviser is incorrect in its expectation of fluctuations in securities prices or interest
rates. The successful use of options for hedging purposes also depends in part on the ability of
the Investment Adviser to correctly anticipate future price fluctuations and the degree of
correlation between the options and securities (or currency) markets. If the Investment Adviser is
incorrect in its expectation of changes in securities prices or determination of the correlation
between the securities or securities indices on which options are written and purchased and the
securities in the Funds investment portfolio, the Fund may incur losses that it would not
otherwise incur. The writing of options could increase the Funds portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
Futures Contracts and Options on Futures Contracts
The Fund may purchase and sell various kinds of futures contracts, and purchase and write call
and put options on any of such futures contracts. The Fund may also enter into closing purchase and
sale transactions with respect to any of such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities indices, foreign
currencies and any other financial instruments and indices. Financial futures contracts used by the
Fund include interest rate futures contracts including, among others, Eurodollar futures contracts.
Eurodollar futures contracts are U.S. dollar-denominated futures contracts that are based on the
implied forward London Interbank Offered Rate (LIBOR) of a three-month deposit.
The Fund may engage in futures and related options transactions in order to seek to increase
total return or to hedge against changes in interest rates, securities prices or currency exchange
rates, or to otherwise manage its term structure, sector selection and duration in accordance with
its investment objective and policies. The Fund may also enter into closing purchase and sale
transactions
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with respect to such contracts and options. The Trust, on behalf of the Fund, has claimed an
exclusion from the definition of the term commodity pool operator under the Commodity Exchange
Act and, therefore, is not subject to registration or regulation as a pool operator under that Act
with respect to the Fund.
Futures contracts entered into by the Fund have historically been traded on U.S. exchanges or
boards of trade that are licensed and regulated by the Commodity Futures Trading Commission
(CFTC) or on foreign exchanges. More recently, certain futures may also be traded either
over-the-counter or on trading facilities such as derivatives transaction execution facilities,
exempt boards of trade or electronic trading facilities that are licensed and/or regulated to
varying degrees by the CFTC. Also, certain single stock futures and narrow based security index
futures may be traded either over-the-counter or on trading facilities such as contract markets,
derivatives transaction execution facilities and electronic trading facilities that are licensed
and/or regulated to varying degrees by both the CFTC and the SEC or on foreign exchanges.
Neither the CFTC, National Futures Association, SEC nor any domestic exchange regulates
activities of any foreign exchange or boards of trade, including the execution, delivery and
clearing of transactions, or has the power to compel enforcement of the rules of a foreign exchange
or board of trade or any applicable foreign law. This is true even if the exchange is formally
linked to a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction occurs. For these
reasons, the Funds investments in foreign futures or foreign options transactions may not be
provided the same protections in respect of transactions on United States exchanges. In particular,
persons who trade foreign futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTCs regulations and the rules of
the National Futures Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. Similarly, these persons may not have the protection
of the U.S. securities laws.
Futures Contracts
. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or currencies for an agreed
price during a designated month (or to deliver the final cash settlement price, in the case of a
contract relating to an index or otherwise not calling for physical delivery at the end of trading
in the contract).
When interest rates are rising or securities prices are falling, the Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of futures contracts.
When interest rates are falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases. The Fund may purchase and sell futures contracts
on a specified currency in order to seek to increase total return or to protect against changes in
currency exchange rates. For example, the Fund may seek to offset anticipated changes in the value
of a currency in which its portfolio securities, or securities that it intends to purchase, are
quoted or denominated by purchasing and selling futures contracts on such currencies. As another
example, the Fund may enter into futures transactions to seek a closer correlation between the
Funds overall currency exposures and the currency exposures of the Funds performance benchmark.
Positions taken in the futures markets are not normally held to maturity but are instead
liquidated through offsetting transactions which may result in a profit or a loss. While futures
contracts on securities or currency will usually be liquidated in this manner, the Fund may instead
make or take delivery of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on which futures on
securities or currency are traded guarantees that, if still open, the sale or purchase will be
performed on the settlement date.
Hedging Strategies Using Futures Contracts
. When the Fund uses futures for hedging
purposes, the Fund often seeks to establish with more certainty than would otherwise be possible
the effective price or rate of return on portfolio securities (or securities that the Fund proposes
to acquire) or the exchange rate of currencies in which portfolio securities are quoted or
denominated. The Fund may, for example, take a short position in the futures market by selling
futures contracts to seek to hedge against an anticipated rise in interest rates or a decline in
market prices or foreign currency rates that would adversely affect the U.S. dollar value of the
Funds portfolio securities. Such futures contracts may include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to those of the Funds
portfolio securities. Similarly, the Fund may each sell futures contracts on any currencies in
which its portfolio securities are quoted or denominated or sell futures contracts on one currency
to seek to hedge against fluctuations in the value of securities quoted or denominated in a
different currency if there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Investment Adviser, there is a sufficient degree of
correlation between price trends for the Funds portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the Fund may also enter into such
futures contracts as part of a hedging strategy. Although under some circumstances prices of
securities in the Funds portfolio may be more or less volatile than prices of such futures
contracts, the Investment Adviser will
B-36
attempt to estimate the extent of this volatility difference based on historical patterns and
compensate for any such differential by having the Fund enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price changes affecting
the Funds portfolio securities. When hedging of this character is successful, any depreciation in
the value of portfolio securities will be substantially offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the value of the Funds
portfolio securities would be substantially offset by a decline in the value of the futures
position.
On other occasions, the Fund may take a long position by purchasing futures contracts. This
may be done, for example, when the Fund anticipates the subsequent purchase of particular
securities when it has the necessary cash, but expects the prices or currency exchange rates then
available in the applicable market to be less favorable than prices or rates that are currently
available.
Options on Futures Contracts
. The acquisition of put and call options on futures
contracts will give the Fund the right (but not the obligation) for a specified price to sell or to
purchase, respectively, the underlying futures contract at any time during the option period. As
the purchaser of an option on a futures contract, the Fund obtains the benefit of the futures
position if prices move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially
offset a decline in the value of the Funds assets. By writing a call option, the Fund becomes
obligated, in exchange for the premium, to sell a futures contract if the option is exercised,
which may have a value higher than the exercise price. The writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value lower than the
exercise price. Thus, the loss incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs
in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by selling
or purchasing an offsetting option on the same financial instrument. There is no guarantee that
such closing transactions can be effected. The Funds ability to establish and close out positions
on such options will be subject to the development and maintenance of a liquid market.
Other Considerations
. The Fund will engage in transactions in futures contracts and
related options transactions only to the extent such transactions are consistent with the
requirements of the Code for maintaining their qualifications as regulated investment companies for
federal income tax purposes. Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in certain cases, require the Fund to segregate cash
or liquid assets. The Fund may cover their transactions in futures contracts and related options
through the segregation of cash or liquid assets or by other means, in any manner permitted by
applicable law.
While transactions in futures contracts and options on futures may reduce certain risks, such
transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates,
securities prices or currency exchange rates may result in a poorer overall performance for the
Fund than if it had not entered into any futures contracts or options transactions. When futures
contracts and options are used for hedging purposes, perfect correlation between the Funds futures
positions and portfolio positions may be impossible to achieve, particularly where futures
contracts based on individual equity or corporate fixed income securities are currently not
available. In the event of imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be obtained and the Fund
may be exposed to risk of loss.
In addition, it is not possible for the Fund to hedge fully or perfectly against currency
fluctuations affecting the value of securities quoted or denominated in foreign currencies because
the value of such securities is likely to fluctuate as a result of independent factors unrelated to
currency fluctuations. The profitability of the Funds trading in futures depends upon the ability
of the Investment Adviser to analyze correctly the futures markets.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options transactions,
multiple futures transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate and other swap transactions and any combination of futures,
options, currency and swap transactions (component transactions) as part of a single or combined
strategy when, in the opinion of the Investment Adviser, it is in the best interests of the Fund to
do so. A combined transaction will usually contain elements of risk that are present in each of its
component transactions. Although combined transactions are normally entered
B-37
into based on the Investment Advisers judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the portfolio management
objective.
Short Sales
The Fund may engage in short sales. Short sales are transactions in which the Fund sells a
security it does not own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The
Fund then is 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 amounts equal to any dividend which accrues during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would increase the cost of the
security sold. There will also be other costs associated with short sales.
The 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 increased, by the
amount of any premium or amounts in lieu of interest the Fund may be required to pay in connection
with a short sale, and will be also decreased by any transaction or other costs.
Until the Fund replaces a borrowed security in connection with a short sale, the Fund will (a)
segregate cash or liquid assets at such a level that the segregated assets plus any amount
deposited with the broker as collateral will equal the current value of the security sold short or
(b) otherwise cover its short position in accordance with applicable law.
There is no guarantee that the Fund will be able to close out a short position at any
particular time or at an acceptable price. During the time that the Fund is short a security, it is
subject to the risk that the lender of the security will terminate the loan at a time when the Fund
is unable to borrow the same security from another lender. If that occurs, the Fund may be bought
in at the price required to purchase the security needed to close out the short position, which
may be a disadvantageous price.
The Fund may engage in short sales against the box. As noted above, a short sale is made by
selling a security the seller does not own. A short sale is against the box to the extent that
the seller contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. It may be entered into by the Fund, for example, to lock in a sales
price for a security the Fund does not wish to sell immediately. If the Fund sells securities
short against the box, it may protect itself from loss if the price of the securities declines in
the future, but will lose the opportunity to profit on such securities if the price rises.
If the Fund effects a short sale of securities at a time when it has an unrealized gain on the
securities, it may be required to recognize that gain as if it had actually sold the securities (as
a constructive sale) on the date it effects the short sale. However, such constructive sale
treatment may not apply if the Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other conditions are
satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the
extent to which the Fund may effect short sales.
Mortgage Dollar Rolls
The Fund may enter into mortgage dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts with the same counterparty to repurchase
similar, but not identical securities on a specified future date. During the roll period, the Fund
loses the right to receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the securities sold
and the lower forward price for the future purchase or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward purchase. All cash
proceeds will be invested in instruments that are permissible investments for the Fund. The Fund
will segregate until the settlement date cash or liquid assets, as permitted by applicable law, in
an amount equal to its forward purchase price.
For financial reporting and tax purposes, the Fund treats mortgage dollar rolls as two
separate transactions; one involving the purchase of a security and a separate transaction
involving a sale. The Fund does not currently intend to enter into mortgage dollar rolls for
financing and does not treat them as borrowings.
Mortgage dollar rolls involve certain risks including the following: if the broker-dealer to
whom the Fund sells the security becomes insolvent, the Funds right to purchase or repurchase the
mortgage-related securities subject to the mortgage dollar roll may
B-38
be restricted. Also, the instrument which the Fund is required to repurchase may be worth less
than an instrument which the Fund originally held. Successful use of mortgage dollar rolls will
depend upon the Investment Advisers ability to manage the Funds interest rate and mortgage
prepayments exposure. For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed. The use of this technique may diminish the investment performance of the
Fund compared with what such performance would have been without the use of mortgage dollar rolls.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or exchanged for a specified
amount of common stock (or other securities) of the same or different issuer within a particular
period of time at a specified price or formula. A convertible security entitles the holder to
receive interest that is generally paid or accrued on debt or a dividend that is paid or accrued on
preferred stock until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics, in that they generally (i) have
higher yields than common stocks, but lower yields than comparable non-convertible securities, (ii)
are less subject to fluctuation in value than the underlying common stock due to their fixed income
characteristics and (iii) provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The value of a convertible security is a function of its investment value (determined by its
yield in comparison with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege) and its conversion value (the securitys worth, at market value,
if converted into the underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value normally declining as interest rates
increase and increasing as interest rates decline. The credit standing of the issuer and other
factors may also have an effect on the convertible securitys investment value. The conversion
value of a convertible security is determined by the market price of the underlying common stock.
If the conversion value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible security generally
will sell at a premium over its conversion value by the extent to which investors place value on
the right to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer at a price
established in the convertible securitys governing instrument. If a convertible security held by
the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Funds ability to achieve its investment objective,
which, in turn, could result in losses to the Fund. To the extent that the Fund holds a convertible
security, or a security that is otherwise converted or exchanged for common stock (
e.g.
, as a
result of a restructuring), the Fund may, consistent with its investment objective, hold such
common stock in its portfolio.
Lending of Portfolio Securities
The Fund may lend its portfolio securities to brokers, dealers and other institutions,
including Goldman Sachs. By lending its securities, the Fund attempts to increase its net
investment income.
Securities loans are required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government securities equal to at least 100% of the value of
the loaned securities. This collateral must be valued, or marked to market, daily. Borrowers
are required to furnish additional collateral to the Fund as necessary to fully cover their
obligations.
With respect to loans that are collateralized by cash, the Fund may reinvest that cash in
short-term investments and pay the borrower a pre-negotiated fee or rebate from any return earned
on the investment. Investing the collateral subjects it to market depreciation or appreciation,
and the Fund is responsible for any loss that may result from its investment of the borrowed
collateral. Cash collateral may be invested in, among other things, other registered or
unregistered funds, including private investing funds or money market funds that are managed by the
Investment Adviser or its affiliates for the purpose of investing cash collateral generated from
securities lending activities, and which pay the Investment Adviser or its affiliates for their
services. If the Fund would receive non-cash collateral, the Fund receives a fee from the borrower
equal to a negotiated percentage of the market value of the loaned securities.
For the duration of any securities loan, the Fund will continue to receive the equivalent of
the interest, dividends or other distributions paid by the issuer on the loaned securities. The
Fund will not have the right to vote its loaned securities during the period of the loan, but the
Fund may attempt to recall a loaned security in anticipation of a material vote if it desires to do
so. The Fund will
B-39
have the right to terminate a loan at any time and recall the loaned securities within the
normal and customary settlement time for securities transactions.
Securities lending involves certain risks. The Fund may lose money on its investment of cash
collateral, resulting in a loss of principal, or may fail to earn sufficient income on its
investment to cover the fee or rebate it has agreed to pay the borrower. The Fund may incur losses
in connection with its securities lending activities that exceed the value of the interest income
and fees received in connection with such transactions. Securities lending subjects the Fund to
the risk of loss resulting from problems in the settlement and accounting process, and to
additional credit, counterparty and market risk. These risks could be greater with respect to
non-U.S. securities. Engaging in securities lending could have a leveraging effect, which may
intensify the other risks associated with investments in the Fund. In addition, the Fund bears the
risk that the price of the securities on loan will increase while they are on loan, or that the
price of the collateral will decline in value during the period of the loan, and that the
counterparty will not provide, or will delay in providing, additional collateral. The Fund also
bears the risk that a borrower may fail to return securities in a timely manner or at all, either
because the borrower fails financially or for other reasons. If a borrower of securities fails
financially, the Fund may also lose its rights in the collateral. The Fund could experience delays
and costs in recovering loaned securities or in gaining access to and liquidating the collateral,
which could result in actual financial loss and which could interfere with portfolio management
decisions or the exercise of ownership rights in the loaned securities. If the Fund is not able to
recover the securities lent, the Fund may sell the collateral and purchase replacement securities
in the market. However, the Fund will incur transaction costs on the purchase of replacement
securities. These events could trigger adverse tax consequences for the Fund. In determining
whether to lend securities to a particular borrower, and throughout the period of the loan, the
creditworthiness of the borrower will be considered and monitored. Loans will only be made to
firms deemed to be of good standing, and where the consideration that can be earned currently from
securities loans of this type is deemed to justify the attendant risk. It is intended that the
value of securities loaned by the Fund will not exceed one-third of the value of the Funds total
assets (including the loan collateral).
The Fund will consider the loaned securities as assets of the Fund, but will not consider any
collateral as the Fund asset except when determining total assets for the purpose of the above
one-third limitation. Loan collateral (including any investment of the collateral) is not subject
to the percentage limitations stated elsewhere in this SAI or in the Prospectus regarding investing
in fixed income securities and cash equivalents.
The Funds Board of Trustees may approve the Funds participation in a securities lending
program and adopt policies and procedures relating thereto. The Fund may retain an affiliate of the
Investment Adviser to serve as its securities lending agent.
For its services, the securities lending agent may receive a fee from the Fund, including a
fee based on the returns earned on the Funds investment of cash received as collateral for the
loaned securities. In addition, the Fund may make brokerage and other payments to Goldman Sachs
and its affiliates in connection with the Funds portfolio investment transactions. The Funds
Board of Trustees periodically reviews securities loan transactions for which a Goldman Sachs
affiliate has acted as lending agent for compliance with the Funds securities lending procedures.
Goldman Sachs may also be approved as a borrower under the Funds securities lending program,
subject to certain conditions.
Restricted and Illiquid Securities
The Fund may purchase securities that are not registered or that are offered in an exempt
non-public offering (Restricted Securities) under the Securities Act of 1933, as amended (1933
Act), including securities eligible for resale to qualified institutional buyers pursuant to
Rule 144A under the 1933 Act. However, the Fund will not invest more than 15% of its net assets in
illiquid investments, which include repurchase agreements with a notice or demand period of more
than seven days, certain SMBS, certain municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities unless, based upon a review of
the trading markets for the specific Restricted Securities, such Restricted Securities are
determined to be liquid. The Trustees have adopted guidelines and delegated to the Investment
Advisers the function of determining and monitoring the liquidity of the Funds portfolio
securities. This investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become for a time uninterested in
purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities may reflect a discount
from the price at which such securities trade when they are not restricted, since the restriction
make them less liquid. The amount of the discount from the prevailing market price is expected to
vary depending upon the type of security, the character of the issuer, the party who will bear the
expenses of registering the Restricted Securities and prevailing supply and demand conditions.
B-40
When-Issued and Forward Commitment Securities
The Fund may purchase securities on a when-issued basis or purchase or sell securities on a
forward commitment basis beyond the customary settlement time. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the securities will be delivered
and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the other party, and
such commitments are not traded on exchanges. The Fund will generally purchase securities on a
when-issued basis or purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may dispose of or negotiate
a commitment after entering into it. The Fund may also sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. The Fund may realize
capital gains or losses in connection with these transactions. For purposes of determining the
Funds duration, the maturity of when-issued or forward commitment securities for fixed-rate
obligations will be calculated from the commitment date. The Fund is generally required to
segregate, until three days prior to settlement date, cash and liquid assets in an amount
sufficient to meet the purchase price unless the Funds obligations are otherwise covered.
Alternatively, the Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines prior to the
settlement date or if the value of the security to be sold increases prior to the settlement date.
Other Investment Companies
The Fund may invest in securities of other investment companies, including ETFs. The Fund
will indirectly bear its proportionate share of any management fees and other expenses paid by
investment companies in which it invests, in addition to the management fees (and other expenses)
paid by the Fund. The Funds investments in other investment companies are subject to statutory
limitations prescribed by the Act, including in certain circumstances a prohibition on the Fund
acquiring more that 3% of the voting shares of any other investment company, and a prohibition on
investing more than 5% of the Funds total assets in securities of any one investment company or
more than 10% of its total assets in the securities of all investment companies. Many ETFs,
however, have obtained exemptive relief from the SEC to permit unaffiliated funds (such as the
Fund) to invest in their shares beyond these statutory limits, subject to certain conditions and
pursuant to contractual arrangements between the ETFs and the investing funds. The Fund may rely
on these exemptive orders in investing in ETFs. Moreover, pursuant to an exemptive order obtained
from the SEC or under an exemptive rule adopted by the SEC, the Fund may invest in investment
companies and money market funds for which an Investment Adviser, or any of its affiliates, serves
as investment adviser, administrator and/or distributor. However, to the extent that the Fund
invests in a money market fund for which an Investment Adviser or any of its affiliates acts as
investment adviser, the management fees payable by the Fund to the Investment Adviser will, to the
extent required by the SEC, be reduced by an amount equal to the Funds proportionate share of the
management fees paid by such money market fund to its investment adviser. Although the Fund does
not expect to do so in the foreseeable future, the Fund is authorized to invest substantially all
of its assets in a single open-end investment company or series thereof that has substantially the
same investment objective, policies and fundamental restrictions as the Fund. Additionally, to the
extent that the Fund serves as an underlying Fund to another Goldman Sachs Fund, the Fund may
invest a percentage of its assets in other investment companies if those investments are consistent
with applicable law and/or exemptive orders obtained from the SEC.
The Fund may purchase shares of investment companies investing primarily in foreign
securities, including country funds. Country funds have portfolios consisting primarily of
securities of issuers located in specified foreign countries or regions.
ETFs are shares of unaffiliated investment companies issuing shares which are traded like
traditional equity securities on a national stock exchange. An ETF represents a portfolio of
securities, which is often designed to track a particular market segment or index. An investment
in an ETF, like one in any investment company, carries the same risks as those of its underlying
securities. An ETF may fail to accurately track the returns of the market segment or index that it
is designed to track, and the price of an ETFs shares may fluctuate or lose money. In addition,
because they, unlike other investment companies, are traded on an exchange, ETFs are subject to the
following risks: (i) the market price of the ETFs shares may trade at a premium or discount to the
ETFs net asset value; (ii) an active trading market for an ETF may not develop or be maintained;
and (iii) there is no assurance that the requirements of the exchange necessary to maintain the
listing of the ETF will continue to be met or remain unchanged. In the event substantial market or
other disruptions affecting ETFs should occur in the future, the liquidity and value of the Funds
shares could also be substantially and adversely affected.
B-41
Repurchase Agreements
The Fund may enter into repurchase agreements with banks, brokers, and dealers which furnish
collateral at least equal in value or market price to the amount of their repurchase obligation.
With respect to the Fund, these repurchase agreements may involve foreign government securities. A
repurchase agreement is an arrangement under which the Fund purchases securities and the seller
agrees to repurchase the securities within a particular time and at a specified price. Custody of
the securities is maintained by the Funds custodian (or sub-custodian). The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act, and generally for tax purposes, a repurchase agreement is deemed to
be a loan from the Fund to the seller of the security. For other purposes, it is not always clear
whether a court would consider the security purchased by the Fund subject to a repurchase agreement
as being owned by the Fund or as being collateral for a loan by the Fund to the seller. In the
event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the
security before repurchase of the security under a repurchase agreement, the Fund may encounter
delay and incur costs before being able to sell the security. Such a delay may involve loss of
interest or a decline in value of the security. If the court characterizes the transaction as a
loan and the Fund has not perfected a security interest in the security, the Fund may be required
to return the security to the sellers estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or all of the principal
and interest involved in the transaction.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the
seller may fail to repurchase the security. However, if the market value of the security subject to
the repurchase agreement becomes less than the repurchase price (including accrued interest), the
Fund will direct the seller of the security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds the repurchase price.
Certain repurchase agreements which provide for settlement in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such repurchase agreements
will be regarded as liquid instruments.
The Fund, together with other registered investment companies having management agreements
with the Investment Advisers or their affiliates, may transfer uninvested cash balances into a
single joint account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
Reverse Repurchase Agreements
The Fund may borrow money by entering into transactions called reverse repurchase agreements.
Under these arrangements, the Fund will sell portfolio securities to dealers in U.S. Government
securities or members of the Federal Reserve System, with an agreement to repurchase the security
on an agreed date, price and interest payment. The Funds reverse repurchase agreements may involve
foreign government securities. Reverse repurchase agreements involve the possible risk that the
value of portfolio securities the Fund relinquishes may decline below the price the Fund must pay
when the transaction closes. Borrowings may magnify the potential for gain or loss on amounts
invested resulting in an increase in the speculative character of the Funds outstanding shares.
When the Fund enters into a reverse repurchase agreement, it places in a separate custodial
account either liquid assets or other high grade debt securities that have a value equal to or
greater than the repurchase price. The account is then continuously monitored by the Investment
Adviser to make sure that an appropriate value is maintained. Reverse repurchase agreements are
considered to be borrowings under the Act.
Collateralized Loan Obligations
The Fund may invest in collateralized debt obligations (CDOs), which include collateralized
loan obligations (CLOs), collateralized bond obligations (CBOs), and other similarly structured
securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among
others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate
corporate loans, including loans that may be rated below investment grade or equivalent unrated
loans. CDOs may charge management and other administrative fees.
The cashflows from the trust are split into two or more portions, called tranches, varying in
risk and yield. The riskiest portion is the equity tranche which bears the bulk of defaults from
the bonds or loans in the trust and serves to protect the other, more senior tranches from default
in all but the most severe circumstances. Since it is partially protected from defaults, a senior
tranche from a
B-42
CLO trust typically has higher ratings and lower yields than its underlying securities, and
can be rated investment grade. Despite the protection from the equity tranche, CLO tranches can
experience substantial losses due to actual defaults, increased sensitivity to defaults due to
collateral default and disappearance of protecting tranches, market anticipation of defaults, as
well as aversion to CLO securities as a class.
The risks of an investment in a CDO depend largely on the type of the collateral securities
and the class of the CDO in which the Fund invests. Normally, CLOs and other CDOs are privately
offered and sold, and thus, are not registered under the securities laws. As a result, investments
in CDOs may be characterized by the Fund as illiquid securities, however an active dealer market
may exist for CDOs allowing a CDO to qualify a under the Rule 144A safe harbor from the
registration requirements of the Securities Act for resales of certain securities to qualified
institutional buyers. In addition to the normal risks associated with fixed income securities
discussed elsewhere in this SAI and the Funds Prospectus (e.g., interest rate risk and default
risk), CDOs carry additional risks including, but are not limited to, the risk that: (i)
distributions from collateral securities may not be adequate to make interest or other payments;
(ii) the quality of the collateral may decline in value or default; (iii) the Fund may invest in
CDOs that are subordinate to other classes; and (iv) the complex structure of the security may not
be fully understood at the time of investment and may produce disputes with the issuer or
unexpected investment results.
Portfolio Maturity
Dollar-weighted average maturity is derived by multiplying the value of each investment by the
time remaining to its maturity, adding these calculations, and then dividing the total by the value
of the Funds portfolio. An obligations maturity is typically determined on a stated final
maturity basis, although there are some exceptions. For example, if an issuer of an instrument
takes advantage of a maturity-shortening device, such as a call, refunding, or redemption
provision, the date on which the instrument is expected to be called, refunded, or redeemed may be
considered to be its maturity date. There is no guarantee that the expected call, refund or
redemption will occur and the Funds average maturity may lengthen beyond the Investment Advisers
expectations should the expected call refund or redemption not occur. Similarly, in calculating its
dollar-weighted average maturity, the Fund may determine the maturity of a variable or floating
rate obligation according to the interest rate reset date, or the date principal can be recovered
on demand, rather than the date of ultimate maturity.
Temporary Investments
The
Fund may, for temporary defensive purposes, invest any portion of its total
assets in: U.S. Government securities; commercial paper rated at least A-2 by Standard & Poors,
P-2 by Moodys or having a comparable rating by another NRSRO; certificates of deposit; bankers
acceptances; repurchase agreements; non-convertible preferred stocks and non-convertible corporate
bonds with a remaining maturity of less than one year;
exchange-traded funds (ETFs); other investment companies; cash; and
cash equivalents. When the Funds assets are invested in such instruments, the Fund may not
be achieving its investment objective.
Portfolio Turnover
The Fund may engage in active short-term trading to benefit from yield disparities among different
issues of securities or among the markets for fixed income securities, or for other reasons. As a
result of active management, it is anticipated that the portfolio turnover rate of the Fund will
vary from year to year, and may be affected by changes in the holdings of specific issuers, changes
in country and currency weightings, cash requirements for redemption of shares and by requirements
which enable the Fund to receive favorable tax treatment. The Fund is not restricted by policy with
regard to portfolio turnover and will make changes in their investment portfolio from time to time
as business and economic conditions as well as market prices may dictate. When the Fund purchases a
TBA mortgage, it can either receive the underlying pools of the TBA mortgage or roll it forward a
month. The portfolio turnover rate increases when the Fund rolls the TBA forward.
Special Note Regarding Market Events
Events in the financial sector over the past several years have resulted in reduced liquidity
in credit and fixed income markets and in an unusually high degree of volatility in the financial
markets, both domestically and internationally. While entire markets have been impacted, issuers
that have exposure to the real estate, mortgage and credit markets have been particularly affected.
These events and the potential for continuing market turbulence may have an adverse effect on the
Funds investments. It is uncertain how long these conditions will continue.
The instability in the financial markets led the U.S. government to take a number of
unprecedented actions designed to support certain financial institutions and certain segments of
the financial markets. Federal, state, and foreign governments, regulatory agencies, and self
-regulatory organizations may take actions that affect the regulation of the instruments in which
the Fund invests, or
B-43
the issuers of such instruments, in ways that are unforeseeable. Such legislation or
regulation could limit or preclude the Funds ability to achieve its investment objective.
Governments or their agencies may also acquire distressed assets from financial institutions
and acquire ownership interests in those institutions. The implications of government ownership and
disposition of these assets are unclear, and such ownership or disposition may have positive or
negative effects on the liquidity, valuation and performance of the Funds portfolio holdings.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Trust as fundamental
policies that cannot be changed without the affirmative vote of the holders of a majority of the
outstanding voting securities (as defined in the Act) of the Fund. The investment objective of the
Fund and all other investment policies or practices of the Fund are considered by the Trust not to
be fundamental and accordingly may be changed without shareholder approval. As defined in the Act,
a majority of the outstanding voting securities of the Fund means the vote of (i) 67% or more of
the shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50% of the shares of the
Fund.
For the purposes of the limitations (except for the asset coverage requirement with respect to
borrowings), any limitation which involves a maximum percentage shall not be considered violated
unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund. The identification of the
issuer of a Municipal Security that is not a general obligation is made by the Investment Adviser
based on the characteristics of the Municipal Security, the most important of which is the source
of funds for the payment of principal and interest on such security.
As a matter of fundamental policy, the Fund may not:
|
(1)
|
|
Make any investment inconsistent with the Funds classification as a diversified company
under the Act;
|
|
|
|
(2)
|
|
Invest more than 25% of its total assets in the securities of one or more issuers
conducting their principal business activities in the same industry (excluding the U.S.
Government or its agencies or instrumentalities). (For the purposes of this restriction,
state and municipal governments and their agencies, authorities and instrumentalities are
not deemed to be industries; telephone companies are considered to be a separate industry
from water, gas or electric utilities; personal credit finance companies and business credit
finance companies are deemed to be separate industries; and wholly-owned finance companies
are considered to be in the industry of their parents if their activities are primarily
related to financing the activities of their parents.) This restriction does not apply to
investments in Municipal Securities which have been pre-refunded by the use of obligations
of the U.S. government or any of its agencies or instrumentalities;
|
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(3)
|
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Borrow money, except (a) the Fund, to the extent permitted by applicable law, may borrow
from banks (as defined in the Act), other affiliated investment companies and other persons
or through reverse repurchase agreements in amounts up to 33-1/3% of its total assets
(including the amount borrowed); (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for temporary purposes; (c) the Fund
may obtain such short-term credits as may be necessary for the clearance of purchases and
sales of portfolio securities; (d) the Fund may purchase securities on margin to the extent
permitted by applicable law; and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings;
|
|
The following interpretation applies to, but is not part of, this
fundamental policy: In determining whether a particular investment in
portfolio instruments or participation in portfolio transactions is
subject to this borrowing policy, the accounting treatment of such
instrument or participation shall be considered, but shall not by itself
be determinative. Whether a particular instrument or transaction
constitutes a borrowing shall be determined by the Board, after
consideration of all of the relevant circumstances.
|
(4)
|
|
Make loans, except through (a) the purchase of debt obligations in accordance with the
Funds investment objective and policies; (b) repurchase agreements with banks, brokers,
dealers and other financial institutions; (c) loans of securities as permitted by applicable
law; and (d) loans to affiliates of the Fund to the extent permitted by law;
|
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(5)
|
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Underwrite securities issued by others, except to the extent that the sale of portfolio
securities by the Fund may be deemed to be an underwriting;
|
B-44
|
(6)
|
|
Purchase, hold or deal in real estate, although the Fund may purchase and sell securities
that are secured by real estate or interests therein, securities of real estate investment
trusts and mortgage-related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities;
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(7)
|
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Invest in commodities or commodity contracts, except that the Fund may invest in currency
and financial instruments and contracts that are commodities or commodity contracts; and
|
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(8)
|
|
Issue senior securities to the extent such issuance would violate applicable law.
|
Notwithstanding any other fundamental investment restriction or policy, the Fund may invest
some or all of its assets in a single open-end investment company or series thereof with
substantially the same fundamental investment objective, restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have adopted the
following non-fundamental policies which can be changed or amended by action of the Trustees
without approval of shareholders. Again, for purposes of the following limitations, any limitation
which involves a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of securities by the Fund.
The Fund may not:
|
(1)
|
|
Invest in companies for the purpose of exercising control or management;
|
|
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(2)
|
|
Invest more than 15% of the Funds net assets in illiquid investments, including illiquid
repurchase agreements with a notice or demand period of more than seven days, securities
which are not readily marketable and restricted securities not eligible for resale pursuant
to Rule 144A under the 1933 Act; or
|
|
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(3)
|
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Purchase additional securities if the Funds borrowings, as permitted by the Funds
borrowing policy, exceed 5% of its net assets. (Mortgage dollar rolls are not subject to
this limitation).
|
B-45
TRUSTEES AND OFFICERS
The Trusts Leadership Structure
The business and affairs of the Fund are managed under the direction of the Board of Trustees
(the Board), subject to the laws of the State of Delaware and the Trusts Declaration of Trust.
The Trustees are responsible for deciding matters of general policy for the Fund and providing
oversight of the Funds business and operations including the actions of the Funds service
providers. The officers of the Trust conduct and supervise the Funds daily business operations.
Trustees who are not deemed to be interested persons of the Trust as defined in the Act are
referred to as Independent Trustees. Trustees who are deemed to be interested persons of the
Trust are referred to as Interested Trustees. The Board is currently composed of six Independent
Trustees and two Interested Trustees. The Board has selected an Independent Trustee to act as
Chairman, whose duties include presiding at meetings of the Board and acting as a focal point to
address significant issues that may arise between regularly scheduled Board and Committee meetings.
In the performance of the Chairmans duties, the Chairman will consult with the other Independent
Trustees and the Fund officers and legal counsel, as appropriate. The Chairman may perform other
functions as requested by the Board from time to time.
The Board meets as often as necessary to discharge its responsibilities. Currently, the Board
conducts regular, in-person meetings at least six times a year, and holds special in-person or
telephonic meetings as necessary to address specific issues that require attention prior to the
next regularly scheduled meeting. In addition, the Independent Trustees meet at least annually to
review, among other things, investment management agreements, distribution (Rule 12b-1) and/or
service plans and related agreements, transfer agency agreements and certain other agreements
providing for the compensation of Goldman Sachs and/or its affiliates by the Fund, and to consider
such other matters as they deem appropriate.
The Board has established six standing committees Audit, Governance and Nominating,
Compliance, Valuation, Dividend and Contract Review Committees. The Board may establish other
committees, or nominate one or more Trustees to examine particular issues related to the Boards
oversight responsibilities, from time to time. Each Committee meets periodically to perform its
delegated oversight functions and reports its findings and recommendations to the Board. For more
information on the Committees, see the section STANDING BOARD COMMITTEES, below.
The Trustees have determined that the Trusts leadership structure is appropriate because it
allows the Trustees to effectively perform their oversight responsibilities.
Trustees of the Trust
Information pertaining to the Trustees of the Trust as of June 30, 2010 is set forth below.
B-46
Independent Trustees
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Number of
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Term of
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Portfolios in
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Office and
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Fund
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Position(s)
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Length of
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Complex
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Other
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Name,
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Held with
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Time
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Principal Occupation(s)
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Overseen by
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Directorships
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Address and Age
1
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the Trust
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Served
2
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During Past 5 Years
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Trustee
3
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Held by Trustee
4
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Ashok N. Bakhru
Age: 68
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Chairman of the
Board of Trustees
|
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Since 1996 (Trustee
Since 1991)
|
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President, ABN
Associates (July
1994March 1996 and
November
1998Present);
Director, Apollo
Investment Corporation
(a business
development company)
(October
2008-Present);
Executive Vice
PresidentFinance and
Administration and
Chief Financial
Officer and Director,
Coty Inc.
(manufacturer of
fragrances and
cosmetics) (April
1996November 1998);
Director of Arkwright
Mutual Insurance
Company (19841999);
Trustee of
International House of
Philadelphia (program
center and residential
community for students
and professional
trainees from the
United States and
foreign countries)
(19892004); Member
of Cornell University
Council (19922004
and 2006Present);
Trustee of the Walnut
Street Theater
(19922004); Trustee,
Scholarship America
(19982005); Trustee,
Institute for Higher
Education Policy
(20032008);
Director, Private
Equity InvestorsIII
and IV (November
19982007), and
Equity-Linked
Investors II (April
20022007); and
Chairman, Lenders
Service Inc. (provider
of mortgage lending
services)
(20002003).
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96
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Apollo Investment
Corporation (a
business
development
company)
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Chairman of the Board
of TrusteesGoldman
Sachs Mutual Fund
Complex.
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John P. Coblentz,
Jr.
Age: 69
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Trustee
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Since 2003
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Partner, Deloitte &
Touche LLP (June
1975May 2003);
Director, Emerging
Markets Group, Ltd.
(20042006); and
Director, Elderhostel,
Inc. (2006Present).
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96
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None
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TrusteeGoldman Sachs
Mutual Fund Complex.
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B-47
Independent Trustees
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Number of
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Term of
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Portfolios in
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Office and
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Fund
|
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Position(s)
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Length of
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|
Complex
|
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Other
|
Name,
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Held with
|
|
Time
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|
Principal Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Address and Age
1
|
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the Trust
|
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Served
2
|
|
During Past 5 Years
|
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Trustee
3
|
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Held by Trustee
4
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Diana M. Daniels
Age: 61
|
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Trustee
|
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Since 2007
|
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Ms. Daniels is retired
(since January 2007).
Formerly, she was Vice
President, General
Counsel and Secretary,
The Washington Post
Company (19912006).
Ms. Daniels is Vice
Chair of the Board of
Trustees of Cornell
University
(2009Present);
Member, Advisory
Board, Psychology
Without Borders
(international
humanitarian aid
organization) (since
2007), and former
Member of the Legal
Advisory Board, New
York Stock Exchange
(20032006) and of
the Corporate Advisory
Board, Standish Mellon
Management Advisors
(20062007).
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96
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|
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None
|
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|
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|
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|
|
|
|
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|
|
|
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TrusteeGoldman Sachs
Mutual Fund Complex.
|
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Patrick T. Harker
Age: 51
|
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Trustee
|
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Since 2000
|
|
President, University
of Delaware (July
2007Present); Dean
and Reliance Professor
of Operations and
Information
Management, The
Wharton School,
University of
Pennsylvania (February
2000June 2007);
Interim and Deputy
Dean, The Wharton
School, University of
Pennsylvania (July
1999January 2000);
and Professor and
Chairman of Department
of Operations and
Information
Management, The
Wharton School,
University of
Pennsylvania (July
1997August 2000).
|
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96
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Pepco Holdings,
Inc. (an energy
delivery company)
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TrusteeGoldman Sachs
Mutual Fund Complex.
|
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Jessica Palmer
Age: 61
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Trustee
|
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Since 2007
|
|
Ms. Palmer is retired.
Formerly, she was
Consultant, Citigroup
Human Resources
Department
(2007-2008); Managing
Director, Citigroup
Corporate and
Investment Banking
(previously, Salomon
Smith Barney/Salomon
Brothers)
(19842006). Ms.
Palmer was a Member of
the Board of Trustees
of Indian Mountain
School (private
elementary and
secondary school)
(20042009).
|
|
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96
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|
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None
|
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|
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|
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|
|
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|
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|
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TrusteeGoldman Sachs
Mutual Fund Complex.
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B-48
Independent Trustees
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Number of
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|
|
Term of
|
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Portfolios in
|
|
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|
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|
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Office and
|
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|
Fund
|
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|
Position(s)
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Length of
|
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|
Complex
|
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Other
|
Name,
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Held with
|
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Time
|
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Principal Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Address and Age
1
|
|
the Trust
|
|
Served
2
|
|
During Past 5 Years
|
|
Trustee
3
|
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Held by Trustee
4
|
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|
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|
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Richard P. Strubel
Age: 70
|
|
Trustee
|
|
Since 1987
|
|
Director, Cardean
Learning Group
(provider of
educational services
via the internet)
(20032008);
President, COO and
Director, Cardean
Learning Group
(19992003);
Director, Cantilever
Technologies, Inc. (a
private software
company) (19992005);
Audit Committee
Chairman, The
University of Chicago
(2006-Present);
Trustee, The
University of Chicago
(1987Present); and
Managing Director,
Tandem Partners, Inc.
(management services
firm) (19901999).
|
|
|
96
|
|
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Gildan Activewear
Inc. (a clothing
marketing and
manufacturing
company); The
Northern Trust
Mutual Fund Complex
(58 Portfolios)
(Chairman of the
Board of Trustees).
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs
Mutual Fund Complex.
|
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|
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|
Interested Trustees
|
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|
|
|
|
James A. McNamara*
Age: 47
|
|
President and
Trustee
|
|
Since 2007
|
|
Managing Director,
Goldman Sachs
(December
1998Present);
Director of
Institutional Fund
Sales, GSAM (April
1998December 2000);
and Senior Vice
President and Manager,
Dreyfus Institutional
Service Corporation
(January 1993April
1998).
|
|
|
96
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PresidentGoldman
Sachs Mutual Fund
Complex (November
2007Present); Senior
Vice
PresidentGoldman
Sachs Mutual Fund
Complex (May
2007November 2007);
and Vice
PresidentGoldman
Sachs Mutual Fund
Complex (20012007).
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|
|
|
|
|
|
TrusteeGoldman Sachs
Mutual Fund Complex
(since November 2007
and December 2002May
2004).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan A. Shuch*
Age: 60
|
|
Trustee
|
|
Since 1990
|
|
Advisory
DirectorGSAM (May
1999Present);
Consultant to GSAM
(December 1994May
1999); and Limited
Partner, Goldman Sachs
(December 1994May
1999).
|
|
|
96
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs
Mutual Fund Complex.
|
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|
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|
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|
*
|
|
These persons are considered to be Interested Trustees because they hold positions with
Goldman Sachs and own securities issued by The Goldman Sachs Group, Inc. Each Interested
Trustee holds comparable positions with certain other companies of which Goldman Sachs, GSAM
or an affiliate thereof is the investment adviser, administrator and/or distributor.
|
|
1
|
|
Each Trustee may be contacted by writing to the Trustee, c/o Goldman Sachs, 200 West Street,
New York, NY 10282, Attn: Peter V. Bonanno.
|
B-49
|
|
|
2
|
|
Each Trustee holds office for an indefinite term until the earliest of: (a) the election of
his or her successor; (b) the date the Trustee resigns or is removed by the Board of Trustees
or shareholders, in accordance with the Trusts Declaration of Trust; (c) the conclusion of
the first Board meeting held subsequent to the day the Trustee attains the age of 72 years (in accordance with
the current resolutions of the Board of Trustees, which may be changed by the Trustees without
shareholder vote); or (d) the termination of the Trust.
|
|
|
3
|
|
The Goldman Sachs Mutual Fund Complex consists of the Trust, Goldman Sachs Municipal
Opportunity Fund, Goldman Sachs Credit Strategies Fund and Goldman Sachs Variable Insurance
Trust. As of June 30, 2010, the Trust consisted of 84 portfolios, the Goldman Sachs Variable
Insurance Trust consisted of 11 portfolios and the Goldman Sachs Municipal Opportunity Fund
did not offer shares to the public.
|
|
|
4
|
|
This column includes only directorships of companies required to report to the SEC under the
Securities Exchange Act of 1934 (i.e., public companies) or other investment companies
registered under the Act.
|
The significance or relevance of a Trustees particular experience, qualifications,
attributes and/or skills is considered by the Board on an individual basis. Experience,
qualifications, attributes and/or skills common to all Trustees include the ability to critically
review, evaluate and discuss information provided to them and to interact effectively with the
other Trustees and with representatives of the Investment Adviser and its affiliates, other service
providers, legal counsel and the Funds independent registered public accounting firm, the capacity
to address financial and legal issues and exercise reasonable business judgment, and a commitment
to the representation of the interests of the Fund and its shareholders. The Governance and
Nominating Committees charter contains certain other factors that are considered by the Governance
and Nominating Committee in identifying and evaluating potential nominees to serve as Independent
Trustees. Based on each Trustees experience, qualifications, attributes and/or skills, considered
individually and with respect to the experience, qualifications attributes and/or skills of other
Trustees, the Board has concluded that each Trustee should serve as a Trustee. Below is a brief
discussion of the experience, qualifications, attributes and/or skills of each individual Trustee
as of June 30, 2010 that led the Board to conclude that such individual should serve as a Trustee.
Ashok N. Bakhru.
Mr. Bakhru has served as a Trustee since 1991 and Chairman of the Board
since 1996. Mr. Bakhru serves as President of ABN Associates, a management and financial
consulting firm, and is a Director of Apollo Investment Corporation, a business development
company. Previously, Mr. Bakhru was the Chief Financial Officer, Chief Administrative Officer and
Director of Coty Inc., a multinational cosmetics, fragrance and personal care company. Previously,
Mr. Bakhru held several senior management positions at Scott Paper Company, a major manufacturer of
paper products, including Senior Vice President and Chief Financial Officer. Mr. Bakhru also
serves on the Governing Council of the Independent Directors Council and the Board of Governors of
the Investment Company Institute. He also serves on the Advisory Board of BoardIQ, an investment
publication. In addition, Mr. Bakhru has served as Director of Equity-Linked Investments II and
Private Equity Investors III and IV, which are private equity partnerships based in New York City.
Mr. Bakhru was also a Director of Arkwright Mutual Insurance Company. Based on the foregoing, Mr.
Bakhru is experienced with financial and investment matters.
John P. Coblentz, Jr.
Mr. Coblentz has served as Trustee since 2003. Mr. Coblentz has been
designated as the Boards audit committee financial expert given his extensive accounting and
finance experience. Mr. Coblentz was a partner with Deloitte & Touche LLP for 28 years. While at
Deloitte & Touche LLP, Mr. Coblentz was lead partner responsible for all auditing and accounting
services to a variety of large, global companies, a significant portion of which operated in the
financial services industry. Mr. Coblentz was also the national managing partner for the firms
risk management function, a member of its Executive Committee and the first managing partner of the
firms Financial Advisory Services practice, which brought together the firms mergers and
acquisition services, forensic and dispute services, corporate finance, asset valuation and
reorganization businesses under one management structure. He served as a member of the firms
Board of Directors and a member of its Executive Committee. Mr. Coblentz also currently serves as
a Director and chairman of the finance committee of Elderhostel, Inc., a not-for-profit
organization. Based on the foregoing, Mr. Coblentz is experienced with accounting, financial and
investment matters.
Diana M. Daniels.
Ms. Daniels has served as Trustee since 2007. Ms. Daniels also serves as
Vice Chair of the Board of Trustees of Cornell University. Ms. Daniels held several senior
management positions at The Washington Post Company, where she worked for 20 years. While at The
Washington Post Company, Ms. Daniels served as Vice Present, General Counsel, Secretary to the
Board of Directors and Secretary to the Audit Committee. Previously, Ms. Daniels served as Vice
President and General Counsel of Newsweek, Inc. Ms. Daniels has also served as a member of the
Corporate Advisory Board of Standish Mellon Management Advisors and of the Legal Advisory Board of
New York Stock Exchange. Ms. Daniels is also a member of the American Law Institute and of the
Advisory Council of the Inter-American Press Association. Based on the foregoing, Ms. Daniels is
experienced with legal, financial and investment matters.
Patrick T. Harker.
Mr. Harker has served as Trustee since 2000. Mr. Harker is President of
the University of Delaware and serves as a professor of business administration and as a professor
of civil and environmental engineering. Mr. Harker also serves as a Director of Pepco Holdings,
Inc. and is a founding member of the Board of Advisors for Decision Lens, Inc. Mr. Harker also
served
B-50
as Dean of The Wharton School, University of Pennsylvania and was a professor and chairman
of the Department of Operations and Information Management. Based on the foregoing, Mr. Harker is
experienced with financial and investment matters.
Jessica Palmer.
Ms. Palmer has served as Trustee since 2007. Ms. Palmer worked at Citigroup
Corporate and Investment Banking (previously, Salomon Smith Barney/Salomon Brothers) for over 20
years, where she was a Managing Director. While at Citigroup Corporate and Investment Banking, Ms.
Palmer was Head of Global Risk Management, Chair of the Global Commitment Committee, Co-Chair of
International Investment Banking (New York) and Head of Fixed Income Capital Markets. Ms. Palmer
was also a member of the Management Committee and Risk Management Operating Committee of Citigroup,
Inc. Prior to that, Ms. Palmer was a Vice President at Goldman Sachs in its international
corporate finance department. Ms. Palmer was also Assistant Vice President of the International
Division at Wells Fargo Bank, N.A. Ms. Palmer is also member of the Board of Trustees of a private
elementary and secondary school. Based on the foregoing, Ms. Palmer is experienced with financial
and investment matters.
Richard P. Strubel.
Mr. Strubel has served as Trustee since 1987. Mr. Strubel also serves as
Chairman of the Northern Funds, a family of retail and institutional mutual funds managed by The
Northern Trust Company. He also serves on the board of Gildan Activewear Inc., which is listed on
the New York Stock Exchange (NYSE). Mr. Strubel was Vice-Chairman of the Board of Cardean
Learning Group (formerly known as Unext), and previously served as Unexts President and Chief
Operating Officer. Mr. Strubel was Managing Director of Tandem Partners, Inc., a privately-held
management services firm, and served as President and Chief Executive Officer of Microdot, Inc.
Previously, Mr. Strubel served as President of Northwest Industries, then a NYSE-listed company, a
conglomerate with various operating entities located around the country. Before joining Northwest,
Mr. Strubel was an associate and later managing principal of Fry Consultants, a management
consulting firm based in Chicago. Mr. Strubel is also a Trustee of the University of Chicago,
Chairman of its Audit Committee and is an adjunct professor at the University of Chicago Booth
School of Business. Based on the foregoing, Mr. Strubel is experienced with financial and
investment matters.
James A. McNamara.
Mr. McNamara has served as Trustee and President of the Trust since 2007
and has served as an officer of the Trust since 2001. Mr. McNamara is a Managing Director at
Goldman Sachs. Mr. McNamara is currently head of Global Third Party Distribution at GSAM, where he
was previously head of U.S. Third Party Distribution. Prior to that role, Mr. McNamara served as
Director of Institutional Fund Sales. Prior to joining Goldman Sachs, Mr. McNamara was Vice
President and Manager at Dreyfus Institutional Service Corporation. Based on the foregoing, Mr.
McNamara is experienced with financial and investment matters.
Alan A. Shuch.
Mr. Shuch has served as a Trustee since 1990. Mr. Shuch is an Advisory
Director to Goldman Sachs. Mr. Shuch serves on the Board of Trustees of a number of offshore funds
managed by GSAM. He serves on GSAMs Valuation and Brokerage Allocation Committees. Prior to
retiring as a general partner of Goldman Sachs in 1994, Mr. Shuch was president and chief operating
officer of GSAM which he founded in 1988. Mr. Shuch joined the Goldman Sachs Fixed Income Division
in 1976. He was instrumental in building Goldman Sachs Corporate Bond Department and served as
co-head of the Global Fixed Income Sales and the High Yield Bond and Preferred Stock Departments.
He headed the Portfolio Restructuring and Fixed Income Quantitative and Credit Research
Departments. Mr. Shuch also served on a variety of firm-wide committees including the
International Executive, New Product and Strategic Planning Committees and was a member of the
Stone Street/Bridge Street Private Equity Board. Mr. Shuch serves on Whartons Graduate Executive
Board. Based on the foregoing, Mr. Shuch is experienced with financial and investment matters.
B-51
Officers of the Trust
Information pertaining to the officers of the Trust as of June 30, 2010 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
Term of Office and
|
|
|
|
|
Position(s) Held
|
|
Length of Time
|
|
|
Name, Age And Address
|
|
With the Trust
|
|
Served
1
|
|
Principal Occupation(s) During Past 5 Years
|
James A. McNamara
200 West Street
New York, NY 10282
Age: 47
|
|
Trustee and
President
|
|
Since 2007
|
|
Managing Director, Goldman Sachs (December
1998Present); Director of Institutional Fund
Sales, GSAM (April 1998December 2000); and
Senior Vice President and Manager, Dreyfus
Institutional Service Corporation (January
1993April 1998).
|
|
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|
|
|
|
|
|
|
|
|
|
|
PresidentGoldman Sachs Mutual Fund Complex
(November 2007Present); Senior Vice
PresidentGoldman Sachs Mutual Fund Complex (May
2007November 2007); and Vice PresidentGoldman
Sachs Mutual Fund Complex (20012007).
|
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|
|
|
|
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|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex (since
November 2007Present and December 2002May
2004).
|
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|
|
|
|
|
|
Scott McHugh
200 West Street
New York, NY 10282
Age: 38
|
|
Treasurer and
Senior Vice
President
|
|
Since 2009
|
|
Vice President, Goldman Sachs (February
2007Present); Assistant Treasurer of certain
mutual funds administered by DWS Scudder
(20052007); and Director (2005-2007), Vice
President (2000-2005), Assistant Vice President
(1998-2000), Deutsche Asset Management or its
predecessor (19982007).
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|
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|
|
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|
|
TreasurerGoldman Sachs Mutual Fund Complex
(October 2009-Present); Senior Vice
PresidentGoldman Sachs Mutual Fund Complex
(November 2009-Present); and Assistant
TreasurerGoldman Sachs Mutual Fund Complex (May
2007-October 2009).
|
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|
Philip V. Giuca, Jr.
30 Hudson Street
Jersey City, NJ 07302
Age: 48
|
|
Assistant Treasurer
|
|
Since 1997
|
|
Vice President, Goldman Sachs (May 1992Present).
Assistant Treasurer Goldman Sachs Mutual Fund
Complex.
|
|
|
|
|
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|
|
Peter Fortner
30 Hudson Street
Jersey City, NJ 07302
Age: 52
|
|
Assistant Treasurer
|
|
Since 2000
|
|
Vice President, Goldman Sachs (July
2000Present); Principal Financial Officer,
Commerce Bank Mutual Fund Complex (2008
Present); Associate, Prudential Insurance Company
of America (November 1985June 2000); and
Assistant Treasurer, certain closed-end funds
administered by Prudential (19992000).
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|
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|
|
|
|
|
Assistant TreasurerGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
|
|
|
Kenneth G. Curran
30 Hudson Street
Jersey City, NJ 07302
Age: 46
|
|
Assistant Treasurer
|
|
Since 2001
|
|
Vice President, Goldman Sachs (November
1998Present); and Senior Tax Manager, KPMG Peat
Marwick (accountants) (August 1995October
1998).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assistant TreasurerGoldman Sachs Mutual Fund
Complex.
|
B-52
|
|
|
|
|
|
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|
|
|
|
|
Term of Office and
|
|
|
|
|
Position(s) Held
|
|
Length of Time
|
|
|
Name, Age And Address
|
|
With the Trust
|
|
Served
1
|
|
Principal Occupation(s) During Past 5 Years
|
George F. Travers
30 Hudson Street
Jersey City, NJ 07302
Age: 42
|
|
Senior Vice
President and
Principal Financial
Officer
|
|
Since 2009
|
|
Managing Director, Goldman Sachs (2007present);
Managing Director, UBS Ag (20052007); and
Partner, Deloitte & Touche LLP (19902005,
partner from 20002005)
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|
|
Senior Vice President and Principal Financial
OfficerGoldman Sachs Mutual Fund Complex.
|
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|
|
James A. Fitzpatrick
71 South Wacker Drive
Chicago, IL 60606
Age: 50
|
|
Vice President
|
|
Since 1997
|
|
Managing Director, Goldman Sachs (October
1999Present); and Vice President of GSAM (April
1997December 1999).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
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|
Jesse Cole
71 South Wacker Drive
Chicago, IL 60606
Age: 47
|
|
Vice President
|
|
Since 1998
|
|
Managing Director, Goldman Sachs (December
2006Present); Vice President, GSAM (June
1998Present); and Vice President, AIM
Management Group, Inc. (investment adviser)
(April 1996June 1998).
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|
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Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
Kerry K. Daniels
71 South Wacker Drive
Chicago, IL 60606
Age: 47
|
|
Vice President
|
|
Since 2000
|
|
Manager, Financial Control Shareholder
Services, Goldman Sachs (1986Present).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
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|
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|
|
Mark Hancock
71 South Wacker Drive
Chicago, IL 60606
Age: 42
|
|
Vice President
|
|
Since 2007
|
|
Managing Director, Goldman Sachs (November
2005Present); Vice President, Goldman Sachs
(August 2000November 2005); Senior Vice
PresidentDreyfus Service Corp (19992000); and
Vice PresidentDreyfus Service Corp
(19961999).
|
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|
|
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
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|
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|
|
Jeffrey D. Matthes
30 Hudson Street
Jersey City, NJ 07302
Age: 41
|
|
Vice President
|
|
Since 2007
|
|
Vice President, Goldman Sachs (December
2004Present); and Associate, Goldman Sachs
(December 2002December 2004).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
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|
|
|
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|
|
Carlos W. Samuels
30 Hudson Street
Jersey City, NJ 07302
Age: 35
|
|
Vice President
|
|
Since 2007
|
|
Vice President, Goldman Sachs (December
2007Present); Associate, Goldman Sachs
(December 2005December 2007); Analyst, Goldman
Sachs (January 2004December 2005).
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|
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|
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|
|
|
|
|
|
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
B-53
|
|
|
|
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|
|
Term of Office and
|
|
|
|
|
Position(s) Held
|
|
Length of Time
|
|
|
Name, Age And Address
|
|
With the Trust
|
|
Served
1
|
|
Principal Occupation(s) During Past 5 Years
|
Miriam Cytryn
200 West Street
New York, NY 10282
Age: 52
|
|
Vice President
|
|
Since 2008
|
|
Vice President, GSAM (2008Present); Vice
President of Divisional Management, Investment
Management Division (20072008); Vice President
and Chief of Staff, GSAM US Distribution
(20032007); and Vice President of Employee
Relations, Goldman Sachs (19962003).
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|
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Vice PresidentGoldman Sachs Mutual Fund Complex.
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Glen Casey
200 West Street
New York, NY 10282
Age: 45
|
|
Vice President
|
|
Since 2008
|
|
Managing Director, Goldman Sachs (2007Present);
and Vice President, Goldman Sachs (19972007).
Vice PresidentGoldman Sachs Mutual Fund Complex.
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Peter V. Bonanno
200 West Street
New York, NY 10282
Age: 42
|
|
Secretary
|
|
Since 2003
|
|
Managing Director, Goldman Sachs (December
2006Present); Associate General Counsel,
Goldman Sachs (2002Present); Vice President,
Goldman Sachs (19992006); and Assistant General
Counsel, Goldman Sachs (19992002).
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SecretaryGoldman Sachs Mutual Fund Complex
(2006Present); and Assistant SecretaryGoldman
Sachs Mutual Fund Complex (20032006).
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David A. Fishman
200 West Street
New York, NY 10282
Age: 45
|
|
Assistant Secretary
|
|
Since 2001
|
|
Managing Director, Goldman Sachs (December
2001Present); and Vice President, Goldman Sachs
(1997December 2001).
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
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|
|
Danny Burke
200 West Street
New York, NY 10282
Age: 47
|
|
Assistant Secretary
|
|
Since 2001
|
|
Vice President, Goldman Sachs (1987Present).
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
|
|
|
George Djurasovic
200 West Street
New York, NY 10282
Age: 39
|
|
Assistant Secretary
|
|
Since 2007
|
|
Vice President, Goldman Sachs (2005Present);
Associate General Counsel, Goldman Sachs
(2006Present); Assistant General Counsel,
Goldman Sachs (20052006); Senior Counsel, TIAA
CREF (20042005); and Counsel, TIAA CREF
(20002004).
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|
|
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
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|
|
|
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|
|
Patricia Meyer
200 West Street
New York, NY 10282
Age: 36
|
|
Assistant Secretary
|
|
Since 2007
|
|
Vice President, Goldman Sachs (September
2006Present); Associate General Counsel,
Goldman Sachs (2009Present); Assistant General
Counsel, Goldman Sachs (September 2006
December 2008); and Associate, Simpson Thacher &
Bartlett LLP (20002006).
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|
|
|
|
|
|
|
|
|
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
B-54
|
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|
|
|
|
|
|
|
|
|
Term of Office and
|
|
|
|
|
Position(s) Held
|
|
Length of Time
|
|
|
Name, Age And Address
|
|
With the Trust
|
|
Served
1
|
|
Principal Occupation(s) During Past 5 Years
|
Mark T. Robertson
200 West Street
New York, NY 10282
Age: 33
|
|
Assistant Secretary
|
|
Since 2007
|
|
Vice President, Goldman Sachs (April
2007Present); Assistant General Counsel,
Goldman Sachs (April 2007Present); Associate,
Fried, Frank, Harris, Shriver & Jacobson LLP
(20042007); and Solicitor, Corrs Chambers
Westgarth (20022003).
|
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|
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|
|
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
|
|
|
Deborah Farrell
30 Hudson Street
Jersey City, NJ 07302
Age: 39
|
|
Assistant Secretary
|
|
Since 2007
|
|
Vice President, Goldman Sachs (2005Present);
Associate, Goldman Sachs (20012005); and
Analyst, Goldman Sachs (19942005).
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
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|
|
Patrick T. OCallaghan
200 West Street
New York, NY 10282
Age: 38
|
|
Assistant
Secretary
|
|
Since 2009
|
|
Vice President, Goldman Sachs (2000Present); Associate, Goldman Sachs (19982000); Analyst, Goldman Sachs (19951998).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
James A. McCarthy
200 West Street
New York, NY 10282
Age: 46
|
|
Assistant Secretary
|
|
Since 2009
|
|
Managing Director, Goldman Sachs (2003Present);
Vice President, Goldman Sachs (19962003);
Portfolio Manager, Goldman Sachs (19951996).
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
|
|
|
Andrew Murphy
200 West Street
New York, NY 10282
Age: 36
|
|
Assistant Secretary
|
|
Since 2010
|
|
Vice President, Goldman Sachs (April
2009Present); Assistant General Counsel, Goldman
Sachs (April 2009Present); Attorney, Axiom Legal
(20072009); Vice President and Counsel,
AllianceBernstein, L.P. (20012007).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
1
|
|
Officers hold office at the pleasure of the Board of Trustees or until their successors are
duly elected and qualified. Each officer holds comparable positions with certain other
companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser,
administrator and/or distributor.
|
Standing Board Committees
The Audit Committee oversees the audit process and provides assistance to the Board with
respect to fund accounting, tax compliance and financial statement matters. In performing its
responsibilities, the Audit Committee selects and recommends annually to the Board an independent
registered public accounting firm to audit the books and records of the Trust for the ensuing year,
and reviews with the firm the scope and results of each audit. All of the Independent Trustees
serve on the Audit Committee. The Audit Committee held three meetings during the fiscal year ended
March 31, 2010.
The Governance and Nominating Committee has been established to: (i) assist the Board in
matters involving mutual fund governance, which includes making recommendations to the Board with
respect to the effectiveness of the Board in carrying out its
B-55
responsibilities in governing the Fund and overseeing their management; (ii) select and
nominate candidates for appointment or election to serve as Independent Trustees; and (iii) advise
the Board on ways to improve its effectiveness. All of the Independent Trustees serve on the
Governance and Nominating Committee. The Governance and Nominating Committee held two meetings
during the fiscal year ended March 31, 2010. As stated above, each Trustee holds office for an
indefinite term until the occurrence of certain events. In filling Board vacancies, the Governance
and Nominating Committee will consider nominees recommended by shareholders. Nominee
recommendations should be submitted to the Trust at its mailing address stated in the Funds
Prospectus and should be directed to the attention of the Goldman Sachs Trust Governance and
Nominating Committee.
The Compliance Committee has been established for the purpose of overseeing the compliance
processes: (i) of the Fund; and (ii) insofar as they relate to services provided to the Fund, of
the Funds investment adviser, distributor, administrator (if any), and transfer agent, except that
compliance processes relating to the accounting and financial reporting processes, and certain
related matters, are overseen by the Audit Committee. In addition, the Compliance Committee
provides assistance to the full Board with respect to compliance matters. The Compliance Committee
met two times during the fiscal year ended March 31, 2010. All of the Independent Trustees serve
on the Compliance Committee.
The Valuation Committee is authorized to act for the Board in connection with the valuation of
portfolio securities held by the Fund in accordance with the Trusts Valuation Procedures. Messrs.
McNamara and Shuch serve on the Valuation Committee, together with certain employees of GSAM who
are not Trustees. The Valuation Committee met twelve times during the fiscal year ended March 31,
2010. The Valuation Committee reports periodically to the Board.
The Dividend Committee is authorized, subject to the ratification of Trustees who are not
members of the committee, to declare dividends and capital gain distributions consistent with each
Funds Prospectus. Messrs. McNamara and McHugh serve on the Dividend Committee. The Dividend
Committee met twelve times during the fiscal year ended March 31, 2010.
The Contract Review Committee has been established for the purpose of overseeing the processes
of the Board for reviewing and monitoring performance under the Funds investment management,
distribution, transfer agency, and certain other agreements with the Funds Investment Adviser and
its affiliates. The Contract Review Committee is also responsible for overseeing the Boards
processes for considering and reviewing performance under the operation of the Funds distribution,
service and other plans, and any agreements related to the plans, whether or not such plans and
agreements are adopted pursuant to Rule 12b-1 under the Act. The Contract Review Committee also
provides appropriate assistance to the Board in connection with the Boards approval, oversight and
review of the Fund other service providers including, without limitation, the Funds
custodian/accounting agent, sub-transfer agents, professional (legal and accounting) firms and
printing firms. The Contract Review Committee met two times during the fiscal year ended March 31,
2010. All of the Independent Trustees serve on the Contract Review Committee.
Risk Oversight
The Board is responsible for the oversight of the activities of the Fund, including oversight
of risk management. Day-to-day risk management with respect to the Fund is the responsibility of
GSAM or other service providers (depending on the nature of the risk), subject to supervision by
GSAM. The risks of the Fund include, but are not limited to, investment risk, compliance risk,
operational risk, reputational risk, credit risk and counterparty risk. Each of GSAM and the other
service providers have their own independent interest in risk management and their policies and
methods of risk management may differ from the Fund and each others in the setting of priorities,
the resources available or the effectiveness of relevant controls. As a result, the Board
recognizes that it is not possible to identify all of the risks that may affect the Fund or to
develop processes and controls to eliminate or mitigate their occurrence or effects, and that some
risks are simply beyond the control of the Fund or GSAM, its affiliates or other service providers.
The Board effectuates its oversight role primarily through regular and special meetings of the
Board and Board committees. In certain cases, risk management issues are specifically addressed in
presentations and discussions. For example, GSAM has an independent dedicated Market Risk Group
that assists GSAM in managing investment risk. Representatives from the Market Risk Group
regularly meet with the Board to discuss their analysis and methodologies. In addition, investment
risk is discussed in the context of regular presentations to the Board on Fund strategy and
performance. Other types of risk are addressed as part of presentations on related topics (e.g.
compliance policies) or in the context of presentations focused specifically on one or more risks.
The Board also receives reports from GSAM management on operational risks, reputational risks and
counterparty risks relating to the Fund.
B-56
Board oversight of risk management is also performed by various Board committees. For
example, the Audit Committee meets with both the Funds independent registered public accounting
firm and the GSAMs internal audit group to review risk controls in place that support the Fund as
well as test results, and the Compliance Committee meets with the CCO and representatives of GSAMs
compliance group to review testing results of the Funds compliance policies and procedures and
other compliance issues. Board oversight of risk is also performed as needed between meetings
through communications between the GSAM and the Board. The Board may, at any time and in its
discretion, change the manner in which it conducts risk oversight. The Boards oversight role does
not make the Board a guarantor of the Funds investments or activities.
Trustee Ownership of Fund Shares
The following table shows the dollar range of shares beneficially owned by each Trustee in the
Fund and other portfolios of the Trust and Goldman Sachs Variable Insurance Trust as of December
31, 2009.
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of
|
|
|
|
|
Equity Securities in All
|
|
|
|
|
Portfolios in Fund
|
|
|
Dollar Range of
|
|
Complex Overseen By
|
Name of Trustee
|
|
Equity Securities in the Fund
1
|
|
Trustee
2
|
Ashok N. Bakhru
|
|
None.
|
|
Over $100,000
|
John P. Coblentz, Jr.
|
|
None.
|
|
Over $100,000
|
Diana M. Daniels
|
|
None.
|
|
Over $100,000
|
Patrick T. Harker
|
|
None.
|
|
Over $100,000
|
James A. McNamara
|
|
None.
|
|
Over $100,000
|
Jessica Palmer
|
|
None.
|
|
Over $100,000
|
Alan A. Shuch
|
|
None.
|
|
Over $100,000
|
Richard P. Strubel
|
|
None.
|
|
Over $100,000
|
|
|
|
1
|
|
Includes the value of shares beneficially owned by each Trustee in the Fund described in this
SAI.
|
|
2
|
|
The Goldman Sachs Mutual Fund Complex consists of the Trust, Goldman Sachs Variable Insurance
Trust, Goldman Sachs Credit Strategies Fund and Goldman Sachs Municipal Opportunity Fund. As
of December 31, 2009, the Trust consisted of 83 portfolios (of which 82 offered shares to the
public), the Goldman Sachs Variable Insurance Trust consisted of 11 portfolios, and the
Goldman Sachs Municipal Opportunity Fund did not offer shares to the public.
|
As of June 30, 2010, the Fund had not commenced operations, and the Trustees and Officers
of the Trust as a group did not own any outstanding shares of beneficial interest of the Fund.
Board Compensation
The Trust pays each Independent Trustee an annual fee for his or her services as a Trustee of
the Trust, plus an additional fee for each regular and special telephonic Board meeting, Governance
and Nominating Committee, Compliance Committee, Contract Review Committee and Audit Committee
meeting attended by such Trustee. The Independent Trustees are also reimbursed for travel expenses
incurred in connection with attending such meetings. The Trust may also pay the incidental costs of
a Trustee to attend training or other types of conferences relating to the investment company
industry.
The following tables set forth certain information with respect to the compensation of each
Trustee of the Trust for the fiscal year ended March 31, 2010:
Trustee Compensation
B-57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Pension or Retirement
|
|
Total Compensation
|
|
|
Compensation
|
|
Benefits Accrued as Part of
|
|
From Fund Complex
|
Name of Trustee
|
|
from the Fund*
|
|
the Trusts Expenses
|
|
(including the Fund)**
|
Ashok N. Bakhru
1
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
336,625
|
|
John P. Coblentz
2
|
|
|
0
|
|
|
|
0
|
|
|
|
188,000
|
|
Diana M. Daniels
|
|
|
0
|
|
|
|
0
|
|
|
|
214,250
|
|
Patrick T. Harker
|
|
|
0
|
|
|
|
0
|
|
|
|
164,000
|
|
James A. McNamara
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Jessica Palmer
|
|
|
0
|
|
|
|
0
|
|
|
|
164,000
|
|
Alan A. Shuch
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard P. Strubel
|
|
|
0
|
|
|
|
0
|
|
|
|
164,000
|
|
|
|
|
|
*
|
|
The Fund had not commenced operations as of the date of this SAI.
|
|
|
**
|
|
Represents fees paid to each Trustee during the fiscal year ended March 31, 2010 from the
Goldman Sachs Mutual Fund Complex. The Fund Complex consists of the Trust, Goldman Sachs
Municipal Opportunity Fund, Goldman Sachs Credit Strategies Fund and Goldman Sachs Variable
Insurance Trust. The Trust consisted of 83 portfolios, and Goldman Sachs Variable Insurance
Trust consisted of 11 portfolios as of March 31, 2010. The Goldman Sachs Municipal Opportunity
Fund does not currently offer shares to the public.
|
|
|
1
|
|
Includes compensation as Board Chairman.
|
|
2
|
|
Includes compensation as audit committee financial expert, as defined in Item 3 of Form N-CSR.
|
|
3
|
|
Messrs. McNamara and Shuch are Interested Trustees, and as such, receive no compensation from the Fund or the Goldman Sachs Mutual Fund Complex.
|
B-58
Miscellaneous
Class A Shares of the Fund may be sold at net asset value without payment of any sales charge
to Goldman Sachs, its affiliates and their respective officers, partners, directors or employees
(including retired employees and former partners), any partnership of which Goldman Sachs is a
general partner, any Trustee or officer of the Trust and designated family members of any of the
above individuals. These and the Funds other sales load waivers are due to the nature of the
investors and/or the reduced sales effort and expense that are needed to obtain such investments.
The Trust, its Investment Advisers and principal underwriter have adopted codes of ethics
under Rule 17j-1 of the Act that permit personnel subject to their particular codes of ethics to
invest in securities, including securities that may be purchased or held by the Fund.
MANAGEMENT SERVICES
As stated in the Funds Prospectus, GSAM, 200 West Street, New York, New York 10282, serves as
the Investment Adviser to the Fund pursuant to Management Agreement. GSAM is a subsidiary of The
Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. See Service Providers in the Funds
Prospectus for a description of the Investment Advisers duties to the Fund.
Founded in 1869, Goldman Sachs Group, Inc. is a financial holding company and a leading global
investment banking, securities and investment management firm. Goldman Sachs is a leader in
developing portfolio strategies and in many fields of investing and financing, participating in
financial markets worldwide and serving individuals, institutions, corporations and governments.
Goldman Sachs is also among the principal market sources for current and thorough information on
companies, industrial sectors, markets, economies and currencies, and trades and makes markets in a
wide range of equity and debt securities 24 hours a day. The firm is headquartered in New York with
offices in countries throughout the world. It has trading professionals throughout the United
States, as well as in London, Frankfurt, Tokyo, Seoul, Sao Paulo and other major financial centers
around the world. The active participation of Goldman Sachs in the worlds financial markets
enhances its ability to identify attractive investments. Goldman Sachs has agreed to permit the
Fund to use the name Goldman Sachs or a derivative thereof as part of the Funds name for as long
as the Funds Management Agreement is in effect.
The Investment Adviser is able to draw on the substantial research and market expertise of
Goldman Sachs, whose investment research effort is one of the largest in the industry. The Goldman
Sachs Global Investment Research Department covers approximately 3,000 equity securities, 350 fixed
income securities and 25 stock markets in more than 50 economies and regions. The in-depth
information and analyses generated by Goldman Sachs research analysts are available to the
Investment Adviser subject to Chinese Wall restrictions.
In addition, many of Goldman Sachs economists, securities analysts, portfolio strategists and
credit analysts have consistently been highly ranked in respected industry surveys conducted in the
United States and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure and evaluate
portfolios. For example, Goldman Sachs options evaluation model analyzes a securitys term, coupon
and call option, providing an overall analysis of the securitys value relative to its interest
risk.
The Investment Adviser expects to utilize Goldman Sachs sophisticated option-adjusted
analytics to help make strategic asset allocations within the markets for U.S. Government
securities, Mortgage-Backed Securities and other securities and to employ this technology
periodically to re-evaluate the Funds investments as market conditions change. Goldman Sachs has
also developed a prepayment model designed to estimate mortgage prepayments and cash flows under
different interest rate scenarios. Because a Mortgage-Backed Security incorporates the borrowers
right to prepay the mortgage, the Investment Adviser uses a sophisticated option-adjusted spread
(OAS) model to measure expected returns. A securitys OAS is a function of the level and shape of
the yield curve, volatility and the applicable Investment Advisers expectation of how a change in
interest rates will affect prepayment levels. Since the OAS model assumes a relationship between
prepayments and interest rates, the Investment Adviser considers it a better way to measure a
securitys expected return and absolute and relative values than yield to maturity. In using OAS
technology, the Investment Adviser will first evaluate the absolute level of a securitys OAS and
consider its liquidity and its interest rate, volatility and prepayment sensitivity. The Investment
Adviser will then analyze its value relative to alternative investments and to its own investments.
The Investment Adviser will also measure a securitys interest rate risk by computing an option
adjusted duration (OAD). The Investment Adviser believes a securitys OAD is a better measurement
of its price sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Investment Adviser also evaluates returns for different mortgage market sectors and
evaluates the credit risk of individual securities. This sophisticated technical analysis allows
the Investment Adviser to develop
B-59
portfolio and trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility to meet the Funds
duration targets and cash flow pattern requirements.
Because the OAS is adjusted for the differing characteristics of the underlying securities,
the OAS of different Mortgage-Backed Securities can be compared directly as an indication of their
relative value in the market. The Investment Adviser also expects to use OAS-based pricing methods
to calculate projected security returns under different, discrete interest rate scenarios, and
Goldman Sachs proprietary prepayment model to generate yield estimates under these scenarios. The
OAS, scenario returns, expected returns, and yields of securities in the mortgage market can be
combined and analyzed in an optimal risk-return matching framework.
The Investment Adviser will use OAS analytics to choose what it believes is an appropriate
portfolio of investments for the Fund from a universe of eligible investments. In connection with
initial portfolio selections, in addition to using OAS analytics as an aid to meeting the Funds
particular composition and performance targets, the Investment Adviser will also take into account
important market criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Investment Adviser also expects to use OAS analytics to evaluate the mortgage market on an
ongoing basis. Changes in the relative value of various Mortgage-Backed Securities could suggest
tactical trading opportunities for the Fund. The Investment Adviser will have access to both
current market analysis as well as historical information on the relative value relationships among
different Mortgage-Backed Securities. Current market analysis and historical information is
available in the Goldman Sachs database for most actively traded Mortgage-Backed Securities.
Goldman Sachs has agreed to provide the Investment Adviser, on a non-exclusive basis, use of
its mortgage prepayment model, OAS model and any other proprietary services which it now has or may
develop, to the extent such services are made available to other similar customers. Use of these
services by the Investment Adviser with respect to the Fund does not preclude Goldman Sachs from
providing these services to third parties or using such services as a basis for trading for its own
account or the account of others.
The fixed income research capabilities of Goldman Sachs available to the Investment Adviser
include the Goldman Sachs Fixed Income Research Department and the Credit Department. The Fixed
Income Research Department monitors developments in U.S. and foreign fixed income markets, assesses
the outlooks for various sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed Income Research
Department is at the forefront in developing and using computer-based tools for analyzing fixed
income securities and markets, developing new fixed income products and structuring portfolio
strategies for investment policy and tactical asset allocation decisions. The Credit Department
tracks specific governments, regions and industries and from time to time may review the credit
quality of the Funds investments.
In allocating assets in the Funds portfolios among currencies, the Investment Adviser will
have access to the Global Asset Allocation Model. The model is based on the observation that the
prices of all financial assets, including foreign currencies, will adjust until investors globally
are comfortable holding the pool of outstanding assets. Using the model, the Investment Adviser
will estimate the total returns from each currency sector which are consistent with the average
investor holding a portfolio equal to the market capitalization of the financial assets among those
currency sectors. These estimated equilibrium returns are then combined with the expectations of
Goldman Sachs research professionals to produce an optimal currency and asset allocation for the
level of risk suitable for the Fund given its investment objectives and criteria.
The Management Agreement provides that GSAM, in its capacity as Investment Adviser, may each
render similar services to others so long as the services under the Management Agreement are not
impaired thereby. The Funds Management Agreement was most recently approved by the Trustees of the
Trust, including a majority of the Trustees of the Trust who are not parties to such agreement or
interested persons (as such term is defined in the Act) of any party thereto (the non-interested
Trustees), on June 17, 2010 with respect to the Fund. A discussion regarding the Trustees basis
for approving the Management Agreement for the Fund in 2010 will be available in the Trusts
semi-annual report for the period ended September 30, 2010.
The Management Agreement will remain in effect until June 30, 2011 and will continue in effect
with respect to the Fund from year to year thereafter provided such continuance is specifically
approved at least annually by (i) the vote of a majority of the outstanding voting securities of
the Fund or a majority of the Trustees of the Trust, and (ii) the vote of a majority of the
non-interested Trustees of the Trust cast in person at a meeting called for the purpose of voting
on such approval.
The Management Agreement will terminate automatically if assigned (as defined in the Act). The
Management Agreement is also terminable at any time without penalty by the Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Fund on 60 days written notice
to the Investment Adviser and by the Investment Adviser on 60 days written notice to the Trust.
B-60
Pursuant to the Management Agreement, the Investment Adviser is entitled to receive the fees
set forth below, payable monthly based on the Funds average daily net assets.
|
|
|
|
|
|
|
|
Fund
|
|
Management Fee Annual Rate
|
|
Average Daily Net Assets
|
Strategic Income Fund
|
|
|
0.60
|
%
|
|
First $1 Billion
|
|
|
|
0.54
|
%
|
|
Next $1 Billion
|
|
|
|
0.51
|
%
|
|
Next $3 Billion
|
|
|
|
0.50
|
%
|
|
Next $3 Billion
|
|
|
|
0.49
|
%
|
|
Over $8 Billion
|
|
The Investment Adviser performs administrative services for the Fund under the Management
Agreement. Such administrative services include, subject to the general supervision of the Trustees
of the Trust, (i) providing supervision of all aspects of the Funds non-investment operations
(other than certain operations performed by others pursuant to agreements with the Fund); (ii)
providing the Fund, to the extent not provided pursuant to the agreement with the Trusts
custodian, transfer and dividend disbursing agent or agreements with other institutions, with
personnel to perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of the Fund; (iii) arranging, to the extent not
provided pursuant to such agreements, for the preparation, at the Funds expense, of the Funds tax
returns, reports to shareholders, periodic updating of the Funds prospectus and statement of
additional information, and reports filed with the SEC and other regulatory authorities; (iv)
providing the Fund, to the extent not provided pursuant to such agreements, with adequate office
space and certain related office equipment and services; and (v) maintaining all of the Funds
records other than those maintained pursuant to such agreements.
B-61
Portfolio Managers Other Accounts Managed by the Portfolio Managers
The following table discloses other accounts within each type of category listed below for
which the portfolio managers are jointly and primarily responsible for day to day portfolio
management (unless otherwise noted, the information below is provided as of March 31, 2010).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed and Total Assets by Account Type*
|
|
|
Number of Accounts and Total Assets for Which Advisory Fee is Performance Based*
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Other Pooled
|
|
|
Other
|
|
|
Investment
|
|
|
Other Pooled
|
|
|
Other
|
|
|
|
Companies
|
|
|
Investment Vehicle
|
|
|
Accounts
|
|
|
Companies
|
|
|
Investment Vehicles
|
|
|
Accounts
|
|
Name of
|
|
Number
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Number
|
|
|
|
|
Portfolio
|
|
of
|
|
|
Assets
|
|
|
of
|
|
|
Assets
|
|
|
of
|
|
|
Assets
|
|
|
of
|
|
|
Assets
|
|
|
of
|
|
|
Assets
|
|
|
of
|
|
|
Assets
|
|
Manager
|
|
Accounts
|
|
|
Managed
|
|
|
Accounts
|
|
|
Managed
|
|
|
Accounts
|
|
|
Managed
|
|
|
Accounts
|
|
|
Managed
|
|
|
Accounts
|
|
|
Managed
|
|
|
Accounts
|
|
|
Managed
|
|
Enhanced Income Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Fixed Income
and Liquidity
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Beinner
|
|
|
142
|
|
|
|
65,783
|
|
|
|
52
|
|
|
|
16,524
|
|
|
|
2,288
|
|
|
|
200,486
|
|
|
|
7
|
|
|
|
1,187
|
|
|
|
19
|
|
|
|
4,704
|
|
|
|
93
|
|
|
|
25,307
|
|
Michael Swell
|
|
|
112
|
|
|
|
37,037
|
|
|
|
49
|
|
|
|
13,557
|
|
|
|
633
|
|
|
|
151,440
|
|
|
|
7
|
|
|
|
1,187
|
|
|
|
19
|
|
|
|
4,704
|
|
|
|
86
|
|
|
|
20,905
|
|
|
B-62
Conflicts of Interest
. The Investment Advisers portfolio managers are often
responsible for managing the Fund as well as other accounts, including proprietary accounts,
separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A
portfolio manager may manage a separate account or other pooled investment vehicle which may have
materially higher fee arrangements than the Fund and may also have a performance-based fee. The
side-by-side management of these funds may raise potential conflicts of interest relating to cross
trading, the allocation of investment opportunities and the aggregation and allocation of trades.
The Investment Adviser has a fiduciary responsibility to manage all client accounts in a fair
and equitable manner. The Investment Adviser seeks to provide best execution of all securities
transactions and aggregate and then allocate securities to client accounts in a fair and timely
manner. To this end, the Investment Adviser has developed policies and procedures designed to
mitigate and manage the potential conflicts of interest that may arise from side-by-side
management. In addition, the Investment Adviser and the Fund have adopted policies limiting the
circumstances under which cross-trades may be effected between the Fund and another client account.
The Investment Adviser conducts periodic reviews of trades for consistency with these policies. For
more information about conflicts of interests that may arise in connection with the portfolio
managers management of the Funds investments and the investments of other accounts, see
Potential Conflicts of Interest Potential Conflicts Relating to the Allocation of Investment
Opportunities Among the Fund and Other Goldman Sachs Accounts and Potential Conflicts Relating to
Goldman Sachs and the Investment Advisers Proprietary Activities and Activities on Behalf of
Other Accounts.
Portfolio Managers Compensation
Compensation for portfolio managers of the Investment Adviser is comprised of a base salary
and discretionary variable compensation. The base salary is fixed from year to year. Year-end
discretionary variable compensation is primarily a function of each portfolio managers individual
performance and his or her contribution to overall team performance; the performance of the
Investment Advisers and Goldman Sachs; the teams net revenues for the past year which in part is
derived from advisory fees, and for certain accounts, performance-based fees; and anticipated
compensation levels among competitor firms. Portfolio managers are rewarded, in part, for their
delivery of investment performance, measured on a pre-tax basis, which is reasonably expected to
meet or exceed the expectations of clients and fund shareholders in terms of: excess return over an
applicable benchmark, peer group ranking, risk management and factors specific to the Fund such as
yield or regional focus. Performance is judged over 1-, 3- and 5-year time horizons.
The benchmark for the Fund is the Barclays Capital Aggregate Bond Index.
The discretionary variable compensation for portfolio managers is also significantly
influenced by: (1) effective participation in team research discussions and process; and (2)
management of risk in alignment with the targeted risk parameter and investment objective of the
Fund. Other factors may also be considered including: (1) general client/shareholder orientation
and (2) teamwork and leadership. Portfolio managers may receive equity-based awards as part of
their discretionary variable compensation.
Other Compensation
In addition to base salary and discretionary variable
compensation, the Investment Adviser has a number of additional benefits in place including (1) a
401k program that enables employees to direct a percentage of their pretax salary and bonus income
into a tax-qualified retirement plan; and (2) investment opportunity programs in which certain
professionals may participate subject to certain eligibility requirements.
Portfolio Managers Portfolio Managers Ownership of Shares of the Fund
The following table shows the portfolio managers ownership of shares of the Fund.
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Name of Portfolio Manager
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Dollar Range of Equity Securities Beneficially Owned by Portfolio Manager*
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Strategic Income Fund
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Jonathan Beinner
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$
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0
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Michael Swell
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0
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*
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The Fund had not commenced operations as of the date of this SAI.
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B-63
POTENTIAL CONFLICTS OF INTEREST
Summary
The Goldman Sachs Group, Inc. is a worldwide, full-service investment banking, broker-dealer,
asset management and financial services organization, and a major participant in global financial
markets. As such, it acts as an investor, investment banker, research provider, investment manager,
investment adviser, financier, advisor, market maker, proprietary trader, prime broker, lender,
agent and principal, and has other direct and indirect interests in the global fixed income,
currency, commodity, equity, bank loan and other markets in which the Fund directly and indirectly
invests. As a result, The Goldman Sachs Group, Inc., the asset management division of Goldman
Sachs, the Investment Adviser, and their affiliates, directors, partners, trustees, managers,
members, officers and employees (collectively for purposes of this Potential Conflicts of
Interest section, Goldman Sachs), including those who may be involved in the management, sales,
investment activities, business operations or distribution of the Fund, are engaged in businesses
and have interests other than that of managing the Fund. The Fund will not be entitled to
compensation related to such businesses. These activities and interests include potential multiple
advisory, transactional, financial and other interests in securities, instruments and companies
that may be directly or indirectly purchased or sold by the Fund and its service providers. These
are considerations of which shareholders should be aware, and which may cause conflicts that could
disadvantage the Fund. The following is a brief summary description of certain of these potential
conflicts of interest:
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While the Investment Adviser will make decisions for the Fund in accordance with its
obligations to manage the Fund appropriately, the fees, allocations, compensation and other
benefits to Goldman Sachs (including benefits relating to business relationships of Goldman
Sachs) arising from those decisions may be greater as a result of certain portfolio,
investment, service provider or other decisions made by the Investment Adviser than they
would have been had other decisions been made which also might have been appropriate for
the Fund.
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Goldman Sachs, its sales personnel and other financial service providers may have
conflicts associated with their promotion of the Fund or other dealings with the Fund that
would create incentives for them to promote the Fund.
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Goldman Sachs and its personnel may receive greater compensation or greater profit in
connection with the Fund than with an account advised by an unaffiliated investment
adviser.
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Goldman Sachs may make payments to Authorized Institutions and other financial
intermediaries from time to time to promote the Fund, other accounts managed by Goldman
Sachs and other products. In addition to placement fees, sales loads, or similar
distribution charges, such payments may be made out of Goldman Sachs assets or amounts
payable to Goldman Sachs rather than as separately identified charges to the Fund.
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While the allocation of investment opportunities among Goldman Sachs, the Fund and
other funds and accounts managed by the Investment Adviser may raise potential conflicts
because of financial, investment or other interests of Goldman Sachs or its personnel, the
Investment Adviser will make allocation decisions consistent with the interests of the Fund
and the other funds and accounts and not solely based on such other interests.
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The Investment Adviser will give advice to and make investment decisions for the Fund
as it believes is in the fiduciary interests of the Fund. Advice given to the Fund or
investment decisions made for the Fund may differ from, and may conflict with, advice given
or investment decisions made for Goldman Sachs or other funds or accounts. For example,
other funds or accounts managed by the Investment Adviser may sell short securities of an
issuer in which the Fund has taken, or will take, a long position in the same securities.
Actions taken with respect to Goldman Sachs or other funds or accounts may adversely impact
the Fund, and actions taken by the Fund may benefit Goldman Sachs or other funds or
accounts (including the Fund).
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The Investment Adviser may buy for the Fund securities or obligations of issuers in
which Goldman Sachs or other funds or accounts have made, or are making, an investment in
securities or obligations that are subordinate or senior to securities of the Fund. For
example, the Fund may invest in debt securities of an issuer at the same time that Goldman
Sachs or other funds or accounts are investing, or currently have an investment, in equity
securities of the same issuer. To the extent that the issuer experiences financial or
operational challenges which may impact the price of its securities and its ability to meet
its obligations, decisions by Goldman Sachs (including the Investment Adviser) relating to
what actions to be taken may also raise conflicts of interests and Goldman Sachs may take
actions for certain accounts that have negative impacts on other advisory accounts.
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B-64
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Goldman Sachs personnel may have varying levels of economic and other interests in
accounts or products promoted or managed by such personnel as compared to other accounts or
products promoted or managed by them.
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Goldman Sachs will be under no obligation to provide to the Fund, or effect
transactions on behalf of the Fund in accordance with, any market or other information,
analysis, technical models or research in its possession. Goldman Sachs may have
information material to the management of the Fund and may not share that information with
relevant personnel of the Investment Adviser.
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To the extent permitted by applicable law, the Fund may enter into transactions in
which Goldman Sachs acts as principal, or in which Goldman Sachs acts on behalf of the Fund
and the other parties to such transactions. Goldman Sachs will have potentially conflicting
interests in connection with such transactions.
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Goldman Sachs may act as broker, dealer, agent, lender or otherwise for the Fund and
will retain all commissions, fees and other compensation in connection therewith.
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Securities traded for the Fund may, but are not required to, be aggregated with trades
for other funds or accounts managed by Goldman Sachs. When transactions are aggregated but
it is not possible to receive the same price or execution on the entire volume of
securities purchased or sold, the various prices may be averaged, and the Fund will be
charged or credited with the average price. Thus, the effect of the aggregation may operate
on some occasions to the disadvantage of the Fund.
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Products and services received by the Investment Adviser or its affiliates from brokers
in connection with brokerage services provided to the Fund and other funds or accounts
managed by Goldman Sachs may disproportionately benefit other of the Funds and accounts
based on the relative amounts of brokerage services provided to the Fund and such other
funds and accounts.
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While the Investment Adviser will make proxy voting decisions as it believes
appropriate and in accordance with the Investment Advisers policies designed to help avoid
conflicts of interest, proxy voting decisions made by the Investment Adviser with respect
to the Funds portfolio securities may also have the effect of favoring the interests of
other clients or businesses of other divisions or units of Goldman Sachs.
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Regulatory restrictions (including relating to the aggregation of positions among
different funds and accounts) and internal Goldman Sachs policies may restrict investment
activities of the Fund. Information held by Goldman Sachs could have the effect of
restricting investment activities of the Fund.
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Prospective investors should carefully review the following section of this document which
more fully describes these and other potential conflicts of interest presented by Goldman Sachs
other businesses and interests.
As a registered investment adviser under the Advisers Act, the Investment Adviser is required
to file a Form ADV with the SEC. Form ADV contains information about assets under management, types
of fee arrangements, types of investments, potential conflicts of interest, and other relevant
information regarding the Investment Adviser. A copy of Part 1 of the Investment Advisers Form ADV
is available on the SECs website (
www.adviserinfo.sec.gov
).
Potential Conflicts Relating to Portfolio Decisions, the Sale of Fund Shares and the Allocation
of Investment Opportunities
Goldman Sachs Other Activities May Have an Impact on the Fund
The Investment Adviser makes decisions for the Fund in accordance with its obligations as the
Investment Adviser of the Fund. However, Goldman Sachs other activities may have a negative effect
on the Fund. As a result of the various activities and interests of Goldman Sachs as described in
the first paragraph under Summary above, it is likely that the Fund will have multiple business
relationships with and will invest in, engage in transactions with, make voting decisions with
respect to, or obtain services from entities for which Goldman Sachs performs or seeks to perform
investment banking or other services. It is also likely that the Fund will undertake transactions
in securities in which Goldman Sachs makes a market or otherwise has other direct or indirect
interests. In addition, while the Investment Adviser will make decisions for the Fund in accordance
with its obligations to manage the Fund appropriately, the fees, allocations, compensation and
other benefits to Goldman Sachs (including benefits relating to business relationships of Goldman
Sachs) arising from those decisions may be greater as a result of certain portfolio, investment,
service provider or other decisions made by the Investment Adviser for the Fund than they would
have been had other decisions been made which also might have been appropriate for the Fund. For
example, the Investment Adviser may make the decision to have Goldman
B-65
Sachs or an affiliate thereof provide administrative or other services to the Fund instead of
hiring an unaffiliated administrator or other service provider, provided that such engagement is on
market terms, as determined by the Fund or the Funds Board in its discretion.
Goldman Sachs conducts extensive broker-dealer, banking and other activities around the world
and operates a business known as Goldman Sachs Security Services (GSS) which provides prime
brokerage, administrative and other services to clients which may involve funds, markets and
securities in which the Fund invests. These businesses will give GSS and many other parts of
Goldman Sachs broad access to the current status of certain markets, investments and funds and
detailed knowledge about fund operators. As a result of the activities described in this paragraph
and the access and knowledge arising from those activities, parts of Goldman Sachs may be in
possession of information in respect of markets, investments and funds, which, if known to the
Investment Adviser, might cause the Investment Adviser to seek to dispose of, retain or increase
interests in investments held by the Fund or acquire certain positions on behalf of the Fund.
Goldman Sachs will be under no duty to make any such information available to the Investment
Adviser or in particular the personnel of the Investment Adviser making investment decisions on
behalf of the Fund.
Goldman Sachs or Intermediaries Financial and Other Interests and Relationships May
Incentivize Goldman Sachs or Intermediaries to Promote the Sale of Fund Shares
Goldman Sachs, its personnel and other financial service providers, have interests in
promoting sales of shares of the Fund. With respect to both Goldman Sachs and its personnel, the
remuneration and profitability relating to services to and sales of shares of the Fund or other
products may be greater than the remuneration and profitability relating to services to and sales
of other products that might be provided or offered. Goldman Sachs and its sales personnel may
directly or indirectly receive a portion of the fees and commissions charged to the Fund or its
shareholders. Goldman Sachs and its advisory or other personnel may also benefit from increased
amounts of assets under management. Fees and commissions may also be higher than for other products
or services, and the remuneration and profitability to Goldman Sachs and such personnel resulting
from transactions on behalf of or management of the Fund may be greater than the remuneration and
profitability resulting from other funds or products.
Conflicts may arise in relation to sales-related incentives.
Goldman Sachs and its
personnel may receive greater compensation or greater profit in connection with the Fund than with
an account advised by an unaffiliated investment adviser. Differentials in compensation may be
related to the fact that Goldman Sachs may pay a portion of its advisory fee to the unaffiliated
investment adviser, or to other compensation arrangements, including for portfolio management,
brokerage transactions or account servicing. Any differential in compensation may create a
financial incentive on the part of Goldman Sachs and its personnel to recommend the Fund over other
accounts or products managed by unaffiliated investment advisers or to effect transactions
differently in the Fund as compared to other accounts or products.
Goldman Sachs may also have relationships with, and purchase, or distribute or sell, services
or products from or to, distributors, consultants and others who recommend the Fund, or who engage
in transactions with or for the Fund. For example, Goldman Sachs regularly participates in industry
and consultant sponsored conferences and may purchase educational, data related or other services
from consultants or other third parties that it deems to be of value to its personnel and its
business. The products and services purchased from consultants may include, but are not limited to,
those that help Goldman Sachs understand the consultants points of view on the investment
management process. Consultants and other parties that provide consulting or other services or
provide service platforms for employee benefit plans to potential investors in the Fund may receive
fees from Goldman Sachs or the Fund in connection with the distribution of shares in the Fund or
other Goldman Sachs products. For example, Goldman Sachs may enter into revenue or fee sharing
arrangements with consultants, service providers, and other intermediaries relating to investments
in mutual funds, collective trusts, or other products or services offered or managed by the
Investment Adviser. Goldman Sachs may also pay a fee for membership in industry-based or state and
municipal organizations, and in connection with clients, consultants or otherwise may participate
in sponsoring conferences and educational forums for investment industry participants including,
but not limited to, trustees, fiduciaries, consultants, administrators, state and municipal
personnel and other clients. Goldman Sachs membership in such organizations and sponsorships
allows Goldman Sachs to participate in these conferences and educational forums, helps Goldman
Sachs interact with conference participants, and helps to develop an understanding of the points of
view and challenges of the conference participants, as well as to educate participants about
industry issues. In addition, Goldman Sachs personnel, including employees of Goldman Sachs, may
have board, advisory, brokerage or other relationships with issuers, distributors, consultants and
others that may have investments in the Fund or that may recommend investments in the Fund or
distribute the Fund. In addition, Goldman Sachs, including the Investment Adviser, may make
charitable contributions to institutions, including those that have relationships with clients or
personnel of clients. Personnel of Goldman Sachs may have board relationships with such charitable
institutions. Personnel of Goldman Sachs may also make political contributions. As a result of the
relationships and arrangements described in this paragraph, consultants, distributors and other
parties may have conflicts associated with their
B-66
promotion of the Fund or other dealings with the Fund that create incentives for them to
promote the Fund or certain portfolio transactions.
One or more divisions of Goldman Sachs may refer certain investment opportunities to the
Investment Adviser or otherwise provide services to, or enter into arrangements with, the
Investment Adviser. In connection with such referrals, services or other arrangements involving
one or more divisions of Goldman Sachs, such divisions may engage in sharing of fees or other
compensation received by the Investment Adviser from the Fund.
To the extent permitted by applicable law, Goldman Sachs or the Fund may make payments to
Authorized Institutions and other financial intermediaries (Intermediaries) from time to time to
promote the current or future accounts or funds managed or advised by Goldman Sachs (including
investment advisers) or in which Goldman Sachs (including investment advisers) or its personnel
have interests (collectively, the Client/GS Accounts), the Fund and other products. In addition
to placement fees, sales loads or similar distribution charges, such payments may be made out of
Goldman Sachs assets, or amounts payable to Goldman Sachs rather than a separately identified
charge to the Fund, Client/GS Accounts or other products. Such payments may compensate
Intermediaries for, among other things: marketing the Fund, Client/GS Accounts and other products
(which may consist of payments resulting in or relating to the inclusion of the Fund, Client/GS
Accounts and other products on the preferred or recommended fund lists or in certain sales programs
from time to time sponsored by the Intermediaries); access to the Intermediaries registered
representatives or salespersons, including at conferences and other meetings; assistance in
training and education of personnel; fees for directing investors to the Fund, Client/GS Accounts
and other products; finders fee or referral fees or other fees for providing assistance in
promoting the Fund, Client/GS Accounts and other products (which may include promotion in
communications with the Intermediaries customers, registered representatives and salespersons);
and/or other specified services intended to assist in the distribution and marketing of the Fund,
Client/GS Accounts and other products. Such payments may be a fixed dollar amount; may be based on
the number of customer accounts maintained by an Intermediary; may be based on a percentage of the
value of interests sold to, or held by, customers of the Intermediary involved; or may be
calculated on another basis. The payments may also, to the extent permitted by applicable
regulations, contribute to various non-cash and cash incentive arrangements to promote certain
products, as well as sponsor various educational programs, sales contests and/or promotions.
Furthermore, subject to applicable law, such payments may also pay for travel expenses, meals,
lodging and entertainment of Intermediaries and their salespersons and guests in connection with
educational, sales and promotional programs. The additional payments by Goldman Sachs may also
compensate Intermediaries for sub-accounting, administrative and/or shareholder processing or other
investor services that are in addition to the fees paid for these services by such products.
The payments made by Goldman Sachs or the Fund may be different for different Intermediaries.
The payments may be negotiated based on a range of factors, including but not limited to, ability
to attract and retain assets, target markets, customer relationships, quality of service and
industry reputation. Payment arrangements may include breakpoints in compensation which provide
that the percentage rate of compensation varies as the dollar value of the amount sold or invested
through an Intermediary increases. The presence of these payments and the basis on which an
Intermediary compensates its registered representatives or salespersons may create an incentive for
a particular Intermediary, registered representative or salesperson to highlight, feature or
recommend certain products based, at least in part, on the level of compensation paid.
Potential Conflicts Relating to the Allocation of Investment Opportunities Among the Fund and
Other Goldman Sachs Accounts
Goldman Sachs has potential conflicts in connection with the allocation of investments or
transaction decisions for the Fund. For example, the Fund may be competing for investment
opportunities with Client/GS Accounts. The Client/GS Accounts may provide greater fees or other
compensation (including performance based fees), equity or other interests to Goldman Sachs
(including the Investment Adviser).
Goldman Sachs may manage or advise Client/GS Accounts that have investment objectives that are
similar to those of the Fund and/or may seek to make investments in securities or other
instruments, sectors or strategies in which the Fund may invest. This may create potential
conflicts where there is limited availability or limited liquidity for those investments. For
example, limited availability may exist, without limitation, in local and emerging markets, high
yield securities, fixed income securities, regulated industries, small capitalization and IPO/new
issues. Transactions in investments by multiple Client/GS Accounts (including accounts in which
Goldman Sachs and its personnel have an interest), other clients of Goldman Sachs or Goldman Sachs
itself may have the effect of diluting or otherwise negatively affecting the values, prices or
investment strategies associated with securities held by Client/GS Accounts, or the Fund,
particularly, but not limited to, in small capitalization, emerging market or less liquid
strategies. The Investment Adviser has developed policies and procedures that provide that it will
allocate investment opportunities and make purchase and sale decisions among the Fund and other
Client/GS Accounts in a manner that it considers, in its sole discretion and consistent with its
fiduciary obligation to the Fund and each Client/GS Account, to be reasonable.
B-67
In many cases, these policies result in the pro rata allocation of limited opportunities
across the Fund and Client/GS Accounts, but in many other cases the allocations reflect numerous
other factors based upon the Investment Advisers good faith assessment of the best use of such
limited opportunities relative to the objectives, limitation and requirements of the Fund and
Client/GS Accounts and applying a variety of factors including those described below. The
Investment Adviser seeks to treat all clients reasonably in light of all factors relevant to
managing an account, and in some cases it is possible that the application of the factors described
below may result in allocations in which certain accounts may receive an allocation when other
accounts do not. Non-proportional allocation may occur more frequently in the fixed income
portfolio management area than many active equity accounts, in many instances because multiple
appropriate or substantially similar investments are available in fixed income strategies, as well
as due to differences in benchmark factors, hedging strategies, or other reasons, but
non-proportional allocations could also occur in other areas. The application of these factors as
described below may result in allocations in which Goldman Sachs and Goldman Sachs employees may
receive an allocation or an opportunity not allocated to other Client/GS Accounts or the Fund.
Allocations may be based on numerous factors and may not always be pro rata based on assets
managed.
The Investment Adviser will make allocation-related decisions with reference to numerous
factors. These factors may include, without limitation, (i) account investment horizons,
investment objectives and guidelines; (ii) different levels of investment for different strategies;
(iii) client-specific investment guidelines and restrictions including the ability to hedge through
short sales or other techniques; (iv) the expected future capacity of the Fund or Client/GS
Accounts; (v) fully directed brokerage accounts; (vi) tax sensitivity of accounts; (vii)
suitability requirements and the nature of investment opportunity; (viii) account turnover
guidelines; (ix) cash and liquidity considerations, including without limitation, availability of
cash for investment; (x) relative sizes and expected future sizes of applicable accounts; (xi)
availability of other appropriate investment opportunities; and/or (xii) minimum denomination,
minimum increments, de minimus threshold and round lot considerations. Suitability considerations
can include without limitation (i) relative attractiveness of a security to different accounts;
(ii) concentration of positions in an account; (iii) appropriateness of a security for the
benchmark and benchmark sensitivity of an account; (iv) an accounts risk tolerance, risk
parameters and strategy allocations; (v) use of the opportunity as a replacement for a security
Goldman Sachs believes to be attractive for an account; (vi) considerations relating to hedging a
position in a pair trade; and/or (vii) considerations related to giving a subset of accounts
exposure to an industry. In addition, the fact that certain Goldman Sachs personnel are dedicated
to one or more funds, accounts or clients, including the Fund, may be a factor in determining the
allocation of opportunities sourced by such personnel. Reputational matters and other such
considerations may also be considered.
During periods of unusual market conditions, the Investment Adviser may deviate from its
normal trade allocation practices. For example, this may occur with respect to the management of
unlevered and/or long-only funds or accounts that are typically managed on a side-by-side basis
with levered and/or long-short funds or accounts. During such periods, the Investment Adviser will
seek to exercise a disciplined process for determining its actions to appropriately balance the
interests of all accounts, including the Fund, as it determines in its sole discretion.
In addition to allocations of limited availability investments, Goldman Sachs may, from time
to time, develop and implement new investment opportunities and/or trading strategies, and these
strategies may not be employed in all accounts (including the Fund) or pro rata among the accounts
where they are employed, even if the strategy is consistent with the objectives of all accounts.
Goldman Sachs may make decisions based on such factors as strategic fit and other portfolio
management considerations, including, without limitation, an accounts capacity for such strategy,
the liquidity of the strategy and its underlying instruments, the accounts liquidity, the business
risk of the strategy relative to the accounts overall portfolio make-up, and the lack of efficacy
of, or return expectations from, the strategy for the account, and such other factors as Goldman
Sachs deems relevant in its sole discretion. For example, such a determination may, but will not
necessarily, include consideration of the fact that a particular strategy will not have a
meaningful impact on an account given the overall size of the account, the limited availability of
opportunities in the strategy and the availability of other strategies for the account.
Allocation decisions among accounts may be more or less advantageous to any one account or
group of accounts. As a result of these allocation issues, the amount, timing, structuring or terms
of an investment by the Fund may differ from, and performance may be lower than, investments and
performance of other Client/GS Accounts.
Notwithstanding anything in the foregoing, the Fund may or may not receive, but in any event
will have no rights with respect to, opportunities sourced by Goldman Sachs businesses and
affiliates. Such opportunities or any portion thereof may be offered to GS/Client Accounts,
Goldman Sachs or affiliates thereof, all or certain investors of the Fund, or such other persons or
entities as determined by Goldman Sachs in its sole discretion. The Fund will have no rights and
will not receive any compensation related to such opportunities.
The Investment Adviser and/or its affiliates manage accounts of clients of Goldman Sachs
Private Wealth Management (PWM) business. Such PWM clients receive advice from Goldman Sachs by
means of separate accounts (PWM Separate Accounts). With
B-68
respect to the Fund, the Investment Adviser may follow a strategy that is expected to be
similar over time to that delivered by the PWM Separate Accounts. The Fund and the PWM Separate
Account Clients are subject to independent management and, given the independence in the
implementation of advice to these accounts, there can be no warranty that such investment advice
will be implemented simultaneously. Neither the Investment Adviser (in the case of the Fund) nor
its affiliates (in the case of PWM Separate Accounts), will know when advice issued has been
executed (if at all) and, if so, to what extent. While each will use reasonable endeavors to
procure timely execution, it is possible that prior execution for or on behalf of the PWM Separate
Accounts could adversely affect the prices and availability of the securities, currencies and
instruments in which the Fund invests.
Other Potential Conflicts Relating to the Management of the Fund by the Investment Adviser
Potential Restrictions and Issues Relating to Information Held by Goldman Sachs
As a result of informational barriers constructed between different divisions of Goldman
Sachs, the Investment Adviser will generally not have access to information and may not consult
with personnel in other areas of Goldman Sachs. Therefore, the Investment Adviser will generally
not be able to manage the Fund with the benefit of information held by many other divisions of
Goldman Sachs. From time to time and subject to the Investment Advisers policies and procedures
regarding information barriers, the Investment Adviser may consult with personnel in other areas of
Goldman Sachs, or with persons unaffiliated with Goldman Sachs, or may form investment policy
committees comprised of such personnel. In certain circumstances, personnel of affiliates of the
Investment Adviser may have input into, or make determinations regarding, portfolio management
transactions for the Fund. The performance by such persons of obligations related to their
consultation with personnel of the Investment Adviser could conflict with their areas of primary
responsibility within Goldman Sachs or elsewhere. In connection with their activities with the
Investment Adviser, such persons may receive information regarding the Investment Advisers
proposed investment activities of the Fund that is not generally available to the public. There
will be no obligation on the part of such persons to make available for use by the Fund any
information or strategies known to them or developed in connection with their own client,
proprietary or other activities. In addition, Goldman Sachs will be under no obligation to make
available any research or analysis prior to its public dissemination.
The Investment Adviser makes decisions for the Fund based on the Funds investment program.
The Investment Adviser from time to time may have access to certain fundamental analysis and
proprietary technical models developed by Goldman Sachs and its personnel. Goldman Sachs will not
be under any obligation, however, to effect transactions on behalf of the Fund in accordance with
such analysis and models.
In addition, Goldman Sachs has no obligation to seek information or to make available to or
share with the Fund any information, investment strategies, opportunities or ideas known to Goldman
Sachs personnel or developed or used in connection with other clients or activities. Goldman Sachs
and certain of its personnel, including the Investment Advisers personnel or other Goldman Sachs
personnel advising or otherwise providing services to the Fund, may be in possession of information
not available to all Goldman Sachs personnel, and such personnel may act on the basis of such
information in ways that have adverse effects on the Fund. The Fund or a GS/Client Account could
sustain losses during periods in which Goldman Sachs and its affiliates and other accounts achieve
significant profits on their trading for proprietary or other accounts.
From time to time, Goldman Sachs may come into possession of material, non-public information
or other information that could limit the ability of the Fund to buy and sell investments. The
investment flexibility of the Fund may be constrained as a consequence. The Investment Adviser
generally is not permitted to obtain or use material non-public information in effecting purchases
and sales in public securities transactions for the Fund.
Issues Relating to the Valuation of Assets by Multiple Divisions or Units Within Goldman Sachs
Certain securities and other assets in which the Fund may invest may not have a readily
ascertainable market value and will be valued by the Investment Adviser in accordance with the
valuation guidelines described herein. Such securities and other assets may constitute a
substantial portion of the Funds investments.
The Investment Adviser may face a conflict of interest in valuing the securities or assets in
the Funds portfolio that lack a readily ascertainable market value. Such valuations will affect
the Investment Advisers compensation. The Investment Adviser will value such securities and other
assets in accordance with the valuation policies described herein.
Various divisions and units within Goldman Sachs are required to value assets, including in
connection with managing or advising Client/GS Accounts and in their capacity as a broker-dealer.
These various divisions and units may share information regarding valuation techniques and models
or other information relevant to the calculation of a specific asset or category of assets.
Goldman Sachs does not, however, have any obligation to engage in such information sharing.
Therefore, a division or unit of Goldman Sachs may value an identical asset differently than
another division or unit of Goldman Sachs. This is particularly the case when an asset does not
have a readily ascertainable market price and/or where one division or unit of Goldman Sachs has
more recent and/or accurate information about the asset being valued.
B-69
Potential Conflicts Relating to Goldman Sachs and the Investment Advisers Proprietary Activities
and Activities On Behalf of Other Accounts
The results of the investment activities of the Fund may differ significantly from the results
achieved by Goldman Sachs for its proprietary accounts and from the results achieved by Goldman
Sachs for other Client/GS Accounts. The Investment Adviser will manage the Fund and the other
Client/GS Accounts it manages in accordance with their respective investment objectives and
guidelines. However, Goldman Sachs may give advice, and take action, with respect to any current or
future Client/GS Accounts that may compete or conflict with the advice the Investment Adviser may
give to the Fund, including with respect to the return of the investment, the timing or nature of
action relating to the investment or method of exiting the investment.
Transactions undertaken by Goldman Sachs or Client/GS Accounts may adversely impact the Fund.
Goldman Sachs and one or more Client/GS Accounts may buy or sell positions while the Fund is
undertaking the same or a differing, including potentially opposite, strategy, which could
disadvantage the Fund. For example, the Fund may buy a security and Goldman Sachs or Client/GS
Accounts may establish a short position in that same security. The subsequent short sale may result
in impairment of the price of the security which the Fund holds. Conversely, the Fund may establish
a short position in a security and Goldman Sachs or other Client/GS Accounts may buy that same
security. The subsequent purchase may result in an increase of the price of the underlying position
in the short sale exposure of the Fund and such increase in price would be to the Funds detriment.
In addition, the Investment Adviser and other Goldman Sachs affiliates may manage funds or
accounts, and Goldman Sachs may be invested in funds or accounts, that have similar investment
objectives or portfolios to that of the Fund, and events occurring with respect to the Funds or
accounts could affect the performance of the Fund. For example, in the event that withdrawals of
capital or performance losses results in such the Fund or account de-leveraging its portfolio by
selling securities, this could result in securities of the same issuer, strategy or type held by
the Fund falling in value, which could have a material adverse effect on the Fund. Conflicts may
also arise because portfolio decisions regarding the Fund may benefit Goldman Sachs or other
Client/GS Accounts. For example, the sale of a long position or establishment of a short position
by the Fund may impair the price of the same security sold short by (and therefore benefit) Goldman
Sachs or other Client/GS Accounts, and the purchase of a security or covering of a short position
in a security by the Fund may increase the price of the same security held by (and therefore
benefit) Goldman Sachs or other Client/GS Accounts.
In addition, transactions in investments by one or more Client/GS Accounts and Goldman Sachs
may have the effect of diluting or otherwise disadvantaging the values, prices or investment
strategies of the Fund, particularly, but not limited to, in small capitalization, emerging market
or less liquid strategies. For example, this may occur when portfolio decisions regarding the Fund
are based on research or other information that is also used to support portfolio decisions for
other Client/GS Accounts. When Goldman Sachs or a Client/GS Account implements a portfolio decision
or strategy ahead of, or contemporaneously with, similar portfolio decisions or strategies for the
Fund (whether or not the portfolio decisions emanate from the same research analysis or other
information), market impact, liquidity constraints, or other factors could result in the Fund
receiving less favorable trading results and the costs of implementing such portfolio decisions or
strategies could be increased or the Fund could otherwise be disadvantaged. Goldman Sachs may, in
certain cases, elect to implement internal policies and procedures designed to limit such
consequences to Client/GS Accounts, which may cause the Fund to be unable to engage in certain
activities, including purchasing or disposing of securities, when it might otherwise be desirable
for it to do so.
The Investment Adviser may, but is not required to aggregate purchase or sale orders for the
Fund with trades for other funds or accounts managed by Goldman Sachs, including Client/GS
Accounts. When orders are aggregated for execution, it is possible that Goldman Sachs and Goldman
Sachs employee interests will receive benefits from such transactions, even in limited capacity
situations. While the Investment Adviser maintains policies and procedures that it believes are
reasonably designed to deal with conflicts of interest that may arise in certain situations when
purchase or sale orders for the Fund are aggregated for execution with orders for Client/GS
Accounts, in some cases the Investment Adviser will make allocations to accounts in which Goldman
Sachs and/or employees have an interest.
The Investment Adviser has established a trade sequencing and rotation policy for certain U.S.
equity client accounts (including the Fund) and wrap fee accounts. The Investment Adviser does
not generally aggregate trades on behalf of wrap fee accounts at the present time. Wrap fees
usually cover execution costs only when trades are placed with the sponsor of the account. Trades
through different sponsors are generally not aggregated. The Investment Adviser currently utilizes
an asset-based trade sequencing and rotation policy for determining the order in which trades for
institutional and wrap accounts are placed. Given current asset levels, the Investment Advisers
trade sequencing and rotation policy provides that wrap accounts trade ahead of other accounts,
including the Fund, 10% of the time. Other accounts, including the Fund, currently trade before
wrap accounts 90% of the time. This is reflected in a ten week trade rotation schedule. The
Investment Adviser may deviate from the rotation schedule under certain circumstances. These
include situations, for example, where in the Investment Advisers view it is not practical for the
wrap fee accounts to participate in certain types of trades or when there are unusually long delays
in a given wrap sponsors execution of a particular trade. In addition, a
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portfolio management team may provide instructions simultaneously regarding the placement of a
trade in lieu of the rotation schedule if the trade represents a relatively small proportion of the
average daily trading volume of the relevant security.
The directors, officers and employees of Goldman Sachs, including the Investment Adviser, may
buy and sell securities or other investments for their own accounts (including through investment
funds managed by Goldman Sachs, including the Investment Adviser). As a result of differing trading
and investment strategies or constraints, positions may be taken by directors, officers and
employees that are the same, different from or made at different times than positions taken for the
Fund. To reduce the possibility that the Fund will be materially adversely affected by the personal
trading described above, the Fund and Goldman Sachs, as the Funds Investment Adviser and
distributor, has established policies and procedures that restrict securities trading in the
personal accounts of investment professionals and others who normally come into possession of
information regarding the Funds portfolio transactions. The Fund and Goldman Sachs, as the Funds
Investment Adviser and distributor, have adopted a code of ethics (collectively, the Codes of
Ethics) in compliance with Section 17(j) of the Act and monitoring procedures relating to certain
personal securities transactions by personnel of the Investment Adviser which the Investment
Adviser deems to involve potential conflicts involving such personnel, Client/GS Accounts managed
by the Investment Adviser and the Fund. The Codes of Ethics require that personnel of the
Investment Adviser comply with all applicable federal securities laws and with the fiduciary duties
and anti-fraud rules to which the Investment Adviser is subject. The Codes of Ethics can be
reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The
Codes of Ethics are also available on the EDGAR Database on the SECs Internet site at
http://www.sec.gov. Copies may also be obtained after paying a duplicating fee by writing the SECs
Public Reference Section, Washington, DC 20549-0102, or by electronic request to
publicinfo@sec.gov.
Clients of Goldman Sachs (including Client/GS Accounts) may have, as a result of receiving
client reports or otherwise, access to information regarding the Investment Advisers transactions
or views which may affect such clients transactions outside of accounts controlled by personnel of
the Investment Adviser, and such transactions may negatively impact the performance of the Fund.
The Fund may also be adversely affected by cash flows and market movements arising from purchase
and sales transactions, as well as increases of capital in, and withdrawals of capital from, other
Client/GS Accounts. These effects can be more pronounced in thinly traded and less liquid markets.
The Investment Advisers management of the Fund may benefit Goldman Sachs. For example, the
Fund may, subject to applicable law, invest directly or indirectly in the securities of companies
affiliated with Goldman Sachs or which Goldman Sachs (or funds or accounts managed by Goldman Sachs
and/or in which Goldman Sachs has an interest) has an equity, debt or other interest. In addition,
to the extent permitted by applicable law, the Fund may engage in investment transactions which may
result in other Client/GS Accounts being relieved of obligations or otherwise divesting of
investments or cause the Fund to have to divest certain investments. The purchase, holding and sale
of investments by the Fund may enhance the profitability of Goldman Sachs or other Client/GS
Accounts own investments in and its activities with respect to such companies.
Goldman Sachs and one or more Client/GS Accounts (including the Fund) may also invest in
different classes of securities of the same issuer. As a result, one or more Client/GS Accounts may
pursue or enforce rights with respect to a particular issuer in which the Fund has invested, and
those activities may have an adverse effect on the Fund. For example, if a Client/GS Account holds
debt securities of an issuer and the Fund holds equity securities of the same issuer, if the issuer
experiences financial or operational challenges, the Client/GS Account which holds the debt
securities may seek a liquidation of the issuer, whereas the Fund which holds the equity securities
may prefer a reorganization of the issuer. In addition, the Investment Adviser may also, in certain
circumstances, pursue or enforce rights with respect to a particular issuer jointly on behalf of
one or more Client/GS Accounts, the Fund, or Goldman Sachs employees may work together to pursue or
enforce such rights. The Fund may be negatively impacted by Goldman Sachs and other Client/GS
Accounts activities, and transactions for the Fund may be impaired or effected at prices or terms
that may be less favorable than would otherwise have been the case had Goldman Sachs and other
Client/GS Accounts not pursued a particular course of action with respect to the issuer of the
securities. In addition, in certain instances personnel of the Investment Adviser may obtain
information about the issuer that would be material to the management of other Client/GS Accounts
which could limit the ability of personnel of the Investment Adviser to buy or sell securities of
the issuer on behalf of the Fund.
To the extent permitted by applicable law Goldman Sachs (including its personnel or Client/GS
Accounts) may create, write, sell or issue, or act as placement agent or distributor of, derivative
instruments with respect to the Fund or with respect to underlying securities, currencies or
instruments of the Fund, or which may be otherwise based on or seek to replicate or hedge the
performance of the Fund (collectively referred to as Structured Investment Products). The values
of Structured Investment Products may be linked to the net asset value of the Fund and/or the
values of the Funds investments. In connection with the Structured Investment Products and for
hedging, re-balancing, investment and other purposes, to the extent permitted by applicable law,
the Fund and/or Goldman Sachs (including its personnel or Client/GS Accounts) may (i) purchase or
sell investments held by the Fund and/or Client/GS Accounts, (ii) purchase or sell investments held
by the Fund, or (iii) hold synthetic positions that seek to replicate or hedge the
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performance of the Fund, the Funds investments, a Client/GS Account of a Client/GS Accounts
investments. Such positions may be significant and may differ from and/or be contra to the Funds
or a Client/GS Accounts positions. Goldman Sachs (including its personnel or Client/GS Accounts)
reserves the right to make purchases and sales of investments that may also be held by the Fund
and/or Client/GS Account and to make purchases and sales of shares in the Fund at any time and
without notice to the investors in the Fund. These derivative-related activities, as well as such
investment and redemption activities, may have an adverse effect on the investment management of
the Fund and the Funds positions, flexibility, diversification strategies and on the amount of
fees, expenses and other costs incurred directly or indirectly through the Fund by investors.
The structure or other characteristics of the derivative instruments (including the Structured
Investment Products) may have an adverse effect on the Fund. For example, the derivative
instruments could represent leveraged investments in the Fund, and the leveraged characteristics of
such investments could make it more likely, due to events of default or otherwise, that there would
be significant redemptions of interests from the Fund more quickly than might otherwise be the
case. Goldman Sachs, acting in commercial capacities in connection with such derivative
instruments, may in fact cause such a redemption. This may have an adverse effect on the investment
management and positions, flexibility and diversification strategies of the Fund and on the amount
of fees, expenses and other costs incurred directly or indirectly for the account of the Fund.
Potential Conflicts in Connection with Investments in Goldman Sachs Money Market Funds
To the extent permitted by applicable law, the Fund may invest all or some of its short term
cash investments in any money market fund advised or managed by Goldman Sachs. In connection with
any such investments, the Fund, to the extent permitted by the Act, will pay its share of all
expenses of a money market fund in which it invests which may result in the Fund bearing some
additional expenses. All advisory, administrative, or Rule 12b-1 fees applicable to the investment
and the fees or allocations from the Fund will not be reduced thereby (
i.e.
, there could be double
fees involved in making any such investment, which would not arise in connection with an
investors direct purchase of the underlying investments, because Goldman Sachs could receive fees
with respect to both the management of the Fund and such money market fund). In such
circumstances, as well as in all other circumstances in which Goldman Sachs receives any fees or
other compensation in any form relating to the provision of services, no accounting or repayment to
the Fund will be required.
Goldman Sachs May In-Source or Outsource
Subject to applicable law, Goldman Sachs, including the Investment Adviser, may from time to
time and without notice to investors in-source or outsource certain processes or functions in
connection with a variety of services that it provides to the Fund in its administrative or other
capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
Potential Conflicts That May Arise When Goldman Sachs Acts in a Capacity Other Than Investment
Adviser to the Fund
Potential Conflicts Relating to Principal and Cross Transactions
To the extent permitted by applicable law, the Fund may enter into transactions and invest in
futures, securities, currencies, swaps, options, forward contracts or other instruments in which
Goldman Sachs acting as principal or on a proprietary basis for its customers, serves as the
counterparty. To the extent permitted by applicable law, the Fund may also enter into cross
transactions (
i.e.
, where the Investment Adviser causes the Fund to buy securities from, or sell a
security to, another client of the Investment Adviser or its affiliates) and agency cross
transactions (
i.e.
, where Goldman Sachs acts as a broker for, and receives a commission from, both
the Fund on one side of the transaction and another account on the other side of the transaction in
connection with the purchase or sale of securities). Goldman Sachs may have a potentially
conflicting division of loyalties and responsibilities to both parties to a cross transaction or
agency cross transaction. For example, in a cross transaction, the Investment Adviser or an
affiliate will represent both the Fund on one side of a transaction and another account on the
other side of the transaction (including an account in which Goldman Sachs or its affiliates have a
proprietary interest) in connection with the purchase of a security by the Fund. In addition, in
an agency cross transaction, Goldman Sachs will act as broker and receive compensation or other
payments from either or both parties, which could influence the decision of Goldman Sachs to cause
the Fund to purchase such security. The Investment Adviser will ensure that any such cross
transaction or agency cross transactions are effected on commercially reasonable market terms and
in accordance with the Investment Advisers fiduciary duties to such entities.
Potential Conflicts That May Arise When Goldman Sachs Acts in a Capacity Other Than as Investment
Adviser to the Fund
To the extent permitted by applicable law, Goldman Sachs may act as broker, dealer, agent,
lender, borrower or advisor or in other commercial capacities for the Fund. It is anticipated that
the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees,
sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits,
rates, terms and conditions charged by Goldman Sachs will be in its view commercially reasonable,
although Goldman Sachs, including its
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sales personnel, will have an interest in obtaining fees and other amounts that are favorable
to Goldman Sachs and such sales personnel. The Fund may, to the extent permitted by applicable law,
borrow funds from Goldman Sachs at rates and on other terms arranged with Goldman Sachs.
Goldman Sachs may be entitled to compensation when it acts in capacities other than as the
Investment Adviser, and the Fund will not be entitled to any such compensation. For example,
Goldman Sachs (and its personnel and other distributors) will be entitled to retain fees and other
amounts that it receives in connection with its service to the Fund as broker, dealer, agent,
lender, advisor or in other commercial capacities and no accounting to the Fund or its shareholders
will be required, and no fees or other compensation payable by the Fund or its shareholders will be
reduced by reason of receipt by Goldman Sachs of any such fees or other amounts.
When Goldman Sachs acts as broker, dealer, agent, lender or advisor or in other commercial
capacities in relation to the Fund, Goldman Sachs may take commercial steps in its own interests,
which may have an adverse effect on the Fund. For example, in connection with lending arrangements
involving the Fund, Goldman Sachs may require repayment of all or part of a loan at any time or
from time to time.
The Fund will be required to establish business relationships with its counterparties based on
its own credit standing. Goldman Sachs, including the Investment Adviser, will not have any
obligation to allow its credit to be used in connection with the Funds establishment of its
business relationships, nor is it expected that the Funds counterparties will rely on the credit
of Goldman Sachs in evaluating the Funds creditworthiness.
Potential Conflicts in Connection with Brokerage Transactions and Proxy Voting
To the extent permitted by applicable law, purchases and sales of securities for the Fund may
be bunched or aggregated with orders for other Client/GS Accounts. The Investment Adviser and its
affiliates, however, are not required to bunch or aggregate orders if portfolio management
decisions for different accounts are made separately, or if they determine that bunching or
aggregating is not practicable, or required with respect to involving client directed accounts.
Prevailing trading activity frequently may make impossible the receipt of the same price or
execution on the entire volume of securities purchased or sold. When this occurs, the various
prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the
effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In
addition, under certain circumstances, the Fund will not be charged the same commission or
commission equivalent rates in connection with a bunched or aggregated order. Without limitation,
time zone differences, separate trading desks or portfolio management processes in a global
organization may, among other factors, result in separate, non-aggregated executions.
The Investment Adviser may select brokers (including, without limitation, affiliates of the
Investment Adviser) that furnish the Investment Adviser, the Fund, other Client/GS Accounts or
their affiliates or personnel, directly or through correspondent relationships, with proprietary
research or other appropriate services which provide, in the Investment Advisers view, appropriate
assistance to the Investment Adviser in the investment decision-making process (including with
respect to futures, fixed-price offerings and over-the-counter transactions). Such research or
other services may include, to the extent permitted by law, research reports on companies,
industries and securities; economic and financial data; financial publications; proxy analysis;
trade industry seminars; computer databases; quotation equipment and services; and
research-oriented computer hardware, software and other services and products. Research or other
services obtained in this manner may be used in servicing the Fund and other Client/GS Accounts,
including in connection with Client/GS Accounts other than those that pay commissions to the broker
relating to the research or other service arrangements. To the extent permitted by applicable law,
such products and services may disproportionately benefit other Client/GS Accounts relative to the
Fund based on the amount of brokerage commissions paid by the Fund and such other Client/GS
Accounts. For example, research or other services that are paid for through one clients
commissions may not be used in managing that clients account. In addition, other Client/GS
Accounts may receive the benefit, including disproportionate benefits, of economies of scale or
price discounts in connection with products and services that may be provided to the Fund and to
such other Client/GS Accounts. To the extent that the Investment Adviser uses soft dollars, it will
not have to pay for those products and services itself. The Investment Adviser may receive research
that is bundled with the trade execution, clearing, and/or settlement services provided by a
particular broker-dealer. To the extent that the Investment Adviser receives research on this
basis, many of the same conflicts related to traditional soft dollars may exist. For example, the
research effectively will be paid by client commissions that also will be used to pay for the
execution, clearing, and settlement services provided by the broker-dealer and will not be paid by
the Investment Adviser.
The Investment Adviser may endeavor to execute trades through brokers who, pursuant to such
arrangements, provide research or other services in order to ensure the continued receipt of
research or other services the Investment Adviser believes are useful in its investment
decision-making process. The Investment Adviser may from time to time choose not to engage in the
above described arrangements to varying degrees.
B-73
The Investment Adviser has adopted policies and procedures designed to prevent conflicts
of interest from influencing proxy voting decisions that it makes on behalf of advisory clients,
including the Fund, and to help ensure that such decisions are made in accordance with the
Investment Advisers fiduciary obligations to its clients. Nevertheless, notwithstanding such proxy
voting policies and procedures, actual proxy voting decisions of the Investment Adviser may have
the effect of favoring the interests of other clients or businesses of other divisions or units of
Goldman Sachs and/or its affiliates provided that the Investment Adviser believes such voting
decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of
these policies and procedures, see the section of this SAI entitled Proxy Voting.
Potential Regulatory Restrictions on Investment Adviser Activity
From time to time, the activities of the Fund may be restricted because of regulatory
requirements applicable to Goldman Sachs and/or its internal policies designed to comply with,
limit the applicability of, or otherwise relate to such requirements. A client not advised by
Goldman Sachs would not be subject to some of those considerations. There may be periods when the
Investment Adviser may not initiate or recommend certain types of transactions, or may otherwise
restrict or limit its advice in certain securities or instruments issued by or related to companies
for which Goldman Sachs is performing investment banking, market making or other services or has
proprietary positions. For example, when Goldman Sachs is engaged in an underwriting or other
distribution of securities of, or advisory services for, a company, the Fund may be prohibited from
or limited in purchasing or selling securities of that company. In addition, there may be certain
investment opportunities, investment strategies or actions that Goldman Sachs will not undertake on
behalf of the Fund in view of Goldman Sachs client or firm activities. For example, Goldman Sachs
may determine that the Fund may be precluded from exercising certain rights that it may have as a
creditor to a particular borrower. Certain activities and actions may be considered to result in
reputational risk or disadvantage for the management of the Fund as well as for Goldman Sachs. The
Fund may also be prohibited from participating in an auction or from otherwise investing in or
purchasing certain assets, or from providing financing to a purchaser or potential purchaser if
Goldman Sachs is representing the seller. Similar situations could arise if Goldman Sachs
personnel serve as directors of companies the securities of which the Fund wishes to purchase or
sell or is representing or providing financing to another potential purchaser. The larger the
Investment Advisers investment advisory business and Goldman Sachs businesses, the larger the
potential that these restricted list policies will impact investment transactions. However, if
permitted by applicable law, the Fund may purchase securities or instruments that are issued by
such companies or are the subject of an underwriting, distribution, or advisory assignment by
Goldman Sachs, or in cases in which Goldman Sachs personnel are directors or officers of the
issuer.
The investment activities of Goldman Sachs for its proprietary accounts and for Client/GS
Accounts may also limit the investment strategies and rights of the Fund. For example, in regulated
industries, in certain emerging or international markets, in corporate and regulatory ownership
definitions, and in certain futures and derivative transactions, there may be limits on the
aggregate amount of investment by affiliated investors that may not be exceeded without the grant
of a license or other regulatory or corporate consent or, if exceeded, may cause Goldman Sachs, the
Fund or other Client/GS Accounts to suffer disadvantages or business restrictions. If certain
aggregate ownership thresholds are reached or certain transactions undertaken, the ability of the
Investment Adviser on behalf of clients (including the Fund) to purchase or dispose of investments,
or exercise rights or undertake business transactions, may be restricted by regulation or otherwise
impaired. In addition, certain investments may be considered to result in reputational risk or
disadvantage. As a result, the Investment Adviser on behalf of clients (including the Fund) may
limit purchases, sell existing investments, or otherwise restrict or limit the exercise of rights
(including voting rights) when the Investment Adviser, in its sole discretion, deems it
appropriate.
Distributor and Transfer Agent
Goldman Sachs, 200 West Street, New York, New York 10282 serves as the exclusive distributor
of shares of the Fund pursuant to a best efforts arrangement as provided by a distribution
agreement with the Trust on behalf of the Fund. Shares of the Fund are offered and sold on a
continuous basis by Goldman Sachs, acting as agent. Pursuant to the distribution agreement, after
the Prospectus and periodic reports have been prepared, set in type and mailed to shareholders,
Goldman Sachs will pay for the printing and distribution of copies thereof used in connection with
the offering to prospective investors. Goldman Sachs will also pay for other supplementary sales
literature and advertising costs. Goldman Sachs may enter into sales agreements with certain
investment dealers and other financial service firms to solicit subscriptions for Class A, Class C,
Class R and Class IR Shares of the Fund. Goldman Sachs receives a portion of the sales charge
imposed on the sale, in the case of Class A Shares, or redemption in the case of Class C Shares
(and in certain cases, Class A Shares), of the Fund shares.
Dealer Reallowances.
Class A Shares of the Fund are sold subject to a front-end sales charge,
as described in the Prospectus and in this SAI in the section Shares of the Trust. Goldman Sachs
pays commissions to Authorized Institutions who sell Class A shares of
B-74
the Fund in the form of a reallowance of all or a portion of the sales charge paid on the
purchase of those shares. Goldman Sachs may reallow the following amounts, expressed as a
percentage of the Funds offering price with respect to purchases under $100,000:
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Fund
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Strategic Income Fund
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3.25%
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Dealer allowances may be changed periodically. During special promotions, the entire sales
charge may be reallowed to Authorized Institutions. Authorized Institutions to whom substantially
the entire sales charge is reallowed may be deemed to be underwriters under the 1933 Act.
Goldman Sachs, 71 South Wacker Drive, Chicago, IL 60606 serves as the Trusts transfer and
dividend disbursing agent. Under its transfer agency agreement with the Trust, Goldman Sachs has
undertaken with the Trust with respect to the Fund to: (i) record the issuance, transfer and
redemption of shares, (ii) provide purchase and redemption confirmations and quarterly statements,
as well as certain other statements, (iii) provide certain information to the Trusts custodian and
the relevant sub-custodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi) provide certain state
Blue Sky and other information, (vii) provide shareholders and certain regulatory authorities with
tax related information, (viii) respond to shareholder inquiries, and (ix) render certain other
miscellaneous services. For its transfer agency services, Goldman Sachs is entitled to receive a
transfer agency fee equal, on an annualized basis, to 0.04% of average daily net assets with
respect to the Funds Institutional Shares and 0.13% of average daily net assets with respect to
the Funds Class A, Class C, Class R and Class IR Shares. Goldman Sachs may pay to certain
intermediaries who perform transfer agent services to shareholders a networking or sub-transfer
agent fee. These payments will be made from the transfer agency fees noted above and in the Funds
Prospectus.
The Trusts distribution and transfer agency agreements each provide that Goldman Sachs may
render similar services to others so long as the services Goldman Sachs provides thereunder are not
impaired thereby. Such agreements also provide that the Trust will indemnify Goldman Sachs against
certain liabilities.
Expenses
The Trust, on behalf of the Fund, is responsible for the payment of the Funds expenses. The
expenses include, without limitation, the fees payable to the Investment Adviser, service fees and
shareholder administration fees paid to Authorized Institutions, the fees and expenses of the
Trusts custodian and subcustodians, transfer agent fees and expenses, pricing service fees and
expenses, brokerage fees and commissions, filing fees for the registration or qualification of the
Trusts shares under federal or state securities laws, expenses of the organization of the Fund,
fees and expenses incurred by the Trust in connection with membership in investment company
organizations including, but not limited to, the Investment Company Institute, taxes, interest,
costs of liability insurance, fidelity bonds or indemnification, any costs, expenses or losses
arising out of any liability of, or claim for damages or other relief asserted against, the Trust
for violation of any law, legal, tax and auditing fees and expenses (including the cost of legal
and certain accounting services rendered by employees of Goldman Sachs or its affiliates with
respect to the Trust), expenses of preparing and setting in type Prospectus, SAIs, proxy material,
reports and notices and the printing and distributing of the same to the Trusts shareholders and
regulatory authorities, any expenses assumed by the Fund pursuant to its distribution and service
plans, compensation and expenses of its non-interested Trustees, the fees and expenses of pricing
services, dividend expenses on short sales and extraordinary expenses, if any, incurred by the
Trust. Except for fees and expenses under any distribution and service plan applicable to a
particular class and transfer agency fees and expenses, all Fund expenses are borne on a non-class
specific basis.
The imposition of the Investment Advisers fees, as well as other operating expenses, will
have the effect of reducing the total return to investors. From time to time, the Investment
Adviser may waive receipt of is fees and/or voluntarily assume certain expenses of the Fund, which
would have the effect of lowering the Funds overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
As of the date of this SAI, the Investment Adviser has agreed to reduce or limit certain
Other Expenses of the Fund (excluding management fees, distribution and service fees, transfer
agency fees and expenses, taxes, interest, brokerage fees, and litigation, indemnification,
shareholder meeting and other extraordinary expenses, exclusive of any custody and transfer agent
fee credit reductions) to the following annual percentage rate of the Funds average daily net
assets:
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Other
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Expenses
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Strategic Income Fund
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0.054%
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Such reductions or limits, if any, are calculated monthly on a cumulative basis during the
Funds fiscal year and will continue in effect until at least June 30, 2011.
Fees and expenses borne by the Fund relating to legal counsel, registering shares of the Fund,
holding meetings and communicating with shareholders may include an allocable portion of the cost
of maintaining an internal legal and compliance department. The Fund may also bear an allocable
portion of the Investment Advisers costs of performing certain accounting services not being
provided by the Funds custodian.
Custodian and Sub-Custodians
State Street Bank and Trust Company (State Street) is the custodian of the Trusts portfolio
securities and cash. State Street also maintains the Trusts accounting records. State Street may
appoint domestic and foreign sub-custodians and use depositories from time to time to hold
securities and other instruments purchased by the Trust in foreign countries and to hold cash and
currencies for the Trust.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110 is the Funds independent
registered public accounting firm. In addition to audit services, PricewaterhouseCoopers LLP
prepares the Funds federal and state tax returns and provides assistance on certain non-audit
matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio transactions for the Fund are generally effected at a net price without a
brokers commission (
i.e
., a dealer is dealing with the Fund as principal and receives compensation
equal to the spread between the dealers cost for a given security and the resale price of such
security). In certain foreign countries, debt securities are traded on exchanges at fixed
commission rates. In connection with portfolio transactions, the Management Agreement provides that
the Investment Adviser shall attempt to obtain the most favorable execution and net price
available. The Management Agreement provides that, on occasions when the Investment Adviser deems
the purchase or sale of a security to be in the best interests of the Fund as well as its other
customers (including any other fund or other investment company or advisory account for which the
Investment Adviser or an affiliate acts as Investment Adviser), the Fund, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for such other customers in order to obtain the best net
price and most favorable execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser
in the manner it considers to be most equitable and consistent with its fiduciary obligations to
the Fund and such other customers. In some instances, this procedure may adversely affect the size
and price of the position obtainable for the Fund. The Management Agreement permits the Investment
Adviser, in its discretion, to purchase and sell portfolio securities to and from dealers who
provide the Trust with brokerage or research services in which dealers may execute brokerage
transactions at a higher cost to the Fund. Brokerage and research services furnished by firms
through which the Fund effects its securities transactions may be used by the Investment Adviser in
servicing other accounts and not all of these services may be used by the Investment Adviser in
connection with the Fund, which is generating the brokerage credits. Such research or other
services may include research reports on companies, industries and securities; economic and
financial data; financial publications; computer data bases; quotation equipment and services; and
research-oriented computer hardware, software and other services. The fees received under the
Management Agreement are not reduced by reason of the Investment Adviser receiving such brokerage
and research services.
Such services are used by the Investment Adviser in connection with all of its investment
activities, and some of such services obtained in connection with the execution of transactions of
the Fund may be used in managing other investment accounts. Conversely, brokers furnishing such
services may be selected for the execution of transactions of such other accounts, whose aggregate
assets may be larger than those of the Fund, and the services furnished by such brokers may be used
by the Investment Adviser in providing management services for the Trust. The Investment Adviser
may also participate in so-called commission sharing arrangements and client commission
arrangements under which the Investment Adviser may execute transactions through a broker-dealer
and request that the broker-dealer allocate a portion of the commissions or commission credits to
another firm that provides research to the Investment Adviser. The Investment Adviser excludes
from use under these arrangements those products and services that are not fully eligible under
applicable law and regulatory interpretations even as to the portion that would be eligible if
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accounted for separately.
The research services received as part of commission sharing and client commission
arrangements will comply with Section 28(e) and may be subject to different legal requirements in
the jurisdictions in which the Investment Adviser does business. Participating in commission
sharing and client commission arrangements may enable the Investment Adviser to consolidate
payments for research through one or more channels using accumulated client commissions or credits
from transactions executed through a particular broker-dealer to obtain research provided by other
firms. Such arrangements also help to ensure the continued receipt of research services while
facilitating best execution in the trading process. The Investment Adviser believes such research
services are useful in its investment decision-making process by, among other things, ensuring
access to a variety of high quality research, access to individual analysts and availability of
resources that the Investment Adviser might not be provided access to absent such arrangements.
The Fund is prohibited, in accordance with Rule 12b-1 under the 1940 Act, from compensating a
broker or dealer for any promotion or sale of Fund shares by directing to such broker or dealer the
Trusts portfolio transactions or by making any payment to such broker or dealer received or to be
received (which payment may include commissions, mark-ups or mark-downs or other fees) from the
Trusts portfolio transactions effected through another broker or dealer. However, the Fund may
direct portfolio transactions to a broker or dealer that promotes or sells shares of the Trust if
the Trusts Board of Trustees approve policies and procedures designed to ensure that the selection
of such brokers is not influenced by considerations about the sale of Trust shares. Accordingly,
the Trustees (including a majority of the Trustees who are not interested Trustees) have approved
policies permitting the Trust to direct portfolio securities transactions to a broker or dealer
that promotes or sells shares of the Trust subject to the prohibitions that: i) all persons
responsible for selecting such brokers or dealers (including but not limited to trading desk
personnel and portfolio managers) may not take into account in connection with their selections the
promotion or sale of shares issued by the Trust or any other registered investment company, and ii)
the Trust, the Investment Adviser and Goldman, Sachs & Co. as the Trusts distributor may not enter
into any agreement or understanding where the Trust or the Investment Adviser direct, or are
expected to direct, portfolio transactions or any payment to a broker or dealer in consideration
for the promotion or sale of shares of the Trust or any other registered investment company.
The Fund may participate in the Fund commission recapture program. Under such a program,
participating broker-dealers rebate a percentage of commissions earned on the Fund portfolio
transactions to the Fund, from which they were generated. The rebated commissions are expected to
be treated as realized capital gains of the Fund.
Subject to the above considerations, the Investment Adviser may use Goldman Sachs or an
affiliate as a broker for the Fund. In order for Goldman Sachs or an affiliate, acting as agent, to
effect securities or futures transactions for the Fund, the commissions, fees or other remuneration
received by Goldman Sachs or an affiliate must be reasonable and fair compared to the commissions,
fees or other remuneration received by other brokers in connection with comparable transactions
involving similar securities or futures contracts. Furthermore, the Trustees, including a majority
of the Trustees who are not interested Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to Goldman Sachs are
consistent with the foregoing standard. Brokerage transactions with Goldman Sachs are also subject
to such fiduciary standards as may be imposed upon Goldman Sachs by applicable law. The amount of
brokerage commissions paid by the Fund may vary substantially from year to year because of
differences in shareholder purchase and redemption activity, portfolio turnover rates and other
factors.
SHARES OF THE TRUST
The fiscal year end for the Fund is March 31. The Fund is a series of Goldman Sachs Trust, a
Delaware statutory trust established by an Agreement and Declaration of Trust dated January 28,
1997. The Trustees have authority under the Trusts Declaration of Trust to create and classify
shares of beneficial interest in separate series, without further action by shareholders. The
Trustees also have authority to classify and reclassify any series of shares into one or more
classes of shares. As of June 17, 2010, the Trustees have classified the shares of the Fund into
five classes: Institutional Shares, Class A Shares, Class C Shares, Class R Shares and Class IR
Shares. Additional series and classes may be added in the future.
Each Institutional Share, Class A Share, Class C Share, Class R Share and Class IR Share of
the Fund represents a proportionate interest in the assets belonging to the applicable class of the
Fund. All expenses of the Fund are borne at the same rate by each class of shares, except that fees
under Distribution and Service Plans are borne exclusively by Class A, Class C or Class R Shares
and transfer agency fees and expenses are borne at different rates by different share classes. The
Trustees may determine in the future that it is appropriate to allocate other expenses differently
among classes of shares and may do so to the extent consistent with the rules of the SEC and
positions of the IRS. Each class of shares may have different minimum investment requirements and
be entitled to different shareholder services. With limited exceptions, shares of a class may only
be exchanged for shares of the same or
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an equivalent class of another fund. See Shareholder Guide in the Prospectus and Other
Information Regarding Maximum Sales Charge, Purchases, Redemptions, Exchanges and Dividends below.
In addition, the fees and expenses set forth below for each class may be subject to voluntary fee
waivers or reimbursements, as discussed more fully in the Funds Prospectus.
Institutional Shares may be purchased at net asset value without a sales charge for accounts
in the name of an investor or institution that is not compensated by the Fund under a Plan for
services provided to the institutions customers.
Class A Shares are sold with an initial sales charge of up to 3.75%, through brokers and
dealers who are members of the Financial Industry Regulatory Authority (FINRA) and certain other
financial service firms that have sales agreements with Goldman Sachs. Class A Shares bear the
cost of distribution and service fees at the aggregate rate of up to 0.25% of the average daily net
assets of such Class A Shares of the Fund. With respect to Class A Shares, the distributor at its
discretion may use compensation for distribution services paid under the Distribution and Services
Plan for personal and account maintenance services and expenses so long as such total compensation
under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Class C Shares of the Fund are sold subject to a CDSC of up to 1.0% through brokers and
dealers who are members of FINRA and certain other financial services firms that have sales
arrangements with Goldman Sachs. Class C Shares bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.75% of the average daily net assets attributable to Class C Shares.
Class C Shares also bear the cost of service fees at an annual rate of up to 0.25% of the average
daily net assets attributable to Class C Shares.
Class R and Class IR Shares are sold at net asset value without a sales charge. As noted in
the Prospectus, Class R and Class IR Shares are not sold directly to the public. Instead, Class R
and Class IR Shares generally are available only to 401(k) plans, 457 plans, employer-sponsored
403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and
non-qualified deferred compensation plans (Retirement Plans). Class R and Class IR Shares are
also generally available only to Retirement Plans where plan level or omnibus accounts are held on
the books of the Fund. Class R Shares are not available to traditional and Roth Individual
Retirement Accounts (IRAs), SEPs, SARSEPs, SIMPLE IRAs and individual 403(b) plans. Participant in
a Retirement Plan should contact their Retirement Plan service provider for information regarding
purchases, sales and exchanges of Class R and Class IR Shares. Class R Shares bear the cost of
distribution (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average daily net assets
attributable to Class R Shares.
It is possible that an institution or its affiliate may offer different classes of shares
(
i.e.
, Institutional, Class A, Class C, Class R and Class IR Shares) to its customers and thus
receive different compensation with respect to different classes of shares of the Fund. Dividends
paid by the Fund, if any, with respect to each class of shares will be calculated in the same
manner, at the same time on the same day and will be the same amount, except for differences caused
by the fact that the respective transfer agency and Plan fees relating to a particular class will
be borne exclusively by that class. Similarly, the net asset value per share may differ depending
upon the class of shares purchased.
Certain aspects of the shares may be altered after advance notice to shareholders if it is
deemed necessary in order to satisfy certain tax regulatory requirements.
When issued for the consideration described in the Funds Prospectus, shares are fully paid
and non-assessable. The Trustees may, however, cause shareholders, or shareholders of a particular
series or class, to pay certain custodian, transfer agency, servicing or similar charges by setting
off the same against declared but unpaid dividends or by reducing share ownership (or by both
means). In the event of liquidation, shareholders are entitled to share pro rata in the net assets
of the applicable class of the Fund available for distribution to such shareholders. All shares
are freely transferable and have no preemptive, subscription or conversion rights. The Trustees
may require Shareholders to redeem Shares for any reason under terms set by the Trustees.
The Act requires that where more than one series of shares exists, each series must be
preferred over all other series in respect of assets specifically allocated to such series. In
addition, Rule 18f-2 under the Act provides that any matter required to be submitted by the
provisions of the Act or applicable state law, or otherwise, to the holders of the outstanding
voting securities of an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the outstanding shares of
each series affected by such matter. Rule 18f-2 further provides that a series shall be deemed to
be affected by a matter unless the interests of each series in the matter are substantially
identical or the matter does not affect any interest of such series. However, Rule 18f-2 exempts
the selection of independent public accountants, the approval of principal distribution contracts
and the election of trustees from the separate voting requirements of Rule 18f-2.
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The Trust is not required to hold annual meetings of shareholders and does not intend to hold
such meetings. In the event that a meeting of shareholders is held, each share of the Trust will be
entitled, as determined by the Trustees without the vote or consent of the shareholders, either to
one vote for each share or to one vote for each dollar of net asset value represented by such share
on all matters presented to shareholders including the election of Trustees (this method of voting
being referred to as dollar based voting). However, to the extent required by the Act or
otherwise determined by the Trustees, series and classes of the Trust will vote separately from
each other. Shareholders of the Trust do not have cumulative voting rights in the election of
Trustees. Meetings of shareholders of the Trust, or any series or class thereof, may be called by
the Trustees, certain officers or upon the written request of holders of 10% or more of the shares
entitled to vote at such meetings. The Trustees will call a special meeting of shareholders for
the purpose of electing Trustees, if, at any time, less than a majority of Trustees holding office
at the time were elected by shareholders. The shareholders of the Trust will have voting rights
only with respect to the limited number of matters specified in the Declaration of Trust and such
other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers, employees and
agents of the Trust unless the recipient is adjudicated (i) to be liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such persons office or (ii) not to have acted in good faith in the reasonable belief
that such persons actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the shareholders acts or
omissions or for some other reason, the shareholder or former shareholder (or the shareholders
heirs, executors, administrators, legal representatives or general successors) shall be held
harmless from and indemnified against all loss and expense arising from such liability. The Trust,
acting on behalf of any affected series, must, upon request by such shareholder, assume the defense
of any claim made against such shareholder for any act or obligation of the series and satisfy any
judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any series or class of the
Trust (i) by a majority of the affected shareholders at a meeting of shareholders of the Trust,
series or class; or (ii) by a majority of the Trustees without shareholder approval if the Trustees
determine, in their sole discretion, that such action is in the best interest of the Trust, such
series, such class or their respective shareholders. The Trustees may consider such factors as
they, in their sole discretion, deem appropriate in making such determination, including (i) the
inability of the Trust or any series or class to maintain its assets at an appropriate size; (ii)
changes in laws or regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a significant adverse impact
on the business or operations of the Trust or series.
The Declaration of Trust authorizes the Trustees, without shareholder approval, to cause the
Trust, or any series thereof, to merge or consolidate with any corporation, association, trust or
other organization or sell or exchange all or substantially all of the property belonging to the
Trust or any series thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series of the Trust in the
securities of another open-end investment company with substantially the same investment objective,
restrictions and policies.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust without a
shareholder vote. However, shareholders of the Trust have the right to vote on any amendment (i)
that would adversely affect the voting rights of shareholders; (ii) that is required by law to be
approved by shareholders; (iii) that would amend the provisions of the Declaration of Trust
regarding amendments and supplements thereto; or (iv) that the Trustees determine to submit to
shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or classes of
the Trusts shares (the Series Trustees). Series Trustees may, but are not required to, serve as
Trustees of the Trust or any other series or class of the Trust. To the extent provided by the
Trustees in the appointment of Series Trustees, the Series Trustees may have, to the exclusion of
any other Trustees of the Trust, all the powers and authorities of Trustees under the Declaration
of Trust with respect to such Series or Class, but may have no power or authority with respect to
any other series or class.
Shareholder and Trustee Liability
Under Delaware Law, the shareholders of the Fund are not generally subject to liability for
the debts or obligations of the Trust. Similarly, Delaware law provides that a series of the Trust
will not be liable for the debts or obligations of any other series of the Trust. However, no
similar statutory or other authority limiting statutory trust shareholder liability exists in other
states. As a result, to the extent that a Delaware statutory trust or a shareholder is subject to
the jurisdiction of courts of such other states, the courts may not apply Delaware law and may
thereby subject the Delaware statutory trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability for acts or
obligations of a series. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series of the Trust. The Declaration
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of Trust provides for indemnification by the relevant series for all loss suffered by a
shareholder as a result of an obligation of the series. The Declaration of Trust also provides that
a series shall, upon request, assume the defense of any claim made against any shareholder for any
act or obligation of the series and satisfy any judgment thereon. In view of the above, the risk of
personal liability of shareholders of a Delaware statutory trust is remote.
In addition to the requirements under Delaware law, the Declaration of Trust provides that
shareholders of a series may bring a derivative action on behalf of the series only if the
following conditions are met: (a) shareholders eligible to bring such derivative action under
Delaware law who hold at least 10% of the outstanding shares of the series, or 10% of the
outstanding shares of the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a reasonable amount of time
to consider such shareholder request and to investigate the basis of such claim. The Trustees will
be entitled to retain counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the series for the
expense of any such advisers in the event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee
against liability to which he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or
her office.
Principal Holders of Securities
The Fund had not commenced operations as of the date of this SAI, and the Trust does not know
of any persons who own of record or beneficially 5% or more of any class of the Funds shares as of
that date.
NET ASSET VALUE
In accordance with procedures adopted by the Trustees of the Trust, the net asset value per
share of each class of the Fund is calculated by determining the value of the net assets attributed
to each class of the Fund and dividing by the number of outstanding shares of that class. All
securities are valued on each Business Day as of the close of regular trading on the New York Stock
Exchange (normally, but not always, 4:00 p.m. New York time) or such other time as the New York
Stock Exchange or NASDAQ market may officially close. The term Business Day means any day the New
York Stock Exchange is open for trading, which is Monday through Friday except for holidays. The
New York Stock Exchange is closed on the following holidays: New Years Day (observed), Martin
Luther King, Jr. Day, Washingtons Birthday (observed), Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas.
The time at which transactions and shares are priced and the time by which orders must be
received may be changed in case of an emergency or if regular trading on the New York Stock
Exchange is stopped at a time other than 4:00 p.m. New York Time. The Trust reserves the right to
reprocess purchase, redemption and exchange transactions that were initially processed at a net
asset value other than the Funds official closing net asset value (as the same may be subsequently
adjusted), and to recover amounts from (or distribute amounts to) shareholders based on the
official closing net asset value. The Trust reserves the right to advance the time by which
purchase and redemption orders must be received for same business day credit as otherwise permitted
by the SEC. In addition, the Fund may compute its net asset value as of any time permitted pursuant
to any exemption, order or statement of the SEC or its staff.
For the purpose of calculating the net asset value of the Fund, investments are valued under
valuation procedures established by the Trustees. Portfolio securities, for which market quotations
are readily available, other than money market instruments, are valued via electronic feeds to the
custodian bank containing dealer-supplied bid quotations or bid quotations from a recognized
pricing service. Securities for which a pricing service either does not supply a quotation or
supplies a quotation that is believed by the Investment Adviser to be inaccurate, will be valued
based on bid-side broker quotations. Securities for which the custodian bank is unable to obtain an
external price as provided above or with respect to which the Investment Adviser believes an
external price does not reflect accurate market values, will be valued by the Investment Adviser in
good faith based on yield equivalents, a pricing matrix or other sources, under valuation
procedures established by the Trustees. The pricing services may use valuation models or matrix
pricing, which considers yield or price with respect to comparable bonds, quotations from bond
dealers or by reference to other securities that are considered comparable in such characteristics
as rating, interest rate and maturity date, to determine current value. Other securities are valued
as follows: (i) overnight repurchase agreements will be valued at cost; (ii) term repurchase
agreements (
i.e
., those whose maturity exceeds seven days) and swaps, caps, collars and floors will
be valued at the average of the bid quotations obtained daily from at least one dealer; (iii) debt
securities with a remaining maturity of 60 days or less are valued at amortized cost,
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which the Trustees have determined to approximate fair value; (iv) spot and forward foreign
currency exchange contracts will be valued using a pricing service such as Reuters (if quotations
are unavailable from a pricing service or, if the quotations by the Investment Adviser are believed
to be inaccurate, the contracts will be valued by calculating the mean between the last bid and
asked quotations supplied by at least one independent dealers in such contracts); (v)
exchange-traded options and futures contracts will be valued by the custodian bank at the last sale
price on the exchange where such contracts and options are principally traded if accurate
quotations are readily available; and (vi) over-the-counter options will be valued by a broker
identified by the portfolio manager/trader.
Other securities, including those for which a pricing service supplies no exchange quotation
or a quotation that is believed by the portfolio manager/trader to be inaccurate, will be valued at
fair value as stated in the valuation procedures which were approved by the Board of Trustees.
The value of all assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at current exchange rates of such currencies against U.S. dollars last quoted by
any major bank. If such quotations are not available, the rate of exchange will be determined in
good faith by or under procedures established by the Board of Trustees.
Generally, trading in securities on European, Asian and Far Eastern securities exchanges and
on over-the-counter markets in these regions is substantially completed at various times prior to
the close of business on each Business Day in New York (
i.e
., a day on which the New York Stock
Exchange is open for trading). In addition, European, Asian or Far Eastern securities trading
generally or in a particular country or countries may not take place on all Business Days in New
York. Furthermore, trading takes place in various foreign markets on days which are not Business
Days in New York and days on which the Funds net asset value is not calculated. Such calculation
does not take place contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. The Funds investments are valued based on market
quotations which may be furnished by a pricing service or provided by securities dealers. If
accurate market quotations are not readily available, or if the Investment Adviser believes that
such quotations or prices do not accurately reflect fair value, the fair value of the Funds
investments may be determined based on yield equivalents, a pricing matrix or other sources, under
valuation procedures established by the Trustees.
The Investment Adviser, consistent with its procedures and applicable regulatory guidance, may
(but need not) determine to make an adjustment to the previous closing prices of either domestic or
foreign securities in light of significant events, to reflect what it believes to be the fair value
of the securities at the time of determining the Funds NAV. Significant events that could affect a
large number of securities in a particular market may include, but are not limited to: situations
relating to one or more single issuers in a market sector; significant fluctuations in U.S. or
foreign markets; market dislocations; market disruptions or market closings; equipment failures;
natural or man-made disasters or act of God; armed conflicts; governmental actions or other
developments; as well as the same or similar events which may affect specific issuers or the
securities markets even though not tied directly to the securities markets. Other significant
events that could relate to a single issuer may include, but are not limited to: corporate actions
such as reorganizations, mergers and buy-outs; corporate announcements, including those relating to
earnings, products and regulatory news; significant litigation; low trading volume; trading limits;
or suspensions.
The proceeds received by the Fund and each other series of the Trust from the issue or sale of
its shares, and all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to the Fund or particular
series and constitute the underlying assets of the Fund or series. The underlying assets of the
Fund will be segregated on the books of account, and will be charged with the liabilities in
respect of the Fund and with a share of the general liabilities of the Trust. Expenses of the Trust
with respect to the Fund and the other series of the Trust are generally allocated in proportion to
the net asset values of the Fund or series except where allocations of direct expenses can
otherwise be fairly made.
Errors and Corrective Actions
The Investment Adviser will report to the Board of Trustees any material breaches of
investment objective, policies or restrictions and any material errors in the calculation of the
NAV of the Fund or the processing of purchases and redemptions. Depending on the nature and size of
an error, corrective action may or may not be required. Corrective action may involve a prospective
correction of the NAV only, correction of any erroneous NAV and compensation to the Fund, or
correction of any erroneous NAV, compensation to the Fund and reprocessing of individual
shareholder transactions. The Trusts policies on errors and corrective action limit or restrict
when corrective action will be taken or when compensation to the Fund or its shareholders will be
paid, and not all mistakes will result in compensable errors. As a result, neither the Fund nor its
shareholders who purchase or redeem shares during periods in which errors accrue or occur may be
compensated in connection with the resolution of an error. Shareholders will generally not be
notified of the occurrence of a compensable error or the resolution thereof absent unusual
circumstances. As discussed in more detail
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under Net Asset Value, the Funds portfolio securities may be priced based on quotations for
those securities provided by pricing services. There can be no guarantee that a quotation provided
by a pricing service will be accurate.
TAXATION
The following is a summary of the principal U.S. federal income, and certain state and local,
tax considerations affecting the Fund and their shareholders that are not described in the
Prospectuses. This summary does not address special tax rules applicable to certain classes of
investors, such as tax exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his or her own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Fund. The summary is based
on the laws in effect on June 30, 2010, which are subject to change.
General
The Fund is a separate taxable entity. The Fund has elected to be treated and intends to
qualify for each taxable year as a regulated investment company under Subchapter M of Subtitle A,
Chapter 1, of the Code. To qualify as such, the Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, the Fund will not be subject to federal income or
excise tax on any net investment income and net realized capital gains that are distributed to its
shareholders in accordance with certain timing requirements of the Code.
There are certain tax requirements that the Fund must follow in order to avoid federal
taxation. In their efforts to adhere to these requirements, the Fund may have to limit its
investment activities in some types of instruments. Qualification as a regulated investment company
under the Code requires, among other things, that (i) the Fund derive at least 90% of its gross
income (including tax exempt interest) for its taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of stocks or securities,
or foreign currencies, income from certain publicly traded partnerships or other income (including
but not limited to gains from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the 90% gross income test); and
(ii) the Fund diversify its holdings so that, at the close of each quarter of its taxable year, (a)
at least 50% of the market value of its total (gross) assets is comprised of cash, cash items, 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 in value than 5% of the value of the
Funds total assets and to not more than 10% of the outstanding voting securities of such issuer,
and (b) not more than 25% of the value of its total (gross) assets is invested in the securities of
any one issuer (other than U.S. Government securities and securities of other regulated investment
companies) or two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses, or in the securities of certain publicly traded partnerships.
Future Treasury regulations could provide that qualifying income under the 90% gross income
test will not include gains from foreign currency transactions that are not directly related to the
principal business of the Fund in investing in stock or securities or options and futures with
respect to stock or securities. Using foreign currency positions or entering into foreign currency
options, futures and forward contracts for purposes other than hedging currency risk with respect
to securities in the Fund, or anticipated to be acquired may not qualify as directly related
under these tests.
As a regulated investment company, the Fund will not be subject to U.S. federal income tax on
the portion of its income and capital gains that it distributes to its shareholders in any taxable
year for which it distributes, in compliance with the Codes timing and other requirements, an
amount at least equal to the sum of 90% of its investment company taxable income (which includes
dividends, taxable interest, taxable original issue discount income, market discount income, income
from securities lending, net short-term capital gain in excess of net long-term capital loss,
certain net realized foreign exchange gains, and any other taxable income other than net capital
gain as defined below and is reduced by deductible expenses) plus 90% of the excess of its gross
tax exempt interest income, if any, over certain disallowed deductions (net tax exempt interest).
The Fund may retain for investment its net capital gain (which consists of the excess of its net
long-term capital gain over its net short-term capital loss). However, if the Fund retains any
investment company taxable income or net capital gain, it will be subject to tax at regular
corporate rates on the amount retained.
The Fund generally intends to distribute for each taxable year to its shareholders all or
substantially all of its investment company taxable income (if any), net capital gain and any net
tax exempt interest. Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales by foreign investors
such as the Fund, and may therefore make it more difficult for the Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution requirements described below.
However, the Fund generally expects to be able to obtain sufficient cash to
B-82
satisfy such requirements from new investors, the sale of securities or other sources. If for
any taxable year the Fund does not qualify as a regulated investment company, it will be taxed on
all of its investment company taxable income and net capital gain at corporate rates, its net tax
exempt interest (if any) may be subject to the alternative minimum tax, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its current and accumulated
earnings and profits.
If the Fund retains any net capital gain, the Fund may designate the retained amount as
undistributed capital gains in a notice to its shareholders who (1) if subject to U.S. federal
income tax on long-term capital gains, will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of that undistributed amount, and (2) will be
entitled to credit their proportionate shares of the tax paid by the Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds those
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by the amount of any such undistributed net capital gain included in
the shareholders gross income and decreased by the federal income tax paid by the Fund on that
amount of net capital gain.
For federal income tax purposes, the Fund is permitted to carry forward a net capital loss in
any year to offset its own capital gains, if any, during the eight years following the year of the
loss. These amounts are available to be carried forward to offset future capital gains to the
extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, the Fund must distribute or be deemed to have
distributed by December 31 of each calendar year at least 98% of its taxable ordinary income for
such year, at least 98% of the excess of its capital gains over its capital losses (generally
computed on the basis of the one-year period ending on March 31 of such year) and 100% of any
taxable ordinary income and the excess of capital gains over capital losses for the prior year that
were not distributed during such year and on which the Fund did not pay federal income tax. The
Fund anticipate that they will generally make timely distributions of income and capital gains in
compliance with these requirements so that they will generally not be required to pay the excise
tax.
Dividends paid by the Fund that are derived from interest paid on both exempt and taxable
municipal securities will be taxable to the Funds shareholders.
Gains and losses on the sale, lapse, or other termination of options and futures contracts,
options thereon and certain forward contracts (except certain foreign currency options, forward
contracts and futures contracts) will generally be treated as capital gains and losses. Certain of
the futures contracts, forward contracts and options held by the Fund will be required to be
marked-to-market for federal income tax purposes, that is, treated as having been sold at their
fair market value on the last day of the Funds taxable year. These provisions may require the Fund
to recognize income or gains without a concurrent receipt of cash. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. As a result of certain
hedging transactions entered into by the Fund, that Fund may be required to defer the recognition
of losses on futures or forward contracts and options or underlying securities or foreign
currencies to the extent of any unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be changed. The tax provisions
described above applicable to options, futures and forward contracts may affect the amount, timing,
and character of the Funds distributions to shareholders. Certain tax elections may be available
to the Fund to mitigate some of the unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain foreign currency
transactions and instruments that may affect the amount, timing and character of income, gain or
loss recognized by the Fund. Under these rules, foreign exchange gain or loss realized by the Fund
with respect to foreign currencies and certain futures and options thereon, foreign
currency-denominated debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as ordinary income or loss,
although in some cases elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to exceed the Funds
investment company taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future years. Net loss,
if any, from certain foreign currency transactions or instruments could exceed net investment
income otherwise calculated for accounting purposes with the result being either no dividends being
paid or a portion of the Funds dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholders tax basis in his or her shares and, once such basis is
exhausted, generally giving rise to capital gains.
The Fund may be subject to foreign taxes on income (possibly including, in some cases, capital
gains) from foreign securities. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes in some cases. If more than 50% of the Funds total assets at the
close of any taxable year consist of stock or securities of foreign corporations and it meets the
distribution
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requirements described above, the Fund will generally qualify to file an election with the IRS
pursuant to which shareholders of the Fund would be required to (i) include in ordinary gross
income (in addition to taxable dividends actually received) their pro rata shares of foreign income
taxes paid by the Fund that are treated as income taxes under U.S. tax regulations (which excludes,
for example, stamp taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders; and (ii) treat such respective pro rata portions as foreign income
taxes paid by them. The Fund, if eligible, may or may not make this election for any particular
taxable year. The Fund may not satisfy the 50% requirement described above and, therefore, may not
be permitted to make this election. If ineligible, or if it does not make the election, the Fund
will, however, be entitled to deduct such taxes in computing the amounts they are required to
distribute.
If the Fund makes this election, its shareholders may then deduct such pro rata portions of
qualified foreign taxes in computing their taxable incomes, or, alternatively, use them as foreign
tax credits, subject to applicable limitations, against their U.S. federal income taxes.
Shareholders who do not itemize deductions for federal income tax purposes will not, however, be
able to deduct their pro rata portion of qualified foreign taxes paid by the Fund, although such
shareholders will be required to include their shares of such taxes in gross income if the Fund
makes the election referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid by such
shareholder as a result of any such election by the Fund the amount of the credit that may be
claimed in any year may not exceed the same proportion of the U.S. tax against which such credit is
taken which the shareholders taxable income from foreign sources (but not in excess of the
shareholders entire taxable income) bears to his or her entire taxable income. For this purpose,
distributions from long-term and short-term capital gains or foreign currency gains by these will
generally not be treated as income from foreign sources. This foreign tax credit limitation may
also be applied separately to certain specific categories of foreign-source income and the related
foreign taxes. As a result of these rules, and certain other limitations, which have different
effects depending upon each shareholders particular tax situation, certain shareholders of the
Fund may not be able to claim a credit for the full amount of their proportionate shares of the
foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including tax exempt
shareholders, will ordinarily not benefit from this election. Each year, if any, that the Fund
files the election described above, its shareholders will be notified of the amount of (i) each
shareholders pro rata share of qualified foreign income taxes paid by the Fund; and (ii) the
portion of Fund dividends which represents income from each foreign country.
If the Fund acquires stock (including, under proposed regulations, an option to acquire stock
such as is inherent in a convertible bond) in certain foreign corporations (passive foreign
investment companies) that receive at least 75% of their annual gross income from passive sources
(such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income, the Fund could be subject to federal income
tax and additional interest charges on excess distributions received from such companies or gain
from the sale of such stock in such companies, even if all income or gain actually received by the
Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax liability or
maximize its return from these investments.
The Funds investment in zero coupon securities, deferred interest securities, capital
appreciation bonds or other securities bearing original issue discount or, if the Fund elects to
include market discount in income currently, market discount, as well as any mark-to-market gain
from certain options, futures or forward contracts, as described above, will generally cause it to
realize income or gain prior to the receipt of cash payments with respect to these securities or
contracts. In order to obtain cash to enable it to distribute this income or gain, maintain its
qualification as a regulated investment company and avoid federal income or excise taxes, the Fund
may be required to liquidate portfolio securities earlier than it might otherwise have done.
Investment in lower-rated securities may present special tax issues for the Fund to the extent
actual or anticipated defaults may be more likely with respect to such securities. Tax rules are
not entirely clear about issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payment received on obligations in default should be allocated between
principal and income; and whether exchanges of debt obligations in a workout context are taxable.
These and other issues will be addressed by the Fund, if it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
The application of certain requirements for qualification as a regulated investment company
and the application of certain other tax rules may be unclear in some respects in connection with
certain investment practices such as dollar rolls, or investments in certain derivatives, including
interest rate swaps, floors, cap and collars, currency swaps, total return swaps, mortgage swaps,
index swaps,
B-84
forward contracts and structured notes. As a result, the Fund may therefore be required to
limit its investments in such transactions and it is also possible that the IRS may not agree with
the Funds tax treatment of such transactions. In addition, the tax treatment of derivatives, and
certain other investments, may be affected by future legislation, Treasury Regulations and guidance
issued by the IRS that could affect the timing, character and amount of the Funds income and gains
and distributions to shareholders.
Taxable U.S. Shareholders Distributions
Distributions from investment company taxable income, whether reinvested in additional shares
or paid in cash, as defined above, are generally taxable to shareholders who are subject to tax as
ordinary income whether paid in cash or reinvested in additional shares. However, under current
law, which is scheduled to expire after 2010, certain distributions of qualified dividends to
noncorporate shareholders attributable to dividends received by the Fund from U.S. and certain
foreign corporations will generally be taxed at the long-term capital gain rate, as long as certain
other requirements are met. For these lower rates to apply, the noncorporate shareholders must have
owned their Fund shares for at least 61 days during the 121-day period beginning 60 days before the
Funds ex-dividend date. It is not expected that the Funds distributions will be qualified
dividends.
Taxable distributions include distributions from the Fund that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond interest, recognized market discount
income, original issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls, income from
interest rate, currency, total return swaps, options on swaps, caps, floors and collars, and a
portion of the discount from certain stripped tax exempt obligations or their coupons; or (ii)
capital gains from the sale of securities or other investments (including from the disposition of
rights to when-issued securities prior to issuance) or from options, futures or certain forward
contracts. Any portion of such taxable distributions that is attributable to the Funds net capital
gain, as defined above, may be designated by the Fund as a capital gain dividend, taxable to
shareholders as long-term capital gain whether received in cash or additional shares and regardless
of the length of time their shares of the Fund have been held.
It is expected that distributions made by the Fund will ordinarily not qualify for the
dividends-received deduction for corporations because qualifying distributions may be made only
from the Funds dividend income that it receives from stock in U.S. domestic corporations. The Fund
does not intend to purchase stock of domestic corporations other than in limited instances,
distributions from which may in rare cases qualify as dividends for this purpose. The
dividends-received deduction, if available, is reduced to the extent the shares with respect to
which the dividends are received are treated as debt-financed under the federal income tax law and
is eliminated if the shares are deemed to have been held for less than a minimum period, generally
46 days. Receipt of certain distributions qualifying for the deduction may result in reduction of
the tax basis of the corporate shareholders shares and may give rise to or increase its liability
for federal corporate alternative minimum tax.
Distributions in excess of the Funds current and accumulated earnings and profits, as
computed for federal income tax purposes, will first reduce a shareholders basis in his or her
shares and, after the shareholders basis is reduced to zero, will generally constitute capital
gains to a shareholder who holds his or her shares as capital assets.
Shareholders receiving a distribution in the form of newly issued shares will be treated for
U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of
cash that they would have received had they elected to receive cash and will have a cost basis in
the shares received equal to such amount.
After the close of each calendar year, the Fund will inform shareholders of the federal income
tax status of its dividends and distributions for such year, including the portion of such
dividends, if any, that qualifies as tax exempt or as capital gain, the portion, if any, that
should be treated as a tax preference item for purposes of the federal alternative minimum tax and
the foreign tax credits, if any, associated with such dividends.
All distributions, whether received in shares or in cash, as well as redemptions and
exchanges, must be reported by each shareholder who is required to file a U.S. federal income tax
return.
Different tax treatment, including penalties on certain excess contributions and deferrals,
certain pre-retirement and post-retirement distributions, and certain prohibited transactions is
accorded to accounts maintained as qualified retirement plans. Shareholders should consult their
tax advisers for more information.
Information Reporting and Backup Withholding
B-85
The Fund will be required to report to the IRS all taxable distributions, as well as gross
proceeds from the redemption or exchange of Fund shares, except in the case of certain exempt
recipients,
i.e
., corporations and certain other investors distributions to which are exempt from
the information reporting provisions of the Code. Under the backup withholding provisions of Code
Section 3406 and applicable Treasury regulations, all such reportable distributions and proceeds
may be subject to backup withholding of federal income tax at the current specified rate of 28%
(scheduled to increase to 31% after 2010) in the case of exempt recipients that fail to certify to
the Fund that they are not subject to withholding, non-exempt shareholders who fail to furnish the
Fund with their correct taxpayer identification number (TIN) and with certain required
certifications or if the IRS or a broker notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup withholding as a result of
failure to report interest or dividend income. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification that the number
provided is correct. If the backup withholding provisions are applicable, any such distributions
and proceeds, whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a shareholders U.S. federal
income tax liability. If a shareholder does not have a TIN, it should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS. Backup withholding
could apply to payments relating to a shareholders account while it is waiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account established under a Uniform
Gifts or Transfers to Minors Act, the TIN of the minor should be furnished. Investors should
consult their tax advisers about the applicability of the backup withholding provisions.
Non-U.S. Shareholders
The discussion above relates solely to U.S. federal income tax law as it applies to U.S.
persons subject to tax under such law.
Except as discussed below, distributions attributable to shareholders who, as to the United
States, are not U.S. persons, (
i.e.
, are nonresident aliens, foreign corporations, fiduciaries of
foreign trusts or estates, foreign partnerships or other non-U.S. investors) generally will be
subject to U.S. federal withholding tax at the rate of 30% on distributions treated as ordinary
income unless the tax is reduced or eliminated pursuant to a tax treaty or the distributions are
effectively connected with a U.S. trade or business of the shareholder; but distributions of net
capital gain (the excess of any net long-term capital gains over any net short-term capital losses)
including amounts retained by the Fund which are designated as undistributed capital gains, to such
a non-U.S. shareholder will not be subject to U.S. federal income or withholding tax unless the
distributions are effectively connected with the shareholders trade or business in the United
States or, in the case of a shareholder who is a nonresident alien individual, the shareholder is
present in the United States for 183 days or more during the taxable year and certain other
conditions are met.
Under a temporary position, which expired for taxable years of a fund beginning after December
31, 2009, non-U.S. shareholders generally are not subject to U.S. federal income tax withholding on
certain distributions of interest income and/or short-term capital gains that are designated by a
fund. It is possible that Congress may extend this provision on a temporary basis. In the event of
such an extension, the Fund may generally make designation of short-term gains, to the extent
permitted, but the Fund does not intend to make designations of any distributions attributable to
interest income. As a result, U.S. tax withholding would apply to distributions attributable to
interest income, dividends and other investment income earned by the Fund and, would also apply to
distributions of short-term gains, unless Congress extends the above provision.
Any capital gain realized by a non-U.S. shareholder upon a sale or redemption of shares of the
Fund will not be subject to U.S. federal income or withholding tax unless the gain is effectively
connected with the shareholders trade or business in the U.S., or in the case of a shareholder who
is a nonresident alien individual, the shareholder is present in the U.S. for 183 days or more
during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish the Fund with the proper IRS Form W-8 (
i.e.
, W-8BEN,
W-8ECI, W-8IMY or W-8EXP), or an acceptable substitute, may be subject to backup withholding at a
28% (scheduled to increase to 31% after 2010) rate on dividends (including capital gain dividends)
and on the proceeds of redemptions and exchanges.
Also, non-U.S. shareholders of the Fund may be subject to U.S. estate tax with respect to
their Fund shares.
Each shareholder who is not a U.S. person should consult his or her tax adviser regarding the
U.S. and non-U.S. tax consequences of ownership of shares of, and receipt of distributions from,
the Fund.
State and Local Taxes
The Fund may be subject to state or local taxes in certain jurisdictions in which the Fund may
be deemed to be doing business. A
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state income (and possibly local income and/or intangible property) tax exemption is generally
available to the extent (if any) the Funds distributions are derived from interest on (or, in the
case of intangible property taxes, the value of its assets is attributable to) certain U.S.
government obligations and/or tax exempt municipal obligations issued by or on behalf of the
particular state or a political subdivision thereof, provided in some states that certain
thresholds for holdings of such obligations and/or reporting requirements are satisfied. In
addition, in those states or localities which have income tax laws, the treatment of the Fund and
its shareholders under such laws may differ from their treatment under federal income tax laws, and
investment in the Fund may have tax consequences for shareholders different from those of a direct
investment in the Funds portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
PROXY VOTING
The Trust, on behalf of the Fund, has delegated the voting of portfolio securities to the
Investment Adviser. The Investment Adviser has adopted policies and procedures (the Policy) for
the voting of proxies on behalf of client accounts for which the Investment Adviser has voting
discretion, including the Fund. Under the Policy, the Investment Advisers guiding principles in
performing proxy voting are to make decisions that: (i) favor proposals that tend to maximize a
companys shareholder value; and (ii) are not influenced by conflicts of interest. These principles
reflect the Investment Advisers belief that sound corporate governance will create a framework
within which a company can be managed in the interests of its shareholders.
The principles and positions reflected in the Policy are designed to guide the Investment
Adviser in voting proxies, and not necessarily in making investment decisions. The Investment
Adviser periodically reviews the Policy to ensure that it continues to be consistent with the
Investment Advisers guiding principles.
Public Equity Investments
. To implement these guiding principles for investments in publicly-traded
equities, the Investment Adviser has developed customized proxy voting guidelines (the
Guidelines). The Guidelines embody the positions and factors the Investment Adviser generally
considers important in casting proxy votes. They address a wide variety of individual topics,
including, among other matters, shareholder voting rights, anti-takeover defenses, board
structures, the election of directors, executive and director compensation, reorganizations,
mergers, issues of corporate social responsibility and various shareholder proposals. Attached as
Appendix B is a summary of the Guidelines.
The Investment Adviser has retained a third-party proxy voting service (Proxy Service) to
assist in the implementation of certain proxy voting-related functions. Among its responsibilities,
the Proxy Service prepares a written analysis and recommendation (a Recommendation) of each proxy
vote that reflects the Proxy Services application of the GSAM Guidelines to the particular proxy
issues. While it is the Investment Advisers policy generally to follow the Guidelines and
recommendations, the Investment Advisers portfolio management teams (Portfolio Management Teams)
may on certain proxy votes seek approval to diverge from the Guidelines or a recommendation by
following an override process. Such decisions are subject to a review and approval process,
including a determination that the decision is not influenced by any conflict of interest. In
forming their views on particular matters, the Portfolio Management Teams are also permitted to
consider applicable regional rules and practices, including codes of conduct and other guides,
regarding proxy voting, in addition to the Guidelines and recommendations.
The Proxy Service assists in the implementation and administration of the proxy voting
function. The Proxy Service assists the Investment Adviser in the proxy voting process by providing
operational, recordkeeping and reporting services. In addition, the Proxy Service produces
Recommendations as previously discussed and provides assistance in the development and maintenance
of the GSAM Guidelines.
GSAM conducts periodic due diligence meetings with the Proxy Service which include, but are
not limited to, a review of the Proxy Services general organizational structure, new developments
with respect to research and technology, work flow improvements and internal due diligence with
respect to conflicts of interest. The Investment Adviser may hire other service providers to
replace or supplement the Proxy Service with respect to any of the services the Investment Adviser
currently receives from the Proxy Service.
The Investment Adviser has implemented procedures designed to prevent conflicts of interest
from influencing its proxy voting decisions. These procedures include the Investment Advisers use
of the Guidelines and recommendations and the override process, and the establishment of
information barriers between the Investment Adviser and other businesses within The Goldman Sachs
Group, Inc.
B-87
Fixed Income and Private Investments
.
Voting decisions with respect to fixed income securities and
the securities of privately held issuers generally will be made by the Funds managers based on
their assessment of the particular transactions or other matters at issue.
Information regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 will become available on or through the Funds website at
http://www.goldmansachsfunds.com and on the SECs website at
http://www.sec.gov
in August
of the same year.
PAYMENTS TO INTERMEDIARIES
The Investment Adviser, Distributor and/or their affiliates may make payments to Authorized
Institutions, Authorized Institutions and other financial intermediaries (Intermediaries) from
time to time to promote the sale, distribution and/or servicing of shares of the Fund. These
payments (Additional Payments) are made out of the Investment Advisers, Distributors and/or
their affiliates own assets, and are not an additional charge to the Fund or its shareholders. The
Additional Payments are in addition to the distribution and service fees paid by the Fund described
in the Funds Prospectus and this SAI, and are also in addition to the sales commissions payable to
Intermediaries as set forth in the Prospectus.
These Additional Payments are intended to compensate Intermediaries for, among other things:
marketing shares of the Fund, which may consist of payments relating to the Funds inclusion on
preferred or recommended fund lists or in certain sales programs from time to time sponsored by the
Intermediaries; access to the Intermediaries registered representatives or salespersons, including
at conferences and other meetings; assistance in training and education of personnel; finders or
referral fees for directing investors to the Fund; marketing support fees for providing
assistance in promoting the sale of Fund shares (which may include promotions in communications
with the Intermediaries customers, registered representatives and salespersons); and/or other
specified services intended to assist in the distribution and marketing of the Fund. In addition,
the Investment Adviser, Distributor and/or their affiliates may make Additional Payments (including
through sub-transfer agency and networking agreements) for subaccounting, administrative and/or
shareholder processing services that are in addition to the transfer agent, shareholder
administration, servicing and processing fees paid by the Fund. These payments may exceed amounts
earned on these assets by the Investment Adviser, Distributor and/or their affiliates for the
performance of these or similar services. The Additional Payments made by the Investment Adviser,
Distributor and their affiliates may be a fixed dollar amount; may be based on the number of
customer accounts maintained by an Intermediary; may be based on a percentage of the value of
shares sold to, or held by, customers of the Intermediary involved; or may be calculated on another
basis. Furthermore, the Investment Adviser, Distributor and/or their affiliates may, to the extent
permitted by applicable regulations, contribute to various non-cash and cash incentive arrangements
to promote the sale of shares, as well as sponsor various educational programs, sales contests
and/or promotions. The Investment Adviser, Distributor and their affiliates may also pay for the
travel expenses, meals, lodging and entertainment of Intermediaries and their salespersons and
guests in connection with educational, sales and promotional programs subject to applicable FINRA
regulations. The amount of these Additional Payments (excluding payments made through sub-transfer
agency and networking agreements) is normally not expected to exceed 0.50% (annualized) of the
amount sold or invested through the Intermediaries. The Additional Payments are negotiated based on
a range of factors, including but not limited to, ability to attract and retain assets (including
particular classes of the Funds shares), target markets, customer relationships, quality of
service and industry reputation. In addition, certain Intermediaries may have access to certain
research and investment services from the Investment Adviser, Distributor and/or their affiliates.
In certain cases, the Intermediary may not pay for these products or services. Such research and
investment services (Additional Services) may include research reports, economic analysis,
portfolio analysis tools, business planning services, certain marketing and investor education
materials and strategic asset allocation modeling.
The Additional Payments made by the Investment Adviser, Distributor and/or their affiliates or
the Additional Services received by an Intermediary may be different for different Intermediaries
and may vary with respect to the type of fund (
e.g.
, equity, fund, fixed income fund or money
market fund) sold by the Intermediary. In addition, the Additional Payment arrangements may include
breakpoints in compensation which provide that the percentage rate of compensation varies as the
dollar value of the amount sold or invested through an Intermediary increases. The presence of
these Additional Payments or Additional Services, the varying fee structure and the basis on which
an Intermediary compensates its registered representatives or salespersons may create an incentive
for a particular Intermediary, registered representative or salesperson to highlight, feature or
recommend the Fund based, at least in part, on the level of compensation paid.
For the fiscal year ended March 31, 2010, the Investment Adviser, Distributor and their
affiliates made Additional Payments out of their own assets to approximately 129 Intermediaries.
During the fiscal year ended March 31, 2010, the Investment Adviser, Distributor and their
affiliates paid to Intermediaries approximately $100.5 million in Additional Payments (excluding
payments made
B-88
through sub-transfer agency and networking agreements) with respect to all of the Fund of the
Trust and all of the Fund in an affiliated investment company, Goldman Sachs Variable Insurance
Trust.
Shareholders should contact their Authorized Institution or other Intermediary for more
information about the Additional Payments or Additional Services they receive and any potential
conflicts of interest. For additional questions, please contact Goldman Sachs Funds at
1-800-621-2550.
OTHER INFORMATION
Selective Disclosure of Portfolio Holdings
The Board of Trustees of the Trust and the Investment Adviser have adopted a policy on
selective disclosure of portfolio holdings in accordance with regulations that seek to ensure that
disclosure of information about portfolio securities is in the best interest of Fund shareholders
and to address the conflicts between the interests of Fund shareholders and its service providers.
The policy provides that neither the Fund nor its Investment Adviser, Distributor or any agent, or
any employee thereof (Fund Representative) will disclose the Funds portfolio holdings
information to any person other than in accordance with the policy. For purposes of the policy,
portfolio holdings information means the Funds actual portfolio holdings, as well as nonpublic
information about its trading strategies or pending transactions. Under the policy, neither the
Fund nor any Fund Representative may solicit or accept any compensation or other consideration in
connection with the disclosure of portfolio holdings information. The Fund Representative may
provide portfolio holdings information to third parties if such information has been included in
the Funds public filings with the SEC or is disclosed on the Funds publicly accessible website.
Information posted on the Funds website may be separately provided to any person commencing the
day after it is first published on the Funds website.
Portfolio holdings information that is not filed with the SEC or posted on the publicly
available website may be provided to third parties only if the third party recipients are required
to keep all portfolio holdings information confidential and are prohibited from trading on the
information they receive. Disclosure to such third parties must be approved in advance by the
Investment Advisers legal or compliance department. Disclosure to providers of auditing, custody,
proxy voting and other similar services for the Fund, as well as rating and ranking organizations,
will generally be permitted; however, information may be disclosed to other third parties
(including, without limitation, individuals, institutional investors, and intermediaries that sell
shares of the Fund,) only upon approval by the Funds Chief Compliance Officer, who must first
determine that the Fund has a legitimate business purpose for doing so and check with the Fund
Transfer Agent to ascertain whether the third party has been identified as an excessive trader. In
general, each recipient of non-public portfolio holdings information must sign a confidentiality
and non-trading agreement, although this requirement will not apply when the recipient is otherwise
subject to a duty of confidentiality. In accordance with the policy, the identity of those
recipients who receive non-public portfolio holdings information on an ongoing basis is as follows:
the Investment Adviser and their affiliates, the Funds independent registered public accounting
firm, the Funds custodian, the Funds legal counselDechert LLP, the Funds financial
printerBowne, and the Funds proxy voting serviceISS. KPMG LLP, an investor in the Fund, also
receives certain non-public holdings information on an ongoing basis in order to facilitate
compliance with the auditor independence requirements to which it is subject. In addition, the Fund
may provide non-public portfolio holdings information to Standard & Poors Rating Services to allow
the Fund to be rated by it and certain equity funds provide non-public portfolio holdings
information to FactSet, a provider of global financial and economic information. These entities
are obligated to keep such information confidential. Third party providers of custodial or
accounting services to the Fund may release non-public portfolio holdings information of the Fund
only with the permission of Fund Representatives. From time to time portfolio holdings information
may be provided to broker-dealers solely in connection with the Fund seeking portfolio securities
trading suggestions. In providing this information reasonable precautions, including limitations on
the scope of the portfolio holdings information disclosed, are taken to avoid any potential misuse
of the disclosed information. All marketing materials prepared by the Trusts principal underwriter
is reviewed by Goldman Sachs Compliance department for consistency with the Trusts portfolio
holdings disclosure policy.
The Fund currently intends to publish complete portfolio holdings on its website as of the end
of each fiscal quarter, subject to a thirty-one calendar day lag, and to post selected holdings
information monthly on a ten calendar day lag. The Fund may publish on the website complete
portfolio holdings information more frequently if it has a legitimate business purpose for doing
so.
Under the policy, Fund Representatives will initially supply the Board of the Trustees with a
list of third parties who receive portfolio holdings information pursuant to any ongoing
arrangement. In addition, the Board is to receive information, on a quarterly basis, regarding any
other disclosures of non-public portfolio holdings information that were permitted during the
preceding quarter. In addition, the Board of Trustees is to approve at its meetings a list of Fund
Representatives who are authorized to disclose portfolio holdings information under the policy. As
of June 17, 2010, only certain officers of the Trust as well as certain senior members of the
B-89
compliance and legal groups of the Investment Adviser have been approved by the Board of
Trustees to authorize disclosure of portfolio holdings information.
Miscellaneous
The Fund will redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder. The Fund, however, reserves the
right, in its sole discretion, to pay redemptions by a distribution in kind of securities (instead
of cash) if (i) the redemption exceeds the lesser of $250,000 or 1% of the net asset value of the
Fund at the time of redemption; or (ii) with respect to lesser redemption amounts, the redeeming
shareholder requests in writing a distribution in kind of securities instead of cash. The
securities distributed in kind would be valued for this purpose using the same method employed in
calculating the Funds net asset value per share. See Net Asset Value. If a shareholder receives
redemption proceeds in kind, the shareholder should expect to incur transaction costs upon the
disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by the Fund may be
suspended for more than seven days for any period during which the New York Stock Exchange is
closed, other than the customary weekends or holidays, or when trading on such Exchange is
restricted as determined by the SEC; or during any emergency, as determined by the SEC, as a result
of which it is not reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the SEC may by order
permit for the protection of shareholders of the Fund. (The Trust may also suspend or postpone the
recordation of the transfer of shares upon the occurrence of any of the foregoing conditions.)
As stated in the Prospectus, the Trust may authorize Authorized Institutions, Authorized
Institutions and other institutions that provide recordkeeping, reporting and processing services
to their customers to accept on the Trusts behalf purchase, redemption and exchange orders placed
by or on behalf of their customers and, if approved by the Trust, to designate other intermediaries
to accept such orders. These institutions may receive payments from the Trust or Goldman Sachs for
their services. Certain Authorized Institutions, Authorized Institutions or institutions may enter
into sub-transfer agency agreements with the Trust or Goldman Sachs with respect to their services.
In the interest of economy and convenience, the Trust does not issue certificates representing
the Funds shares. Instead, the transfer agent maintains a record of each shareholders ownership.
Each shareholder receives confirmation of purchase and redemption orders from the transfer agent.
Fund shares and any dividends and distributions paid by the Fund are reflected in account
statements from the transfer agent.
The Prospectus and this SAI do not contain all the information included in the Registration
Statement filed with the SEC under the 1933 Act with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted from the Prospectus
and this SAI pursuant to the rules and regulations of the SEC. The Registration Statement
including the exhibits filed therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this SAI as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this SAI form a part, each such statement being qualified in all respects
by such reference.
Line of Credit
The Fund may in the future participate in a $580,000,000 committed, unsecured revolving line
of credit facility together with other funds of the Trust and registered investment companies
having management or investment advisory agreements with GSAM or its affiliates. Pursuant to the
terms of this facility, the Fund and other borrowers may increase the credit amount by an
additional $340,000,000, for a total of up to $920,000,000. Under the most restrictive
arrangement, the Fund must own securities having a market value in excess of 300% of the Funds
total bank borrowings. This facility is to be used for temporary emergency purposes or to allow
for an orderly liquidation of securities to meet redemption requests. The interest rate on
borrowings is based on the federal funds rate. The facility also requires a fee to be paid by the
Fund based on the amount of the commitment that has not been utilized.
Large Trade Notifications
The Transfer Agent may from time to time receive notice that an Authorized Institution or
other financial intermediary has received an order for a large trade in the Funds shares. The Fund
may determine to enter into portfolio transactions in anticipation of
B-90
that order, even though the order will not be processed until the following business day. This
practice provides for a closer correlation between the time shareholders place trade orders and the
time the Fund enters into portfolio transactions based on those orders, and permits the Fund to be
more fully invested in investment securities, in the case of purchase orders, and to more orderly
liquidate their investment positions, in the case of redemption orders. On the other hand, the
Authorized Institution or other financial intermediary may not ultimately process the order. In
this case, the Fund may be required to borrow assets to settle the portfolio transactions entered
into in anticipation of that order, and would therefore incur borrowing costs. The Fund may also
suffer investment losses on those portfolio transactions. Conversely, the Fund would benefit from
any earnings and investment gains resulting from such portfolio transactions.
Corporate Actions
From time to time, the issuer of a security held in the Funds portfolio may initiate a
corporate action relating to that security. Corporate actions relating to equity securities may
include, among others, an offer to purchase new shares, or to tender existing shares, of that
security at a certain price. Corporate actions relating to debt securities may include, among
others, an offer for early redemption of the debt security, or an offer to convert the debt
security into stock. Certain corporate actions are voluntary, meaning that the Fund may only
participate in the corporate action if it elects to do so in a timely fashion. Participation in
certain corporate actions may enhance the value of the Funds investment portfolio.
In cases where the Fund or its Investment Adviser receives sufficient advance notice of a
voluntary corporate action, the Investment Adviser will exercise its discretion, in good faith, to
determine whether the Fund will participate in that corporate action. If the Fund or its Investment
Adviser does not receive sufficient advance notice of a voluntary corporate action, the Fund may
not be able to timely elect to participate in that corporate action. Participation or lack of
participation in a voluntary corporate action may result in a negative impact on the value of the
Funds investment portfolio.
FINANCIAL STATEMENTS
A copy of the annual report of the Fund (when available) may be obtained upon request and
without charge by writing Goldman, Sachs & Co., P.O. Box 06050, Chicago, Illinois 60606 or by
calling Goldman, Sachs & Co., at the telephone number on the back cover of the Funds Prospectus.
The annual report for the fiscal period ending March 31, 2011 will become available to investors in
May 2011.
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES, REDEMPTIONS, EXCHANGES
AND DIVIDENDS
(Class A Shares, Class C Shares and Class R Shares Only)
The following information supplements the information in the Prospectus under the captions
Shareholder Guide and Dividends. Please see the Prospectus for more complete information.
Maximum Sales Charges
Class A Shares of the Fund are sold with a maximum sales charge of 3.75%. Using the initial
net asset value per share, the maximum offering price of the Funds Class A shares would be as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Sales
|
|
Offering Price to
|
|
|
Net Asset Value
|
|
Charge
|
|
Public
|
Strategic Income Fund
|
|
$
|
10.00
|
|
|
|
3.75
|
%
|
|
$
|
10.39
|
|
The actual sales charge that is paid by an investor on the purchase of Class A Shares may
differ slightly from the sales charge listed above or in the Funds Prospectus due to rounding in
the calculations. As a result of such rounding in the calculations, the actual sales load paid by
an investor may be somewhat greater or somewhat lesser than that listed above or in the Prospectus.
Contact your financial advisor for further information.
B-91
Other Purchase Information/Sales Charge Waivers
Class A Shares of the Fund may be sold at NAV without payment of any sales charge to
state-sponsored 529 college savings plans. The sales charge waivers on the Funds shares are due
to the nature of the investors involved and/or the reduced sales effort that is needed to obtain
such investments.
At the discretion of the Trusts officers and in addition to the NAV purchases permitted in
the Funds Prospectus, Class A Shares of the Fund may also be sold at NAV without payment of any
sales charge for shares purchased through certain Section 401(k), profit sharing, money purchase
pension, tax-sheltered annuity, defined benefit pension, or other employee benefit (including
health savings accounts) or SIMPLE plans that are sponsored by one or more employers (including
governmental or church employers) or employee organizations investing in the Fund.
If shares of the Fund are held in a street name account with an Authorized Institution, all
recordkeeping, transaction processing and payments of distributions relating to the beneficial
owners account will be performed by the Authorized Institution, and not by the Fund and its
transfer agent. Since the Fund will have no record of the beneficial owners transactions, a
beneficial owner should contact the Authorized Institution to purchase, redeem or exchange shares,
to make changes in or give instructions concerning the account or to obtain information about the
account. The transfer of shares in a street name account to an account with another dealer or to
an account directly with the Fund involves special procedures and will require the beneficial owner
to obtain historical purchase information about the shares in the account from the Authorized
Institution.
Right of Accumulation (Class A)
A Class A shareholder qualifies for cumulative quantity discounts if the current purchase
price of the new investment plus the shareholders current holdings of existing Class A and/or
Class C Shares (acquired by purchase or exchange) of the Fund and Class A and/or Class C Shares of
any other Goldman Sachs Fund total the requisite amount for receiving a discount. For example, if
a shareholder owns shares with a current market value of $65,000 and purchases additional Class A
Shares of any Goldman Sachs Fund with a purchase price of $45,000, the sales charge for the $45,000
purchase would be 3.00% (the rate applicable to a single purchase of $100,000 but less than
$250,000). Class A and/or Class C Shares of the Fund and Class A and/or Class C Shares of any
other Goldman Sachs Fund purchased (i) by an individual, his spouse, his parents and his children,
and (ii) by a trustee, guardian or other fiduciary of a single trust estate or a single fiduciary
account, will be combined for the purpose of determining whether a purchase will qualify for such
right of accumulation and, if qualifying, the applicable sales charge level. For purposes of
applying the right of accumulation, shares of the Fund and any other Goldman Sachs Fund purchased
by an existing client of Goldman Sachs Wealth Management or GS Ayco Holding LLC will be combined
with Class A and/or Class C Shares and other assets held by all other Goldman Sachs Wealth
Management accounts or accounts of GS Ayco Holding LLC, respectively. In addition, Class A and/or
Class C Shares of the Fund and Class A and/or Class C Shares of any other Goldman Sachs Fund
purchased by partners, directors, officers or employees of the same business organization, groups
of individuals represented by and investing on the recommendation of the same accounting firm,
certain affinity groups or other similar organizations (collectively, eligible persons) may be
combined for the purpose of determining whether a purchase will qualify for the right of
accumulation and, if qualifying, the applicable sales charge level. This right of accumulation is
subject to the following conditions: (i) the business organizations, groups or firms agreement
to cooperate in the offering of the Funds shares to eligible persons; and (ii) notification to the
Fund at the time of purchase that the investor is eligible for this right of accumulation. In
addition, in connection with SIMPLE IRA accounts, cumulative quantity discounts are available on a
per plan basis if (i) your employee has been assigned a cumulative discount number by Goldman
Sachs; and (ii) your account, alone or in combination with the accounts of other plan participants
also invested in Class A and/or Class C Shares of the Goldman Sachs Funds, totals the requisite
aggregate amount as described in the Prospectus.
Statement of Intention (Class A)
If a shareholder anticipates purchasing at least $100,000 of Class A Shares of the Fund alone
or in combination with Class A Shares of any other Goldman Sachs Fund within a 13-month period, the
shareholder may purchase shares of the Fund at a reduced sales charge by submitting a Statement of
Intention (the Statement). Shares purchased pursuant to a Statement will be eligible for the
same sales charge discount that would have been available if all of the purchases had been made at
the same time. The shareholder or his Authorized Institution must inform Goldman Sachs that the
Statement is in effect each time shares are purchased. There is no obligation to purchase the full
amount of shares indicated in the Statement. A shareholder may include the value of all Class A
Shares on which a sales charge has previously been paid as an accumulation credit toward the
completion of the Statement, but a price readjustment will be made only on Class A Shares purchased
within ninety (90) days before submitting the Statement. The
B-92
Statement authorizes the transfer
agent to hold in escrow a sufficient number of shares which can be redeemed to make up any
difference in the sales charge on the amount actually invested. For purposes of satisfying the
amount specified on the Statement, the gross amount of each investment, exclusive of any
appreciation on shares previously purchased, will be taken into account.
The provisions applicable to the Statement, and the terms of the related escrow agreement, are
set forth in Appendix C to this SAI.
Cross-Reinvestment of Dividends and Distributions
Shareholders may receive dividends and distributions in additional shares of the same class of
the Fund or they may elect to receive them in cash or shares of the same class of other Goldman
Sachs Funds or ILA Service Shares of the Prime Obligations Portfolio or the Tax-Exempt Diversified
Portfolio, if they hold Class A Shares of the Fund, or ILA Class C Shares of the Prime Obligations
Portfolio, if they hold Class C Shares of the Fund (the ILA Portfolios).
The Fund shareholder should obtain and read the prospectus relating to any other Goldman Sachs
Fund or ILA Portfolio and its shares and consider its investment objective, policies and applicable
fees before electing cross-reinvestment into that Fund. The election to cross-reinvest dividends
and capital gain distributions will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then used to purchase
shares of the acquired fund. Such reinvestment of dividends and distributions in shares of other
Goldman Sachs Funds or ILA Portfolios is available only in states where such reinvestment may
legally be made.
Automatic Exchange Program
The Fund shareholder may elect to exchange automatically a specified dollar amount of shares
of the Fund for shares of the same class or an equivalent class of another Goldman Sachs Fund
provided the minimum initial investment requirement has been satisfied. The Fund shareholder
should obtain and read the prospectus relating to any other Goldman Sachs Fund and its shares and
consider its investment objective, policies and applicable fees and expenses before electing an
automatic exchange into that Goldman Sachs Fund.
Class C Exchanges
As stated in the Prospectus, Goldman Sachs normally begins paying the annual 0.75%
distribution fee on Class C Shares to Authorized Institutions after the shares have been held for
one year. When an Authorized Institution enters into an appropriate agreement with Goldman Sachs
and stops receiving this payment on Class C Shares that have been beneficially owned by the
Authorized Institutions customers for at least ten years, those Class C Shares may be exchanged
for Class A Shares (which bear a lower distribution fee) of the Fund at their relative net asset
value without a sales charge in recognition of the reduced payment to the Authorized Institution.
Exchanges from Collective Investment Trusts to Goldman Sachs Funds
The Investment Adviser manages a number of collective investment trusts that hold assets of
401(k) plans and other retirement plans (each, a Collective Investment Trust). An investor in a
Collective Investment Trust (or an Intermediary acting on behalf of the investor) may elect to
exchange some or all of the interests it holds in a Collective Investment Trust for shares of one
or more of the Goldman Sachs Funds. Generally speaking, Rule 22c-1 under the Act requires a
purchase order for shares of a Goldman Sachs Fund to be priced based on the current NAV of the
Goldman Sachs Fund that is next calculated after receipt of the purchase order. A Goldman Sachs
Fund will treat a purchase order component of an exchange from an investor in a Collective
Investment Trust as being received in good order at the time it is communicated to an Intermediary
or the Transfer Agent, if the amount of shares to be purchased is expressed as a percentage of the
value of the investors interest in a designated Collective Investment Trust that it is
contemporaneously redeeming (
e.g.
, if the investor communicates a desire to exchange 100% of its
interest in a Collective Investment Trust for shares of a Goldman Sachs Fund). The investors
purchase price and the number of Goldman Sachs Fund shares it will acquire will therefore be
calculated as of the pricing of the Collective Investment Trust on the day of the purchase order.
Such an order will be deemed to be irrevocable as of the time the Goldman Sachs Funds NAV is next
calculated after receipt of the purchase order. An investor should obtain and read the prospectus
relating to any Goldman Sachs Fund and its shares and consider its investment objective, policies
and applicable fees and expenses before electing an exchange into that Goldman Sachs Fund. For
federal income tax purposes, an exchange of interests in a Collective Investment Trust for shares
of a Goldman Sachs Fund may be subject to tax, and you should consult your tax adviser concerning
the tax consequences of an exchange.
B-93
Systematic Withdrawal Plan
A systematic withdrawal plan (the Systematic Withdrawal Plan) is available to shareholders
of the Fund whose shares are worth at least $5,000. The Systematic Withdrawal Plan provides for
monthly payments to the participating shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the Systematic Withdrawal Plan
are reinvested in additional full and fractional shares of the Fund at net asset value. The
transfer agent acts as agent for the shareholder in redeeming sufficient full and fractional shares
to provide the amount of the systematic withdrawal payment. The Systematic Withdrawal Plan may be
terminated at any time. Goldman Sachs reserves the right to initiate a fee of up to $5 per
withdrawal, upon thirty (30) days written notice to the shareholder. Withdrawal payments should
not be considered to be dividends, yield or income. If periodic withdrawals continuously exceed
new purchases and reinvested dividends and capital gains distributions, the shareholders original
investment will be correspondingly reduced and ultimately exhausted. The maintenance of a
withdrawal plan concurrently with purchases of additional Class A or Class C Shares would be
disadvantageous because of the sales charge imposed on purchases of Class A Shares or the
imposition of a CDSC on redemptions of Class A or Class C Shares. The CDSC applicable to Class A
or Class C Shares redeemed under a systematic withdrawal plan may be waived. See Shareholder
Guide in the Prospectus. In addition, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be reported for federal and state income tax purposes. A shareholder
should consult his or her own tax adviser with regard to the tax consequences of participating in
the Systematic Withdrawal Plan. For further information or to request a Systematic Withdrawal
Plan, please write or call the transfer agent.
DISTRIBUTION AND SERVICE PLANS
(Class A Shares, Class C Shares and Class R Shares Only)
Distribution and Service Plans
.
As described in the Prospectus, the Trust has
adopted, on behalf of Class A, Class C and Class R Shares of the Fund, distribution and service
plans (each a Plan). See Shareholder GuideDistribution and Service Fees in the Prospectus.
The distribution fees payable under the Plans are subject to Rule 12b-1 under the Act and finance
distribution and other services that are provided to investors in the Fund and enable the Fund to
offer investors the choice of investing in either Class A, Class C or Class R Shares when investing
in the Fund. In addition, distribution fees payable under the Plans may be used to assist the Fund
in reaching and maintaining asset levels that are efficient for the Funds operations and
investments.
The Plans for the Funds Class A, Class C and Class R Shares were most recently approved on
June 17, 2010 by a majority vote of the Trustees of the Trust, including a majority of the
non-interested Trustees of the Trust who have no direct or indirect financial interest in the
Plans, cast in person at a meeting called for the purpose of approving the Plans.
The compensation for distribution services payable under a Plan to Goldman Sachs may not
exceed 0.25%, 0.75% and 0.50% per annum of the Funds average daily net assets attributable to
Class A, Class C and Class R Shares, respectively, of the Fund.
Under the Plan for Class C Shares, Goldman Sachs is also entitled to receive a separate fee
for personal and account maintenance services equal on an annual basis to 0.25% of the Funds
average daily net assets attributable to Class C Shares. With respect to Class A and Class R
Shares, the Distributor at its discretion may use compensation for distribution services paid under
the Plan for personal and account maintenance services and expenses so long as such total
compensation under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Each Plan is a compensation plan which provides for the payment of a specified fee without
regard to the expenses actually incurred by Goldman Sachs. If such fee exceeds Goldman Sachs
expenses, Goldman Sachs may realize a profit from these arrangements. The distribution fees
received by Goldman Sachs under the Plans and CDSC on Class A, Class C and Class R Shares may be
sold by Goldman Sachs as distributor to entities which provide financing for payments to Authorized
Institutions in respect of sales of Class A, Class C and Class R Shares. To the extent such fees
are not paid to such dealers, Goldman Sachs may retain such fees as compensation for its services
and expenses of distributing the Funds Class A, Class C and Class R Shares.
Under each Plan, Goldman Sachs, as distributor of the Funds Class A, Class C and Class R
Shares, will provide to the Trustees of the Trust for their review, and the Trustees of the Trust
will review at least quarterly a written report of the services provided and amounts expended by
Goldman Sachs under the Plans and the purposes for which such services were performed and
expenditures were made.
B-94
The Plans will remain in effect until June 30, 2011 and from year to year thereafter, provided
that such continuance is approved annually by a majority vote of the Trustees of the Trust,
including a majority of the non-interested Trustees of the Trust who have no direct or indirect
financial interest in the Plans. The Plans may not be amended to increase materially the amount of
distribution compensation described therein without approval of a majority of the outstanding Class
A, Class C or Class R Shares of the Fund and affected share class but may be amended without
shareholder approval to increase materially the amount of non-distribution compensation. All
material amendments of a Plan must also be approved by the Trustees of the Trust in the manner
described above. A Plan may be terminated at any time as to the Fund without payment of any
penalty by a vote of a majority of the non-interested Trustees of the Trust or by vote of a
majority of the Class A, Class C or Class R Shares, respectively, of the Fund and affected share
class. If a Plan was terminated by the Trustees of the Trust and no successor plan was adopted,
the Fund would cease to make payments to Goldman Sachs under the Plan and Goldman Sachs would be
unable to recover the amount of any of its unreimbursed expenditures. So long as a Plan is in
effect, the selection and nomination of non-interested Trustees of the Trust will be committed to
the discretion of the non-interested Trustees of the Trust. The Trustees of the Trust have
determined that in their judgment there is a reasonable likelihood that the Plans will benefit the
Fund and its Class A, Class C and Class R shareholders.
B-95
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Short-Term Credit Ratings
A Standard & Poors short-term issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation having an original
maturity of no more than 365 days. The following summarizes the rating categories used by Standard
& Poors for short-term issues:
A-1 A short-term obligation rated A-1 is rated in the highest category by Standard &
Poors. The obligors capacity to meet its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+). This indicates that the
obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. Ratings of B-1, B-2, and B-3 may be assigned to indicate finer distinctions
within the B category. The obligor currently has the capacity to meet its financial commitment on
the obligation; however, it faces major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated B-1 is regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated B-2 is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated B-3 is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments
over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors 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 or the
taking of a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks Country risk considerations are a standard part
of Standard & Poors analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligors capacity to repay foreign currency obligations may be
lower than its capacity to repay obligations in its local currency due to the sovereign
governments own relatively lower capacity to repay external versus domestic debt. These sovereign
risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign
Currency issuer ratings are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
Moodys Investors Service (Moodys) short-term ratings are opinions of the ability of
issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations generally have an original
maturity not exceeding thirteen months, unless explicitly noted.
Moodys employs the following designations to indicate the relative repayment ability of rated
issuers:
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
1-A
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories.
Fitch, Inc. / Fitch Ratings Ltd. (Fitch) short-term ratings scale applies to foreign
currency and local currency ratings. A short-term rating has a time horizon of less than 13 months
for most obligations, or up to three years for U.S. public finance, in line with industry
standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that
are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on
the liquidity necessary to meet financial commitments in a timely manner. The following summarizes
the rating categories used by Fitch for short-term obligations:
F1 Securities possess the highest credit quality. This designation indicates the
strongest capacity for timely payment of financial commitments; may have an added + to denote any
exceptionally strong credit feature.
F2 Securities possess good credit quality. This designation indicates a satisfactory
capacity for timely payment of financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 Securities possess fair credit quality. This designation indicates that the capacity
for timely payment of financial commitments is adequate; however, near term adverse changes could
result in a reduction to non investment grade.
B Securities possess speculative credit quality. This designation indicates minimal
capacity for timely payment of financial commitments, plus vulnerability to near term adverse
changes in financial and economic conditions.
C Securities possess high default risk. Default is a real possibility. This designation
indicates a capacity for meeting financial commitments which is solely reliant upon a sustained,
favorable business and economic environment.
D Indicates an entity or sovereign that has defaulted on all of its financial
obligations.
NR This designation indicates that Fitch does not publicly rate the associated issuer or
issue.
WD This designation indicates that the rating has been withdrawn and is no longer
maintained by Fitch.
The following summarizes the ratings used by Dominion Bond Rating Service Limited (DBRS) for
commercial paper and short-term debt:
R-1 (high) Short-term debt rated R-1 (high) is of the highest credit quality, and
indicates an entity possessing unquestioned ability to repay current liabilities as they fall due.
Entities rated in this category normally maintain strong liquidity positions, conservative debt
levels, and profitability that is both stable and above average. Companies achieving an R-1
(high) rating are normally leaders in structurally sound industry segments with proven track
records, sustainable positive future results, and no substantial qualifying negative factors. Given
the extremely tough definition DBRS has established for an R-1 (high), few entities are strong
enough to achieve this rating.
R-1 (middle) Short-term debt rated R-1 (middle) is of superior credit quality and, in
most cases, ratings in this category differ from R-1 (high) credits by only a small degree. Given
the extremely tough definition DBRS has established for the R-1 (high) category, entities rated
R-1 (middle) are also considered strong credits, and typically exemplify above average strength
in key areas of consideration for the timely repayment of short-term liabilities.
R-1 (low) Short-term debt rated R-1 (low) is of satisfactory credit quality. The
overall strength and outlook for key liquidity, debt and profitability ratios are not normally as
favorable as with higher rating categories, but these considerations are still respectable. Any
qualifying negative factors that exist are considered manageable, and the entity is normally of
sufficient size to have some influence in its industry.
R-2 (high) Short-term debt rated R-2 (high) is considered to be at the upper end of
adequate credit quality. The ability to repay obligations as they mature remains acceptable,
although the overall strength and outlook for key liquidity, debt, and profitability ratios is not
as strong as credits rated in the R-1 (low) category. Relative to the latter category, other
shortcomings often include areas such as stability, financial flexibility, and the relative size
and market position of the entity within its industry.
R-2 (middle) Short-term debt rated R-2 (middle) is considered to be of adequate credit
quality. Relative to the R-2 (high) category, entities rated R-2 (middle) typically have some
combination of higher volatility, weaker debt or liquidity positions, lower future cash flow
capabilities, or are negatively impacted by a weaker industry. Ratings in this category would be
more vulnerable to adverse changes in financial and economic conditions.
R-2 (low) Short-term debt rated R-2 (low) is considered to be at the lower end of
adequate credit quality, typically having some combination of challenges that are not acceptable
for an R-2 (middle) credit. However, R-2 (low) ratings still display a level of credit strength
that allows for a higher rating than the R-3 category, with this distinction often reflecting the
issuers liquidity profile.
2-A
R-3 Short-term debt rated R-3 is considered to be at the lowest end of adequate credit
quality, one step up from being speculative. While not yet defined as speculative, the R-3
category signifies that although repayment is still expected, the certainty of repayment could be impacted by a variety of possible adverse developments,
many of which would be outside the issuers control. Entities in this area often have limited
access to capital markets and may also have limitations in securing alternative sources of
liquidity, particularly during periods of weak economic conditions.
R-4 Short-term debt rated R-4 is speculative. R-4 credits tend to have weak liquidity
and debt ratios, and the future trend of these ratios is also unclear. Due to its speculative
nature, companies with R-4 ratings would normally have very limited access to alternative sources
of liquidity. Earnings and cash flow would typically be very unstable, and the level of overall
profitability of the entity is also likely to be low. The industry environment may be weak, and
strong negative qualifying factors are also likely to be present.
R-5 Short-tern debt rated R-5 is highly speculative. There is a reasonably high level
of uncertainty as to the ability of the entity to repay the obligations on a continuing basis in
the future, especially in periods of economic recession or industry adversity. In some cases, short
term debt rated R-5 may have challenges that if not corrected, could lead to default.
D A security rated D implies the issuer has either not met a scheduled payment or the
issuer has made it clear that it will be missing such a payment in the near future. In some cases,
DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace
periods may exist in the underlying legal documentation. Once assigned, the D rating will
continue as long as the missed payment continues to be in arrears, and until such time as the
rating is discontinued or reinstated by DBRS.
Long-Term Credit Ratings
The following summarizes the ratings used by Standard & Poors for long-term issues:
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The
obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only to a small
degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher-rated categories. However, the
obligors capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial,
or economic conditions which could lead to the obligors inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair the obligors capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C A C rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or
obligations of an issuer that is the subject of a bankruptcy petition or similar action which have
not experienced a payment default. Among others, the C rating may be assigned to subordinated
debt, preferred stock or other obligations on which cash payments have been suspended in accordance
with the instruments terms.
D An obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such
3-A
payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poors does not rate a particular
obligation as a matter of policy.
Local Currency and Foreign Currency Risks Country risk considerations are a standard part
of Standard & Poors analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligors capacity to repay foreign currency obligations may be
lower than its capacity to repay obligations in its local currency due to the sovereign
governments own relatively lower capacity to repay external versus domestic debt. These sovereign
risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign
currency issuer ratings are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
The following summarizes the ratings used by Moodys for long-term debt:
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit
risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low
credit risk.
A Obligations rated A are considered upper-medium grade and are subject to low credit
risk.
Baa Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit risk.
Caa Obligations rated Caa are judged to be of poor standing and are subject to very
high credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal or interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category.
The following summarizes long-term ratings used by Fitch:
AAA Securities considered to be of the highest credit quality. AAA ratings denote the
lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events.
AA Securities considered to be of very high credit quality. AA ratings denote
expectations of very low credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
A Securities considered to be of high credit quality. A ratings denote expectations of
low credit risk. The capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Securities considered to be of good credit quality. BBB ratings indicate that there
is currently expectations of low credit risk. The capacity for payment of financial commitments is
considered adequate but adverse changes in circumstances and economic conditions are more likely to
impair this capacity. This is the lowest investment grade category.
BB Securities considered to be speculative. BB ratings indicate that there is a
possibility of credit risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow financial commitments
to be met. Securities rated in this category are not investment grade.
B Securities considered to be highly speculative. For issuers and performing obligations,
B ratings indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic environment. For individual
obligations, may indicate distressed or defaulted obligations with potential for extremely high
recoveries. Such obligations would possess a Recovery Rating of RR1 (outstanding).
4-A
CCC For issuers and performing obligations, default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable business or economic
conditions. For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior levels of recovery.
Differences in credit quality may be denoted by plus/minus distinctions. Such obligations
typically would possess a Recovery Rating of RR2 (superior), or RR3 (good) or RR4 (average).
CC For issuers and performing obligations, default of some kind appears probable. For
individual obligations, may indicate distressed or defaulted obligations with a Recovery Rating of
RR4 (average) or RR5 (below average).
C For issuers and performing obligations, default is imminent. For individual
obligations, may indicate distressed or defaulted obligations with potential for below-average to
poor recoveries. Such obligations would possess a Recovery Rating of RR6 (poor).
RD Indicates an entity that has failed to make due payments (within the applicable grace
period) on some but not all material financial obligations, but continues to honor other classes of
obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial
obligations.
Plus (+) or minus (-) may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the AAA category or to categories below CCC.
NR Denotes that Fitch does not publicly rate the associated issue or issuer.
WD Indicates that the rating has been withdrawn and is no longer maintained by Fitch.
The following summarizes the ratings used by DBRS for long-term debt:
AAA Long-term debt rated AAA is of the highest credit quality, with exceptionally
strong protection for the timely repayment of principal and interest. Earnings are considered
stable, the structure of the industry in which the entity operates is strong, and the outlook for
future profitability is favorable. There are few qualifying factors present that would detract from
the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and
the entity has established a credible track record of superior performance. Given the extremely
high standard that DBRS has set for this category, few entities are able to achieve a AAA rating.
AA Long-term debt rated AA is of superior credit quality, and protection of interest
and principal is considered high. In many cases they differ from long-term debt rated AAA only to
a small degree. Given the extremely restrictive definition DBRS has for the AAA category,
entities rated AA are also considered to be strong credits, typically exemplifying above-average
strength in key areas of consideration and unlikely to be significantly affected by reasonably
foreseeable events.
A Long-term debt rated A is of satisfactory credit quality. Protection of interest and
principal is still substantial, but the degree of strength is less than that of AA rated
entities. While A is a respectable rating, entities in this category are considered to be more
susceptible to adverse economic conditions and have greater cyclical tendencies than higher-rated
securities.
BBB Long-term debt rated BBB is of adequate credit quality
.
Protection of interest and
principal is considered acceptable, but the entity is fairly susceptible to adverse changes in
financial and economic conditions, or there may be other adverse conditions present which reduce
the strength of the entity and its rated securities.
BB
Long-term debt rated BB is defined to be speculative and non-investment grade, where
the degree of protection afforded interest and principal is uncertain, particularly during periods
of economic recession. Entities in the BB range typically have limited access to capital markets
and additional liquidity support. In many cases, deficiencies in critical mass, diversification,
and competitive strength are additional negative considerations.
B Long-term debt rated B is considered highly speculative and there is a reasonably
high level of uncertainty as to the ability of the entity to pay interest and principal on a
continuing basis in the future, especially in periods of economic recession or industry adversity.
CCC, CC and C Long-term debt rated in any of these categories is very highly
speculative and is in danger of default of interest and principal. The degree of adverse elements
present is more severe than long-term debt rated B. Long-term debt rated below B often have
features which, if not remedied, may lead to default. In practice, there is little difference
between these three categories, with CC and C normally used for lower ranking debt of companies
for which the senior debt is rated in the CCC to B range.
D
A security rated D implies the issuer has either not met a scheduled payment of
interest or principal or that the issuer has made it clear that it will miss such a payment in the
near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement
scenario, as allowances for grace periods may exist in the underlying legal documentation.
5-A
Once assigned, the D rating will continue as long as the missed payment continues to be in arrears,
and until such time as the rating is discontinued or reinstated by DBRS.
(high, low) Each rating category is denoted by the subcategories high and low. The
absence of either a high or low designation indicates the rating is in the middle of the
category. The AAA and D categories do not utilize high, middle, and low as differential
grades.
Municipal Note Ratings
A Standard & Poors U.S. municipal note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely receive a note rating.
Notes maturing beyond three years will most likely receive a long-term debt rating. The following
criteria will be used in making that assessment:
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Amortization schedule-the larger the final maturity relative to other maturities, the
more likely it will be treated as a note; and
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Source of payment-the more dependent the issue is on the market for its refinancing, the
more likely it will be treated as a note.
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Note rating symbols are as follows:
SP-1 The issuers of these municipal notes exhibit a strong capacity to pay principal and
interest. Those issues determined to possess a very strong capacity to pay debt service are given a
plus (+) designation.
SP-2 The issuers of these municipal notes exhibit a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 The issuers of these municipal notes exhibit speculative capacity to pay principal
and interest.
Moodys uses three rating categories for short-term municipal obligations that are considered
investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are
divided into three levels MIG-1 through MIG-3. In addition, those short-term obligations
that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at
the maturity of the obligation. The following summarizes the ratings used by Moodys for these
short-term obligations:
MIG-1 This designation denotes superior credit quality. Excellent protection is afforded
by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to
the market for refinancing.
MIG-2 This designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group.
MIG-3 This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments in this
category may lack sufficient margins of protection.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned;
a long- or short-term debt rating and a demand obligation rating. The first element represents
Moodys evaluation of the degree of risk associated with scheduled principal and interest payments.
The second element represents Moodys evaluation of the degree of risk associated with the ability
to receive purchase price upon demand (demand feature), using a variation of the MIG rating
scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated
NR,
e.g.
, Aaa/NR or NR/VMIG-1.
VMIG rating expirations are a function of each issues specific structural or credit features.
VMIG-1 This designation denotes superior credit quality. Excellent protection is afforded
by the superior short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
VMIG-2 This designation denotes strong credit quality. Good protection is afforded by the
strong short-term credit strength of the liquidity provider and structural and legal protections
that ensure the timely payment of purchase price upon demand.
6-A
VMIG-3 This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon demand.
SG This designation denotes speculative-grade credit quality. Demand features rated in
this category may be supported by a liquidity provider that does not have an investment grade
short-term rating or may lack the structural and/or legal protections necessary to ensure the
timely payment of purchase price upon demand.
Fitch uses the same ratings for municipal securities as described above for other short-term
credit ratings.
About Credit Ratings
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor
with respect to a specific financial obligation, a specific class of financial obligations, or a
specific financial program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms
of credit enhancement on the obligation and takes into account the currency in which the obligation
is denominated. The issue credit rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or suitability for a
particular investor.
Moodys credit ratings must be construed solely as statements of opinion and not as statements of
fact or recommendations to purchase, sell or hold any securities.
Fitchs credit ratings provide an opinion on the relative ability of an entity to meet financial
commitments, such as interest, preferred dividends, repayment of principal, insurance claims or
counterparty obligations. Fitch credit ratings are used by investors as indications of the
likelihood of receiving their money back in accordance with the terms on which they invested.
Fitchs credit ratings cover the global spectrum of corporate, sovereign (including supranational
and sub-national), financial, bank, insurance, municipal and other public finance entities and the
securities or other obligations they issue, as well as structured finance securities backed by
receivables or other financial assets.
DBRS credit ratings are not buy, hold or sell recommendations, but rather the result of qualitative
and quantitative analysis focusing solely on the credit quality of the issuer and its underlying
obligations.
7-A
APPENDIX B:
GSAM PROXY VOTING GUIDELINES
Effective for Meetings on or after March 1, 2010
Updated March 1, 2010
The following is a summary of the GSAM Proxy Voting Guidelines (the Guidelines), which form the
substantive basis of GSAMs Policy on Proxy Voting for Client Accounts (Policy). As described in
the main body of the Policy, one or more GSAM portfolio management teams may diverge from the
Guidelines and a related Recommendation on any particular proxy vote or in connection with any
individual investment decision in accordance with the override process described in the Policy.
The following section is a summary of the Guidelines, which form the substantive basis of the
Policy with respect to U.S. public equity investments.
1. Operational Items
Auditor Ratification
Vote FOR proposals to ratify auditors, unless any of the following apply:
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An auditor has a financial interest in or association with the company, and is
therefore not independent;
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There is reason to believe that the independent auditor has rendered an opinion
which is neither accurate nor indicative of the companys financial position;
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Poor accounting practices are identified that rise to a serious level of concern,
such as: fraud; misapplication of GAAP; and material weaknesses identified in Section
404 disclosures; or
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Fees for non-audit services (Other fees) are excessive.
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Non-audit fees are excessive if:
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Non-audit (other) fees exceed audit fees + audit-related fees + tax
compliance/preparation fees
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Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors
from engaging in non-audit services taking into account issues that are consistent with SEC rules
adopted to fulfill the mandate of Sarbanes Oxley such as an audit firm providing services that
would impair its independence or the overall scope and disclosure of fees for all services done by
the audit firm.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation, taking into account:
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The tenure of the audit firm;
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The length of rotation specified in the proposal;
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Any significant audit-related issues at the company;
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The number of Audit Committee meetings held each year;
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The number of financial experts serving on the committee; and
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Whether the company has a periodic renewal process where the auditor is evaluated
for both audit quality and competitive price.
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2. Board of Directors
Where applicable, the New York Stock Exchange or NASDAQ Listing Standards definition is to be used
to classify directors as insiders or affiliated outsiders:
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Employee of the company or one of its affiliates
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Among the five most highly paid individuals (excluding interim CEO)
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Listed as an officer as defined under Section 16 of the Securities and Exchange Act of 1934
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Current interim CEO
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Beneficial owner of more than 50 percent of the companys voting
power (this may be aggregated if voting power is distributed among more than one
member of a defined group)
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Affiliated Outside Director (AO)
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Board attestation that an outside director is not independent
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1-B
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Former CEO or other executive of the company within the last three years
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Former CEO or other executive of an acquired company within the past three years
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Former interim CEO if the service was longer than eighteen
months. If the service was between twelve and eighteen months an assessment of
the interim CEOs employment agreement will be made
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Not independent under applicable listing standards
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Independent Outside Director
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No material connection to the company other than a board seat
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Voting on Director Nominees in Uncontested Elections
Vote on director nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD from individual directors who:
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Attend less than 75 percent of the board and committee meetings without a valid
excuse, such as illness, service to the nation, work on behalf of the company, or
funeral obligations or start date after the middle of the year. If the company
provides meaningful public or nonmaterial private disclosure explaining the directors
absences, evaluate the information on a CASE-BY-CASE basis taking into account the
following factors:
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Degree to which absences were due to an unavoidable conflict;
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Pattern of absenteeism; and
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Other extraordinary circumstances underlying the directors absence;
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Sit on more than six public company boards;
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Are CEOs of public companies who sit on the boards of more than two public companies
besides their ownwithhold only at their outside boards.
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Other items considered for an AGAINST vote include specific concerns about the individual or the
company, such as criminal wrongdoing or breach of fiduciary responsibilities, sanctions from
government or authority, violations of laws and regulations, or other issues related to improper
business practice.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except from new nominees,
who should be considered on a CASE-BY-CASE basis and except as discussed below) if:
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The companys poison pill has a dead-hand or modified dead-hand feature. Vote
against/withhold every year until this feature is removed; however, vote against the
poison pill if there is one on the ballot with this feature rather than the director;
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The board adopts or renews a poison pill without shareholder approval, does not
commit to putting it to shareholder vote within 12 months of adoption (or in the case
of an newly public company, does not commit to put the pill to a shareholder vote
within 12 months following the IPO), or reneges on a commitment to put the pill to a
vote, and has not yet received a withhold/against recommendation for this issue;
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The board failed to act on a shareholder proposal that received approval of the
majority of shares cast for the previous two consecutive years (a management proposal
with other than a FOR recommendation by management will not be considered as sufficient
action taken); an adopted proposal that is substantially similar to the original
shareholder proposal will be deemed sufficient; (in this case vote AGAINST the members
of the committee of the board that is responsible for the issue under consideration, or
in the cases of classified boards against the independent Chairman or lead director);
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The board failed to act on takeover offers where the majority of the shareholders
tendered their shares;
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At the previous board election, any director received more than 50 percent
withhold/against votes of the shares cast and the company has failed to address the
underlying issue(s) that caused the high withhold/against vote; (in this case should
not be an automatic vote against the entire board; instead should be against the
nominating committee if there is one; if there is no nominating committee then vote
against the outside directors that are performing nominating committee duties.);
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The board is classified, and a continuing director responsible for a problematic
governance issue at the board/committee level that would warrant a withhold/against
vote recommendation is not up for election any or all appropriate nominees (except
new) may be held accountable;
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The board lacks accountability and oversight, coupled with sustained poor
performance relative to peers. Sustained poor performance is measured by one- and
three-year total shareholder returns in the bottom half of a companys four-digit GICS
industry group (Russell 3000 companies only).
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2-B
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors (per the
Classification of Directors below) when:
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The inside or affiliated outside director serves on any of the three key committees:
audit, compensation, or nominating;
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The company lacks an audit, compensation, or nominating committee so that the full
board functions as that committee;
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The company lacks a formal nominating committee, even if the board attests that the
independent directors fulfill the functions of such a committee;
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The full board is less than majority independent; (in this case withhold from
affiliated outside directors). At controlled companies, GSAM will vote against the
election of affiliated outsiders and nominees affiliated with the parent and will not
vote against the executives of the issuer.
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Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
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The non-audit fees paid to the auditor are excessive;
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The company receives an adverse opinion on the companys financial statements from
its auditor; or
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There is persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the company, or
its shareholders, to pursue legitimate legal recourse against the audit firm.
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Vote CASE-by-CASE on members of the Audit Committee and/or the full board if poor accounting
practices, which rise to a level of serious concern are identified, such as: fraud; misapplication
of GAAP; and material weaknesses identified in Section 404 disclosures.
Examine the severity, breadth, chronological sequence and duration, as well as the companys
efforts at remediation or corrective actions in determining whether negative vote recommendations
are warranted against the members of the Audit Committee who are responsible for the poor
accounting practices, or the entire board.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if one or more of the
following poor pay practices exist and there is no Management Say on Pay Proposal (MSOP). If no
Compensation Committee members are up for election (i.e., board is classified)and there is not a
proposal for which GSAM could instead vote FOR declassification, then WITHHOLD from other members
up for reelection if one or more of the following poor pay practices exist:
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There is a negative correlation between the chief executives pay and company
performance (see discussion under Equity Compensation Plans);
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The company reprices underwater options for stock, cash or other consideration
without prior shareholder approval, even if allowed in their equity plan;
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The company fails to submit one-time transfers of stock options to a shareholder
vote;
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The company fails to fulfill the terms of a burn rate commitment they made to
shareholders;
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The company has backdated options (see Options Backdating policy);
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The company has poor compensation practices (see Pay Practices policy). Poor pay
practices may warrant withholding votes from the CEO and potentially the entire board
as well.
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Vote AGAINST or WITHHOLD from directors, individually or the entire board, for egregious actions or
failure to replace management as appropriate.
3-B
Independent Chair (Separate Chair/CEO)
Vote on a CASE-BY-CASE basis. (Apply the below criteria only when management is AGAINST the
proposal; if management is FOR it, vote FOR it.) GSAM will generally recommend a vote AGAINST
proposals requiring that the chairmans position be filled by an independent director, if the
company satisfies 3 of the 4 following criteria:
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Designated lead director, elected by and from the independent board members with
clearly delineated and comprehensive duties. (The role may alternatively reside with a
presiding director, vice chairman, or rotating lead director; however the director must
serve a minimum of one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
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presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent directors;
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serves as liaison between the chairman and the independent directors;
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approves information sent to the board;
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approves meeting agendas for the board;
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approves meeting schedules to assure that there is sufficient
time for discussion of all agenda items;
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has the authority to call meetings of the independent directors;
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if requested by major shareholders, ensures that he is available
for consultation and direct communication;
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Two-thirds independent board;
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All independent key committees; or
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Established, disclosed governance guidelines.
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Majority Vote Shareholder Proposals
Generally vote FOR precatory and binding resolutions requesting that the board change the companys
bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast,
provided it does not conflict with the state law where the company is incorporated. Binding
resolutions need to allow for a carve-out for a plurality vote standard when there are more
nominees than board seats. Majority voting is the preferred voting method preferred by GSAM.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director
resignation policy) that provides guidelines so that the company will promptly address the
situation of a holdover director.
Cumulative Vote Shareholder Proposals GSAM will generally support shareholder proposals to restore
or provide cumulative voting unless:
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The company has adopted majority vote standard with a carve-out for plurality voting in
situations where there are more nominees than seats, and a director resignation policy to
address failed elections.
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Performance/Governance Evaluation for Directors
Vote WITHHOLD/AGAINST on all director nominees if the board lacks accountability and oversight,
coupled with sustained poor performance relative to peers, measured by one- and three-year total
shareholder returns in the bottom half of a companys four-digit GICS industry group (Russell 3000
companies only).
Evaluate board accountability and oversight at companies that demonstrate sustained poor
performance. Problematic provisions include but are not limited to:
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a classified board structure;
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a supermajority vote requirement;
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majority vote standard for director elections with no carve out for contested
elections;
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the inability of shareholders to call special meetings or the inability of
shareholders to act by written consent;
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a dual-class structure; and/or
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a non-shareholder approved poison pill.
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If a company exhibits sustained poor performance coupled with a lack of board accountability and
oversight, also take into consideration the companys five-year total shareholder return and
five-year operational metrics in the evaluation.
3. Proxy Contests
Voting for Director Nominees in Contested Elections
4-B
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following
factors:
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Long-term financial performance of the target company relative to its industry;
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Managements track record;
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Background to the proxy contest;
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Qualifications of director nominees (both slates);
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Strategic plan of dissident slate and quality of critique against management;
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Likelihood that the proposed goals and objectives can be achieved (both slates);
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Stock ownership positions.
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Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When voting in
conjunction with support of a dissident slate, vote FOR the reimbursement of all appropriate proxy
solicitation expenses associated with the election.
Generally vote FOR shareholder proposals calling for the reimbursement of reasonable costs incurred
in connection with nominating one or more candidates in a contested election where the following
apply:
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The election of fewer than 50% of the directors to be elected is contested in the
election;
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One or more of the dissidents candidates is elected;
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Shareholders are not permitted to cumulate their votes for directors; and
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The election occurred, and the expenses were incurred, after the adoption of this
bylaw.
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4. Antitakeover Defenses and Voting Related Issues
Advance Notice Requirements for Shareholder Proposals/Nominations
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that allow shareholders
to submit proposals/nominations reasonably close to the meeting date and within the broadest window
possible, recognizing the need to allow sufficient notice for company, regulatory and shareholder
review.
To be reasonable, the companys deadline for shareholder notice of a proposal/ nominations must not
be more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the
deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a
proponents economic and voting position in the company so long as the informational requirements
are reasonable and aimed at providing shareholders with the necessary information to review such
proposal.
Poison Pills
Vote FOR shareholder proposals requesting that the company submit its poison pill to a shareholder
vote or redeem it UNLESS the company has: (1) A shareholder approved poison pill in place; or (2)
the company has adopted a policy concerning the adoption of a pill in the future specifying that
the board will only adopt a shareholder rights plan if either:
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Shareholders have approved the adoption of the plan; or
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The board, in exercising its fiduciary responsibilities, determines that it is in
the best interest of shareholders under the circumstances to adopt a pill without the
delay that would result from seeking stockholder approval (i.e., the fiduciary out
provision). A poison pill adopted under this fiduciary out will be put to a
shareholder ratification vote within 12 months of adoption or expire. If the pill is
not approved by a majority of the votes cast on this issue, the plan will immediately
terminate.
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Vote FOR shareholder proposals calling for poison pills to be put to a vote within a time period of
less than one year after adoption. If the company has no non-shareholder approved poison pill in
place and has adopted a policy with the provisions outlined above, vote AGAINST the proposal. If
these conditions are not met, vote FOR the proposal, but with the caveat that a vote within 12
months would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing on the features of
the shareholder rights plan. Rights plans should contain the following attributes:
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No lower than a 20% trigger, flip-in or flip-over;
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A term of no more than three years;
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5-B
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No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a
future board to redeem the pill;
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Shareholder redemption feature (qualifying offer clause); if the board refuses to
redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares
may call a special meeting or seek a written consent to vote on rescinding the pill.
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In addition, the rationale for adopting the pill should be thoroughly explained by the company. In
examining the request for the pill, take into consideration the companys existing governance
structure, including: board independence, existing takeover defenses, and any problematic
governance concerns.
For management proposals to adopt a poison pill for the stated purpose of preserving a companys
net operating losses (NOL pills), the following factors should be considered:
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the trigger (NOL pills generally have a trigger slightly below 5%);
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the value of the NOLs;
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the term;
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shareholder protection mechanisms (sunset provision, causing expiration of the pill
upon exhaustion or expiration of NOLs); and
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other factors that may be applicable.
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In addition, vote WITHHOLD/AGAINST the entire board of directors, (except new nominees, who should
be considered on a CASE-by-CASE basis) if the board adopts or renews a poison pill without
shareholder approval, does not commit to putting it to a shareholder vote within 12 months of
adoption (or in the case of a newly public company, does not commit to put the pill to a
shareholder vote within 12 months following the IPO), or reneges on a commitment to put the pill to
a vote, and has not yet received a withhold recommendation for this issue.
5. Mergers and Corporate Restructurings
Overall Approach
For mergers and acquisitions, review and evaluate the merits and drawbacks of the proposed
transaction, balancing various and sometimes countervailing factors including:
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Valuation
Is the value to be received by the target shareholders (or paid by the
acquirer) reasonable? While the fairness opinion may provide an initial starting point
for assessing valuation reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
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Market reaction
How has the market responded to the proposed deal? A negative
market reaction should cause closer scrutiny of a deal.
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Strategic rationale
Does the deal make sense strategically? From where is the
value derived? Cost and revenue synergies should not be overly aggressive or
optimistic, but reasonably achievable. Management should also have a favorable track
record of successful integration of historical acquisitions.
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Negotiations and process
Were the terms of the transaction negotiated at
arms-length? Was the process fair and equitable? A fair process helps to ensure the
best price for shareholders. Significant negotiation wins can also signify the deal
makers competency. The comprehensiveness of the sales process (e.g., full auction,
partial auction, no auction) can also affect shareholder value.
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Conflicts of interest
Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider shareholders? As the
result of potential conflicts, the directors and officers of the company may be more
likely to vote to approve a merger than if they did not hold these interests. Consider
whether these interests may have influenced these directors and officers to support or
recommend the merger.
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Governance
Will the combined company have a better or worse governance profile
than the current governance profiles of the respective parties to the transaction? If
the governance profile is to change for the worse, the burden is on the company to
prove that other issues (such as valuation) outweigh any deterioration in governance.
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6. State of Incorporation
Reincorporation Proposals
Evaluate management or shareholder proposals to change a companys state of incorporation on a
CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns
including the following:
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Reasons for reincorporation;
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6-B
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Comparison of companys governance practices and provisions prior to and following
the reincorporation; and
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Comparison of corporation laws of original state and destination state
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Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance
changes.
7. Capital Structure
Common Stock Authorization
Votes on proposals to increase the number of shares of common stock authorized for issuance are
determined on a CASE-BY-CASE basis. We consider company-specific factors that include, at a
minimum, the following:
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Past Board performance
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The companys use of authorized shares during the last three years;
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One- and three-year total shareholder return;
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The boards governance structure and practices;
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The current request;
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Disclosure in the proxy statement of specific reasons for the proposed increase;
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The dilutive impact of the request as determined through an allowable cap generated
by RiskMetrics quantitative model; which examines the companys need for shares and
three-year total shareholder return; and
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Risks to shareholders of not approving the request.
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Preferred Stock
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred stock authorized for
issuance. Take into account company-specific factors which include, at a minimum, the following:
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Specific reasons/ rationale for the proposed increase;
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The dilutive impact of the request as determined through an allowable cap generated
by RiskMetrics quantitative model;
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The boards governance structure and practices; and
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Risks to shareholders of not approving the request.
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Vote AGAINST proposals authorizing the creation of new classes of preferred stock with unspecified
voting, conversion, dividend distribution, and other rights (blank check preferred stock).
Vote FOR proposals to create declawed blank check preferred stock (stock that cannot be used as a
takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company specifies the voting,
dividend, conversion, and other rights of such stock and the terms of the preferred stock appear
reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock authorized for
issuance when no shares have been issued or reserved for a specific purpose.
8. Executive and Director Compensation
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the
following factors apply:
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The total cost of the companys equity plans is unreasonable;
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The plan expressly permits the repricing of stock options/stock appreciation rights
(SARs) without prior shareholder approval;
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The CEO is a participant in the proposed equity-based compensation plan and there is
a disconnect between CEO pay and the companys performance where over 50 percent of the
year-over-year increase is attributed to equity awards;
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The companys three year burn rate exceeds the greater of 2% and the mean plus one
standard deviation of its industry group; (with a 10% tolerance); in conjunction with
the qualitative overlay as outlined in the policy
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7-B
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guidelines OR the company has a poor record of compensation practices, which is
highlighted either in analysis of the compensation plan or the evaluation of the
election of directors;
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The plan provides for the acceleration of vesting of equity awards even though an
actual change in control may not occur (e.g., upon shareholder approval of a
transaction or the announcement of a tender offer); or
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The plan is a vehicle for poor pay practices.
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Pay Practices
Good pay practices should align managements interests with long-term shareholder value creation.
Detailed disclosure of compensation criteria is required; proof that companies follow the criteria
should be evident. Compensation practices should allow a company to attract and retain proven
talent. Some examples of poor pay practices include: repricing or replacing of underwater stock
options/stock appreciation rights without prior shareholder approval, special bonuses that are not
performance based, practices that could incentivize excessive risk-taking, excessive tax
reimbursements related to executive perquisites or other payments and multi-year guarantees for
salary increases.
If the company maintains problematic or poor pay practices, generally vote first:
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AGAINST Management Say on Pay (MSOP) Proposals or;
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AGAINST an equity-based incentive plan proposal if excessive non-performance-based
equity awards are the major contributor to a pay-for-performance misalignment, then;
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If no MSOP or equity-based incentive plan proposal item is on the ballot,
AGAINST/WITHHOLD on compensation committee members (or, in rare cases where the full
board is deemed responsible, all directors including the CEO) in egregious situations.
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GSAM generally does not penalize a company by double counting a negative vote (i.e., voting against
a compensation issue and against the compensation committee members)
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and potentially the entire
board, if the company has poor compensation practices. Vote AGAINST equity plans if the plan is a
vehicle for poor compensation practices.
The following practices, while not exhaustive, are examples of poor compensation practices. The
presence of one or more of the following practices when combined with a negative correlation
between pay and performance may warrant withhold vote recommendations:
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Egregious employment contracts Contracts containing multi-year guarantees for
salary increases, bonuses and equity compensation;
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Excessive perks/tax reimbursements:
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Overly generous perquisites, which may include, but are not
limited to the following: personal use of corporate aircraft, personal security
system maintenance and/or installation, car allowances;
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Reimbursement of income taxes on executive perquisites or other
payments; (note about tax gross-ups: these may be acceptable in cases where
gross-ups are provided pursuant to a plan, policy, or arrangement applicable to
management employees of the company, such as relocation or expatriate tax
equalization policy);
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Perquisites for former executives, such as car allowances,
personal use of corporate aircraft or other inappropriate arrangements;
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Abnormally large bonus payouts without justifiable performance
linkage or proper disclosure Performance metrics that are changed, canceled or
replaced during the performance period without adequate explanation of the
action and the link to performance;
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Excessive severance and/or change in control provisions:
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Inclusion of excessive change in control or severance payments,
especially those with a multiple in excess of 3X cash pay;
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Payments upon an executives termination in connection with
performance failure;
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Change in control payouts without loss of job or substantial
diminution of job duties (single-triggered);
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New or materially amended employment or severance agreements that
provide for modified single triggers, under which an executive may voluntarily
leave for any reason and still receive the change-in-control severance package;
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Liberal change in control definition in individual contracts or
equity plans which could result in payments to executives without an actual
change in control occurring;
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8-B
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New or materially amended employment or severance agreements that
provide for an excise tax gross-up. Modified gross-ups would be treated in the
same manner as full gross-ups;
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Perquisites for former executives such as car allowances,
personal use of corporate aircraft or other inappropriate arrangements;
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Dividends or dividend equivalents paid on unvested performance shares or units;
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Poor disclosure practices:
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Unclear explanation of how the CEO is involved in the pay setting process;
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Retrospective performance targets and methodology not discussed;
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Methodology for benchmarking practices and/or peer group not disclosed and explained;
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Internal Pay Disparity:
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Excessive differential between CEO total pay and that of next
highest paid named executive officer (NEO);
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Options backdating (covered in a separate policy);
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Other excessive compensation payouts or poor pay practices at the company.
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Other Compensation Proposals and Policies
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals
Vote CASE-BY-CASE on management proposals for an advisory vote on executive compensation. Vote
AGAINST these resolutions in cases where boards have failed to demonstrate good stewardship of
investors interests regarding executive compensation practices.
For U.S. companies, consider the following factors in the context of each companys specific
circumstances and the boards disclosed rationale for its practices:
Relative Considerations:
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Assessment of performance metrics relative to business strategy, as discussed and
explained in the CD&A;
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Evaluation of peer groups used to set target pay or award opportunities;
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Alignment of company performance and executive pay trends over time (e.g.,
performance down: pay down);
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Assessment of disparity between total pay of the CEO and other Named Executive
Officers (NEOs).
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Design Considerations:
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Balance of fixed versus performance-driven pay;
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Assessment of excessive practices with respect to perks, severance packages,
supplemental executive pension plans, and burn rates.
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Communication Considerations:
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Evaluation of information and board rationale provided in CD&A about how
compensation is determined (e.g., why certain elements and pay targets are used, and
specific incentive plan goals, especially retrospective goals);
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Assessment of boards responsiveness to investor input and engagement on
compensation issues (e.g., in responding to majority-supported shareholder proposals on
executive pay topics).
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Employee Stock Purchase Plans Non-Qualified Plans
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR nonqualified employee
stock purchase plans with all the following features:
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Broad-based participation (i.e., all employees of the company with the exclusion of
individuals with 5 percent or more of beneficial ownership of the company);
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Limits on employee contribution, which may be a fixed dollar amount or expressed as
a percent of base salary;
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Company matching contribution up to 25 percent of employees contribution, which is
effectively a discount of 20 percent from market value;
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No discount on the stock price on the date of purchase since there is a company
matching contribution.
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Vote AGAINST nonqualified employee stock purchase plans when any of the plan features do not meet
the above criteria. If the company matching contribution exceeds 25 percent of employees
contribution, evaluate the cost of the plan against its allowable cap.
9-B
Option Exchange Programs/Repricing Options
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice options, taking into
consideration:
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Historic trading patternsthe stock price should not be so volatile that the
options are likely to be back in-the-money over the near term;
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Rationale for the re-pricing- -was the stock price decline beyond managements
control?
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Is this a value-for-value exchange?
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Are surrendered stock options added back to the plan reserve?
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Option vesting- -does the new option vest immediately or is there a black-out
period?
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Term of the option- -the term should remain the same as that of the replaced option;
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Exercise priceshould be set at fair market or a premium to market;
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Participantsexecutive officers and directors should be excluded.
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If the surrendered options are added back to the equity plans for re-issuance, then also take into
consideration the companys total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the
repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an
exchange program at this point in time. Repricing underwater options after a recent precipitous
drop in the companys stock price demonstrates poor timing. Repricing after a recent decline in
stock price triggers additional scrutiny and a potential AGAINST vote on the proposal. At a
minimum, the decline should not have happened within the past year. Also, consider the terms of
the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates
of surrendered options should be far enough back (two to three years) so as not to suggest that
repricings are being done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Other Shareholder Proposals on Compensation
Advisory Vote on Executive Compensation (Say-on-Pay)
Generally, vote FOR shareholder proposals that call for non-binding shareholder ratification of the
compensation of the Named Executive Officers and the accompanying narrative disclosure of material
factors provided to understand the Summary Compensation Table.
Golden Coffins/Executive Death Benefits
Generally vote FOR proposals calling on companies to adopt a policy of obtaining shareholder
approval for any future agreements and corporate policies that could oblige the company to make
payments or awards following the death of a senior executive in the form of unearned salary or
bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites
and other payments or awards made in lieu of compensation. This would not apply to any benefit
programs or equity plan proposals for which the broad-based employee population is eligible.
Share Buyback Holding Periods
Generally vote AGAINST shareholder proposals prohibiting executives from selling shares of company
stock during periods in which the company has announced that it may or will be repurchasing shares
of its stock. Vote FOR the proposal when there is a pattern of abuse by executives exercising
options or selling shares during periods of share buybacks.
Stock Ownership or Holding Period Guidelines
Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors
must own in order to qualify as a director or to remain on the board. While stock ownership on the
part of directors is favored, the company should determine the appropriate ownership requirement.
Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt policies requiring Named
Executive Officers to retain 75% of the shares acquired through compensation plans while employed
and/or for two years following the termination of their employment, and to report to shareholders
regarding this policy. The following factors will be taken into account:
10-B
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Whether the company has any holding period, retention ratio, or officer ownership
requirements in place. These should consist of:
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Rigorous stock ownership guidelines, or
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A holding period requirement coupled with a significant long-term ownership requirement, or
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A meaningful retention ratio,
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Actual officer stock ownership and the degree to which it meets or exceeds the
proponents suggested holding period/retention ratio or the companys own stock
ownership or retention requirements.
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Problematic pay practices, current and past, which may promote a short-term versus a
long-term focus.
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Tax Gross-Up Proposals
Generally vote FOR proposals asking companies to adopt a policy of not providing tax gross-up
payments to executives, except where gross-ups are provided pursuant to a plan, policy, or
arrangement applicable to management employees of the company, such as a relocation or expatriate
tax equalization policy.
9.
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Corporate Social Responsibility (CSR) Issues
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Overall Approach
When evaluating social and environmental shareholder proposals, the following factors should be
considered:
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Whether adoption of the proposal is likely to enhance or protect shareholder value;
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Whether the information requested concerns business issues that relate to a
meaningful percentage of the companys business as measured by sales, assets, and
earnings;
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The degree to which the companys stated position on the issues raised in the
proposal could affect its reputation or sales, or leave it vulnerable to a boycott or
selective purchasing;
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Whether the issues presented are more appropriately/effectively dealt with through
governmental or company-specific action;
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Whether the company has already responded in some appropriate manner to the request
embodied in the proposal;
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Whether the companys analysis and voting recommendation to shareholders are
persuasive;
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What other companies have done in response to the issue addressed in the proposal;
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Whether the proposal itself is well framed and the cost of preparing the report is
reasonable;
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Whether implementation of the proposals request would achieve the proposals
objectives;
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Whether the subject of the proposal is best left to the discretion of the board;
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Whether the requested information is available to shareholders either from the
company or from a publicly available source; and
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Whether providing this information would reveal proprietary or confidential
information that would place the company at a competitive disadvantage.
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Genetically Modified Ingredients
Generally vote AGAINST proposals asking suppliers, genetic research companies, restaurants and food
retail companies to voluntarily label genetically engineered (GE) ingredients in their products
and/or eliminate GE ingredients. The cost of labeling and/or phasing out the use of GE ingredients
may not be commensurate with the benefits to shareholders and is an issue better left to
regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of labeling products
containing GE ingredients taking into account:
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The companys business and the proportion of it affected by the resolution;
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The quality of the companys disclosure on GE product labeling, related voluntary
initiatives, and how this disclosure compares with industry peer disclosure; and
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Companys current disclosure on the feasibility of GE product labeling, including
information on the related costs.
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Generally vote AGAINST proposals seeking a report on the social, health, and environmental effects
of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators
and the scientific community.
11-B
Generally vote AGAINST proposals to completely phase out GE ingredients from the companys products
or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the
companys products. Such resolutions presuppose that there are proven health risks to GE
ingredients (an issue better left to regulators) that may outweigh the economic benefits derived
from biotechnology.
Pharmaceutical Pricing, Access to Medicines, and Product Reimportation
Generally vote AGAINST proposals requesting that companies implement specific price restraints on
pharmaceutical products unless the company fails to adhere to legislative guidelines or industry
norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company report on their product pricing policies
or their access to medicine policies, considering:
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The nature of the companys business and the potential for reputational and market
risk exposure;
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The existing disclosure of relevant policies;
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Deviation from established industry norms;
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The companys existing, relevant initiatives to provide research and/or products to
disadvantaged consumers;
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Whether the proposal focuses on specific products or geographic regions; and
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The potential cost and scope of the requested report.
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Generally vote FOR proposals requesting that companies report on the financial and legal impact of
their prescription drug reimportation policies unless such information is already publicly
disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of
legislative activity and may place the company at a competitive disadvantage relative to its peers.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Generally vote FOR proposals seeking to amend a companys EEO statement or diversity policies to
prohibit discrimination based on sexual orientation and/or gender identity, unless the change would
result in excessive costs for the company.
Generally vote AGAINST proposals to extend company benefits to, or eliminate benefits from domestic
partners. Decisions regarding benefits should be left to the discretion of the company.
Climate Change
Generally vote FOR resolutions requesting that a company disclose information on the impact of
climate change on the companys operations and investments considering whether:
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The company already provides current, publicly-available information on the impacts
that climate change may have on the company as well as associated company policies and
procedures to address related risks and/or opportunities;
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The companys level of disclosure is at least comparable to that of industry peers;
and
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There are no significant, controversies, fines, penalties, or litigation associated
with the companys environmental performance.
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Lobbying Expenditures/Initiatives
Vote CASE-BY-CASE on proposals requesting information on a companys lobbying initiatives,
considering:
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Significant controversies, fines, or litigation surrounding a companys public
policy activities,
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The companys current level of disclosure on lobbying strategy, and
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The impact that the policy issue may have on the companys business operations.
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Political Contributions and Trade Association Spending
Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the
workplace so long as:
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There are no recent, significant controversies, fines or litigation regarding the
companys political contributions or trade association spending; and
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The company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
prohibits coercion.
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12-B
Vote AGAINST proposals to publish in newspapers and public media the companys political
contributions. Such publications could present significant cost to the company without providing
commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a companys political contributions and
trade association spending, considering:
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Recent significant controversy or litigation related to the companys political
contributions or governmental affairs; and
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|
The public availability of a company policy on political contributions and trade
association spending including information on the types of organizations supported, the
business rationale for supporting these organizations, and the oversight and compliance
procedures related to such expenditures of corporate assets.
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Vote AGAINST proposals barring the company from making political contributions. Businesses are
affected by legislation at the federal, state, and local level and barring political contributions
can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal
counsels, lobbyists, or investment bankers that have prior government service and whether such
service had a bearing on the business of the company. Such a list would be burdensome to prepare
without providing any meaningful information to shareholders.
Labor and Human Rights Standards
Generally vote FOR proposals requesting a report on company or company supplier labor and/or human
rights standards and policies unless such information is already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor and/or human rights
standards and policies, considering:
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The degree to which existing relevant policies and practices are disclosed;
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|
Whether or not existing relevant policies are consistent with internationally
recognized standards;
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Whether company facilities and those of its suppliers are monitored and how;
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Company participation in fair labor organizations or other internationally
recognized human rights initiatives;
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Scope and nature of business conducted in markets known to have higher risk of
workplace labor/human rights abuse;
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Recent, significant company controversies, fines, or litigation regarding human
rights at the company or its suppliers;
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The scope of the request; and
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Deviation from industry sector peer company standards and practices.
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Sustainability Reporting
Generally vote FOR proposals requesting the company to report on its policies, initiatives, and
oversight mechanisms related to social, economic, and environmental sustainability, unless:
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The company already discloses similar information through existing reports or
policies such as an Environment, Health, and Safety (EHS) report; a comprehensive Code
of Corporate Conduct; and/or a Diversity Report; or
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The company has formally committed to the implementation of a reporting program based
on Global Reporting Initiative (GRI) guidelines or a similar standard within a
specified time frame.
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|
The following section is a summary of the Guidelines, which form the substantive basis of the
Policy with respect to non-U.S. public equity investments. Note that some items may vary by market
based on specific country regulations or practices.
Financial Results/Director and Auditor Reports
Vote FOR approval of financial statements and director and auditor reports, unless:
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There are concerns about the accounts presented or audit procedures used; or
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The company is not responsive to shareholder questions about specific items that
should be publicly disclosed.
|
13-B
Appointment of Auditors and Auditor Fees
Vote FOR the reelection of auditors and proposals authorizing the board to fix auditor fees,
unless:
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There are serious concerns about the accounts presented or the audit procedures
used;
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The auditors are being changed without explanation; or
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Non-audit-related fees are substantial or are routinely in excess of standard annual
audit-related fees.
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Vote AGAINST the appointment of external auditors if they have previously served the company in an
executive capacity or can otherwise be considered affiliated with the company.
Appointment of Internal Statutory Auditors
Vote FOR the appointment or reelection of statutory auditors, unless:
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There are serious concerns about the statutory reports presented or the audit
procedures used;
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Questions exist concerning any of the statutory auditors being appointed; or
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The auditors have previously served the company in an executive capacity or can
otherwise be considered affiliated with the company.
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Allocation of Income
Vote FOR approval of the allocation of income, unless:
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The dividend payout ratio has been consistently below 30 percent without adequate
explanation; or
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The payout is excessive given the companys financial position.
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|
Stock (Scrip) Dividend Alternative
Vote FOR most stock (scrip) dividend proposals.
Vote AGAINST proposals that do not allow for a cash option unless management demonstrates that the
cash option is harmful to shareholder value.
Amendments to Articles of Association
Vote amendments to the articles of association on a CASE-BY-CASE basis.
Change in Company Fiscal Term
Vote FOR resolutions to change a companys fiscal term unless a companys motivation for the change
is to postpone its AGM.
Lower Disclosure Threshold for Stock Ownership
Vote AGAINST resolutions to lower the stock ownership disclosure threshold below 5 percent unless
specific reasons exist to implement a lower threshold.
Amend Quorum Requirements
Vote proposals to amend quorum requirements for shareholder meetings on a CASE-BY-CASE basis.
Transact Other Business
Vote AGAINST other business when it appears as a voting item.
Director Elections
14-B
Vote FOR management nominees in the election of directors, unless:
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Adequate disclosure has not been provided in a timely manner; OR
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|
There are clear concerns over questionable finances or restatements; OR
|
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|
There have been questionable transactions with conflicts of interest; OR
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There are any records of abuses against minority shareholder interests; OR
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The board fails to meet minimum corporate governance standards. OR
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Vote FOR individual nominees unless there are specific concerns about the individual or company,
such as criminal wrongdoing or breach of fiduciary responsibilities. Other considerations may
include sanctions from government or authority, violations of laws and regulations, or other issues
related to improper business practice.
Vote AGAINST individual directors if repeated absences at board meetings have not been explained
(in countries where this information is disclosed).
Vote on a CASE-BY-CASE basis for contested elections of directors, e.g., the election of
shareholder nominees or the dismissal of incumbent directors, determining which directors are best
suited to add value for shareholders.
Vote FOR employee and/or labor representatives if they sit on either the audit or compensation
committee and are required by law to be on those committees.
Vote AGAINST employee and/or labor representatives if they sit on either the audit or compensation
committee, if they are not required to be on those committees.
Executive Director
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Employee or executive of the company;
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Any director who is classified as a non-executive, but receives salary, fees, bonus,
and/or other benefits that are in line with the highest-paid executives of the company.
|
Non-Independent Non-Executive Director (NED)
|
|
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Any director who is attested by the board to be a non-independent NED;
|
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Any director specifically designated as a representative of a significant
shareholder of the company;
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Any director who is also an employee or executive of a significant shareholder of
the company;
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Beneficial owner (direct or indirect) of at least 10% of the companys stock, either
in economic terms or in voting rights (this may be aggregated if voting power is
distributed among more than one member of a defined group, e.g., family members who
beneficially own less than 10% individually, but collectively own more than 10%),
unless market best practice dictates a lower ownership and/or disclosure threshold (and
in other special market-specific circumstances);
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Government representative;
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Currently provides (or a relative provides) professional services to the company, to
an affiliate of the company, or to an individual officer of the company or of one of
its affiliates in excess of $10,000 per year;
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Represents customer, supplier, creditor, banker, or other entity with which company
maintains transactional/commercial relationship (unless company discloses information
to apply a materiality test);
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Any director who has conflicting or cross-directorships with executive directors or
the chairman of the company;
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Relative of a current employee of the company or its affiliates;
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Relative of a former executive of the company or its affiliates;
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A new appointee elected other than by a formal process through the General Meeting
(such as a contractual appointment by a substantial shareholder);
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Founder/co-founder/member of founding family but not currently an employee;
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Former executive (5 year cooling off period);
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Years of service is generally not a determining factor unless it is recommended best
practice in a market and/or in extreme circumstances, in which case it may be
considered.
|
Independent NED
|
|
|
No material connection, either directly or indirectly, to the company other than a
board seat.
|
15-B
Employee Representative
|
|
|
Represents employees or employee shareholders of the company (classified as
employee representative but considered a non-independent NED).
|
Discharge of Directors
Generally vote FOR the discharge of directors, including members of the management board and/or
supervisory board, unless there is reliable information about significant and compelling
controversies that the board is not fulfilling its fiduciary duties warranted by:
|
|
|
A lack of oversight or actions by board members which invoke shareholder distrust
related to malfeasance or poor supervision, such as operating in private or company
interest rather than in shareholder interest; or
|
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Any legal issues (e.g. civil/criminal) aiming to hold the board responsible for
breach of trust in the past or related to currently alleged actions yet to be confirmed
(and not only the fiscal year in question), such as price fixing, insider trading,
bribery, fraud, and other illegal actions; or
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Other egregious governance issues where shareholders will bring legal action against
the company or its directors.
|
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|
|
For markets which do not routinely request discharge resolutions (e.g. common law
countries or markets where discharge is not mandatory), analysts may voice concern in
other appropriate agenda items, such as approval of the annual accounts or other
relevant resolutions, to enable shareholders to express discontent with the board.
|
Director Compensation
Vote FOR proposals to award cash fees to non-executive directors unless the amounts are excessive
relative to other companies in the country or industry.
Vote non-executive director compensation proposals that include both cash and share-based
components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both non-executive and executive directors into a
single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for non-executive directors.
Director, Officer, and Auditor Indemnification and Liability Provisions
Vote proposals seeking indemnification and liability protection for directors and officers on a
CASE-BY-CASE basis. Vote AGAINST proposals to indemnify auditors.
Board Structure
Vote FOR proposals to fix board size. Vote AGAINST the introduction of classified boards and
mandatory retirement ages for directors. Vote AGAINST proposals to alter board structure or size in
the context of a fight for control of the company or the board.
Chairman CEO combined role (for applicable markets)
An independent Chairman could promote the interest of shareholders and provide oversight. The
independent chairman can perform important duties such as setting board meeting agendas, overseeing
the information flow to the board and leading the board evaluation process. There may be some cases
however, where requiring an independent chairman may not be necessary because there is evidence of
strong board independence.
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|
GSAM will generally recommend a vote AGAINST shareholder proposals requiring that the
chairmans position be filled by an independent director, if the company satisfies 3 of the
4 following criteria:
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|
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2/3 independent board, or majority in countries where employee representation is common
practice;
|
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|
|
A designated, or a rotating, lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties;
|
|
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|
|
Fully independent key committees; and/or
|
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|
|
Established, publicly disclosed, governance guidelines and director biographies/profiles.
|
16-B
3.
|
|
Capital Structure Share Issuance Requests
|
General Issuances:
Vote FOR issuance requests with preemptive rights to a maximum of 100 percent over currently issued
capital. Vote FOR issuance requests without preemptive rights to a maximum of 20 percent of
currently issued capital.
Specific Issuances:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive rights.
Increases in Authorized Capital
Vote FOR non-specific proposals to increase authorized capital up to 100 percent over the current
authorization unless the increase would leave the company with less than 30 percent of its new
authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount, unless:
|
|
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The specific purpose of the increase (such as a share-based acquisition or merger)
does not meet RMG guidelines for the purpose being proposed; or
|
|
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|
|
The increase would leave the company with less than 30 percent of its new
authorization outstanding after adjusting for all proposed issuances.
|
Vote AGAINST proposals to adopt unlimited capital authorizations.
Reduction of Capital
Vote FOR proposals to reduce capital for routine accounting purposes unless the terms are
unfavorable to shareholders. Vote proposals to reduce capital in connection with corporate
restructuring on a CASE-BY-CASE basis.
Capital Structures
Vote FOR resolutions that seek to maintain or convert to a one-share, one-vote capital structure.
Vote AGAINST requests for the creation or continuation of dual-class capital structures or the
creation of new or additional supervoting shares.
Preferred Stock
Vote FOR the creation of a new class of preferred stock or for issuances of preferred stock up to
50 percent of issued capital unless the terms of the preferred stock would adversely affect the
rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as the maximum number of
common shares that could be issued upon conversion meets RMG guidelines on equity issuance
requests.
Vote AGAINST the creation of a new class of preference shares that would carry superior voting
rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board clearly states that the
authorization will not be used to thwart a takeover bid. Vote proposals to increase blank check
preferred authorizations on a CASE-BY-CASE basis.
Debt Issuance Requests
Vote non-convertible debt issuance requests on a CASE-BY-CASE basis, with or without preemptive
rights.
Vote FOR the creation/issuance of convertible debt instruments as long as the maximum number of
common shares that could be issued upon conversion meets RMG guidelines on equity issuance
requests.
Vote FOR proposals to restructure existing debt arrangements unless the terms of the restructuring
would adversely affect the rights of shareholders.
Pledging of Assets for Debt
Vote proposals to approve the pledging of assets for debt on a CASE-BY-CASE basis.
Increase in Borrowing Powers
17-B
Vote proposals to approve increases in a companys borrowing powers on a CASE-BY-CASE basis.
Share Repurchase Plans
Generally vote FOR share repurchase programs/market repurchase authorities, provided that the
proposal meets the following parameters:
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|
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Maximum volume: 10 percent for market repurchase within any single authority and 10
percent of outstanding shares to be kept in treasury (on the shelf);
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Duration does not exceed 18 months.
|
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|
For markets that either generally do not specify the maximum duration of the
authority or seek a duration beyond 18 months that is allowable under market specific
legislation, RMG will assess the companys historic practice. If there is evidence that
a company has sought shareholder approval for the authority to repurchase shares on an
annual basis, RMG will support the proposed authority.
|
In addition, vote AGAINST any proposal where:
|
|
|
The repurchase can be used for takeover defenses;
|
|
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|
|
There is clear evidence of abuse;
|
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|
|
There is no safeguard against selective buybacks;
|
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|
|
Pricing provisions and safeguards are deemed to be unreasonable in light of market
practice.
|
RMG may support share repurchase plans in excess of 10 percent volume under exceptional
circumstances, such as one-off company specific events (e.g. capital re-structuring). Such
proposals will be assessed case-by-case based on merits, which should be clearly disclosed in the
annual report, provided that following conditions are met:
|
|
|
The overall balance of the proposed plan seems to be clearly in shareholders
interests;
|
|
|
|
|
The plan still respects the 10 percent maximum of shares to be kept in treasury.
|
Reissuance of Repurchased Shares
Vote FOR requests to reissue any repurchased shares unless there is clear evidence of abuse of this
authority in the past.
Capitalization of Reserves for Bonus Issues/Increase in Par Value
Vote FOR requests to capitalize reserves for bonus issues of shares or to increase par value.
4.
|
|
Other Reorganizations/Restructurings
|
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
Mergers and Acquisitions
Vote CASE-BY-CASE on mergers and acquisitions taking into account the following:
For every M&A analysis, RMG reviews publicly available information as of the date of the report and
evaluates the merits and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
|
|
|
While the fairness opinion may provide an initial starting point for assessing
valuation reasonableness, RMG places emphasis on the offer premium, market reaction,
and strategic rationale.
|
|
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|
|
|
Valuation Is the value to be received by the target shareholders (or paid by the
acquirer) reasonable?
|
|
|
|
|
|
|
Market reaction How has the market responded to the proposed deal? A negative
market reaction will cause RMG to scrutinize a deal more closely.
|
|
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|
|
Strategic rationale Does the deal make sense strategically? From where is the
value derived? Cost and revenue synergies should not be overly aggressive or
optimistic, but reasonably achievable.
|
|
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|
|
Management should also have a favorable track record of successful integration of
historical acquisitions.
|
|
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|
|
Conflicts of interest Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider shareholders? RMG
will consider whether any special interests may have influenced these directors and
officers to support or recommend the merger.
|
|
18-B
|
|
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|
Governance Will the combined company have a better or worse governance profile
than the current governance profiles of the respective parties to the transaction? If
the governance profile is to change for the worse, the burden is on the company to
prove that other issues (such as valuation) outweigh any deterioration in governance.
|
|
Vote AGAINST if the companies do not provide sufficient information upon request to make an
informed voting decision.
Mandatory Takeover Bid Waivers
Vote proposals to waive mandatory takeover bid requirements on a CASE-BY-CASE basis.
Reincorporation Proposals
Vote reincorporation proposals on a CASE-BY-CASE basis.
Expansion of Business Activities
Vote FOR resolutions to expand business activities unless the new business takes the company into
risky areas.
Related-Party Transactions
Vote related-party transactions on a CASE-BY-CASE basis.
Compensation Plans
Good pay practices should align managements interests with long-term shareholder value creation.
Detailed disclosure of compensation criteria is required; proof that companies follow the criteria
should be evident. Compensation practices should allow a company to attract and retain proven
talent. Some examples of poor pay practices include: repricing or replacing of underwater stock
options/stock appreciation rights without prior shareholder approval, special bonuses that are not
performance based, practices that could incentivize excessive risk-taking, excessive tax
reimbursements related to executive perquisites or other payments, and multi-year guarantees for
salary increases.
Vote compensation plans on a CASE-BY-CASE basis.
Antitakeover Mechanisms
Generally vote AGAINST all antitakeover proposals, unless they are structured in such a way that
they give shareholders the ultimate decision on any proposal or offer.
Shareholder Proposals
Vote all shareholder proposals on a CASE-BY-CASE basis.
Vote FOR proposals that would improve the companys corporate governance or business profile at a
reasonable cost.
Vote AGAINST proposals that limit the companys business activities or capabilities or result in
significant costs being incurred with little or no benefit.
19-B
APPENDIX C
STATEMENT OF INTENTION
(applicable only to Class A Shares)
If a shareholder anticipates purchasing within a 13-month period Class A Shares of the Fund
alone or in combination with Class A Shares of another Goldman Sachs Fund in the amount of $100,000
or more, the shareholder may obtain shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by checking and filing the Statement of Intention
in the Account Application. Income dividends and capital gain distributions taken in additional
shares, as well as any appreciation on shares previously purchased, will not apply toward the
completion of the Statement of Intention.
To ensure that the reduced price will be received on future purchases, the investor must
inform Goldman Sachs that the Statement of Intention is in effect each time shares are purchased.
Subject to the conditions mentioned below, each purchase will be made at the public offering price
applicable to a single transaction of the dollar amount specified on the Account Application. The
investor makes no commitment to purchase additional shares, but if the investors purchases within
13 months plus the value of shares credited toward completion do not total the sum specified, the
investor will pay the increased amount of the sales charge prescribed in the Escrow Agreement.
Escrow Agreement
Out of the initial purchase (or subsequent purchases if necessary), 5% of the dollar amount
specified on the Account Application will be held in escrow by the Transfer Agent in the form of
shares registered in the investors name. All income dividends and capital gains distributions on
escrowed shares will be paid to the investor or to his or her order. When the minimum investment so
specified is completed (either prior to or by the end of the 13th month), the investor will be
notified and the escrowed shares will be released.
If the intended investment is not completed, the investor will be asked to remit to Goldman
Sachs any difference between the sales charge on the amount specified and on the amount actually
attained. If the investor does not within 20 days after written request by Goldman Sachs pay such
difference in the sales charge, the Transfer Agent will redeem, pursuant to the authority given by
the investor in the Account Application, an appropriate number of the escrowed shares in order to
realize such difference. Shares remaining after any such redemption will be released by the
Transfer Agent.
1-C
PART C: OTHER INFORMATION
Item 28. Exhibits
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(a)
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(1)
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Agreement and Declaration of Trust dated January 28, 1997
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(2)
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Amendment No. 1 dated April 24, 1997 to Agreement and
Declaration of Trust January 28, 1997
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(3)
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Amendment No. 2 dated July 21, 1997 to Agreement and
Declaration of Trust dated January 28, 1997
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(4)
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Amendment No. 3 dated October 21, 1997 to the Agreement and
Declaration of Trust dated January 28, 1997
3
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(5)
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Amendment No. 4 dated January 28, 1998 to the Agreement and
Declaration of Trust dated January 28, 1997
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(6)
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Amendment No. 5 dated January 28, 1998 to Agreement and
Declaration of Trust dated January 28, 1997
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(7)
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Amendment No. 6 dated July 22, 1998 to Agreement and
Declaration of Trust dated January 28, 1997
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(8)
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Amendment No. 7 dated November 3, 1998 to Agreement and
Declaration of Trust dated January 28, 1997
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(9)
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Amendment No. 8 dated March 1, 1999 to Agreement and
Declaration of Trust dated January 28, 1997
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(10)
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Amendment No. 9 dated April 28, 1999 to Agreement and
Declaration of Trust dated January 28, 1997
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(11)
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Amendment No. 10 dated July 27, 1999 to Agreement and
Declaration of Trust dated January 28, 1997
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(12)
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Amendment No. 11 dated July 27, 1999 to Agreement and
Declaration of Trust dated January 28, 1997
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(13)
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Amendment No. 12 dated October 26, 1999 to Agreement and
Declaration of Trust dated January 28, 1997
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(14)
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Amendment No. 13 dated February 3, 2000 to Agreement and
Declaration of Trust dated January 28, 1997
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(15)
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Amendment No. 14 dated April 26, 2000 to Agreement and
Declaration of Trust dated January 28, 1997
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(16)
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Amendment No. 15 dated August 1, 2000 to Agreement and
Declaration of Trust dated January 28, 1997
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(17)
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Amendment No. 16 dated January 30, 2001 to Agreement and
Declaration of Trust dated January 28, 1997
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(18)
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Amendment No. 17 dated April 25, 2001 to Agreement and
Declaration of Trust dated January 28, 1997
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C-1
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(19)
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Amendment No. 18 dated July 1, 2002 to Agreement and
Declaration of Trust dated January 28, 1997
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(20)
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Amendment No. 19 dated August 1, 2002 to Agreement and
Declaration of Trust dated January 28, 1997
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(21)
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Amendment No. 20 dated August 1, 2002 to Agreement and
Declaration of Trust dated January 28, 1997
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(22)
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Amendment No. 21 dated January 29, 2003 to the Agreement and
Declaration of Trust dated January 28, 1997
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(23)
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Amendment No. 22 dated July 31, 2003 to the Agreement and
Declaration of Trust dated January 28, 1997
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(24)
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Amendment No. 23 dated October 30, 2003 to the Agreement and
Declaration of Trust dated January 28, 1997
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(25)
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Amendment No. 24 dated May 6, 2004 to the Agreement and
Declaration of Trust dated January 28, 1997
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(26)
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Amendment No. 25 dated April 21, 2004 to the Agreement and
Declaration of Trust dated January 28, 1997
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(27)
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Amendment No. 26 dated November 4, 2004 to the Agreement and
Declaration of Trust dated January 28, 1997
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(28)
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Amendment No. 27 dated February 10, 2005 to the Agreement and
Declaration of Trust dated January 28, 1997
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(29)
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Amendment No. 28 dated May 12, 2005 to the Agreement and
Declaration of Trust dated January 28, 1997
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(30)
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Amendment No. 29 dated June 16, 2005 to the Agreement and
Declaration of Trust dated January 28, 1997
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(31)
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Amendment No. 30 dated August 4, 2005 to the Agreement and
Declaration of Trust dated January 28, 1977
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(32)
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Amendment No. 31 dated November 2, 2005 to the Agreement and
Declaration of Trust dated January 28, 1997
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(33)
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Amendment No. 32 dated December 31, 2005 to the Agreement and
Declaration of Trust dated January 28, 1997
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(34)
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Amendment No. 33 dated March 16, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(35)
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Amendment No. 34 dated March 16, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(36)
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Amendment No. 35 dated May 11, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(37)
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Amendment No. 36 dated June 15, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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C-2
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(38)
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Amendment No. 37 dated August 10, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(39)
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Amendment No. 38 dated November 9, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(40)
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Amendment No. 39 dated December 14, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(41)
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Amendment No. 40 dated December 14, 2006 to the Agreement and
Declaration of Trust dated January 28, 1997
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(42)
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Amendment No. 41 dated February 8, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(43)
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Amendment No. 42 dated March 15, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(44)
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Amendment No. 43 dated May 10, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(45)
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Amendment No. 44 dated June 13, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997.
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(46)
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Amendment No. 45 dated June 13, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(47)
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Amendment No. 46 dated November 8, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(48)
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Amendment No. 47 dated November 8, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(49)
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Amendment No. 48 dated December 13, 2007 to the Agreement and
Declaration of Trust dated January 28, 1997
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(50)
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Amendment No. 49 dated June 19, 2008 to the Agreement and
Declaration of Trust dated January 28, 1997
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(51)
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Amendment No. 50 dated August 14, 2008 to the Agreement and
Declaration of Trust dated January 28, 1997
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(52)
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Amendment No. 51 dated August 25, 2008 to the Agreement and
Declaration of Trust dated January 28, 1997
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(53)
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Amendment No. 52 dated November 13, 2008 to the Agreement and
Declaration of Trust dated January 28, 1997
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(54)
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Amendment No. 53 dated May 21, 2009 to the Agreement and
Declaration of Trust dated January 28, 1997
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(55)
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Amendment No. 54 dated November 19, 2009 to the Agreement and
Declaration of Trust dated January 28, 1997
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(56)
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Amendment No. 55 dated February 11, 2010 to the Agreement and
Declaration of Trust dated January 28, 1997
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C-3
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(57)
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Amendment
No. 56 dated May 20, 2010 to the Agreement and
Declaration of Trust dated January 28, 1997, filed herewith
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(58)
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Amendment No. 57 dated June 17, 2010 to the Agreement and
Declaration of Trust dated January 28, 1997, filed herewith
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(b)
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(1)
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Amended and Restated By-laws of Goldman Sachs Trust dated October 30, 2002
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(2)
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Amendment No. 1 dated November 4, 2004 to Amended and Restated
By-laws of Goldman Sachs Trust dated October 30, 2002.
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(3)
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Amendment No. 2 dated October 16, 2009 to Amended and Restated
By-laws of Goldman Sachs Trust dated October 30, 2002.
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(c)
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Instruments defining the rights of holders of Registrants shares of beneficial interest
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(d)
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(1)
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Management Agreement dated April 30, 1997 between Registrant, on behalf of
Goldman Sachs Short Duration Government Fund, and Goldman Sachs Funds Management, L.P.
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(2)
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Management Agreement dated April 30, 1997 between Registrant,
on behalf of Goldman Sachs Adjustable Rate Government Fund, and Goldman Sachs
Funds Management, L.P.
3
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(3)
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Management Agreement dated April 30, 1997 between Registrant,
on behalf of Goldman Sachs Short Duration Tax-Free Fund, and Goldman Sachs
Asset Management
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(4)
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Management Agreement dated April 30, 1997 between Registrant,
on behalf of Goldman Sachs Core Fixed Income Fund, and Goldman Sachs Asset
Management
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(5)
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Management Agreement dated April 30, 1997 between the
Registrant, on behalf of Goldman Sachs Institutional Liquid Assets, and
Goldman Sachs Asset Management
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(6)
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Management Agreement dated April 30, 1997 between Registrant,
Goldman Sachs Asset Management, Goldman Sachs Fund Management L.P. and Goldman
Sachs Asset Management International
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(7)
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Management Agreement dated January 1, 1998 on behalf of the
Goldman Sachs Asset Allocation Portfolios and Goldman Sachs Asset Management
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(8)
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Amended Annex A dated September 25, 2007 to the Management
Agreement dated January 1, 1998 on behalf of the Goldman Sachs Asset Allocation
Portfolios and Goldman Sachs Asset Management
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(9)
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Amended Annex A dated June 17, 2010 to the Management Agreement
dated April 30, 1997 between Registrant, Goldman Sachs Asset Management,
Goldman Sachs Fund Management L.P. and Goldman Sachs Asset Management
International, filed herewith
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(10)
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Assumption Agreement dated April 26, 2003 between Goldman,
Sachs & Co. and Goldman Sachs Asset Management, L.P. (with respect to the
Goldman Sachs Short-Duration Tax-Free Fund)
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(11)
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Assumption Agreement dated April 26, 2003 between Goldman,
Sachs & Co. and Goldman Sachs Asset Management, L.P. (with respect to the
Goldman Sachs Institutional Liquid Assets Portfolios)
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(12)
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Assumption Agreement dated April 26, 2003 between Goldman,
Sachs & Co. and Goldman Sachs Asset Management, L.P. (with respect to certain
of the Goldman Sachs Fixed Income, Equity, Specialty and Money Market Funds)
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C-4
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(13)
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Assumption Agreement dated April 26, 2003 between Goldman,
Sachs & Co. and Goldman Sachs Asset Management, L.P. (with respect to the
Goldman Sachs Core Fixed Income Fund)
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(14)
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Assumption Agreement dated April 26, 2003 between Goldman,
Sachs & Co. and Goldman Sachs Asset Management, L.P. (with respect to the
Goldman Sachs Asset Allocation Funds)
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(15)
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Fee Reduction Commitment dated April 29, 2005 between Goldman
Sachs Asset Management, L.P. and Goldman Sachs Trust relating to the Equity
Growth Strategy (formerly Aggressive Growth Strategy), Balanced Strategy,
Growth and Income Strategy and Growth Strategy Portfolios
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(16)
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Fee Reduction Commitment dated July 1, 2008 between Goldman
Sachs Asset Management, L.P. and Goldman Sachs Trust relating to the Short
Duration Tax-Free Fund
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(17)
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Fee Reduction Commitment dated July 1, 2008 between Goldman
Sachs Asset Management, L.P. and Goldman Sachs Trust relating to the
Ultra-Short Duration Government Fund (formerly Goldman Sachs Adjustable Rate
Government Fund)
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(18)
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Fee Reduction Commitment dated July 1, 2008 between Goldman
Sachs Asset Management, L.P. and Goldman Sachs Trust relating to the Short
Duration Government Fund
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(19)
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Fee Reduction Commitment dated July 1, 2008 between Goldman
Sachs Asset Management, L.P. and Goldman Sachs Trust relating to the Core Fixed
Income Fund
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(e)
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(1)
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Distribution Agreement dated April 30, 1997, as amended October 30, 2003
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(2)
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Amended Exhibit A dated November 19, 2009 to the Distribution
Agreement dated April 30, 1997, as amended October 30, 2003
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(f)
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Not applicable
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(g)
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(1)
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Custodian Agreement dated July 15, 1991, between Registrant and State Street Bank and Trust Company
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(2)
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Custodian Agreement dated December 27, 1978 between Registrant
and State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets
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(3)
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Letter Agreement dated December 27, 1978 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, pertaining to the fees payable by Registrant
pursuant to the Custodian Agreement
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(4)
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Amendment dated May 28, 1981 to the Custodian Agreement dated
December 27, 1978 between Registrant and State Street Bank and Trust Company,
on behalf of Goldman Sachs Institutional Liquid Assets
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(5)
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Fee schedule relating to the Custodian Agreement between
Registrant on behalf of the Goldman Sachs Asset Allocation Portfolios and State
Street Bank and Trust Company
2
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(6)
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Letter Agreement dated June 14, 1984 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, pertaining to a change in wire charges under the
Custodian Agreement
41
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C-5
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(7)
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Letter Agreement dated March 29, 1983 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, pertaining to the latters designation of Bank of
America, N.T. and S.A. as its subcustodian and certain other matters
41
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(8)
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Letter Agreement dated March 21, 1985 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, pertaining to the creation of a joint repurchase
agreement account
41
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(9)
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Letter Agreement dated November 7, 1985, with attachments,
between Registrant and State Street Bank and Trust Company, on behalf of
Goldman Sachs Institutional Liquid Assets, authorizing State Street Bank and
Trust Company to permit redemption of units by check
41
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(10)
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Money Transfer Services Agreement dated November 14, 1985,
including attachment, between Registrant and State Street Bank and Trust
Company, on behalf of Goldman Sachs Institutional Liquid Assets, pertaining
to transfers of funds on deposit with State Street Bank and Trust Company
41
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(11)
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Letter Agreement dated November 27, 1985 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, amending the Custodian Agreement
41
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(12)
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Letter Agreement dated July 22, 1986 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, pertaining to a change in wire charges
41
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(13)
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Letter Agreement dated June 20, 1987 between Registrant and
State Street Bank and Trust Company, on behalf of Goldman Sachs
Institutional Liquid Assets, amending the Custodian Agreement
41
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(14)
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Letter Agreement between Registrant and State Street Bank and
Trust Company, on behalf of Goldman Sachs Institutional Liquid Assets,
pertaining to the latters designation of Security Pacific National Bank as its
subcustodian and certain other matters
41
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(15)
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Amendment dated July 19, 1988 to the Custodian Agreement
between Registrant and State Street Bank and Trust Company, on behalf of
Goldman Sachs Institutional Liquid Assets
41
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(16)
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Amendment dated December 19, 1988 to the Custodian Agreement
between Registrant and State Street Bank and Trust Company, on behalf of
Goldman Sachs Institutional Liquid Assets
41
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(17)
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Custodian Agreement dated April 6, 1990 between Registrant and
State Street Bank and Trust Company on behalf of Goldman Sachs Capital Growth
Fund
5
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(18)
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Sub-Custodian Agreement dated March 29, 1983 between State
Street Bank and Trust Company and Bank of America, National Trust and Savings
Association on behalf of Goldman Sachs Institutional Liquid Assets
5
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(19)
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Fee schedule dated April 12, 1999 relating to Custodian
Agreement dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Strategic Growth and Growth Opportunities Portfolios)
7
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C-6
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(20)
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|
Fee schedule dated July 19, 1999 relating to Custodian
Agreement dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Tollkeeper Fund (formerly Internet Tollkeeper Fund))
8
/
|
|
|
|
|
|
|
|
|
(21)
|
|
Fee schedule dated October 1, 1999 relating to the Custodian
Agreement dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Large Cap Value Fund)
42
/
|
|
|
|
|
|
|
|
|
(22)
|
|
Fee schedule dated January 12, 2000 relating to Custodian
Agreement dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Structured Tax-Managed Equity Fund (formerly CORE Tax-Managed
Equity Fund))
10
/
|
|
|
|
|
|
|
|
(23)
|
|
Fee schedule dated January 6, 2000 relating to Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (High Yield Municipal Fund)
10
/
|
|
|
|
|
|
|
|
(24)
|
|
Fee schedule dated April 14, 2000 relating to Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Enhanced Income Fund)
11
/
|
|
|
|
|
|
|
|
(25)
|
|
Additional Portfolio Agreement dated September 27, 1999 between
Registrant and State Street Bank and Trust Company
10
/
|
|
|
|
|
|
|
|
(26)
|
|
Letter Agreement dated September 27, 1999 between Registrant
and State Street Bank and Trust Company relating to Custodian Agreement dated
December 27, 1978
10
/
|
|
|
|
|
|
|
|
(27)
|
|
Letter Agreement dated September 27, 1999 between Registrant
and State Street Bank and Trust Company relating to Custodian Agreement dated
April 6, 1990
10
/
|
|
|
|
|
|
|
|
(28)
|
|
Letter Agreement dated September 27, 1999 between Registrant
and State Street Bank and Trust Company relating to Custodian Agreement dated
July 15, 1991
10
/
|
|
|
|
|
|
|
|
(29)
|
|
Amendment dated July 2, 2001 to the Custodian Agreement dated
December 27, 1978 between Registrant and State Street Bank and Trust Company
14
/
|
|
|
|
|
|
|
|
(30)
|
|
Amendment dated July 2, 2001 to the Custodian Contract dated
April 6, 1990 between Registrant and State Street Bank and Trust Company
14
/
|
|
|
|
|
|
|
|
(31)
|
|
Amendment dated July 2, 2001 to the Custodian Contract dated
July 15, 1991 between Registrant and State Street Bank and Trust Company
14
/
|
|
|
|
|
|
|
|
(32)
|
|
Form of amendment to the Custodian Agreement dated December 27,
1978 between Registrant and State Street Bank and Trust Company
14
/
|
|
|
|
|
|
|
|
|
(33)
|
|
Amendment to the Custodian Agreement dated April 6, 1990
between Registrant and State Street Bank and Trust Company
43
/
|
|
|
|
|
|
|
|
|
|
(34)
|
|
Amendment to the Custodian Agreement dated July 15, 1991
between Registrant and State Street Bank and Trust Company
43
/
|
|
|
|
|
|
|
|
|
(35)
|
|
Letter Amendment dated May 15, 2002 to the Custodian Agreement
dated April 6, 1990 between Registrant and State Street Bank and Trust Company
15
/
|
|
|
|
|
|
|
|
|
(36)
|
|
Global Custody Agreement dated June 30, 2006 between Registrant
and JPMorgan Chase Bank, N.A.
44
/
|
|
C-7
|
|
|
|
|
|
|
|
(37)
|
|
Letter Amendment dated August 26, 2003 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs Emerging Markets Debt Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(38)
|
|
Letter Amendment dated October 28, 2003 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs U.S. Mortgages Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(39)
|
|
Letter Amendment dated February 8, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(for the fund now known as Goldman Sachs Commodity Strategy Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(40)
|
|
Letter Amendment dated March 14, 2007 to Custodian Agreement
dated July 15, 1991 between Registrant and State Street Bank and Trust Company
(Goldman Sachs Satellite Strategies Portfolio)
45
/
|
|
|
|
|
|
|
|
|
|
(41)
|
|
Letter Amendment dated April 23, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Strategic International Equity Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(42)
|
|
Letter Amendment dated May 2, 2007 to the Custodian Agreement
dated July 15, 1991 between Registrant and State Street Bank and Trust Company
(Goldman Sachs Structured Small Cap Growth Fund and Goldman Sachs Structured
Small Cap Value Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(43)
|
|
Letter Amendment dated August 10, 2007 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs Inflation Protected Securities Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(44)
|
|
Letter Amendment dated August 10, 2007 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs Retirement Strategies Portfolios)
45
/
|
|
|
|
|
|
|
|
|
|
(45)
|
|
Letter Amendment dated September 12, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Structured International Small Cap Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(46)
|
|
Letter Amendment dated September 12, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Structured Emerging Markets Equity Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(47)
|
|
Letter Amendment dated September 18, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Enhanced Dividend Global Equity Portfolio)
45
/
|
|
|
|
|
|
|
|
|
|
(48)
|
|
Letter Amendment dated September 18, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Tax-Advantaged Global Equity Portfolio)
45
/
|
|
|
|
|
|
|
|
|
|
(49)
|
|
Letter Amendment dated September 18, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Structured International Tax-Managed Equity Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(50)
|
|
Letter Amendment dated September 18, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs International Equity Dividend and Premium Fund)
45
/
|
|
C-8
|
|
|
|
|
|
|
|
(51)
|
|
Letter Amendment dated October 4, 2007 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs Local Emerging Markets Debt Fund)
45
/
|
|
|
|
|
|
|
|
|
|
(52)
|
|
Letter Amendment dated November 28, 2007 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Absolute Return Tracker Fund)
45
/
|
|
|
|
|
|
|
|
|
(53)
|
|
Letter Amendment dated September 17, 2009 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Structured International Equity Fund and Goldman Sachs
Structured International Equity Flex Fund)
34
/
|
|
|
|
|
|
|
|
(54)
|
|
Letter Amendment dated November 19, 2009 to the Custodian
Agreement dated July 15, 1991 between Registrant and State Street Bank and
Trust Company (Goldman Sachs U.S. Equity Fund)
34
/
|
|
|
|
|
|
|
|
|
(55)
|
|
Letter Amendment dated November 19, 2009 to the Custodian
Agreement dated June 30, 2006 between Registrant and JPMorgan Chase Bank, N.A.
(Goldman Sachs Dynamic Allocation Fund)
46
/
|
|
|
|
|
|
|
|
|
|
(56)
|
|
Letter Amendment dated August 11, 2009 to the Custodian
Agreement dated April 6, 1990 between Registrant and State Street Bank and
Trust Company (Tollkeeper Fund)
47
/
|
|
|
|
|
|
|
|
|
|
(57)
|
|
Letter Amendment dated June 17, 2010 to the Custodian Agreement
dated July 15, 1991 between Registrant and State Street Bank and Trust Company
(Goldman Sachs Strategic Income Fund), filed herewith
|
|
|
|
|
|
|
|
(h)
|
|
(1)
|
|
First Amendment dated July 18, 1994 to Amended and Restated Wiring
Agreement dated January 25, 1994 among Goldman, Sachs & Co., State Street Bank and
Trust Company and The Northern Trust Company
48
/
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Amended and Restated Wiring Agreement dated January 25, 1994
among Goldman, Sachs & Co., State Street Bank and Trust Company and The
Northern Trust Company
48
/
|
|
|
|
|
|
|
|
|
|
(3)
|
|
Letter Agreement dated June 20, 1987 regarding use of checking
account between Registrant and The Northern Trust Company
41
/
|
|
|
|
|
|
|
|
|
|
(4)
|
|
Transfer Agency Agreement dated August 9, 2007 between
Registrant and Goldman, Sachs & Co.
49
/
|
|
|
|
|
|
|
|
|
(5)
|
|
Form of Retail Service Agreement on behalf of Goldman Sachs
Trust relating to Class A Shares of Goldman Sachs Asset Allocation Portfolios,
Goldman Sachs Fixed Income Funds, Goldman Sachs Domestic Equity Funds and
Goldman Sachs International Equity Funds
5
/
|
|
|
|
|
|
|
|
|
(6)
|
|
Form of Retail Service Agreement on behalf of Goldman Sachs
Trust TPA Assistance Version relating to the Class A Shares of Goldman Sachs
Asset Allocation Portfolios, Goldman Sachs Fixed Income Funds, Goldman Sachs
Domestic Equity Funds and Goldman Sachs International Equity Funds
50
/
|
|
|
|
|
|
|
|
|
(7)
|
|
Form of Supplemental Service Agreement on behalf of Goldman
Sachs Trust relating to the Administrative Class, Service Class and Cash
Management Class of Goldman Sachs Institutional Liquid Assets Portfolios
5
/
|
C-9
|
|
|
|
|
|
|
(8)
|
|
Form of Supplemental Service Agreement on behalf of Goldman
Sachs Trust relating to the FST Shares, FST Select Shares, FST Preferred
Shares, FST Capital Shares, FST Administration Shares and FST Service Shares of
Goldman Sachs Financial Square Funds
5
/
|
|
|
|
|
|
|
|
|
(9)
|
|
Form of Supplemental Service Agreement on behalf of Goldman
Sachs Trust relating to the Class A Shares and Service Shares of Goldman Sachs
Equity and Fixed Income Funds
50
/
|
|
|
|
|
|
|
|
|
(10)
|
|
Form of Service Agreement on behalf of Goldman Sachs Trust
relating to the Select Class, the Preferred Class, Capital Shares, the
Administration Class, the Service Class and the Cash Management Class, as
applicable, of Goldman Sachs Financial Square Funds, Goldman Sachs
Institutional Liquid Assets Portfolios, Goldman Sachs Fixed Income Funds,
Goldman Sachs Domestic Equity Funds, Goldman Sachs International Equity Funds
and Goldman Sachs Asset Allocation Portfolios
13
/
|
|
|
|
|
|
|
|
|
(11)
|
|
Goldman Sachs Trust Institutional Liquid Assets Administration
Class Administration Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(12)
|
|
Goldman Sachs Trust ILA Cash Management Shares Service Plan
amended and restated as of February 4, 2004
51
/
|
|
|
|
|
|
|
|
|
|
(13)
|
|
Goldman Sachs Trust FST Select Class Select Plan amended and
restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(14)
|
|
Goldman Sachs Trust FST Administration Class Administration
Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(15)
|
|
Goldman Sachs Trust ILA Administration Class Administration
Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(16)
|
|
Goldman Sachs Trust FST Preferred Class Preferred
Administration Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(17)
|
|
Goldman Sachs Trust Administration Class Administration Plan
amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(18)
|
|
Goldman Sachs Trust Institutional Liquid Assets Service Class
Service Plan and Shareholder Administration Plan amended and restated as of
February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(19)
|
|
Goldman Sachs Trust Service Class Service Plan and Shareholder
Administration Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(20)
|
|
Goldman Sachs Trust FST Capital Administration Class Capital
Administration Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(21)
|
|
Goldman Sachs Trust Account Service Plan for Institutional
Shares amended and restated as of February 4, 2004 (U.S. Mortgages Fund and
Investment Grade Credit Fund)
44
/
|
|
|
|
|
|
|
|
|
|
(22)
|
|
Goldman Sachs Trust Account Service Plan for Class A Shares
amended and restated as of February 4, 2004 (U.S. Mortgages Fund and Investment
Grade Credit Fund)
44
/
|
|
|
|
|
|
|
|
|
|
(23)
|
|
Goldman Sachs Trust FST Service Class Service Plan and
Shareholder Administration Plan amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(24)
|
|
Mutual Funds Service Agreement dated June 30, 2006 between
Registrant and J.P. Morgan Investor Services Co.
52
/
|
|
C-10
|
|
|
|
|
|
|
|
(25)
|
|
Form of Fee Waiver Agreement between Goldman Sachs Asset
Management, L.P. and Goldman Sachs Trust relating to the Commodity Strategy
Fund
48
/
|
|
|
|
|
|
|
|
|
|
(26)
|
|
Goldman Sachs Trust FST Cash Management Shares Service Plan
dated February 11, 2010 (on behalf of Financial Square Funds)
53
/
|
|
|
|
|
|
|
|
|
|
(27)
|
|
Goldman Sachs Trust Premier Shares Service Plan and
Administration Plan dated February 11, 2010
53
/
|
|
|
|
|
|
|
|
|
|
(28)
|
|
Goldman Sachs Trust Resource Shares Service Plan dated February
11, 2010
53
/
|
|
|
|
|
|
|
|
(i)
|
|
Opinion and Consent of Dechert LLP, filed herewith
|
|
|
|
|
|
|
|
|
|
(j)
|
|
Not applicable
|
|
|
|
|
|
(k)
|
|
Not applicable
|
|
|
|
|
|
(l)
|
|
Not applicable
|
|
|
|
|
|
(m)
|
|
(1)
|
|
Class A Distribution and Service Plan amended and restated as of May 5, 2004
19
/
|
|
|
|
|
|
|
|
|
(2)
|
|
Class B Distribution and Service Plan amended and restated as
of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(3)
|
|
Class C Distribution and Service Plan amended and restated as
of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
|
(4)
|
|
Cash Management Shares Plan of Distribution pursuant to Rule
12b-1 amended and restated as of February 4, 2004
44
/
|
|
|
|
|
|
|
|
|
(5)
|
|
Class R Distribution and Service Plan dated November 8, 2007
29
/
|
|
|
|
|
|
|
|
|
(6)
|
|
Cash Management Shares Plan of Distribution pursuant to Rule
12b-1 dated February 11, 2010 (on behalf of Financial Square Funds)
53
/
|
|
|
|
|
|
|
|
|
|
(7)
|
|
Resource Shares Plan of Distribution pursuant to Rule 12b-1
dated February 11, 2010
53
/
|
|
|
|
|
|
|
|
(n)
|
|
(1)
|
|
Plan in Accordance with Rule 18f-3, amended and restated as of February 11, 2010
53
/
|
|
|
|
|
|
|
|
(p)
|
|
(1)
|
|
Code of Ethics Goldman Sachs Trust, Goldman Sachs Variable Insurance
Trust and Goldman Sachs Credit Strategies Fund dated April 23, 1997, as amended
effective March 12, 2009, filed herewith
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Code of Ethics Goldman, Sachs & Co., Goldman Sachs Asset
Management, L.P., Goldman Sachs Asset Management International, Goldman Sachs
Hedge Fund Strategies LLC and GS Investment Strategies, LLC dated January 23,
1991, as amended effective January 15, 2010, filed herewith
|
|
|
|
|
|
|
(q)
|
|
(1)
|
|
Powers of Attorney for Messrs. Bakhru, Coblentz, Harker, Shuch and Strubel
23
/
|
|
|
|
|
|
|
|
|
(2)
|
|
Powers of Attorney for Ms. Daniels and Ms. Palmer
54
/
|
|
|
|
|
|
|
|
|
|
(3)
|
|
Power of Attorney for James A. McNamara
55
/
|
|
|
|
|
|
|
|
|
(4)
|
|
Power of Attorney for George F. Travers
34
/
|
C-11
|
|
|
1
/
|
|
Incorporated by reference from Post-Effective Amendment No. 29 to the Registrants
registration statement, SEC File No. 33-17619, filed February 14, 1997.
|
|
2
/
|
|
Incorporated by reference from Post-Effective Amendment No. 40 to the Registrants
registration statement, SEC File No. 33-17619, filed October 16, 1997.
|
|
3
/
|
|
Incorporated by reference from Post-Effective Amendment No. 41 to the Registrants
registration statement, SEC File No. 33-17619, filed February 13, 1998.
|
|
4
/
|
|
Incorporated by reference from Post-Effective Amendment No. 47 to the Registrants
registration statement, SEC File No. 33-17619, filed October 1, 1998.
|
|
5
/
|
|
Incorporated by reference from Post-Effective Amendment No. 50 to the Registrants
registration statement, SEC File No. 33-17619, filed December 29, 1998.
|
|
6
/
|
|
Incorporated by reference from Post-Effective Amendment No. 52 to the Registrants
registration statement, SEC File No. 33-17619, filed February 12, 1999.
|
|
7
/
|
|
Incorporated by reference from Post-Effective Amendment No. 55 to the Registrants
registration statement, SEC File No. 33-17619, filed July 16, 1999.
|
|
8
/
|
|
Incorporated by reference from Post-Effective Amendment No. 56 to the Registrants
registration statement, SEC File No. 33-17619, filed September 16, 1999.
|
|
9
/
|
|
Incorporated by reference from Post-Effective Amendment No. 58 to the Registrants
registration statement, SEC File No. 33-17619, filed November 22, 1999.
|
|
10
/
|
|
Incorporated by reference from Post-Effective Amendment No. 62 to the Registrants
registration statement, SEC File No. 33-17619, filed February 23, 2000.
|
|
11
/
|
|
Incorporated by reference from Post-Effective Amendment No. 65 to the Registrants
registration statement, SEC File No. 33-17619, filed May 3, 2000.
|
|
12
/
|
|
Incorporated by reference from Post-Effective Amendment No. 68 to the Registrants
registration statement, SEC File No. 33-17619, filed November 22, 2000.
|
|
13
/
|
|
Incorporated by reference from Post-Effective Amendment No. 72 to the Registrants
registration statement, SEC File No. 33-17619, filed April 13, 2001.
|
|
14
/
|
|
Incorporated by reference from Post-Effective Amendment No. 73 to the Registrants
registration statement, SEC File No. 33-17619, filed December 21, 2001.
|
|
15
/
|
|
Incorporated by reference from Post-Effective Amendment No. 79 to the Registrants
registration statement, SEC File No. 33-17619, filed December 11, 2002.
|
|
16
/
|
|
Incorporated by reference from Post-Effective Amendment No. 81 to the Registrants
registration statement, SEC File No. 33-17619, filed February 19, 2003.
|
|
17
/
|
|
Incorporated by reference from Post-Effective Amendment No. 85 to the Registrants
registration statement, SEC File No. 33-17619, filed December 12, 2003.
|
|
18
/
|
|
Incorporated by reference from the Registrants Registration Statement on Form N-14
relating to the Registrants acquisition of the Golden Oak
®
Family of Funds
(Acquisition), SEC File No. 333-117561, filed July 22, 2004.
|
|
19
/
|
|
Incorporated by reference from Post-Effective Amendment No. 93 to the Registrants
registration statement, SEC File No. 33-17619, filed December 23, 2004.
|
C-12
|
|
|
20
/
|
|
Incorporated by reference from Post-Effective Amendment No. 103 to the Registrants
registration statement, SEC File No. 33-17619, filed June 17, 2005.
|
|
21
/
|
|
Incorporated by reference from Post-Effective Amendment No. 112 to the Registrants
registration statement, SEC File No. 811-05349, filed December 7, 2005.
|
|
22
/
|
|
Incorporated by reference from Post-Effective Amendment No. 127 to the Registrants
registration statement, SEC File No. 33-17619, filed May 26, 2006.
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23
/
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Incorporated by reference from Post-Effective Amendment No. 114 to the Registrants
registration statement, SEC File No. 33-17619, filed December 29, 2005.
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|
24
/
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Incorporated by reference from Post-Effective Amendment No. 129 to the Registrants
registration statement, SEC File No. 33-17619, filed June 23, 2006.
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25
/
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Incorporated by reference from Post-Effective Amendment No. 133 to the Registrants
registration statement, SEC File No. 33-17619, filed August 18, 2006.
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26
/
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Incorporated by reference from Post-Effective Amendment No. 143 to the Registrants
registration statement, SEC File No. 33-17619, filed December 21, 2006.
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27
/
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Incorporated by reference from Post-Effective Amendment No. 159 to the Registrants
registration statement, SEC File No. 811-05349, filed June 12, 2007.
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28
/
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Incorporated by reference from Post-Effective Amendment No. 162 to the Registrants
registration statement, SEC File No. 811-05349, filed August 14, 2007.
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29
/
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Incorporated by reference from Post-Effective Amendment No. 173 to the Registrants
registration statement, SEC File No. 811-05349, filed November 27, 2007.
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30
/
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Incorporated by reference from Post-Effective Amendment No. 183 to the Registrants
registration statement, SEC File No. 33-17619, filed January 18, 2008.
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31
/
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Incorporated by reference from Post-Effective Amendment No. 205 to the Registrants
registration statement, SEC File No. 33-17619, filed July 29, 2008.
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32
/
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Incorporated by reference from Post-Effective Amendment No. 206 to the Registrants
registration statement, SEC File No. 33-17619, filed August 27, 2008.
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|
33
/
|
|
Incorporated by reference from Post-Effective Amendment No. 217 to the Registrants
registration statement, SEC File No. 33-17619, filed February 27, 2009.
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34
/
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Incorporated by reference from Post-Effective Amendment No. 226 to the Registrants
registration statement, SEC File No. 33-17619, filed November 24, 2009.
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|
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35
/
|
|
Incorporated by reference from Post-Effective Amendment No. 242 to the Registrants
registration statement, SEC File No. 33-17619, filed April 30, 2010.
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36
/
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|
Article II, Section 10, Article IV, Section 3, Article V, Article VI, Article VII,
Article IX, Section 8 and Section 9 of the Registrants Agreement and Declaration of Trust
incorporated herein by reference as Exhibit (a)(1) and Article III of the Registrants Amended
and Restated By-Laws incorporated by reference as Exhibit (b)(3).
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|
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37
/
|
|
Incorporated by reference from Post-Effective Amendment No. 48 to the Registrants
registration statement, SEC File No. 33-17619, filed November 25, 1998.
|
|
C-13
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|
|
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38
/
|
|
Incorporated by reference from Post-Effective Amendment No. 195 to the Registrants
registration statement, SEC File No. 33-17619, filed February 29, 2008.
|
|
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39
/
|
|
Incorporated by reference from Post-Effective Amendment No. 83 to the Registrants
registration statement, SEC File No. 33-17619, filed June 13, 2003.
|
|
|
|
40
/
|
|
Incorporated by reference from Post-Effective Amendment No. 26 to the Registrants
registration statement, SEC File No. 33-17619, filed December 29, 1995.
|
|
|
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41
/
|
|
Incorporated by reference from Post-Effective Amendment No. 43 to the Registrants
registration statement, SEC File No. 33-17619, filed March 2, 1998.
|
|
|
|
42
/
|
|
Incorporated by reference from Post-Effective Amendment No. 59 to the Registrants
registration statement, SEC File No. 33-17619, filed December 1, 1999.
|
|
|
|
43
/
|
|
Incorporated by reference from Post-Effective Amendment No. 75 to the Registrants
registration statement, SEC File No. 33-17619, filed April 15, 2002.
|
|
|
|
44
/
|
|
Incorporated by reference from Post-Effective Amendment No. 86 to the Registrants
registration statement, SEC File No. 33-17619, filed February 24, 2004.
|
|
|
|
45
/
|
|
Incorporated by reference from Post-Effective Amendment No. 218 to the Registrants
registration statement, SEC File No. 33-17619, filed April 30, 2009.
|
|
|
|
46
/
|
|
Incorporated by reference from Post-Effective Amendment No. 233 to the Registrants
registration statement, SEC File No. 33-17619, filed December 28, 2009.
|
|
|
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47
/
|
|
Incorporated by reference from Post-Effective Amendment No. 229 to the Registrants
registration statement, SEC File No. 33-17619, filed December 24, 2009.
|
|
|
|
48
/
|
|
Incorporated by reference from Post-Effective Amendment No. 222 to the Registrants
registration statement, SEC File. No. 33-17619, filed July 28, 2009.
|
|
|
|
49
/
|
|
Incorporated by reference from Post-Effective Amendment No. 175 to the Registrants
registration statement, SEC File No. 33-17619, filed December 10, 2007.
|
|
|
|
50
/
|
|
Incorporated by reference from Post-Effective Amendment No. 198 to the Registrants
registration statement, SEC File No. 33-17619, filed April 28, 2008.
|
|
|
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51
/
|
|
Incorporated by reference from Post-Effective Amendment No. 118 to the Registrants
registration statement, SEC File No. 811-05349, filed February 17, 2006.
|
|
|
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52
/
|
|
Incorporated by reference from Post-Effective Amendment No. 149 to the Registrants
registration statement, SEC File No. 33-17619, filed January 19, 2007.
|
|
|
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53
/
|
|
Incorporated by reference from Post-Effective Amendment No. 245 to the Registrants
registration statement, SEC File No. 33-17619, filed May 14, 2010.
|
|
|
|
54
/
|
|
Incorporated by reference from Post-Effective Amendment No. 161 to the Registrants
registration statement, SEC File No. 33-17619, filed August 10, 2007.
|
|
|
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55
/
|
|
Incorporated by reference from Post-Effective Amendment No. 171 to the Registrants
registration statement, SEC File No. 33-17619, filed November 9, 2007.
|
|
Item 29. Persons Controlled by or Under Common Control with the Fund
C-14
Goldman Sachs Commodity Strategy Fund, a series of the Registrant, wholly owns and
controls Goldman Sachs Cayman Commodity Fund, Ltd. (Subsidiary), a company organized under the
laws of the Cayman Islands. The Subsidiarys financial statements will be included on a
consolidated basis in the Commodity Strategy Funds annual and semi-annual reports to shareholders.
Item 30. Indemnification
Article IV of the Declaration of Trust of Goldman Sachs Trust, a Delaware statutory trust,
provides for indemnification of the Trustees, officers and agents of the Trust, subject to certain
limitations. The Declaration of Trust is incorporated by reference to Exhibit (a)(1).
The Management Agreements (other than the Management Agreements on behalf of the ILA
Portfolios and the Short Duration Government Fund) provide that the applicable Investment Adviser
will not be liable for any error of judgment or mistake of law or for any loss suffered by a Fund,
except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the
Investment Adviser or from reckless disregard by the Investment Adviser of its obligations or
duties under the Management Agreements. Section 7 of the Management Agreements on behalf of the ILA
Portfolios and the Short Duration Government Fund provides that the ILA Portfolios and the Short
Duration Government Fund will indemnify the Adviser against certain liabilities; provided, however,
that such indemnification does not apply to any loss by reason of its willful misfeasance, bad
faith or gross negligence or the Advisers reckless disregard of its obligation under the
Management Agreements. The Management Agreements are incorporated by reference as Exhibits (d)(1)
through (d)(7).
Section 9 of the Distribution Agreement between the Registrant and Goldman Sachs dated April
30, 1997, as amended October 30, 2003 and Section 7 of the Transfer Agency Agreement between the
Registrant and Goldman, Sachs & Co. dated August 9, 2007 provides that the Registrant will
indemnify Goldman, Sachs & Co. against certain liabilities. Copies of the Distribution Agreement
and the Transfer Agency Agreement are incorporated by reference as Exhibits (e)(1) and (h)(4)
respectively, to the Registrants Registration Statement.
Mutual fund and trustees and officers liability policies purchased jointly by the Registrant,
Goldman Sachs Variable Insurance Trust and Goldman Sachs Credit Strategies Fund insure such persons
and their respective trustees, partners, officers and employees, subject to the policies coverage
limits and exclusions and varying deductibles, against loss resulting from claims by reason of any
act, error, omission, misstatement, misleading statement, neglect or breach of duty.
Item 31. Business and Other Connections of Investment Adviser
Goldman Sachs Asset Management, L.P. (GSAM LP) and Goldman Sachs Asset Management
International (GSAMI) are wholly-owned subsidiaries of the Goldman Sachs Group, Inc. and serve as
investment advisers to the Registrant. Set forth below are the names, businesses and business
addresses of certain managing directors of GSAM LP and GSAMI who are engaged in any other business,
profession, vocation or employment of a substantial nature.
|
|
|
|
|
Name and Position with
|
|
Name and Address of Other
|
|
Connection with
|
the Investment Advisers
|
|
Company
|
|
Other Company
|
John S. Weinberg
Managing Director-
GSAM LP
|
|
The Goldman Sachs Group, Inc.
200 West Street
New York, New York 10282
|
|
Vice Chairman
|
|
|
|
|
|
|
|
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
|
|
Managing Director
|
|
|
|
|
|
Lloyd C. Blankfein
Managing Director-
GSAM LP
|
|
The Goldman Sachs Group, Inc.
200 West Street
New York, New York 10282
|
|
Chairman and Chief
Executive Officer
|
|
|
|
|
|
|
|
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
|
|
Managing Director
|
C-15
Item 32. Principal Underwriters
|
(a)
|
|
Goldman, Sachs & Co. or an affiliate or a division thereof currently serves as
distributor for shares of Goldman Sachs Trust and for shares of Goldman Sachs Variable
Insurance Trust. Goldman, Sachs & Co., or a division thereof currently serves as
administrator and distributor of the units or shares of The Commerce Funds.
|
|
|
(b)
|
|
Set forth below is certain information pertaining to the Managing Directors of
Goldman, Sachs & Co., the Registrants principal underwriter, who are members of The
Goldman Sachs Group, Inc.s Management Committee. None of the members of the management
committee holds a position or office with the Registrant.
|
GOLDMAN SACHS MANAGEMENT COMMITTEE
|
|
|
Name and Principal
|
|
|
Business Address
|
|
Position with Goldman, Sachs & Co.
|
Lloyd C. Blankfein (1)
|
|
Chairman and Chief Executive Officer
|
Alan M. Cohen (1)
|
|
Global Head of Compliance, Managing Director
|
Gary D. Cohn (1)
|
|
Managing Director
|
Christopher A. Cole (1)
|
|
Managing Director
|
Edith Cooper (1)
|
|
Managing Director
|
Gordon E. Dyal (2)
|
|
Managing Director
|
Isabelle Ealet (3)
|
|
Managing Director
|
Edward K. Eisler (3)
|
|
Managing Director
|
J. Michael Evans (4)
|
|
Managing Director
|
Edward C. Forst (1)
|
|
Managing Director
|
Richard A. Friedman (1)
|
|
Managing Director
|
Richard J. Gnodde (2)
|
|
Managing Director
|
David B. Heller (1)
|
|
Managing Director
|
Kevin W. Kennedy (1)
|
|
Managing Director
|
Gwen R. Libstag (1)
|
|
Managing Director
|
Masanori Mochida (5)
|
|
Managing Director
|
Donald R. Mullen, Jr. (1)
|
|
Managing Director
|
Timothy J. ONeill (1)
|
|
Managing Director
|
Gregory K. Palm (1)
|
|
General Counsel and Managing Director
|
John F.W. Rogers (1)
|
|
Managing Director
|
Richard M. Ruzika (1)
|
|
Managing Director
|
Pablo J. Salame (3)
|
|
Managing Director
|
Harvey M. Schwartz (1)
|
|
Managing Director
|
Michael S. Sherwood (3)
|
|
Managing Director
|
David M. Solomon (1)
|
|
Managing Director
|
Esta Stecher (1)
|
|
General Counsel and Managing Director
|
Steven H. Strongin (1)
|
|
Managing Director
|
David A. Viniar (1)
|
|
Managing Director
|
John S. Weinberg (1)
|
|
Managing Director
|
Yoel Zaoui (2)
|
|
Managing Director
|
|
|
|
(1)
|
|
200 West Street, New York, NY 10282
|
|
(2)
|
|
Peterborough Court, 133 Fleet Street, London EC4A 2BB, England
|
|
(3)
|
|
River Court, 120 Fleet Street, London EC4A 2QQ, England
|
C-16
|
|
|
(4)
|
|
Cheung Kong Center, 68
th
Floor, 2 Queens Road Central, Hong Kong, China
|
|
(5)
|
|
12-32, Akasaka I-chome, Minato-Ku, Tokyo 107-6006, Japan
|
Item 33. Location of Accounts and Records
The Agreement and Declaration of Trust, Amended and Restated By-laws and minute books of the
Registrant and certain investment adviser records are in the physical possession of GSAM LP, 200
West Street, New York, New York 10282. All other accounts, books and other documents required to be
maintained under Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of State Street Bank and Trust Company, State Street
Financial Center, One Lincoln Street, Boston, MA 02111 and JP Morgan Chase Bank, N.A., 270 Park
Avenue, New York, New York 10017, except for certain transfer agency records which are maintained
by Goldman, Sachs & Co., 71 South Wacker Drive, Chicago, Illinois 60606.
Item 34. Management Services
Not applicable
Item 35. Undertakings
Not applicable
C-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment No. 249 under Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 249 to its Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the City and State of New York on the 30th day of
June, 2010.
|
|
|
|
|
GOLDMAN SACHS TRUST
(A Delaware statutory trust)
|
|
|
|
By:
|
/s/ Peter V. Bonanno
|
|
|
|
Peter V. Bonanno
|
|
|
|
Secretary
|
|
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to said
Registration Statement has been signed below by the following persons in the capacities and on the
date indicated.
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
1
James A. McNamara
James A. McNamara
|
|
President (Chief
Executive Officer)
and Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
George F. Travers
George F. Travers
|
|
Principal Financial
Officer and Senior
Vice President
|
|
June 30, 2010
|
|
|
|
|
|
1
Ashok N. Bakhru
Ashok N. Bakhru
|
|
Chairman and Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
John P. Coblentz, Jr.
John P. Coblentz, Jr.
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
Diana M. Daniels
Diana M. Daniels
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
Patrick T. Harker
Patrick T. Harker
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
Jessica Palmer
Jessica Palmer
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
Alan A. Shuch
Alan A. Shuch
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
1
Richard P. Strubel
Richard P. Strubel
|
|
Trustee
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Peter V. Bonanno
|
|
|
|
Peter V. Bonanno,
|
|
|
|
Attorney-In-Fact
|
|
|
|
|
|
|
|
1
|
|
Pursuant to powers of attorney previously filed.
|
C-18
CERTIFICATE
The undersigned Secretary for Goldman Sachs Trust (the Trust) hereby certifies that the Board of
Trustees of the Trust duly adopted the following resolution at a meeting of the Board held on June
17, 2010.
RESOLVED
, that the Trustees and Officers of the Trust who may be required to execute any
amendments to the Trusts Registration Statement be, and each hereby is, authorized to execute a
power of attorney appointing Peter V. Bonanno, James A. Fitzpatrick and James A. McNamara, jointly
and severally, their attorneys-in-fact, each with power of substitution, for said Trustees and
Officers in any and all capacities to sign the Registration Statement under the Securities Act of
1933 and the Investment Company Act of 1940 of the Trust and any and all amendments to such
Registration Statement, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the SEC, the Trustees and Officers hereby ratifying and confirming all
that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or may have
caused to be done by virtue hereof.
Dated: June 30, 2010
|
|
|
|
|
|
|
|
|
|
/s/ Peter V. Bonanno
|
|
|
Peter V. Bonanno,
|
|
|
Secretary
|
|
|
EXHIBIT INDEX
|
|
|
|
(a)(57)
|
|
Amendment No. 56 dated
May 20, 2010 to the Agreement and Declaration of Trust
dated January 28, 1997
|
|
|
|
(a)(58)
|
|
Amendment No. 57 dated June 17, 2010 to the Agreement and Declaration of Trust
dated January 28, 1997
|
|
|
|
|
|
(d)(9)
|
|
Amended Annex A dated June 17, 2010 to the Management Agreement dated April 30, 1997 between
Registrant, Goldman Sachs Asset Management, Goldman Sachs Fund Management L.P. and Goldman
Sachs Asset Management International
|
|
|
|
|
|
(g)(57)
|
|
Letter Amendment dated June 17, 2010 to the Custodian Agreement dated July 15, 1991 between
Registrant and State Street Bank and Trust Company (Goldman Sachs Strategic Income Fund)
|
|
|
|
|
|
(i)
|
|
Opinion and Consent of Dechert LLP
|
|
|
|
|
|
(p)(1)
|
|
Code of Ethics Goldman Sachs Trust, Goldman Sachs Variable Insurance Trust and Goldman
Sachs Credit Strategies Fund dated April 23, 1997, as revised November 4, 2004 and amended
March 12, 2009
|
|
|
|
|
|
(p)(2)
|
|
Code of Ethics Goldman, Sachs & Co., Goldman Sachs Asset Management, L.P., Goldman Sachs
Asset Management International, Goldman Sachs Hedge Fund Strategies LLC and GS Investment
Strategies, LLC dated January 23, 1991, as revised May 12, 2009 and amended January 15, 2010
|
|